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Clintonomics: a Reappraisal The Hollow Boom

Clintonomics, the Hollow Booom


[Editors' note: The following essay is excerpted from economist ROBERT POLLIN's explosive new book, Contours of Descent: US Economic Fractures and the Landscape of Global Austerity, published in September by Verso.--AC/JSC]

"Watch what we do, not what we say."

– John Mitchell, Attorney General under President Richard Nixon

"It’s the economy stupid," was the one memorable slogan to have emerged out of Bill Clinton’s successful first run at the Presidency in 1992, and it became the overarching theme of his full eight years in office. Clinton came into office pledging to end the economic stagnation that that had enveloped the last two years of the Bush-1 administration and advance a program of "Putting People First" through large investments in job training, education, and rebuilding the country’s public infrastructure.

But Clinton’s economic program changed drastically even during the two-month interregnum between his November election and his inauguration in January 1993, as Bob Woodward of the Washington Post documented in compelling detail in his first Washington insider book on economic policy, The Agenda. As reported by Woodward, Clinton himself acknowledged only weeks after winning the election that "We’re Eisenhower Republicans here.We stand for lower deficits, free trade, and the bond market. Isn’t that great?" Clinton further conceded during this same time period that with his new policy focus "we help the bond market and we hurt the people who voted us in."

Clinton never abandoned the idea that "it’s the economy stupid" should remain the watchwords of his Presidency. It was just that the "Putting People First" agenda of his 1992 campaign would have to yield top priority to the prerogatives of the financial markets and the wealthy. How could Clinton have undergone such a lightening reversal from the program on which he was elected to office? The answer was straightforward, and explained with unvarnished candor by Robert Rubin, who had been Co-Chair of the premier Wall Street firm Goldman Sachs before joining the Clinton administration and who was to become Clinton’s most influential economic advisor and Treasury Secretary. Still during the interregnum before Clinton’s first inauguration, Rubin pointed out to members of the more populist camp within the newly forming administration that the rich "are running the economy and make the decisions about the economy."

What happened when Clinton put the agenda of the financial markets at the top of his administration’s concerns? There is no doubt that dramatic departures from past U.S. economic trends did occur during the Clinton era, including the simultaneous fall of inflation and unemployment; the reversal of the federal budgetary situation from persistent deficits to three years of surplus at the end of Clinton’s second term in office; and the unprecedented run-up in stock prices. But these developments can themselves be adequately understood only within a broader context that includes consideration of both Clinton’s main policy initiatives and the overall performance of the economy in the Clinton years-including the macroeconomic performance, the performance of the financial markets, as well as what happened to "the people" of the abandoned "Putting People First" agenda. This chapter begins by examining Clinton’s main initiatives in the areas of trade policy, regulation of labor and financial markets, and fiscal and monetary policy. With this overall policy environment as background, we then evaluate the economy’s overall performance in the Clinton years. In Chapter 3, we sharpen the focus of the discussion, considering in detail the three extraordinary developments in the Clinton years-the simultaneous fall of inflation and unemployment, the transition from fiscal deficits to surpluses; and the stock market bubble.


Whatever else may be said of macroeconomic performance under the Clinton presidency, the simultaneous fall of unemployment and inflation clearly defied the expectations of virtually all orthodox economists. Between 1993-2000, the unemployment rate fell steadily from 7.5 — 4.0 percent. Meanwhile, the inflation rate also declined steadily, to a low point of 1.6 percent by 1998. Inflation did increase in 1999-2000, but only to 2.2 percent in 1999 and 3.4 percent by 2000. Most economists, adhering to the Natural Unemployment/Non-Accelerating Inflation Rate of Unemployment (NAIRU) doctrines dominant since the early 1970s, had long predicted that unemployment in the region of 4 percent, or even 5 percent, must lead to headlong inflation. This is because with low unemployment rates, workers would gain increased bargaining power. They would demand higher wages and businesses, in turn, would pass on their higher labor costs to their customers through price increases. An inflationary wage-price spiral would ensue. Supporters of this position thus held that policy-makers were obligated to maintain unemployment at or above its NAIRU rate – that is, above the unemployment rate at which inflation would take off. To this end, it was generally believed that unemployment needed to be perhaps as high as six percent.

What caused the dramatic shift in the trade-off between unemployment and inflation, and to what extent was the Clinton administration responsible for it? Some leading economists have conceded that the inflation-safe unemployment rate-that is, the threshold unemployment rate, or NAIRU, below which inflation would begin accelerating-is subject to change over time. Robert Gordon, for one, concludes from an extensive econometric analysis of the past two decades that inflation-safe unemployment rate varies over time-falling, for example, from 6.2 percent in 1990 to 5.6 by mid-1996. Douglas Staiger, James Stock, and Mark Watson concur, finding in a 1997 paper that the inflation-safe unemployment rate in that year was between 5.5 and 5.9 percent, a full percentage point below its level for the early 1980s. They also admit that "the most striking feature of these estimates is their lack of precision". Their 1997 estimate of the inflation-safe unemployment rate not only varies over time but also has the capacity to range widely at a given point in time. In an updated 2002 study, they conclude that the inflation-safe unemployment rate varies in close correspondence with the trend in the actual unemployment rate.

The general thrust of these broad econometric findings appears solid enough. Indeed, they are difficult to dispute precisely because they are so broad. But in focusing exclusively on the details of how the inflation-safe unemployment rate varies over time, they miss the fundamental question that leaps out from these results – namely, what causes the inflation-safe unemployment rate to vary in the first place? It is remarkable that leading economists who have devoted so much time to estimating values for the inflation-safe unemployment rate have also largely neglected this question. Staiger, Stock and Watson do attempt to answer it in their 2002 paper but come up empty. After showing the close correspondence between the inflation-safe unemployment rate and the trend for the actual unemployment rate, they then acknowledge that their data "fail to isolate any economic or demographic determinants of the trend unemployment rate (p. 7)."

Slowly, however, some new modes of thinking are emerging. Almost as an aside in his 1997 paper, Gordon, for example writes,

The two especially large changes in the NAIRU [i.e. inflation-safe unemployment rate]…are the increase between the early and late 1960s and the decrease in the 1990s. The late 1960s were a time of labor militancy, relatively strong unions, a relatively high minimum wage and a marked increase in labor’s share in national income. The 1990s have been a time of labor peace, relatively weak unions, a relatively low minimum wage and a slight decline in labor’s income share.

Gordon also casually refers to intensified world competition in product and labour markets, and increased flows of unskilled immigrant labour into the United States, as factors contributing to a decline in the inflation-safe unemployment rate. Though again these observations are mere asides in Gordon’s paper, the overall point is clear: it is changes in the balance of forces between capital and labour, and the growing integration of the US into the global economy-which has increased the difficulty of U.S. firms raising prices and U.S. workers getting wage increases-that have been the main forces that have weakened the pressure for inflation to accelerate even at low unemployment rates.

Gordon’s general hunch is fully consistent with econometric models of the unemployment/inflation relationship that-unlike Gordon’s own model-incorporates the effects of falling wages and benefits for workers relative to productivity growth. I present the main results of such an exercise in Appendix 2 of this chapter, in which I include the effects of falling wages and benefits for workers relative to productivity growth in a simple econometric model. The model shows that adding this one factor alone generates predictions of the actual movements of the inflation rate of the 1990s between 2-3 times more accurate than the typical model that ignores the effects of low wages and benefits relative to productivity at low unemployment rates. The model does an even better job of predicting the movements of the actual inflation rate when, in line with Gordon’s suggestions, we also take account of intensified global competition, which led to lower import prices.

The central point is that, as we have seen, wage gains for average workers during the Clinton boom remained historically weak, especially in relationship to the ascent of productivity (see Figure 2.1 and Table 2.7). These facts provide the basis for the poll findings reported in Business Week at the end of 1999 that substantial majorities of US citizens expressed acute dissatisfaction with various features of their economic situation. For example, 51 percent of American workers interviewed by the magazine declared that they ‘felt cheated by their employer’. When asked their view of what Business Week termed the ‘current productivity boom’, 63 percent said that the boom has not raised their earnings, and 62 percent that it had not improved their job security. Such negative popular reactions are striking, given the persistent portrayal by the media of the Clinton economy as a time of unparalleled prosperity.

But such attitudes were not lost on leading government policymakers at the time. Thus, Bob Woodward’s paean to Alan Greenspan published in 2000, Maestro: Greenspan’s Fed and the American Boom, includes the following revealing passage:

The old belief held that with such a low unemployment rate workers would have the upper hand and demand higher wages. Yet the data showed that wages weren’t rising that much. It was one of the central economic mysteries of the time. Greenspan hypothesized at one point to colleagues within the Fed about the "traumatized worker"-someone who felt job insecurity in the changing economy and so was accepting smaller wage increases. He had talked with business leaders who said their workers were not agitating and were fearful that their skills might not be marketable if they were forced to change jobs
(p. 168).

Greenspan openly acknowledged his "traumatized worker" explanation for the dampening of inflationary pressures in his regular semi-annual testimony to Congress in July 1997. Saluting the economy’s performance that year as "extraordinary’" and "exceptional," he remarked that a major factor contributing to its outstanding achievement was "a heightened sense of job insecurity and, as a consequence, subdued wages." During her stint as a Federal Reserve Governor, Janet Yellen, co-author of The Fabulous Decade, reached similar conclusions as to the sources of declining inflationary pressures at low unemployment, reporting to Fed’s Open Market Committee on September 24, 1996 that "while the labor market is tight, job insecurity also seems alive and well. Real wage aspirations appear modest, and the bargaining power of workers is surprisingly low." As we have seen, these facts of declining bargaining power for workers did not deter Prof. Yellen from nevertheless concluding that the overall economic performance in the 1990s was "fabulous."

This ‘heightened sense of job insecurity’ lies at the very foundation of the Clinton administration’s economic legacy. But what lies behind the heightened sense of job insecurity itself, even as unemployment fell to a level unseen since the 1960s? It will be helpful here to return to what I called the "Marx problem" in Chapter 1. Marx’s explains in his theory of the reserve army of labor that workers have less bargaining power than employers in labor markets because they do not own their own means of production. But Marx also stressed that workers’ bargaining power diminishes further when unemployment and underemployment are high, since that means that employed workers can be readily replaced by the reserve army outside the factory gates.

In terms of the contemporary global setting, the dynamics of the reserve army effect in the United States and other high-wage economies changes when firms operating in low-wage economies can produce export-competitive manufactured products. In this situation, the potential size of the reserve army necessarily expands to also include both the unemployed and, even more to the point, employed but low-paid workers in the developing economies. As such, U.S. capitalists gained an additional bargaining advantage in wage-setting negotiations. This is because firms can now credibly claim that their own relatively high labor costs will threaten their export markets and increase import competition from low-wage competitors. In addition, the firms whose operations are not tied to a specific location can credibly threaten to move to low-wage economies if costs in their current locations appear too high. The crucial issue here is not that firms actually leave their existing high-wage location but that they can brandish a credible threat to exit.

Moreover, what makes such threats credible is not the rise of low-wage countries manufacturing capacity alone. Rather, it is that, given the rise in export competitiveness among low-wage countries, the Clinton administration did not act to counter the increased bargaining power accruing to capitalists. Quite the contrary as we have seen-by not advancing policies that would strengthen workers’ bargaining position in any of the key areas of trade, labor market regulations or macroeconomic policies, the Clinton administration enabled business to consolidate its increased relative bargaining strength.

Kate Bronfenbrenner of Cornell University has conducted the most directly relevant study of how threats by employers have influenced labor negotiations. Through a series of surveys of workers and union organizers throughout the 1990s, she has found that threats by employers have both inhibited organizing drives and held down wage demands. For example, in her 1993-95 survey, she found that 50 percent of all firms and 65 percent of manufacturing firms that were targets of union organizing campaigns threatened to close their shops and relocate if the workers voted to unionize. Though only 12 percent of those firms that ended up unionized did then carry through on their threat to relocate, workers nevertheless found the threats credible. In particular, in cases where firms did make threats to shutdown or relocate, unions lost a significantly larger percentage of elections. Her general finding from her series of surveys is that

Throughout the last decade, the increasingly rapid pace of global capital mobility, and the job dislocation and corporate restructuring that follows in its wake, has fostered a climate of intense economic insecurity among U.S. workers. This rising sense of economic insecurity has effectively served to hold down wage demands and wage increases even during a period of economic expansion, low unemployment and tight labor market. (2001, p. 2-3).

In a related study on this issue, Minsik Choi of University of Massachusetts-Boston considers what happens to unionized workers employed by U.S. firms with a high proportion of their investments in foreign operations. Everything else equal, we would expect firms with a larger number of foreign plants would have greater capacity to make credible threats against their U.S.-based workers in wage negotiations. Choi has found this to be especially true in industries with the highest proportion of foreign plants operating in conjunction with their domestic activities. For example, in firms producing soap, cleaners, and toilet goods, Choi finds that workers in the U.S. plants of these firms earn about 18 percent less than even non-unionized workers employed by firms with no foreign investment.

Overall then, the absence of inflationary pressures as unemployment fell under Clinton should be no mystery. Class conflict has always been the spectre haunting the analysis of inflation and unemployment. With the Clinton administration providing virtually no support to workers as the bargaining strength of business increased, it is not surprising that workers felt "traumatized"-as Alan Greenspan put it-and therefore scaled back their wage claims even in a period of low unemployment.

ROBERT POLLIN is professor of economic and founding co-director of the Political Economy Research Institute at the University of Massachuesetts-Amherst. He is also the author of the Living Wage (with Stephanie Luce). He can be reached at: pollin@counterpunch.org.