In an Uncertain World (18 page)

In retrospect, the effect of the Clinton economic plan on business and consumer confidence may have been even more important than the effect on interest rates. In important ways, the deficit had become a symbol of the government's inability to manage its own affairs—and of our society's inability to cope with economic challenges more generally, such as our global competitiveness, then much in question. The view that fiscal discipline was being restored contributed to lower interest rates and increased confidence, and that led to more spending and investment, which in turn led to job creation, lower unemployment rates, and increased productivity. Some have argued that the productivity surge of the 1990s was merely a delayed reaction to the new digital technologies that arrived in the 1980s. But that view overlooks what happened in Europe and Japan, where the same access to new technology failed to result in a similar sustained productivity surge, probably because businesses didn't invest in technology to the same degree. That paucity of investment may well have been due to the structural rigidities in the labor and capital markets of Europe and Japan, but even with the flexible economy of the United States, investment, and therefore productivity, probably would not have surged as they did without that increased confidence as well as lower interest rates.

In an economic boom, as in a decline, cause and effect can become difficult to distinguish. The restoration of business and consumer confidence, combined with lower interest rates, created a virtuous circle, a positive feedback loop. Deficit reduction contributed to economic growth, which, through increased government revenues, contributed to further deficit reduction, which in turn led to more growth, and so on. The fiscal effect of the plan was thus a function both of our policy measures and of the growth those policies fed. We didn't design the plan around the potential effect on the stock market, as we had with the bond market, but in fact a similar phenomenon occurred as improved fiscal and economic conditions contributed to a rising stock market, which in turn fed back into deficit reduction and the economy.

While I don't think any of us fully foresaw the impact that restoring fiscal discipline would have on economic confidence, everyone in that room in Little Rock accepted the argument about what a credible plan was likely to do for interest rates. Contrary to some subsequent reports, everyone agreed that a serious deficit reduction program was absolutely necessary. I remember Lloyd Bentsen, the incoming Treasury Secretary, arguing persuasively that we had to do the tough things in the first months, when credibility was highest. Once we were in the White House, some political advisers—such as Paul Begala, James Carville, Stan Greenberg, and Mandy Grunwald—expressed serious concerns about the politics of our program. James Carville even took to calling me “Nick”—referring to Nick Brady, Bush's Treasury Secretary—because of my concern with the bond market (though James always said this with a twinkle in his eye, and I still smile when I remember that nickname). They felt that deficit reduction had no political constituency and that the President's political interests would be better served by following through on the middle-class tax cut and other campaign proposals. And in fact, in one sense their concerns turned out to be well warranted. In the longer run, there is no question in my mind that this program was right not only economically but also politically, because it was essential to the strong economy that helped reelect Clinton in 1996. But the economic benefits were not felt on a sustained basis by the time of the 1994 midterm election, and had we listened more to the concerns of the political advisers, we might have focused better on framing our deficit reduction message in a more politically effective way.

   

DESPITE CONSENSUS ON the broad goal of serious deficit reduction, there was no immediate agreement in Little Rock on the amount of deficit reduction or how to achieve it. At one end of the spectrum, Alice Rivlin advocated the most strenuous program of deficit reduction. Of the same general orientation, although slightly less hawkish, were Al Gore, Lloyd Bentsen, Leon Panetta, and myself. Among the others in the room that day, Bob Reich, Laura Tyson, George Stephanopoulos, and Gene Sperling suggested a more moderate position. While the hawks were focused on our plan's credibility with markets, Gene, Bob, and George wanted to preserve more of the campaign proposals. The new, higher deficit projection the Congressional Budget Office had issued in late December 1992 had made trade-offs between credible deficit reduction and these proposals even more difficult, and everyone understood that new programs in education, job training, health care, and welfare reform would have to be substantially constrained, at best, and that the middle-class tax cut was no longer feasible.

At some point, Leon and Alice presented five options—alternative amounts of deficit reduction, ranging from merely meeting the Bush administration's existing “baseline” deficit projection to cutting it in half over five years. Each option was combined with a commensurate level of investment. We disregarded the extremes at either end and focused on three options, all of which included significant deficit reduction. None eliminated the structural deficit over the five-year period—that was more than was practically possible, given the starting point. But we thought that health care reform's effect on Medicare would mean further reduction and that future budgets could continue the program.

I had told Clinton this wasn't supposed to be the “decision” meeting, merely a first airing of big issues. But as we discussed these options, he indicated support for a strong level of deficit reduction. After the inauguration, our group met in the Roosevelt Room over a period of several weeks to set the exact level of deficit reduction, priorities for allocation of budgetary resources, and the specifics of our tax proposal. Clinton remained intensely involved in the specifics. Throughout the process, his essential view—and the administration consensus—never faltered. The President adhered to a strong deficit target number despite the concerns of his political advisers, pressure from some Democrats in Congress, and the complaints of constituencies that were important to him politically. When the plan ran into serious political trouble, he persisted, and while he sometimes complained and even on occasion lost his temper about the fiscal problems he had inherited, he put tremendous energy into getting his plan passed. This was my first real experience with presidential decision making, and it left me with a respect for Clinton that has continued through the years. Like the Mexico decision, deficit reduction involved exchanging near-term political pain for the potential, not the guarantee, of long-term economic gain.

The decisions the President made in this process marked a dramatic change in fiscal policy. The opponents of that change—especially supply-side advocates who vehemently objected to including tax increases in our deficit reduction program—predicted that our program would lead to increased unemployment, higher deficits, and economic stagnation or recession, or worse. Republican Representative Dick Armey of Texas, chairman of the House Republican Conference, said the plan would be “a disaster for the performance of the economy” and warned that “no deficit reduction, no good can come of it.” His colleague from Texas, Republican Senator Phil Gramm, called it “a one-way ticket to a recession.” Instead, the country had the longest period of growth in its history, massive new private-sector job creation, low inflation, higher incomes across all income groups, increased investment and productivity growth, and lower deficits, eventually followed by surpluses. That has been a great and enduring frustration to supply-side advocates, who first predicted that our policies would cause great economic injury and then, when the opposite happened, argued that sound fiscal policy had nothing to do with economic conditions they had predicted would not occur.

Economic causation is complex and many factors contributed to the strong economy of the 1990s, but I think the evidence strongly supports the conclusion that deficit reduction was, as President Clinton said in our January 7 meeting, a threshold act. Without the policy changes ushered in by the 1993 economic plan, I don't believe that the sustained, robust recovery of the 1990s would have occurred. In our January 7 meeting, Alan Blinder argued that without restoration of fiscal discipline, the recovery could be “choked off” by higher interest rates. A few years ago, the Congressional Budget Office put out a paper arguing that the surplus that arrived in 1998 derived one third from policy decisions and two thirds from economic growth. But in reality these factors cannot be distinguished, since the growth was, to a considerable degree, a product of the policy.

What presidents do and say can have a substantial impact on the economy. So can what they don't do and don't say. On the affirmative side, Clinton maintained consistent focus on fiscal soundness throughout his time in office, as part of a broad-based domestic and international economic policy agenda. On the do-no-harm side, Clinton avoided trying to “jawbone” markets and resisted politically appealing measures that might have had a negative effect. For instance, he often came under pressure to constrict the flexibility of labor markets in various ways, such as proposing plant-closing notification laws. He advocated mitigating the consequences of economic dislocation—through measures such as worker training and universal health care—rather than restricting the workings of the free market.

   

OUR ECONOMIC POLICY DEADLINE was February 17, the date of the President's scheduled address to a joint session of Congress. The first draft of the speech I saw had a lot of language designed to resonate with the public but lacked a tightly reasoned discussion of our economic strategy with regard to deficit reduction and long-term interest rates. So I drafted a few short paragraphs attempting to explain our strategy with some rigor. In a speech frequently punctuated by wild applause, my neat little explanation—“It has an investment program designed to increase public and private investment in areas critical to our economic future. And it has a deficit-reduction program that will increase the savings available for the private sector to invest, will lower interest rates, will decrease the percentage of the federal budget claimed by interest payments, and decrease the risks of financial market disruptions that could adversely affect our economy”—was greeted by zero applause. So much for my future as a speechwriter, but I still thought that having a brief but serious reference point in the President's speech could be useful in the subsequent political debate.

I assumed, as many of us did, that the economic plan, once finished, would pass in due course. After all, our party controlled Congress with a comfortable majority in both houses, and we were standing for a reestablishment of fiscal discipline long advocated by many Republicans. In February 1993, there were already indications that the plan was having an effect, even before it passed. In one of our morning briefings, I told the President that the bond market was reacting more quickly and strongly than I had anticipated. In a recovering economy, interest rates might have been expected to rise in response to improved business and consumer demand and the expectation of future demand. Yet the yield on thirty-year Treasury bonds, 7.4 percent on December 31, 1992, had actually declined, quickly falling by more than half a point to 6.83 percent on February 23, 1993. That suggested to us that the markets were beginning to believe that our deficit reduction plan would work. (By mid-August, immediately after the plan was passed, long-term rates dropped by a full percentage point to 6.37, even though recovery was continuing.)

In monthly lunches the President held in the dining room in the White House residence, corporate leaders began to speak more positively about the economy. Most who came to these sessions were Republicans and hardly sympathetic to the new administration. After spending an hour and a half with the President, however, they often said to me that they thought he was smart, understood their issues, and really listened to them. Many continued to disagree with the tax piece of our plan, but as the months passed, it became clear that business leaders were gaining confidence in the country's economic prospects. I repeated to President Clinton a bit of sage advice Bob Strauss had given to President Carter: there are many people in the business community who probably won't ever support a Democrat for President, but he can take the energy out of their opposition with sound economic policies.

Confident that our plan was right, we put it out and moved on. As Clinton later said to me, this was a crucial tactical mistake. He should have been out talking about his economic program every day. He told me he would never again attempt a major policy initiative without an integral and forceful communication and political strategy. He also said he should have made an intense effort to frame the debate from the very beginning.

I learned through this episode that from the moment a President presents an important proposal to the nation, he has to spend time painting a picture of it his way. Otherwise, his opponents will color it their way and put him on the defensive. Our opponents went right to work casting our plan as a tax increase—a grave distortion in relation to the vast majority of taxpayers, who saw no increase in their income taxes and a gas tax estimated at only $36 a year for an average family of four. We, on the other hand, spent little time explaining how few people were affected by the tax increase or, more important, painting our own picture of the program as a restoration of fiscal discipline to create jobs, increase standards of living, and promote economic growth. Clinton subsequently came back into the debate very vigorously. But because he was largely absent from it for some time, our opponents had a big lead in creating the prism through which our economic plan was viewed. We had to fight against that prism and were never entirely successful. Senator Dianne Feinstein (D-CA) told me that when she ran for reelection in 1994, a poll showed that 42 percent of the people in California thought their income tax rates had been raised in 1993.