In 1993, mere months into the Clinton era, the new administration went to war with itself. Liberals in the Cabinet argued that the central problem of the U.S. economy was the vast middle class that was not seeing its income improve--a problem, they said, that could only be addressed through massive public investment. Moderates, including Robert Rubin, then the chairman of the National Economic Council, replied that the central problem was restoring economic growth, which could only come about by slashing the budget deficit. The moderates won.All was well in the 90s.
When Clinton left office, the Rubinites looked like prophets. Everything they hoped for had come true. Businesses invested more. Incomes grew, and not just for the rich. Families at the middle of the income distribution saw their incomes grow by more than $7,000. The poverty rate fell by one-quarter, and the typical black family saw its income grow by one-third. Even in the early Bush years, the victory of Rubinomics within the Democratic Party seemed complete.But then something happened.
Today, however, the Rubinites have been thrown into doubt. It is not that their policies have failed. (They have been abandoned: Clinton's economic policies meant fiscal responsibility combined with downward redistribution, while Bush has embraced fiscal irresponsibility and upward redistribution.) Rather, what has been shaken is something even deeper: their faith in the possibilities of economic growth.When the pie gets smaller - productivity.
The cause of their doubt is the disturbing performance of the U.S. economy over the last five years. What's happening is very simple: The economy is growing smartly, but, essentially, all the gains are going to the rich. It is almost a dystopian Marxist vision come to life. Corporate profits have soared, incomes at the very top have shot through the stratosphere, and, yet, the vast majority of Americans have not seen their living standards rise at all. This development does not offer much of an intellectual challenge to either the right (which is not particularly troubled) or the left (which is not particularly surprised). But the center is both troubled and surprised. And, for the Rubinites, figuring out just why this is happening, and what to do about it, has begun to unravel their confidence in the moderate remedies that not long ago seemed unassailable.
During the postwar boom, productivity surged at an average rate of 2.5 percent a year. But from 1973 to 1995, by contrast, it grew at a paltry 1.5 percent. The economic pie had stopped growing, and slicing it up more fairly was no longer enough. So a generation of liberals, and especially moderate liberals, began focusing on how to restore rising productivity and get the pie growing again. This was one reason the Clinton administration made it a priority to reduce the budget deficit, which drained savings that could otherwise be tapped by business for investments in new plants and equipment that could raise productivity. "The whole focus was on growth," Rubin recalled in an interview with The Nation's William Greider last June. The focus on growth worked. Starting in 1995, productivity began to climb rapidly once again. And, just as they had after World War II, wages rose up and down the income ladder.Out of touch!
This is what has made the current economic expansion--which began after the brief 2001 recession--such a mystery. On one level, it resembles the expansion of the '90s--high growth, high productivity gains, low unemployment. But, on another level, it resembles the Age of Diminished Expectations: The median income has not grown at all. Workers are helping create enormous fortunes, but not sharing in them. The average hourly wage has actually declined 2 percent since 2003. The crisis of scarcity has been solved, only to be replaced by a crisis of maldistribution.
This seems to run in the face of economic theory. If workers grow more productive, logic suggests, they're making more money for their employers, which means businesses will find it profitable to hire more of them. The more workers get hired, the more businesses have to bid up their price to hire them, which means that their wages will rise. Yet that final step is not happening. The vast new wealth being created by U.S. business is going to owners of capital and nobody else.
Just this week, The New York Times published a story on the front page of the business section marveling at voters' inexplicably downbeat assessment of the economy. "Republican candidates do not seem to be getting any traction from the glowing economic statistics with midterm elections just two weeks away," reported the Times. The author proceeded to puzzle at length about why this could be, without ever considering the possibility that, for most people, the economy was not doing well.The Republicans and most of the pundits only talk to multi-millionaires and yes they are doing well. But this economy is not a "miracle" for over 90% of the citizens. Of course this is what the corporatists want - a return to a feudal society.
Conservatives, for their part, have grown enraged that the public does not adequately appreciate the economic bounty it is enjoying under Bush. The Wall Street Journal editorial page dubbed the current recovery the "Dangerfield economy" (meaning it gets "no respect") and speculated that people only believe the economy is bad because they have been fed misleading reports by the biased liberal press. Columnist George F. Will has fulminated against the "economic hypochondria" of the ungrateful masses. Conservative commentator Larry Kudlow has endlessly touted the Bush boom as "the greatest story never told."
It is certainly true that the economy is performing well by traditional standards. But it ought to be apparent that, in this case, traditional standards are not the most relevant ones. Fast economic growth, after all, is a means to an end--namely, higher living standards for most people. By any decent moral calculation, an economy that does not produce higher living standards for most people is not a good one.
The most obvious mystery is: Why is this happening now? What makes this economic cycle so different from the ones that came before it?
One convenient answer is that Bill Clinton was president during the last expansion, and George W. Bush.