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http://www.sfgate.com/cgi-bin/article.cgi?
file=/chronicle/archive/2000/10/19/MN110519.DTL
NEWS ANALYSIS
Now the Hard Part
Bush and Gore Miles Apart On What Made Economy Roar
Carolyn Lochhead, Chronicle Washington Bureau
Thursday, October 19, 2000
©2000 San Francisco Chronicle
In the 10th year of a record economic boom, this presidential contest
is like no other in recent memory.
Budget surpluses galore, record low unemployment, low inflation and,
until last spring, a soaring stock market have framed the entire
campaign.
"Prosperity with a Purpose" is Republican nominee George W. Bush's
slogan. "Prosperity for All" is Democratic nominee Al Gore's.
But for all their talk of prosperity, Gore and Bush disagree on what
caused it.
Is Gore's running mate, Joseph Lieberman, right, when he
declares, "We are the party that brought prosperity to the
country. . . . We are the party that will continue the prosperity."
Or is Bush right when he charges that Gore threatens prosperity with
a return to "the largest spending increases since LBJ and the Great
Society," quoting a report from the nonprofit bipartisan Committee
for a Responsible Federal Budget.
Was it tax cuts that sparked the boom, as Republicans claim? Or was
it tax increases, as Gore contends?
An accurate reading of the record of the past eight years is critical
to future policy-making.
"Unfortunately, there is no DNA test for determining the real father
of the economic successes of the past five years," former
Congressional Budget Office Director June O'Neill wrote
recently. "The popular nominees -- among them Alan Greenspan, Bill
Clinton, Ronald Reagan -- are likely to be found to have had an
influence. But many people and things, known and unknown, planned and
accidental, were players in the outcome."
GORE TAKES CREDIT
Gore, for his part, takes ample, if not full credit for the
expansion.
He claims the administration lifted the economy out of a "triple-dip
recession," implying, as President Clinton has, that the 1991
recession was the "worst since the Great Depression."
Gore credits the recovery to "the winning policy formula of the
Clinton-Gore administration," centering on a 1993 tax increase.
In fact, the 1991 recession was one of the mildest ever, lasting just
eight months. It also ended in March 1991 -- almost two years before
the administration took office.
Many economists do credit the administration's 1993 deficit-reduction
effort with helping to soothe financial markets and lower interest
rates at a time when deficits were building to record levels.
However, the record shows that the "triple-dip" 1991 recession was a
blip punctuating a remarkable growth period that began under
President Reagan in 1982. The "worst recession since the Great
Depression" better describes the 1981 recession early in Reagan's
first term. Economists credit that sharp downturn with helping to
quash inflation and encourage an industrial restructuring that set
the stage for a record growth run.
After the mild 1991 downturn, the economy resumed its robust climb,
picking up speed in 1996. Budgets remained deeply in deficit through
Clinton's first term.
GOP GLOATS OVER STOCK MARKET
Republicans, for their part, gloat that the stock market picked up
after they took control of Congress, claiming that their balanced-
budget drive undergirded the expansion.
As Cato Institute budget analyst Stephen Moore described it, "About
90 percent of the gain in asset values happened after Republicans
took control of Congress and the markets were assured that
Clintonomics would be curtailed."
Yet while the Dow Jones Industrial Average began climbing in 1995,
the technology-heavy Nasdaq -- which mirrors the so-called New
Economy -- did not take off until 1997. And since last spring, the
Nasdaq has been mired in a deep bear market, off roughly one-third
from its peak. No one is taking credit for that.
Republicans did drag a very reluctant administration to both a
balanced budget pact and welfare reform, despite Gore's frequent
credit-taking for both. Clinton vetoed the GOP welfare bill twice
before signing it, and he fought the GOP budget-balancing drive
through two government shutdowns before acquiescing to the Balanced
Budget Act of 1997.
But despite its title, that GOP triumph both raised spending and cut
taxes, hardly the ingredients of a balanced budget. Although
Republicans tried, with spotty success, to cut spending, almost all
the cuts came from defense, O'Neill said.
The overwhelming reason the budget went into surplus was a growth-
fueled surge in tax revenues. This unexpectedly swung the budget into
the black in 1998, four years earlier than Republicans had planned.
Moreover, the 1997 budget restraints have been broken every year and
are now effectively dead. Total spending is expected to exceed the
1997 ceilings by $100 billion.
FREE TRADE CALLED KEY
Economists give greater credit to the administration's steady push
for free trade that helped fuel world growth. Ironically, some also
applaud the failure of the administration to enact its giant health
care plan early in Clinton's first term.
"The only reason we have a surplus now is that we have a Democratic
president and a Republican Congress," said Nobel economist Milton
Friedman, a Bush supporter. "It's gridlock that has given us the
surplus."
Bush, who can neither campaign on the economic record nor argue
against good times, contends that the "people" rather than the
administration are responsible.
"I don't think the surplus exists because of the ingenuity and hard
work of the federal government," Bush said in Tuesday's debate. "I
think it exists because of the ingenuity and hard work of the
American people, and you ought to have some of the surplus so you can
save and dream and build."
Bush contends that his more market-driven policies would deepen the
prosperity and that Gore's more interventionist approach would
threaten it. "We'll be prosperous if we reduce taxes," Bush
says. "We'll be prosperous if we reduce regulations. . . . We'll be
prosperous if we embrace free trade."
Bush also accuses the administration of "squandering" prosperity,
failing to use the good times to reform Social Security and Medicare,
improve education and health care, and help children.
The administration did back away from a Social Security overhaul and
rejected its own commission's Medicare recommendations.
But it also made a priority of education and health care, doubling
student aid and Head Start, supporting school modernization and
pushing a big, new program to provide health care for poor children,
among many initiatives.
LOW INFLATION RARELY MENTIONED
But the one policy that economists point to as a key to the expansion
is something the candidates seldom mention: low inflation.
It was low inflation that reduced interest rates, triggering an
investment boom that lifted worker productivity and living standards.
Low inflation was the result of "a mixture of luck and skill," said
Anirvan Banerji, director of research at Columbia University's
Economic Cycle Research Institute
The luck was that through the 1990s, the world's economies rarely
expanded simultaneously. The resulting glut in global capacity
reduced prices overseas, allowing the United States to import
disinflation.
"We got a break," Banerji said. "We could have our cake and eat it
too, we could have strong growth and we could have low inflation, so
we have low interest rates, which in turn stimulates the economy."
But twice, in 1994 and now, global economies were expanding in sync,
import prices began rising, and the U.S. began importing inflation.
"That is exactly where the skill came in," Banerji said -- from
Federal Reserve Chairman Alan Greenspan.
"The Fed jumped in and started raising interest rates, exactly when
it was needed," Banerji said. "So we were incredibly lucky. And to
the extent that we weren't lucky, the Fed was extraordinarily
skillful."
Neither candidate mentions the skill or the luck, but both are
counting on it continuing.
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