Pro-Growth and Pro-Wall Street is an Oxymoron

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Thursday, 06 September 2012 05:00

A NYT piece contrasting the politics of Elizabeth Warren and Bill Clinton tells readers that:

"Mr. Clinton is the president who made the sustained case to Democrats that they had to be pro-growth and pro-Wall Street, not just to get elected, but also to build a more modern economy."

There is considerable evidence that these are contradictory positions. Our bloated financial sector is a drain on growth as shown in a recent paper from the Bank of International Settlements. Resources that could be deployed productively are instead applied to rent-seeking activity in the financial sector.

This paper found that a large financial sector posed the largest burden on sectors with more research and development and were heavily dependent on external financing. In the former case, finance apparently pulls away workers who might otherwise be employed as scientists and technicians elsewhere in the economy. In the latter case, finance driving up speculative bubbles could displace finance for new investment. 

President Clinton's policies set the country on a course of bubble driven growth. The prosperity of the last four years of his administration was driven by an unsustainable stock bubble. The collapse of the bubble was responsible for the recession of 2001 (and the deficits that get the Washington establishment types so excited). It was difficult for the economy to recover from this downturn which led to, at the time, the longest period without job growth since the Great Depression. When the economy finally did recover from this downturn and start to create jobs it was on the back of the housing bubble.

This is the economic model that President Clinton is associated with. By contrast, Elizabeth Warren is associated with a growth model that builds on broadly shared income gains. The track record suggests that the Warren model is far more effective.