The Clinton Economy

by / 0 Comments / 55 View / May 5, 2015

The Misleading Claim: President Clinton’s higher tax rates resulted in an economic boom. We need to bring back his tax rates!

First, let’s acknowledge one fact as loud and clear as possible: the economy DID perform fairly well at the time Clinton was President. That’s reasonable to conclude. What’s less reasonable, however, is to conclude that his tax policy was the cause of that growth.

Democrats routinely point to Clinton’s average GDP growth rates and ignore the fact that wages arguably stagnated during his first 4 years in office after enacting the ’93 tax increases. This is likely why Clinton’s results are commonly averaged across his entire tenure, as to mask the stark contrast between both terms. They discount the fact that Clinton’s ’93 tax increases were followed in ’97 by tax cuts, after Clinton himself acknowledged the taxes had been too high. Speaking at a fund raiser in 1995, President Clinton said: “Probably, there are people in this room still mad at me at that budget because you think I raised your taxes too much. It might surprise you to know that I think I raised them too much, too.” Also conveniently missing from the narrative is that economic growth quickened from 3.2% a year to 4.2% a year after the tax cuts were introduced.

But Republicans, too, are often disingenuous with this issue. While they routinely separate Clinton’s two terms to illustrate that most of his economic gains occurred in his second term, coinciding with the election of the Republican led congress and the passage of their tax cut legislation, they attempt to take credit for the economic gains of 1997-2000 while conveniently absolving themselves of any culpability for the 2001 recession, which they dubbed “The Clinton Recession.” Either they influenced the economy or they didn’t; it can’t be both.

People are generally familiar with this left vs right divide, so we’ll offer a different perspective. Here’s a less partisan argument:

President Clinton benefited from unique and abnormal timing; he happened to be President at the time our ever-evolving society experienced the advent of a brand new, history defining, civilization changing industry, called the internet.

As Edward Conard of the Wall Street Journal explains, “Commercialization of the Internet lifted the Nasdaq from 800 in 1995 to 4,500 in 2000, the largest five-year gain of any major index in American history. Put bluntly, increased payoffs for successful investment and rising equity values simply dwarfed offsetting increases in marginal tax rates. The taxes themselves didn’t increase growth.”

It was this expanding bubble of over-investment which helped temporarily propel growth. Clinton averaged 3.8% growth in real GDP throughout his tenure. That’s rather decent. But the bubble began to deflate in March of 2000 as the once “new” industry gradually stabilized and investment strategies returned to normal. In the year that followed the bursting of that dot-com bubble, growth slowed, culminating in a recession that took place 2 months after Clinton left office. One need not be a defender of George W. Bush to recognize that the downward trend he inherited coincided with the bursting of the tech bubble. It’s interesting to ponder how this downward trend would have been part of Clinton’s legacy had he simply been President a few months longer.

The point is, the investment trends of the business cycle coupled with the extremely rare occurrence of a revolutionary new industry made for a powerful bubble of growth whose influence arguably outweighed that of any one man, even a President. This atypical level of capital investment, unlike that of other decades, would have bolstered the record of any leader presiding at that time, regardless of party affiliation.

So to establish causality between high tax rates and good economic times, one needs more than to simply cite the Clinton era. Clinton was and will always be the only President in history lucky enough to preside during the internet revolution. Much like the advent of the steam engine and the industrial revolution, it’s a rare advancement in technology that was part of a long term trend with roots tied to the policies of predecessors. While the 90’s tax policies were in no way irrelevant, their positive or negative influence on GDP was likely constrained within the broader influence of the largest tech bubble in recorded history. In other words, you can’t simply reinstate Clinton-era tax policy and get the same economic growth.


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