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Home Publications Blogs Beat the Press Bill Clinton Gave Us a Hugely Over-Valued Dollar and an Exploding Trade Deficit

Bill Clinton Gave Us a Hugely Over-Valued Dollar and an Exploding Trade Deficit

Thursday, 01 May 2014 07:48

Incredibly, the NYT article on Bill Clinton's economic legacy left out the most important facts. The value of the dollar began to rise after Robert Rubin became Treasury Secretary and openly espoused a high dollar policy. He put muscle behind this policy with his handling of the bailout from the East Asian financial crisis which caused the dollar to soar against the currencies of our trading partners. (Lloyd Bentsen, Clinton's first Treasury Secretary, allowed the dollar to fall. This was supposed to allow an increase in net exports to fill the gap in demand created by Clinton's deficit reduction package.)

The high dollar led to a fall in exports, as our goods became more expensive to people in other countries. It also led to a surge in imports, which became very cheap. As a result, the trade deficit rose to almost 4 percent of GDP ($680 billion a year in today's economy) and eventually peaked at almost 6 percent of GDP ($1,020 billion in today's economy) in 2005. Currently the deficit is around $500 billion or 3.0 percent of GDP.

This trade deficit corresponds to income that is generated in the United States but is creating demand elsewhere rather than in the United States. It is very difficult to find ways to replace this demand, especially in a political environment where people like Bill Clinton tout the virtues of deficit reduction.

The trade deficit is by far the main cause of the "secular stagnation" that many economists, most notably former Clinton Treasury Secretary Larry Summers, have been worrying about in recent years. It certainly should have been discussed in any article on the Clinton legacy.

Comments (13)Add Comment
written by medgeek, May 01, 2014 8:19
Some time ago, an editor at one of the major newspapers (I couldn't find in on a quick look on the web) said he'd rather hire a reporter who "knew something" rather than one who was a good writer. This was because he felt he could always teach an intelligent person how to write a newspaper article. I wonder how many business/finance/economics reporters actually have a background in those fields. You don't need a Ph.D. to avoid elementary blunders like failing to recognize the importance of the exchange rate in determining trade deficits/surpluses, just econ 101.
Dean is the only economist who worries about the trade deficit
written by Bill H, May 01, 2014 8:22
Which means he is the only one who recognizes that an economy that is dependent on consumer spending and is supporting a major trade deficit is one which can continue only by building an ever increasing burden of debt, be it public, private, or business debt. He doesn't say that eliminating the trade deficit is a major part of the answer to solving economic inequality, but I suspect he knows it.
And he deregulated to make up the difference
written by Dave, May 01, 2014 9:12
In addition to this disastrous policy espoused by Rubin and Summers, Summers, Greenspan and Geithner helped tear down Glass-Steagall and keep derivatives unregulated so that the US capital could be used to inflate financial bubbles, specifically a housing bubble, to make up for the difference in demand.

Larry Summers is one of the worst economists in the world.

If Hillary clings to these horrible economists for advice, she's going to prevent an economic recovery. I hope she's smart enough to dump these people and find better economists for her team.
written by Kat, May 01, 2014 9:29
I'm tired of hearing from those who proclaim that Bill Clinton handed Bush the younger a gold plated economy on a silver platter. He didn't. To make it worse, sometimes this is followed by "and Bush ruined it by putting two wars on a credit card and handing out tax cuts to the wealthy." (The case against military interventionism should be argued on its other merits, IMO)
I am grateful for the efforts here to clear up the misconceptions about the Clinton economic legacy, but I wish this was taken up by more economists.
Baker's not alone on trade deficit & how to reduce inequality. Read his short book.
written by jaaaaayceeeee, May 01, 2014 9:33

Bill H., Baker and Bernstein's short book Getting back to full employment (free pdf here at CEPR) is useful, and he often summarizes its conclusions, supported by EPI, CBPP, and others. The House Progressive Caucus's 'Better Off Budget' proposal shows many of these full employment policies in action. The book includes the data backing up how these policies work (history does, too).

Baker often explains how balanced (not just increased) trade can increase jobs here, by 7.5 million relatively high paid jobs (unlike TPP style trade pacts which redistribute income upwards), and reduce the cost of healthcare and other services and drugs.

Although min wage and universal pre-k (Obama's inequality agenda) help a little, full employment policies help a lot, for the entire bottom half of of the income scale.

Full employment policies also include replacing destructive sequestration, reducing destructive financialization, supporting labor, and reducing cyclical unemployment (structural is far less relevant than most say).

Other full employment policies, like public investment, public jobs, and work sharing would offset mindless deficit reduction, supply side tax cuts, and financial deregulation, which increase inequality.

More accurate Central Bank inflation targeting, collection and spending of revenue, and getting our still overvalued dollar back down to a level consistent with balanced trade is economically easy (despite opposition of powerful domestic interest groups benefiting from our overvalued dollar).

Clinton's "legacy"
written by the widower, May 01, 2014 9:46
Clinton has no legacy. The high dollar, repeal of G-S & the expansion of NATO into formerly Warsaw Pact countries violating the Gorbachev-Reagan agreements are all you need to know. There won't be any economic recovery because HRC & the proto-fascists comprising all the Republican wannabes are all on the same page. We are going down the same road as Rome. Plus we have no mainstream press willing to question the wisdom of our current domestic & foreign policies. Too bad, we have no one in congress like Wayne Morse & William Fulbright.
It's The Federal Budget Deficit
written by Tyler, May 01, 2014 10:31
The undersized federal budget deficit is the main cause of stagnation.

For at least the next decade, the federal budget deficit needs to be at least one trillion dollars.
Bill Clinton and Bob Rubin also gave us...
written by ifthethunderdontgetya™³²®©, May 01, 2014 10:49
And utterly out-of-control and over-sized, over-concentrated banking industry.

I'm an economics major, I realize this doesn't fit into your theory of how the world works, Dean.

But I spent over 20 years on Wall Street, and a few years after that as a multi-family underwriter. I saw what happened.

Wall Street blew up the world. That's what happened. And they've been well-compensated for it, and bailed out, and they're doing better than ever.

It will happen again. Value of the dollar be damned.
Rubin and Clinton
written by Peter K., May 01, 2014 11:43
Rubin was first director of the National Economic Council from 1993-95, then Treasury Secretary from 95-99.

Another part of the story is how Rubin convince Clinton to scrap his middle class spending bill and turn to deficit cutting so that Greenspan wouldn't raise rates prematurely. Greenspan did cooperate in the late 90s, but that was followed by the tech bubble and housing bubble as Baker points out. It's as if Clinton turned from demand generated by trade/exports(via government management of the currency) and government spending to bubble-generated/unsustainable demand.
No Hillary for me
written by A Populist, May 01, 2014 12:18
Dave wrote: "If Hillary clings to these horrible economists for advice, she's going to prevent an economic recovery. I hope she's smart enough to dump these people and find better economists for her team. "

I hope Democrats (and voters generally) find someone who is actually on their side - Like Elizabeth Warren.

IMO - It would be better to get a Republican President in 2016, and have a shot at a true economic populist in 2020.

Having Hillary co-opt and discredit the so-called liberal Democrats, will lead to (at best) continued inaction, and at worst, total association of Democrats with the corrupt Wall Street Oligarchy, followed by a Repubican in 2020.

Unless of course, you are pro-oligarchy, but care deeply to promote liberal social issues. Then, by all means - vote Hillary. If there is one thing that will keep the Oligarchy in power, and populists out - it is voting for members of the oligarchy of both parties who will focus on wedge issues (such as guns and abortion), divide voters, and continue the downward slide of he American middle class.
Remember Greenspan
written by Thornton Hall, May 01, 2014 6:22
You can't blame it all on Clinton and his bankers/economists. Greenspan was personally responsible for the end of Glass Steagall. He approved the waiver that created Citigroup and made the later congressional action a fait accompli.
Do we have to get into the mud?
written by Dave, May 02, 2014 5:42
Yes, I see where the potential for spies are. We have a trade policy that favors China. We have elements in the US government that probably favor China. We have business that don't care about anything but profit. We have the Chinese looking after our national security... I get it.

We have industrialists that undermine the press.

Glass Steagall's abolition created TBTF and then they gambled on derivatives
written by Blissex, May 05, 2014 3:46
[q]Wall Street blew up the world. That's what happened. And they've been well-compensated for it, and bailed out, and they're doing better than ever.[/q]

Part of this is well described in "Wall Street: The Book" by Doug Hendon, a very good and informative book that is now available as a free PDF (but please donate).

[q]helped tear down Glass-Steagall and keep derivatives unregulated[/q]

Indeed. The reason why Glass-Steagall was eliminated was to make sure that investment banks were too big to fail and had to be bailed out.

Because after investment banks and deposit banks largely merged, a failure of the investment bank side would close down the deposit/commercial bank side, and thus a huge problem for the credit and payment systems.

Also, deregulating derivatives meant that investment banks could legally gamble with naked bets. The more important aspect of the derivatives deregulating bill by Gramm and his accomplices explicitly exempted derivatives from oversight by the state gambling commissions which otherwise would have had jurisdiction (this is not a joke).

Thus allowing investment bankers to bet with their bank's money, pocket half of the winnings as bonuses when they won the bet, and by betting back and forth, drive down their bank's capital, which then had to be replenished by the Treasury and Fed because otherwise the deposit and commercial businesses of those megabanks would also collapse.

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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.