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Home Publications Blogs Beat the Press Bill Clinton and Mrs. O'Leary

Bill Clinton and Mrs. O'Leary

Friday, 08 July 2011 04:37

According to legend, the Great Chicago Fire of 1871 was started when Mrs. O'Leary's cow knocked over a latern in her barn setting it on fire. While Mrs. O'Leary certainly didn't set the fire on purpose, she is probably not the person we would consult on fire control. In the same vein, it is reasonable to ask why anyone would consult Bill Clinton about the country's current economic problems.

While the economy performed well during the second half of the Clinton administration, it was building up the imbalances that laid the basis for the current crisis. The late 90s growth was driven by a stock bubble which led a consumption boom. When the bubble burst, the economy went into a prolonged downturn. It did not create any jobs from March of 2001 to September of 2003. The jobs lost in the downturn were not gained back until the beginning of 2005, at the time the longest period without job growth since the Great Depression.

Furthermore, when the economy finally did begin creating jobs it was driven by the housing bubble. While the bubble itself cannot be blamed on the Clinton administration, it is responsible for the imbalances that laid its basis. Robert Rubin, Clinton's treasury secretary, consciously pursued a high dollar policy. He used the U.S. control over the IMF to bring it about.

A high dollar makes U.S. goods less competitive in world markets. If the dollar rises by 20 percent it has roughly the same impact as putting a 20 percent tariff on all our exports and giving a 20 percent subsidy on all our imports. This sort of increase in the value of the dollar has way more impact on trade flow than any trade agreement possibly could.

Rubin's high dollar policy meant that the U.S. would run a large trade deficit. If the country has a trade deficit, then it absolutely must have negative national savings. (This is an accounting identity, it has to be true.) Negative national savings means that we must have either large government budget deficits or very low private savings, as was the case at the peak of the housing bubble, when the savings rate hit zero.

It is likely that President Clinton does not understand this basic economics. He recently lectured the public on how to create manufacturing jobs through trade, apparently not realizing the country was losing manufacturing jobs due to the soaring trade deficit during the last three years of his administration. This means that he may not know that he is giving bad advice, but that still doesn't mean that there is any reason for the media to want to seek it out.

Comments (7)Add Comment
Well Said
written by deanx, July 08, 2011 5:12
Well said, and you didn't even have to mention Glass Steagall nor Robert Rubin.
written by bakho, July 08, 2011 6:43
There was also a lack of response by the Bush administration and Congress to the downturn. Instead of granting money to the States to prevent layoffs and build infrastructure projects with available labor, they gave huge tax cuts to wealthy investors who already had too much investment dollars on the sidelines. There was too little fiscal stimulus. We made little progress on energy efficiency during the 1990s so that by 2000, gasoline prices were starting to rise and hurt the economy. Clinton made big missteps in deregulation. That however, was not the cause of the stock market bubble. The stock bubble could have been lessened by better distribution of wealth to the lower income levels.
written by Sherparick, July 08, 2011 7:37
Gee, complete, succint, explaination regarding the fundamental causes of our current economic mess. But somehow, Dean Baker is not good enough for the NY Times Economix column as opposed to Professor Casey "The unemployed just like long vacations" Mulligan.
written by denim, July 08, 2011 12:58
Well, there is nothing like being the victim to know who your victimizer is. When Bill Clinton signed onto to the mis-regulated free trade ideology called NAFTA, a giant sucking sound sucked my high tech systems job to Mexico. I like Mexicans, but the guy who got my job did not buy much of what I made...in fact the blue chip company went belly up for awhile. That's economics, I guess...baad economics, real bad.
written by joe, July 08, 2011 1:23
Manufacturing jobs lost every year for 14 years starting in 1997. About 6.5 million jobs gone.

All Employees: Manufacturing Jan 1997 - May 2011
written by RAP77, July 11, 2011 11:22
"The late 90s growth was driven by a stock bubble which led a consumption boom. When the bubble burst, the economy went into a prolonged downturn."

This is a gross oversimplification. The late 90s growth was driven by the introduction of new technologies that had, and still have a dramatic impact on world culture and economies.

It was the biggest introduction of new tech since the 1920s saw the widespread commercial introduction of technologies like the radio, household appliances etc. - technologies that had been around for awhile but which became commercially viable for mass consumption.

And like the 1920's, it was over investment - the stock bubble that led to the economic crash.

The new technologies continued to grow and drive the economy long after the crash and eventual recovery.

Technology doesn not create bubbles, people do.

It's shocking to see such astute economists as those at CEPR make such an elementary mistake in terminology.
written by RAP77, July 11, 2011 11:29
Excuse me. My mistake. I read tech bubble (I see it so often I must have superimposed it on this column) instead of "stock bubble" - the way it's printed here.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.