Bill Clinton takes to the Charlotte stage Wednesday night to do what he does best—talk . . . about the virtues of Democratic economics.
He'll certainly make a better witness than President Obama, and his goal will be to burnish the last four dreary years with fonder memories of the 1990s. Which means it's a good moment to remind everyone about the real economic history of the Clinton years, and why the results differ so much from those of Obamanomics.
In the nostalgic Democratic telling, Mr. Clinton got elected, raised taxes on the rich in 1993 to close the budget deficit and reduce interest rates, and thus kicked off one of the great booms in history. The truth is very different, starting with the fact that there really were two Clinton economic Presidencies.
Much like Mr. Obama, in his first two years the Arkansan bowed to the priorities of House Democrats and tried to govern from the left. He raised income and gas taxes while trying to impose a BTU energy tax, a government takeover of health care (HillaryCare) and a $31 billion stimulus, but putting off welfare reform.
Unlike Mr. Obama, Mr. Clinton failed to get his main agenda other than a tax hike through a Democratic Congress. This turned out to be an economic blessing for the country because it didn't weigh on growth, and a political benefit for Mr. Clinton, who didn't have to defend an unpopular agenda in 1996. Republicans rode opposition to the early Clinton agenda to take Congress in 1994, and that's when the second Clinton Presidency began.
Mr. Clinton moved sharply to the political middle. Remember "triangulation"? He embraced the goal of a balanced budget, using it to outmaneuver Newt Gingrich and Republicans over a government shutdown. After two vetoes and shortly before the 1996 election, he signed a GOP welfare reform.
As for economic growth, Mr. Clinton inherited an economy that grew 3.4% in 1992, including 4.3% in the fourth quarter. The expansion stumbled in the first nine months of 1993, no doubt in part due to the uncertainty of the Clinton tax hike. In 1994 stocks were flat and interest rates actually rose throughout the year, peaking on the very day in 1994 that Republicans took Congress. As the nearby chart shows, that's when the real 1990s boom began.
On policy, the rest of the decade was defined by a virtuous Beltway gridlock. Washington did little to interfere with private investment, and Congress even helped by restraining spending growth. Only toward the end of the decade did both parties began to spend like politicians again as surpluses rolled in.
Consider the policy contrasts between Messrs. Clinton and Obama. Under Mr. Clinton, federal outlays as a share of the economy fell to 18.2% of GDP in 2000 from 21.9% in 1992. Nearly two percentage points of that was from the post-Cold War cut in defense spending, but domestic spending also fell as a share of the economy.
For his part, Mr. Obama has presided over the largest spending binge since World War II, increasing outlays to 25.2% of GDP in 2009 and close to 24% of GDP for the next three years despite an economic recovery. Deficits have been above $1 trillion for four years.
Mr. Clinton did raise the top income-tax rate to 39.6% from 31% in 1993, and Democrats credit that with shrinking the deficit. But even two years after that tax hike, the Congressional Budget Office was estimating annual deficits of $200 billion a year. Only as rapid growth continued in the later part of the decade did the deficits vanish.
Meanwhile, Mr. Clinton agreed to cut the capital-gains tax rate to 20% from 28% in 1997. Revenue rushed into the Treasury as investors cashed in their pent-up gains.
Mr. Obama says he only wants to return to the Clinton-era tax rates, but he's already raised investment tax rates by 3.8 percentage points as part of Obamacare. Combined with the expiration of the Bush rates, that would leave some tax rates higher than in the 1990s.
Arguably the most memorable phrase (not related to a scandal) that Bill Clinton uttered during his Presidency came in his 1996 State of the Union address: "The era of big government is over." And for a few years, it was over. By contrast, Mr. Obama's four years have been spent expanding the government willy-nilly—with more spending, the promise of higher taxes, and intervention across the economy. His only economic plan now is still-more spending.
So as Mr. Clinton tries to lay hands on Mr. Obama and rewrite the history of the 1990s, the real story isn't how much policy the two Democrats have in common. What matters is what they did differently. Bill Clinton learned from the mistakes of h is first two years. Mr. Obama has doubled down on his—and, on all available evidence, he will double down again if he's re-elected.
A version of this article appeared September 5, 2012, on page A16 in the U.S. edition of The Wall Street Journal, with the headline: Of Bill and Barack.
Source: Argentine Beef Packers S.A.
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