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The Clinton Years: Story of a Survivor
Unprecedented Boom Marks Clinton's Legacy

___ What's Next? ___

The Transition
The Talent Gap
Regulations
Personalities
The Court

Keep up with Al Kamen's In the Loop, Steve Barr's Federal Diary and news from The Post's Federal Page.



By Glenn Kessler
Washington Post Staff Writer
Sunday, Jan. 7, 2001; Page A01

Second in a series of occasional articles.

No matter when or where President Clinton is speaking, there is a certain moment when he really hits his groove. It is when he starts reeling off the statistics that are his lodestar, the report card he eagerly wants to share with the American people.

"The unemployment rate is the lowest in 30 years . . . the lowest inflation since the 1960s . . . 22 million new jobs . . . the largest surplus ever . . . the highest homeownership rate on record."

On and on it goes, a litany of achievements that he traces back to the actions he took in his first months in office. The list is updated constantly by the White House, and the president commits it to memory, weaving elements of it into almost every public utterance.

Nothing better explains the phenomenon of Bill Clinton-a president who leaves office with sky-high job approval ratings despite grave public doubts about his integrity-than the performance of the economy under his watch. Decades from now, when historians evaluate the tumultuous Clinton years, the economic gains of the past eight years will loom as significant markers.

The soaring budget deficit, which reached its zenith the year Clinton won the presidency and has bedeviled every president since the Vietnam War, has been eliminated. The government now projects $5 trillion in surpluses over the next decade.

The economy has grown for the longest period in U.S. history, boosting worker incomes and even spreading prosperity to some of the poorest segments of society.

Stock prices rose dramatically, resulting in the greatest bull market of this century and adding trillions of dollars to the portfolios of investors.

How much is Clinton responsible for this bounty of good news? The answer is as elusive as trying to determine whether President Ronald Reagan was responsible for the end of the Cold War. In both cases, supporters can point to presidential actions that might be logically traced to the ultimate results.

In his speeches, Clinton suggests he came to office in a period of economic distress with a clear sense of how he would get the nation's fiscal house in order. Yet a case can be made that Clinton was successful precisely because he wasn't consistent, much the way a skilled jazz musician can improvise depending on the mood.

Clinton knew the economic notes. He arrived at the White House with a deep understanding of economics and surrounded himself with extremely skilled and knowledgeable economic advisers from Wall Street, Capitol Hill and academia. In fact, Clinton told associates that he felt the reason President George Bush succeeded at foreign policy but not economic policy was that he never put in place a coordinated team of the same caliber as his national security advisers.

Bush, for instance, may have signed a bigger deficit reduction package in 1990, totaling $635 billion over five years in inflation-adjusted dollars, compared with $590 billion for Clinton's effort in 1993. But Bush never effectively sold his deal-in fact, he later disavowed it-while Clinton came to understand that if he impressed Wall Street, he would be rewarded with lower interest rates.

Clinton, aides say, also insisted on a self-consciously analytical approach that outlined the risks of taking action-and the downside of not doing anything.

The result is that for eight years, Clinton managed to skirt through rapid economic changes and political shifts with only a rare misstep to roil the financial markets, a point even his detractors concede. But he did so without significantly reordering the budget priorities of the country or implementing any major new programs.

William Niskanen, chairman of the Cato Institute and former economic adviser to Reagan, said Clinton deserves credit for some of the economic conditions under his presidency, citing in particular his superb partnership with Federal Reserve Chairman Alan Greenspan and his pursuit of free-trade agreements. But he maintains Clinton was effective more because his record was benign, not activist.

"Historians pay too much attention to activism," Niskanen said, saying that the Clinton era will be viewed much like the postwar Eisenhower years and that Clinton's economic policy is akin to "Eisenhower Republicanism."

A recent poll of historians for C-SPAN ranked Clinton overall in the middle range of the nation's 41 presidents, near many of his recent predecessors. But the historians placed him fifth-in the realm of such luminaries as Franklin D. Roosevelt, George Washington, Abraham Lincoln and Theodore Roosevelt-for economic management. He ranked last for moral authority.

"The economy is the president's legacy," said Leon E. Panetta, Clinton's first budget director and later White House chief of staff. "And Bill Clinton knows it."

Switching Gears From the Start

Clinton's willingness to adjust his economic policy to changing events was evident from his first weeks in office. During the campaign, he made only passing reference to deficit reduction and instead advocated a more traditional Democratic response to economic troubles-fiscal stimulus in the form of increased government spending and a tax cut for the middle class, while raising revenues through a big tax increase on the wealthy.

But once elected, Clinton got an earful on the deficit when he ran a marathon, 19-hour session on the economy with 300 business leaders. He hired economic advisers, such as Panetta, who had publicly ridiculed aspects of his campaign platform as unrealistic. He reviewed and debated with his staff every line item in the federal budget in an endless series of meetings. Soon the tax cut was dropped and the spending increase degenerated into a minor pork-barrel bill that was quickly voted down by Congress.

Instead, Clinton proposed a deficit reduction plan that relied about half on spending cuts and half on tax increases.

With the benefit of hindsight, it is clear that this was a remarkable gamble for Clinton at the start of his presidency, the fiscal equivalent of a bank shot in pool. The conventional wisdom held that in times of economic distress, policymakers stimulate the economy by spending more, not less-or by cutting taxes, not raising them. It is little wonder that every Republican on Capitol Hill would join together and denounce the plan as a job-killer that would lead to another recession.

But Clinton and his advisers believed that if he crafted a credible deficit plan, Wall Street traders would bid up the prices of Treasury bonds, leading to a decline in interest rates. The lower interest rates, in turn, would, among other things, reduce mortgage costs for homeowners and make it cheaper for businesses to obtain loans for investment and expansion. Lower overall interest rates would also give the Fed more maneuvering room to fine-tune the economy.

Laura D. Tyson, who chaired the Council of Economic Advisers at the time, said it was impossible to create an economic model that would give a definite answer on what would happen if the plan was enacted. "It was frustrating to the political people, including the president, that there wasn't a precise answer," she said.

The final deficit reduction target-$496 billion (1993 dollars) over five years-was heavily driven by politics, not economics, Tyson said. With Republicans refusing to accept a tax increase, the plan had to be big enough to impress the deficit hawks in the Democratic Party but also include enough changes in social policy-such as a boost in Head Start funding and a dramatic expansion of a tax credit for the working poor-to win over the party's progressive wing.

The tax credit, virtually ignored by the media at the time, not only provided more income to the working poor but also may have made a difference in the outcome. As Clinton worked the phones in the final hours before the House vote on the plan, he swung a few votes by telling lawmakers how many more workers would get additional tax credits in their district than the tax increase levied on the wealthy.

The bill passed by one vote in each chamber.

With the passage of more than seven years, the gamble appeared to have worked: Interest rates declined and the economy took off. Vice President Gore would tell White House aides that it was the first time that they had seen a law of intended consequences.

"It is very well to say this is a credit to the American people and the entrepreneurship of American business and all that, and that is certainly a basic truth," said Treasury Secretary Lawrence H. Summers, an eight-year veteran of the administration. "But the American people were pretty smart in 1991. So you ask yourself what switched, what changed between the late 1980s and the early 1990s and mid-1990s, and it is hard to find anything else that changed as dramatically as public policy."

Significantly, the 1993 bill never contemplated the elimination of the budget deficit-a notion Clinton embraced only when Republicans took control of Congress.

Moreover, much of the recent decline in the deficit cannot be attributed to specific actions taken by Clinton or Congress. Rather, the Congressional Budget Office says, it is the result of other factors, such as lower-than-expected increases in health care costs and much higher tax revenue as the economy moved into full gear, unemployment fell and the stock market surged.

Losing Battles, Winning the War

The 1993 deficit deal set the fate of Clinton's presidency. Republicans were so successful at casting it as a massive tax increase that a year later the issue helped them win control of the House and Senate for the first time in 40 years. From then on, Clinton was forced to play defense on budget issues-meaning he was never able to reap the fruits of prosperity that a progressive president would have craved.

Clinton was not able to redirect as many funds as he claimed for greater social good or deal with the looming retirement of the baby-boom generation. Federal investments in such areas as education and scientific research didn't grab much more of the budget pie and actually declined as a share of the overall economy.

The president found more success pushing for targeted tax cuts in key areas, such as education. Tax credits don't show up in the spending side of the ledger and were easier to sell to Republicans. But Clinton's maneuvering helped make the tax code much more complex and helped turn the Internal Revenue Service into a sort of all-purpose social agency, administering education and benefits for the poor.

Clinton's allies on economic issues were a constantly shifting group of lawmakers. Although not a single Republican supported Clinton's 1993 deficit plan and the GOP was instrumental in killing health care reform the next year, Clinton won approval of key trade agreements largely because of the support of Republicans. He also signed a welfare reform bill in 1996 opposed by most members of his party.

Sometimes, Clinton went it alone, bypassing Congress to bail out the Mexican economy in 1995 by tapping a little known fund in a highly unusual manner. The maneuver may well have averted a financial crisis that would have dragged down the U.S. economy just as the boom was going to kick into high gear.

After his reelection, the budget picture improved enough that he could reach agreement with Republicans on a deal to balance the budget for the first time since 1969.

When the prospect of budget surpluses emerged in 1998, Clinton adroitly blocked GOP demands for a tax cut by forcing a bidding war on how much to reserve for Social Security-a political maneuver that Greenspan has privately told Clinton is an equivalent achievement to his 1993 deficit reduction plan. Otherwise, the surpluses might have disappeared as quickly as they appeared.

Clinton also was blessed with luck. He entered the White House after the end of a recession. His predecessor had laid the groundwork for smaller deficits with his larger deal to reduce the budget deficit and also had overseen a painful restructuring of the banking industry. A revolution in computer and information technologies was about to be unleashed. Even a potential shock, such as the Asian financial crisis in 1997, brought the silver lining of lower oil prices that bolstered the U.S. economy.

Even if the booming economy is not entirely the result of Clinton's handiwork, his efforts to reduce the deficit helped remove a blot on Washington's reputation.

"Maybe the president's ultimate legacy is that people believe once again that the nation can solve problems and move forward and that government can be an important part of that," Summers said. "Before Bill Clinton, it would have been inconceivable to say conservatism has to be compassionate. Now it is necessary."

© 2001 The Washington Post Company


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