I’m glad that in his most recent New York Times column Paul Krugman is good enough to acknowledge that Bill Clinton’s policies had practically nothing to do with the boom of the 1990s:
But why was the Clinton economy so good? It wasn’t because Mr. Clinton had a magic touch, although he did do a good job of responding to crises. Mostly, he had the good luck to hold office when good things were happening for reasons unrelated to politics.
Specifically, the 1990s were the decade in which American business finally figured out what to do with computers — the decade in which offices became networked, in which retailers like Wal-Mart learned to use information technology to manage inventories and coordinate with suppliers. This led to a surge in productivity, which had grown only sluggishly for the previous two decades.
Dr. Krugman really could use a research assistant. By the end of the 1980s (not 1990s) most businesses of any significant size already had installed local area networks and just-in-time was the norm both in manufacturing and retail.
What really happened in the 1990s was that after well over a decade of substantial capital investment in technology, the investment was beginning to pay off and much of the pay-off was a consequence of the opening up of the Internet to commercial use, something that began in the mid 1980s and reached its fruition around 1995. Dr. Krugman nearly acknowledges that:
The technology takeoff also helped fuel a surge in business investment, which in turn produced job creation at a pace that, by the late 1990s, brought America truly full employment. And full employment was the force behind the rising wages of the 1990s.
Business investment actually saw a bump in the 1980s. By the end of the 1980s that had decreased and in the 1990s it really took off again. Note that Bill Clinton didn’t take office until 1993; by that time the increase in BI to which Dr. Krugman points us was well under way.
He nods approvingly to President Clinton’s tax increases:
And it’s worth remembering that in 1993, when Mr. Clinton raised taxes on the wealthy, Republicans uniformly predicted disaster. It will “kill the recovery and put us back in a recession,” predicted Newt Gingrich. It will put the economy “in the gutter,” declared John Kasich. None of that happened, which didn’t stop the same people from making the same predictions when President Obama raised taxes in 2013 – a move followed by the best job growth since the 1990s.
The difference, of course, is that during the Clinton Administration the economy was growing faster than the tax increases. That’s something I’ve pointed out repeatedly: as long as aggregate product is proceeding more rapidly than the increase in taxes, you can increase taxes without much adverse effect. That is not the case today.
It’s an amazingly weak argument and IMO illustrates Dr. Krugman’s desperation to give Bill Clinton credit for the boom of the 1990s. He follows up by putting in his oar for more federal spending:
And in any case, not all productive investment is private. We desperately need to repair and upgrade our infrastructure; meanwhile, the federal government can borrow money incredibly cheaply. So there’s an overwhelming case for a surge in public investment – and one side benefit of such a surge would be full employment, which would help produce another era of rising wages.
As Dr. Krugman undoubtedly knows not all consumption is investment. We’ve already picked the low-hanging fruit on infrastructure spending as investment. There are already 152 bridges across the Mississippi and there’s an interstate highway within a short distance of every city of 50,000 or more people. I’m skeptical that we’ll get much benefit from building the 153rd bridge across the Mississippi or connecting every city of 25,000 people to the interstate highway system.
What are really needed are infrastructure maintenance and decommissioning of unused infrastructure. Sadly, relatively little federal infrastructure money is used for either purpose—much more goes to new construction which, as I’ve noted, is not really needed.
We could use investment in energy, telecommunications, and sewer systems which, unfortunately, just isn’t very glamorous. I don’t think we’re going to see the Harry Reid Memorial Sewage Treatment Plant any time soon.
I do have one question that I wish Dr. Krugman would answer. Assume no multiplier. So much of what we consume is made somewhere else that’s a reasonable assumption. How much more federal spending would be necessary to achieve full employment?
I wish he’d have mentioned the other Clinton Administration policies and reforms: tax changes that lead to the enormous growth in CEO salaries that people complain about under the heading “income inequality”, permanent most favored nation trading status for China which economists are increasingly acknowledging was a mistake, and the repeal of Glass-Steagall. It’s going to be entertaining watching Dr. Krugman tap dance in his support of both Bill Clinton’s policies and Hillary Clinton’s policies, between which there is likely to be almost no relation.