American Economic Policy in the 1990s

Published by EH.Net and H-Business (August 2002)

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Jeffrey A. Frankel and Peter R. Orszag (Eds.), American Economic Policy in the 1990s. Cambridge: MIT Press, 2002. xii + 1119 pp. $49.95 (paper), ISBN 0-262-56151-4.

Reviewed for EH.Net and H-Business by William F. Shughart II, University of Mississippi.

History happens faster nowadays. It took Martin Feldstein four years to produce American Economic Policy in the 1980s (University of Chicago Press, 1994), a volume assessing the decade of Jimmy Carter, Ronald Reagan, and George H. W. Bush, which served as the prototype for the book that is the subject of this review. The twenty-first century was still in diapers when Jeffrey Frankel and Peter Orszag convened a conference at Harvard University’s Kennedy School of Government (June 27-30, 2001) to review the economic policy successes and failures of the Clinton presidency. The conference volume is out just one year later.

American Economic Policy in the 1990s is instant history, or what the editors prefer to call a “‘debriefing’ of those who made the history” (p. 3) over the ten years beginning in 1991. While the decade opened with the second half of George H. W. Bush’s administration and ended with the election of his son, the conference naturally focused on the dominant figure of that era, President Bill Clinton. The volume is organized into 14 chapters that cover the gamut of economic policymaking under his watch. These chapters are in turn divided into four main parts, starting with macroeconomics (monetary policy, fiscal and social security policy, tax policy, international finance and crises in emerging markets), and then moving on to microeconomics (trade policy, information technology, antitrust, energy policy, and environmental policy), and social policy (labor and education, poverty and welfare, health care and tobacco, and Medicare). Part IV is devoted to the institutions and processes of economic policymaking during the Clinton administration. Each of the 14 chapters is followed by the written comments of (usually) three panelists plus a summary of the discussion prompted by the main paper.

Given the institutional affiliations of the editors (Frankel is at the Kennedy School and Orszag is at the Brookings Institution), it should perhaps not be too surprising that the conference’s participants were drawn largely from the Harvard-Brookings-Berkeley-Stanford axis (I am tempted to add “of evil,” but I will resist), with the odd representative from the Urban Institute and Resources for the Future tossed in. With more than half the chapters being contributed by former Clinton officials or old government hands who have served in senior administrative positions since before Bill Clinton entered the White House, the editors have not followed a recipe for producing detached, hardnosed analyses of economic policy during the 1990s. This bias is reinforced by the dominance of similarly pedigreed insiders on the various panels and, if the transcripts of the discussions are any guide, in the audience as well. Only a few of the volume’s contributors and commentators were willing to express reservations about what Jagdish Bhagwati calls the “Clinton hagiography” (p. 333). In addition to Bhagwati, few beyond Bill Niskanen, Alan Meltzer, Richard Schmalensee, Victor Fuchs, Joseph Newhouse, Kip Viscusi, and Glenn Hubbard stand out in this regard. And among these contrarians, Newhouse is the sole contributor of a main paper.

Having said this, however, American Economic Policy in the 1990s contains some first-rate policy analyses. My overall opinion of the volume changed dramatically beginning with Part III where papers by economists take center stage. The chapters by Alan Krueger and Cecelia Rouse on education and labor policy, Rebecca Blank and David Ellwood on the Clinton legacy for America’s poor, and by Joseph Newhouse on Medicare policy are distinguishable from much that has gone before by actually citing and summarizing the scholarly literature addressing the impacts of policymaking on measurable outcomes. An exception is the paper by David Cutler and Jonathan Gruber on health policy, which does an admirable job of recounting the spectacular failure of the administration’s proposed Health Security Act, but, as panelist Victor Fuchs points out in his insightful commentary, makes the fundamental mistake of equating access to health insurance with access to health care. Who, exactly, are the great unwashed masses of uninsured individuals for whose welfare Hillary Rodham Clinton and Ira Magaziner expressed so much concern? (Are they primarily young, healthy people for whom insurance coverage is of less value at the margin than higher wages, for instance?) The chapter never asks or answers this key question. Neither does it satisfactorily make the case that government provision of universal health insurance would not entail large taxpayer-financed subsidies to employers and employees by simply displacing (in policy-wonk jargon, “crowding out”) existing private insurance. Part III is likewise marred by Alan Krueger’s defense of his joint work with David Card purporting to show that increases in the minimum wage do not have statistically significant effects on employment and, hence, are “good” public policy. He fails to address the criticism that one should look, not to the minimum wage’s impact on the number of individuals employed, but to its impact on the number of hours worked, the standard way in economists talk about the supply of labor. He also fails to come to grips with the possibility that rational, profit-maximizing firms may respond to increases in the minimum wage by reducing or eliminating previously provided fringe benefits, such as health insurance, thereby holding their hourly labor costs constant and, arguably, making their employees worse off.

As Jagdish Bhagwati notes with respect to Robert Lawrence’s chapter on trade policy, many of the volume’s assessments of Clintonomics are “a trifle, even excessively, indulgent” (ibid.). The evaluative yardstick frequently taken up by the contributors “is that legislation enacted . . . consistent with the administration’s objectives is viewed as a success” (Comments of Kip Viscusi, p. 885). Nowhere is this indulgence more apparent than in the discussions of macroeconomic policy. One comes away with a sense of astonishment at the hubris of officials of the Treasury and Federal Reserve who apparently truly believe that measures of overall economic performance like interest rates, foreign exchange rates, the inflation rate, the unemployment rate, and the rate of economic growth are choice variables that can be manipulated at will rather than being aggregate statistics that emerge spontaneously and uncoordinatedly from hundreds of millions of individual decisions. Thus, the robust American economy of the 1990s is credited to the “fiscal discipline” presided over by Bill Clinton which produced record federal budget “surpluses” at the end of the decade (“surpluses” only if one ignores the contingent future liabilities of the Social Security and Medicare “trust funds”). An equally reasonable conjecture is that the robust American economy of the 1990s produced record increases in government tax revenue that made exercising fiscal discipline politically cheap. But the possibility of such reverse causality is not on the radar screens of those who make their livings “doing the people’s work.”

It is impossible in the space of a brief review to do justice to a volume that exceeds 1,000 pages in length. There are high points as well as low. The chapter on the “new economy” and information technology (IT) policy during the Clinton-Gore years by Paula Samuelson and Hal Varian, for example, presents evidence on the difficult-to-detect contributions of the IT sector to the decade’s unprecedented economic growth without mentioning that the administration spent its entire term of office trying to destroy the industry’s leader. (The Microsoft antitrust case is discussed in the following chapter by Robert Litan and Carl Shapiro, who pretty much toe the government’s line, ignoring the substantial evidence that casts doubt on the empirical relevance of theories of “network effects” and consumer “lock-in” to inferior technologies.) In an otherwise admirable essay on energy policy during the 1990s, Paul Jaskow does not connect up the administration’s encouragement of a pipeline running under the Caspian Sea from the gas- and oil-rich Central Asian republics to Turkey (so as to avoid alternate routes through Iran and Russia) with its early and ultimately disastrous backing of the Taliban.

If the reader can appropriately discount the obvious biases of some (but certainly not all) of the volume’s contributors, American Economic Policy in the 1990s supplies a valuable and comprehensive record of the policy initiatives of the Clinton years. It contains a wealth of institutional detail and some important lessons, foremost among which is that politics almost always trumps economics. In their fine concluding chapter on economic policy coordination, Jonathan Orszag, Peter Orszag and Laura Tyson admit that the president’s “Save Social Security First” mantra was a ploy to stave off Republican demands for a tax cut and to help divert the public’s attention from the Lewinsky scandal (pp. 1014-15). Similarly, the HOPE scholarship initiative was pushed through Congress despite principled opposition by economists at the National Economic Council and the Council of Economic Advisers (pp. 1010-11).

How much credit should the Clinton administration receive for the strong economy of the 1990s? A great deal, if most of the volume’s contributors are to be believed. Budget surpluses, controlling Medicare cost-inflation, ending “welfare as we know it,” the Earned Income Tax Credit and NAFTA head most of the panelists’ lists; in my view, by contrast, the decade’s greatest policy accomplishment was avoiding the disaster of universal health insurance coverage. The government of the State of Tennessee is now partially shut down owing to a budget impasse caused principally by the (predictable) explosion in spending under TennCare, the local version of Medicare and Medicaid, but with more generous eligibility rules. Similarly, the expansion of benefits to low-income pregnant women and children by CHIP (the Children’s Health Insurance Program), established under the Balanced Budget Act of 1997, have been a major contributor to Mississippi’s present budget woes. That is what might have been had the Clinton administration not mishandled the politics of universal health insurance. Experiences at the state level also illustrate the fundamental point often overlooked by reformers that increased utilization of scarce health care resources, not profiteering by drugs companies and health care providers, is the main reason why health care spending continues to rise faster than the rate of inflation.

Although the events of September 11, 2001, and the continuing War on Terrorism seem to have consigned the ‘nineties to history’s dustbin, more time must pass before a more nuanced and more detached evaluation of the Clinton record can be undertaken. By failing to include more outsiders on the panels, the editors of American Economic Policy in the 1990s missed an opportunity to provide such an evaluation. While there surely is value in hearing from “those who made the history,” one cannot expect history-makers to be very critical of their own records. Nevertheless, American Economic Policy in the 1990s will deservedly become an essential point of entry for economists, historians and political scientists seeking insight into the economically eventful final decade of the twentieth century.

William F. Shughart II is F.A.P. Barnard Distinguished Professor of Economics and holder of the Robert M. Hearin Chair at the University of Mississippi. He is the author, co-author or co-editor of, among others, Antitrust Policy and Interest-Group Politics (Quorum, 1990), The Causes and Consequences of Antitrust: The Public-Choice Perspective (University of Chicago Press, 1995), The Political Economy of the New Deal (Edward Elgar, 1998) and The Elgar Companion to Public Choice (Edward Elgar, 2001); he is also a member of the advisory board and major contributor to the forthcoming Encyclopedia of Public Choice (Kluwer Academic Publishers, 2003).