It's Still the Economy Stupid
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"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 eight years in office. As the U.S. economy has continued to spiral downward in the first months of 2008, the economy is again emerging as the single most important question of the presidential campaign, even eclipsing the Iraq war as a concern among voters.
What do Barack Obama, Hillary Clinton, and John McCain have to say about our current reality of financial crisis and recession, and the generation-long stagnation in average living standards that has preceded the crisis of the moment? There aren't significant distinctions between Obama and Clinton in terms of their campaign platforms, while both Democratic contenders share huge differences with McCain. But the most important question is not where these candidates stand during the campaign; it's what they would actually do while in office. And this is more a matter of political power -- which social groups can exert pressure within a new administration -- than of economic philosophy.
This point was highlighted in dramatic fashion near the end of the March 4 primary campaigns in Ohio and Texas when Austan Goolsbe, a professor at the University of Chicago and Obama's chief economic adviser, was reported to have told Canadian diplomats that Obama was far more sympathetic to free trade measures such as NAFTA than he was letting on in his campaign speeches. Goolsbe denied saying this. But the fact is, we can't know what Obama will really do on NAFTA and related measures until he becomes president, facing a whole range of pressures. These will include big business continuing to seek free access to Mexico's vast pool of low-wage workers.
In terms of public platforms, McCain advances an uneasy combination of the two strands of thinking that have long been dominant among Republicans -- Reaganesque tax cuts that "supply-siders" claim will stimulate economic growth, along with old-school anti-New Deal positions opposing social spending and supporting a balanced federal government budget. It should not be surprising that McCain's approach is a mushy amalgam. McCain openly admitted in late 2007 that "the issue of economics is not something I've understood as well as I should." This is true, despite the fact that he has been a member of Congress for 26 years and a two-time presidential candidate.
Obama and Hillary Clinton are increasingly advancing an agenda focused on job creation, affordable health care, greater equity in the tax code, limits on free trade, and combining economic growth with environmental protection -- so-called "green growth." These are certainly desirable goals.
But we must keep in mind that Bill Clinton advanced similar goals in 1992, under his economic program of "Putting People First." Yet Clinton's economic program changed drastically even during the two-month interregnum between his November election and his inauguration in January 1993. During this time, Clinton decided that the first priority of his administration would be to serve the interests of Wall Street. The Clinton years were defined by across-the-board reductions in government spending as a share of the economy's total spending, virtually unqualified enthusiasm for free trade, tepid and inconsistent efforts to assist working people in labor markets, and the deregulation of financial markets.
Bill Clinton even conceded during the period before his inauguration that with his new policy focus, "we help the bond market and we hurt the people who voted us in." Either Hillary Clinton or Barack Obama could easily fall into this same trap if they aren't faced with intense pressure from progressive forces to maintain their campaign commitments. Such as concern was certainly underscored by the reports of Goolsbe's comments to the Canadians on NAFTA.
We get some insights into the likely economic policy approaches of McCain, Clinton and Obama -- probably more than by reading their respective platforms -- by considering whom they are listening to now, and who would be likely to serve as high-level advisers in a McCain, Clinton, or Obama White House.
McCain has said he will call on people like Pete Peterson and Jack Kemp. Peterson is a billionaire Wall Street investor and a former Commerce Secretary under Richard Nixon. He has long favored cutting deeply into Social Security, Medicare, and other welfare-state policies as a means of maintaining balanced federal government budgets. Not surprisingly, Peterson also believes that Wall Street titans like himself should continue to enjoy lower tax rates than teachers, firefighters, nurses, and waitresses.
Jack Kemp was a congressman during the 1970s and 1980s, and was an original advocate of deep, across-the-board tax cuts as a tool for stimulating economic growth. He was thus instrumental in helping define Reaganomics even before Ronald Reagan took office in 1981. Kemp argues that fiscal deficits are not a serious problem and that Republicans like Peterson practice "root canal" economics by harping on such matters.
Kemp portrays himself as a populist who wants to unshackle the entrepreneurial energies of the American people by lifting their tax burdens. But the Reagan tax cuts, like those under George W. Bush, heavily favored the wealthy. These tax cuts therefore meant more money in the pockets of the rich, with less government revenue to spend on social programs. This created pressures for cuts in social spending. Here is where the Peterson and Kemp politics converge. In both cases, we almost certainly end up with major attacks on social spending, whether the federal budget is in balance or running a deficit.
The economic policy debate should therefore be wide open for either Hillary Clinton or Obama to push hard on an egalitarian agenda focused on jobs, tax fairness, affordable health care, financial regulation, and green growth. At the same time, Obama has said that the people he will want to listen to on economic policy, beyond Goolsbe, include Robert Rubin, Alan Blinder, and Robert Reich. All of them were major economic advisers to Bill Clinton and they are all likely to be recycled by Hillary Clinton.
Rubin, in particular, was Bill Clinton's closest economic adviser as well as Treasury Secretary for four years. And it was Rubin who, even before Clinton's first inauguration, explained to the more populist camp within the newly forming administration that the rich "are running the economy and make the decisions about the economy."
Under a Hillary Clinton or Obama administration, there will almost certainly be a replay of this struggle between Wall Street Rubinites and the working class and middle class people who will have voted a Democrat into office.
Under Bill Clinton, working people and the middle class lost out to Wall Street. But I think the chances are higher for a major shift in direction under a new Democratic administration, particularly one under Obama. My hunch on Obama -- and it is only a hunch -- follows from how he stacks up as a political figure, compared to Hillary Clinton. Obama is obviously not bound up with the history of Clintonomics. His campaign also emerged as a widespread popular movement that has energized a new generation of voters.
But more important than hunches by me or anyone else is the economic reality before us -- that conditions for all but the wealthy have stagnated for a generation, under Reagan, Clinton, and the two Bushes; and that in the short term, we are staring a recession and ongoing financial crisis in the face. The pressures for a viable progressive agenda focused on financial stability, a jobs stimulus, universal health care, and green growth have correspondingly grown. Neither Clinton nor Obama can avoid this reality.
After all, Robert Rubin himself, who has been a director and chair of the executive committee of Citigroup since leaving the Clinton administration in 1999, has been humbled by the massive losses at Citigroup tied to the subprime mortgage crisis. Alan Blinder, who was on Bill Clinton's Council of Economic Advisers when the Clinton administration rammed NAFTA through Congress, is now expressing serious concerns about the effects of globalization on middle class living standards.
In short, a new Democratic administration may well offer possibilities for a dramatic shift in U.S. economic policy, even if some of the same old Bill Clinton crowd is brought back in as advisers. But if such a major policy shift does occur, it will not be primarily because a Democrat -- either Hillary Clinton or Obama -- will be sitting in the White House. It will rather be because the people who put one of them there will have gathered sufficient political strength to make them stick to their campaign promises.
Robert Pollin is professor of economics and co-director of the Political Economy Research Institute (PERI) at the University of Massachusetts.