Thoughts about Clintonomics

Article excerpt

I am going to approach this subject as a card-carrying Democrat. Once, having been embarrassed at the Mexican border without appropriate identification, I learned that a suitable document would have been a voter registration card. Ever since that incident, I have never left home without it and a drivers's license. The voter registration card dominates the driver's license in the eyes of border officials.

There are different ways of assessing the Clinton Administration's economics. One way is to look at the basic document issued during the campaign, Putting People First, and recognize that it was a good document, but is it being faithfully implemented? Of course, it must be judged as a political document and appropriately discounted. I shall try to judge, in terms of practical politics, whether or not the Administration's people are doing what they said they would (try to) do. Also, I would like to judge whether it will do what it aimed to do over the course of four years.

On an earlier occasion, at meetings of the Western Economic Association, at about the same stage of progress of the Reagan Administration's first term, a fellow panelist, Theodore Schultz, asked me what, if anything, President Reagan had done for the economy. I said, "Well, he freed up oil prices," and Professor Schultz replied, "Maybe that is one thing that has happened, thus far." If you point to the Clinton Administration and ask what is the one observable thing that has been put in place, I would respond that it is the drop in the 30-year Treasury bond rate, by 100 or 200 basis points (dated from the election, November, 1992). One may think that this is a small, fussy point, but it does have momentous significance.

Although the Clinton Administration may like to claim 100 percent of the credit for bringing down the 30-year bond rate, I would give them only about one-half the credit. We could say that the long term interest rate fell because people had better inflationary expectations, because the economy is weak, or because there was emphasis on cutting the budget deficit. Maybe there are other reasons, but I focus on those three. Also, without having chosen Robert Rubin as an economic adviser, without having some Wall Street savvy in the Administration, President Clinton would not have been such a good monitor of the bond market. That is usually pretty dull stuff.

He achieved a more normal slope of the yield curve; all the Federal Reserve's attempts to bring down U.S. interest rates focussed on the short-term rate; the long-term rate was not moving very much. Economists would say that the long-term rate is very important in investment decisions and in sensitive consumer credit decisions; so, it was very significant to bring down the long-term rate. In addition, bringing down the long-term rate has done enormous good for the stock market.

I recall another session on Reaganomics in the first year of the Administration comparable to what we are discussing now with respect to Clintonomics. The stock market was then cited by Administration economists as the one public opinion poll that was going against President Reagan in the first nine months of his first term.

Now, the stock market is very supportive of the Clinton Program. A prominent American economist sent me a fax while I was traveling in Japan just at the time of the elections and said that he wanted a vote to support a prestigious American organization's buying a "put" on the S&P 500 index, to protect the portfolio against a fall of at least 10 percent in the stock market. This took place just prior to the vote. I understood the thinking behind that request and replied that I did not, personally, approve of the action. Nevertheless, the "put" was purchased (maturing in March, 1993).

If one thought that the attitude of people would be pessimistic if Clinton were elected and that the stock market would go down, then a logical step would have been to make the speculative purchase. …