Monday, April 18, 2005

Why did the "New Economy" fail to create the "long boom" that was promised?

The economic program of Bill Clinton's presidency is a perfect example of how close one may come to success, and yet fall short. The "New Economy" rose in response to the flow of technology, much of it developed by government, and to an economic program which history will call "Rubinomics."

The key to understanding what the Clinton administration did is to remember what the vicious cycle consists of: America must import energy, this causes a trade deficit. The trade deficit, in turn, means that the US must sell assets abroad, this creates an investment deficit. To bring investment in means that one must also cut taxes on the wealthy, so that companies remain under the control of Americans, rather than being bought up by foreigners, particularly those from nations that do not have internal economies. This creates a budget deficit.

The investment deficit and budget deficit together create conditions in which real wages do not increase as quickly and there is less growth in the kind of upwardly mobile employment that people need. This situation also creates incentives for government to tax consumption, both because this reduces the trade deficit, and because the wealthy cannot be taxed. This creates a wages deficit. The wages deficit, in turn, gives people an incentive to borrow more, particularly against their homes. This creates a wealth deficit, with increasing inequality in assets. The solution to the wealth deficit is for people to use gasoline to shop around for better bargains, and to buy homes further from where they work, and in areas that do not have to pay the carrying costs of large metropolitan areas. This means they burn more energy, and this loops back around to the beginning of the cycle.

The whole cycle then is:

1. Energy deficit creates trade deficit.
2. Trade deficit creates investment deficit.
3. Investment deficit creates budget deficit.
4. Investment deficit and budget deficit creates wages and wealth deficit.
5. Wages and wealth deficits create pressure to use energy to generate housing wealth, which starts the cycle over again.

Each stage pushes the next along, because at each stage there is a group of people that can benefit by pushing the problem to the next group of people.

Democratic politics since 1978 has consisted of a series of attempts to find a way to break this cycle. Carter tried direct conservation, to end the energy deficit. Mondale wanted to raise taxes and investment in the US, to break the wages and wealth deficit. By the time Clinton was elected, however, there was a broad consensus that there could not be a direct attack on these problems. Clinton himself tried to attack the problem directly by proposing an energy tax, but this met with tremendous resistance and was dropped. While he was able, because of the high deficits created both by the borrowing Reaganomics had engaged in, and by the collapse of the Savings and Loan System, which was an unintended consequence of lowering energy prices, he did not have the political capital to go farther along this line than he did. more
posted by Cynthia   Permalink| Comments(2)|

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