When the unemployment rate is stuck above 8 percent, it’s not easy for a sitting president to make the case for his reelection. So President Obama has tried to harken back to a sunnier time when Democrats were in power—the go-go 1990s—and insist he’s part of the same successful tradition.
“My theories have been tested. The last time they were tried was by a guy named Bill Clinton. And we created 23 million new jobs, went from deficits to surplus, and we created a lot of millionaires to boot,” Obama told voters in late July. “1995 to 2000 was a period where we had particular productivity gains and GDP growth, and yet we had income grow pretty much equally at all five quintiles,” Gene Sperling—a Clinton veteran who’s now a top Obama adviser—boasted in a speech last week. Clinton is now poised to play a major role at the Democratic National Convention next month.
Economists like Mark Zandi of Moody’s Analytics agree that Clinton’s fiscal policies contributed to the growth during the 1990s and believe that they bear a resemblance to Obama’s own deficit reduction strategy. But the economic boom of the 1990s—and the 23 million jobs accompanying it—was hardly all Clinton’s own doing. And given the shape and severity of the current recession, it’s unclear whether following a Clintonesque approach to the deficit would spur the same kind of short-term economic boom that accompanied his presidency.
In terms of fiscal policy, Clinton’s signature accomplishment was the 1993 budget act, which raised the top marginal tax rate from 31 to 39.6 percent, raised the corporate tax rate from 34 percent to 35 percent, increased the fuel tax, and raised taxes on Social Security for wealthy beneficiaries, among other changes. Conservatives then, as now, predicted doomsday for the economy, but their worst fears didn’t come to pass, as Bruce Barlett explains. “It is clear from the experience of the 1990s that they can play a very big role in reducing the budget deficit and are not necessarily a drag on growth,” Bartlett concludes.
But according to Mark Zandi, chief economist for Moody’s Analytics, Clinton’s tax hikes ultimately helped fuel growth to the extent that they were part of his broader deficit-reduction package*. Although Clinton’s 1993 budget was best remembered for its $241 billion in tax increases, it also included $255 billion in spending cuts, including major cuts to defense spending as the United States pulled back its military operations after the Cold War ended.
Zandi, in fact, credits Clinton’s predecessor for kicking off the deficit reduction that ultimately helped bring down interest rates and fuel the 1990s boom. ”It’s really fiscal discipline both on tax and spending side that began with Bush I,” he says. “The 1990 Omnibus Reconciliation Act was key to establishing fiscal discipline.”
By continuing that same deficit-reduction tradition, Clinton helped improved market confidence and reduced interest rates, fueling borrowing by businesses and households, Zandi explains. Brookings’ Gary Burtless laid out the case in further detail to Politifact a few years ago:
[Burtless] said that between the beginning of 1993 and passage of the bill later that year, the interest rate on 10-year Treasury securities fell by more than a full percentage point. “Many people, including me, think this was because financial markets began to take seriously the new administration’s determination to be fiscally conservative,” Burtless said. “People buying and selling stocks and bonds on Wall Street were evidently more impressed by the appearance of fiscal discipline than they were upset by the hike in top marginal rates.”
In fact, there was an even more direct connection between Clinton’s tax hikes and low interest rates, as my colleagues Jia Lynn Yang and Steve Mufson explained in 2011: “In 1993, [then-Federal Reserve chair Alan Greenspan] promised Clinton that he would lower interest rates if Clinton backed a deal to narrow the budget deficit. Both men delivered.”
Obama’s approach to the budget is similar to Clinton’s inasmuch as he also wants to raise marginal rates on the highest income bracket, combining the tax hikes with spending cuts. But legislators face bigger obstacles than Clinton did in forming his 1993 budget: Congress is fiercely protective of defense programs, and entitlement programs are getting much larger, making spending cuts more politically difficult as well.
And even if a budget akin to Clinton’s 1993 package were passed, the U.S. economy isn’t necessarily poised to reap the same benefits, at least in the short term: Interest rates are already at rock bottom, and they still haven’t encouraged the kind of borrowing that low interest rates spurred during the 1990s.
What’s more, the other big factors that fueled 1990s growth had little to do with Clinton’s White House. “We had a period of rapid technological innovation, that was really when the Internet came full force as an economic event,” says Zandi. What’s more, the US was still reaping the gains of former Fed Chair Paul Volcker’s successful battle against inflation in the 1980s, as interest rates were already on their way down when Clinton came into office, Zandi adds. (Here’s a good rundown of even more reasons for the 1990s boom.)
That said, a balanced fiscal package could still boost the market and consumers in more intangible ways, avoiding the kind of drop-off that we experienced during the debt-ceiling debacle. That’s why Zandi believes that a fiscal compromise of tax hikes and spending cuts ” is the most important thing the next president can do.” He explains: “There are a lot of parallels between 2013 and 1993: we need to address our long-term fiscal problems, and the only way we can do that is through spending cuts and increased tax revenue.”
So Obama might have good reason to hold up Clinton as proof that tax hikes paired with spending cuts can lead to a healthier budget. But such a budget in and of itself is no guarantee that the boom times will be coming back in the near term.
*Addendum: Republicans frequently argue that it was actually the 1997 tax cuts that the GOP-controlled Congress pushed for that fueled the 1990s boom more than Clinton’s tax hike. Zandi agrees that the lower rates on capital gains “did help” but points out that the stimulative effect of those tax cuts only happened after Clinton’s 1993 reform packaged improved the fiscal situation. Projections were for very small deficit, so we had the luxury at the time to lower tax rates.”