The Economic legacy of the Clinton administration

In 1993, Bill Clinton became the first Democrat to ascend to the US Presidency in just over 12 years. The former Arkansas Governor ran on a ‘Third Way’ platform, promising to enact moderate economic policies, following the three successive Republican Presidential election victories. Clinton promised an end to so-called ‘Reaganomics,’ campaigning on a fiscally conservative agenda in which he pledged to reform welfare and balance the budget. There is no doubt that Clinton presided over an economic boom; poverty fell, real wages rose and unemployment and inflation fell to record-lows over his tenure as President. With this said, critics claim that Clinton deserves little praise for the strong economy of the 1990s, as any President who presided over the birth of the internet would’ve experienced such economic growth. This holds to some extent, although Clinton deserves credit for his welfare reform which simultaneously reduced the deficit and promoted a strong labour market. Whilst Clinton’s welfare and trade policies, alongside his capital gains tax cut, contributed to the strong economy of the 1990s, the internet boom was also largely responsible, with Clinton’s initial tax rises reducing the scope of this economic prosperity.

Taxation

Following Clinton’s election, the Democratic-controlled Congress passed several tax increases. The top income tax rate was hiked from 28% to 39.6%, corporate tax rose from 34% to 35% and transportation fuel taxes faced a 4.3 cents per gallon tax rise. The top income tax rate led to a relatively slow economic recovery from the recession of 1992. This is because the disposable income of wealthy individuals was greatly curtailed, resulting in falling investment, thereby slowing economic growth. The result was real GDP growth averaging at 3% in the first four years of his Presidency, which was disappointing considering that this not only followed a recession but also the end of the Cold War. By comparison, Reagan’s economic recovery saw average GDP growth of 4% in the four years following the recession of 1982. Pursuing contractionary fiscal policies immediately post-recession slowed the economic recovery. This hurt the middle class as real wages stagnated; between 1992 and 1996, real median hourly wages only rose 2 cents from $7.41 to $7.43. This cost the Democrats in the midterm elections of 1994, losing both houses to the Republicans.

In his second term, Clinton recognised his previous mistakes and pursued multiple tax cuts in 1997. The capital gains tax rate was slashed from 28% to 20%, with an increase in the ‘death tax’ exemption from $600,000 to $1 million. What followed was even greater economic prosperity. Even though the US economy had just recovered from a recession, growth increased; in his final four years, growth averaged just over 4% annually – an acceleration of a full percentage point from his first term. This can be attributed to his capital gains tax cut, which greatly encouraged investment and innovation that drove the tech boom, leading to such economic growth and prosperity. The wage stagnation of the previous four years ended; between 1996 and 2000, the real hourly median wage rose from $7.43 to $7.89. The stock market prospered as the S&P 500 rose 78% during this period, creating prosperity for tens of millions of Americans, with over 60% of Americans owning stock during the late 1990s. Whilst there is no doubt that the growth of the internet had a part to play, the Clinton policies of large scale tax cuts during his second term spurred the investment and innovation that contributed to this tech growth.

Spending & Trade

Clinton successfully reformed the bloated welfare state during his second term in office. In 1996, Clinton signed into law the Personal Responsibility and Work Opportunity Act. This replaced the AFDC (Aid to Families with Dependent Children) with a new program named the ‘Temporary Assistance for Needy Families’ (TANF). The legislation converted the New Deal-era AFDC into a block grant, handled by each state. A block grant is a set amount of money, allocated by the Federal Government to the states to administer the program. At the same time, the bill required recipients to start working after two years of receiving benefits, preventing individuals from claiming for more than five years. It also included provisions to encourage two-parent families. The result was an increase in the percentage of black children raised by married parents – from 34.8% to 39% during the five years following the bill’s passage. The number of children living with single parents also fell by 8% during the same period. The number of TANF recipients fell from 12.2 million in 1994 to 4.5 million in 2004, as individuals were encouraged into work by the new welfare provisions. Clinton’s welfare reform ensured that work always paid more than to not work, whilst simultaneously reversing the number of children raised by single parents.

Although NAFTA was largely negotiated by the preceding Bush administration, Clinton was ultimately the President that signed the historic trade bill into law. The North American Free Trade Agreement was the largest in the world, eliminating trade barriers and tariffs between the US, Mexico and Canada. By easing trade between approximately 450 million people across the three nations, economic growth and prosperity soon followed. Greater competition from firms across each nation led to falling prices; in 1992, the US inflation rate stood at 6.1%, falling to 1.4% by 1999. The US could now import oil from either Mexico or Canada without facing the cost of tariffs, thereby resulting in falling oil prices as American oil producers had to compete with foreign imports. At the same time, US exports in services amongst other sectors that the US has a competitive advantage in, greatly increased. However, NAFTA wasn’t without its pitfalls; the decline of US manufacturing was accelerated, as US firms moved production to Mexico due to their lower labour costs. With this said, the lower prices coupled with the financial and services sector boom that came with NAFTA provided a net benefit to the US economy.

“The lower tariffs that resulted from Clinton’s trade policies, which reduced prices to consumers and kept inflation low, were technically the largest tax cut in the history of the world.”

Larry Summers – Treasury Secretary under Clinton

Ultimately, the Clinton Presidency gave birth to unbridled wealth and prosperity through his targeted tax reductions, welfare reform and free trade agreements. Clinton initially had hiked the top income tax rate, leading to a slower economic recovery than was expected, given the circumstances at the time. With this said, the Democratic President soon rectified this through his capital gains tax cut, paving the way for rising real wages, alongside a stock market boom that was facilitated by greater investment and innovation, giving birth to the internet we know of today.