The Clinton Economy

Economics Aug 19, 2020

As Bill Clinton, the 42nd President of the United States, turns 73 on this day, let’s look at how he contributed to the post-cold war economic expansion of the United States.

Under Clinton, the United States oversaw the longest peacetime economic expansion. President Clinton’s economic strategy focused on policies and investments that strengthened communities and the welfare of the people, especially the middle class. A smart fiscal approach alongside these strategies helped Clinton create a fundamentally strong economy from a weak one, in the two terms he served in the Office (1993-2001).


When Clinton first took Office with Vice President Gore, the economy was a challenge; unemployment was up 7.5% (0.9% more compared to the previous year), the country faced record deficits, and poverty was growing. Family incomes were losing ground and employment rate was the slowest since the Great Depression. After eight years, these record budget deficits became record surpluses, 22 million new jobs were created.

HOW MUCH CREDIT DOES BILL CLINTON DESERVE FOR THE 1990S BOOM?

The Clinton administration’s success in making an impact in the economy can be attributed to a countercyclical fiscal policy that the federal government consistently practiced. (A countercyclical fiscal policy refers to the strategies adopted by the government to counter a particular recession or boom using fiscal policies, to stabilize the economy.) These policy decisions:

  1. Instigated growth and strength in the middle class and helped poor families lift
    themselves.
  2. Encouraged inner-city and rural investments.
  3. Closed the fiscal gap. (A fiscal gap is a measure of a government’s total
    indebtedness)
Measures towards the Middle Class:

The middle class plays a huge role in the economic growth and prosperity of a country. It is what makes the United States such a lucrative and dynamic market place. Over the course of administration, a number of policies that directly aimed at supporting and strengthening working families were enacted. These included; 1. an increase in the minimum wage (raising it from $4.25 to $5.15), 2. The Family and Medical Leave Act where parents could take up to 12 weeks of unpaid leave to take care of their new-borns and 3. the child tax credit (reduced a family’s income tax bill by $500 per eligible child).

Under the Clinton administration, Congress granted $3 billion to welfare reforms that put Americans to work. As part of those reforms, around 2 lakh people on welfare received housing vouchers. Communities received federal support in upbringing low-income workers. Additionally, those programs that helped middle-class families gain a foothold in the economy were greatly funded. In 1993, federal funding for Head Start totaled $3.3 billion (Head Start is a federal early childhood learning program) reaching $5.3 billion in 2000. Owing to this, the number of people under welfare fell, from 14.1 million to 5.6 million, reaching its lowest since 1961.

This expansive blend of tax relief, wage builds, availability to child and health care, and protection of working families helped grow and strengthen the middle class.

TRADE

President Clinton outlined his agenda for the new round of World Trade Organization negotiations, set to be about expanding prosperity and improving the quality of life and work. Clinton led the ratification of the North American Free Trade Agreement (NAFTA) in 1993, a treaty that removed trade restrictions and tariffs among the United States, Canada, and Mexico, thereby creating the world’s largest market in terms of population (425 million people).


Though the relaxation of tariffs hugely benefited and led to the development of a lot of industries, the economy gained very little from this. An overall increase of 0.1%-0.5% GDP was noticed by 2002. A recent report on the economic impact of trade agreements states that, in general, NAFTA led to a substantial increase in trade volumes for all three countries; a small increase in U.S. welfare; and little to no change in U.S. aggregate employment. It suggests that Mexico benefitted a lot more than the United States due to the agreement.

In 2000, President Clinton went on to ratify permanent normal trade relations with China,integrating China into the world economy through the World Trade Organization (WTO).This opened the Chinese markets and the Chinese tariffs to U.S export and at the same time protected Americans and American companies against dumping (product when sold in the importing country is less than the price of that product in the market of the exporting

INVESTMENT

A crucial aspect in terms of economic growth of any country lies in its investment. Higher overall investments are directly related to higher incomes, faster productivity growth, and hence better standards of living. President Clinton outlined an investment strategy made to prepare workers students for an information economy, exploiting the technology revolution emerging around the world, and to help high-tech industries prosper and grow. These were accomplished by investing in the
following aspects:

Education

Throughout his administration, Congress invested 10% more on average on education and work-force training. This was done to maintain the competition of Americans with the international workforce in the globalized world. Reforms were made to make education more accessible and affordable. Under the ‘Improving America Schools Act’, the federal funding for primary and secondary schools rose to $11.1 billion a year (from $8.5 billion a year) and this helped improve accountability, increase accessibility to low-income students, and implement technology into the curricula so that every student would be able to benefit from the revolution of technology.

Information Technology

When Clinton first took office, there were only 50 sites on the World Wide Web. By the end of 2000, there were over 50 million active and running. Information technology contributed to 2/3rds of the US economy. This exponential growth can be credited to the early investments the U.S made on the internet and during his term, Congress and his administration directed similar investments toward other critical, innovative technologies and industries. These included Providing Start-Up Money for Innovative Telecommunications Technology, Expanding Access to Technology for Native Americans, Increased Investment in Education Technology, and Closing the Digital Divide.

>>Due to the brisk growth in trade and commerce, stocks spiked. The S&P increased 210% under Clinton – as investors celebrated the rise of the internet and economic growth. GDP topped 4%, inflation remained stable and unemployment dipped below 4% in the years which followed.

CLOSING THE FISCAL GAP

To ensure America’s long-term growth and competitiveness, President Clinton made efforts for a stronger and more sustainable fiscal path. So, in addition to the robust investments his administration promoted (in people, in technology, and communities), they also worked with Congress to close the fiscal gap. Under the Omnibus Budget Reconciliation Act of 1993, the following laws were implemented;

  • The top ordinary income tax rate rose from 31% to 39.6%.
  • Corporate income tax above $10 million was increased.
  • The deductibility of business meals and entertainment expenses were reduced.

As a result, federal borrowing reduced and the economy improved, allowing capital to flow to more productive areas. This boosted the private sector. The improvement allowed the government to focus on other economic matters listed like investing in the future, growing the middle class, mitigating poverty, and strengthening America’s communities.

Undoubtedly, President Clinton’s policies helped the economy come out of the melancholy. By putting the federal budget onto a feasible path, he removed potential obstacles, which later turned into surpluses. By investing in education and information technology, he laid a foundation for the continuous growth of the economy and brought millions out of poverty and into the workforce. These are successful strategies that need to be repeated. His commitment to the fiscal discipline has been instrumental in achieving prosperity and brought forth the New Age economy of technological innovation and rising productivity.

Happy Birthday, Bill!
-B Revanth Reddy

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