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Created: 2000-03-05
Last Modified: 2000-03-05
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Clinton's Economic and Social Policies

J. Bradford DeLong
http://www.j-bradford-delong.net/
delong@econ.berkeley.edu

 


Context:

>Brad, the key here is the "White House Incompetence".
>Clinton had a number of valuable programs which
>he got elected by first term. There was for example an apprenticeship
>program, health insurance, state financed college tuition.


My Comment:

I agree that White House incompetence is a key link.

A story. In the summer of 1994, a friend of mine--David Cutler--who had worked for the campaign in 1992 and for Laura Tyson in 1993 was heading out to give a talk on health care reform, so he called up the White House health care "war room" and asked if they could give him three horror stories--with real names, faces, dates, and insurance companies or HMOs--about what bad things happened to people under our current, unreformed system.

The response was that they couldn't do that--that they couldn't provide any support to anyone who wasn't an administration spokesman--at least not without the approval of Ira Magaziner.

Remember Godfather's Pizza? The guy who stood up and told the President that he was a hard-working entrepreneur whom the President was going to bankrupt by making him pay for his workers health care?

There was a counter: that at present Godfather's Pizza was loading the costs of paying for its workers onto other businesses that did provide health insurance for their employees, that when Godfather's Pizza employees got sick the money that should have gone to pay for their coverage went into Mr. Entrepreneur's pockets while somebody else paid the freight, that the Clinton Plan Mark I would have offered Mr. Entrepreneur a 40% *discount* on health insurance--that the Federal government would pay 40% of his costs in order to induce him to join the system. And that anyone who turned down an offer to provide his employees a benefit for 60 cents on the dollar that they would value as worth much more than a dollar--such a guy does not have his employees best interests at heart.

We sent it up, where it died: not in the administration's interest to be so combattive. We offered to give our analysis--spin-free--to the more sophisticated health care reporters. Silence. We offered to give our background materials and estimates to a "friendly" group. Silence.

My conclusion was that the Clinton White House had a lot of people who didn't want help on their issues, but only wanted to protect their turf--and who viewed anyone who wanted to help them as a potential enemy out to get their job. The Clinton White House also had a lot of people who graded you on how many strikeouts you made: so to get a perfect score, all you had to do was make sure that you never took a turn at bat.


>Instead, his major "accomplishments" seem to be balancing
>the budget, NAFTA and revoking AFDC


"Balancing the budget" was surely worth doing--a major win for economic growth--and was a minor win (boosting tax rates on the rich, expanding the EITC) on the income distribution front. NAFTA had next to no direct impact on the U.S.--remember that Mexico's economy is smaller than Los Angeles's--and was probably a minor win in the sense that it gives Mexico a little bit more running room in its development options, but surely it was not worth the damage that winning NAFTA inflicted on the American economy.

Revoking AFDC would have already been a disaster had we been unlucky enough to have a big recession in the late 1990s, and may well be a disaster in the early 2000s when the next recession comes by, and is on the same level of morality as... the execution of Mr. Rector.


>Why weren't any of
>these policies pursued in Clinton's second term. Even if he never
>could pass health insurance or any valuable program it might
>be much better in the long run to fail trying.


Why weren't any of these policies pursued after the 1994 election? Gene Sperling had to move heaven and earth within the White House to get permission to allow me and others in the Treasury to help Moynihan fight the balanced budget amendment. "Triangulation"...


>
>Why in your estimation was this botched. We know that the
>population in general is in favor of national health insurance.


The people are in favor of national health insurance, but also believe that government is administratively incompetent--and the corrupt tool of the special interests. The Clinton health care plan looked--hell, was--administratively incompetent...

 

Brad DeLong


But... But... We need a lot more income redistribution to shave off extremes if we want to have a healthy society. We...

Paul Krugman put it much better than I can...

To a naive reader , Edward N. Wolff's top-heavy: A study of the increasing inequality of wealth in America might seem unlikely to provoke strong emotional reactions. Wolff , a professor of economics at New York University, provides a rather dry matter of fact summary of trends in wealth distribution, followed by a low-key case for a modest wealth tax. Although Wolff has done a commendable technical job in combining data from a number of sources to produce a fuller picture-in particular his book tells us more about both long term trends and international comparisons that has previously been available-the rough outlines of this story have been familiar and uncontroversial among economists for at least the past five years.

And yet Wolff's book was the target of an astonishing barrage of conservative attacks: multiple op-eds in the Wall Street Journal, hostile book reviews, and so on. Why should such a mild-mannered little volume provoke such rage?...

To understand the significance of Wolff's book, consider this simple parable : there are two societies. In one everyone makes a living at some occupation-say, fishing-in which the amount people earn over the course of the year is fairly closely determined by their skill and effort. Incomes will not be equal in this society-some people are better at fishing than others, some people are willing to work harder than others, but the range of incomes will not be that wide. And there will be a sense that those who catch a lot of fish have earned their success.

In the other society, the main source of income is gold prospecting. A few find rich mother lodes and become wealthy. Others find smaller deposits, and many find themselves working very hard for very little reward. The result will be a very unequal distribution of income. Some of this will reflect effort and skill: those who are especially alert to signs of gold, or willing to put in longer hours prospecting, will on average do better than those who are not. But there will be many skilled, industrious prospectors who do not get rich and a few who become immensely so.

Surely the great majority of Americans , no matter how conservative, instinctively feel that a nation that resembles the second imaginary society is a worse place than one that resembles the first. It is also no question that our nation today is much less like the benign society of fishermen-and much more like the harsh society of prospectors-than it was a generation ago. The evidence is overwhelming, and it comes from many sources-from government agencies like the Bureau of the Census, from Fortune's annual survey of executive compensation, and so on. And, of course, there is the evidence that confronts every one with open eyes. Tom Wolfe is neither an economist nor a liberal, but he is an acute observer. When he wanted to portray what was happening to American society, he wrote the bonfire of the vanities. 
Here's a rough ( and reasonably certain) picture of what has happened: the standard of living of the poorest 10 percent of American families is significantly lower today than it was a generation ago. families in the middle are , at best, slightly better off. Only the wealthiest 20 percent of Americans have achieved income growth anything like the rates nearly everyone experience between the 40's and early 70's. Meanwhile the income of families high in the distribution has risen dramatically with something like a doubling of real incomes of the top 1%.

These widening disparities are often attributed to the increasing importance of education. But while it's true that, on average, workers with a college education have done better than those without, the bulk of the divergence has been among those with similar levels of education. High-school teachers have not done as badly as janitors but they have fallen dramatically behind corporate CEOs, even though they have about the same amount of education.

Also, the growth of inequality cannot be described simply as the rise of some group, such as the college-educated or the top 20%, compared with the rest; the top 5 percent have gotten richer compared with the next 15, the top 1 percent compared with the next four, the top 0.25% compared with the next 0.75, and onwards all the way up to Bill Gates. The important contribution of Wolff's book is that it reinforces the evidence that much of the important action in American inequality has taken place way up the scale, among the extremely well-off.

Wolff focuses on wealth rather than income-on assets rather than cash flow. This has some advantages over annual income as an indicator of a family's economic position, especially among the rich. Someone with a very high-income may be having an unusually good year, while it is not unheard of for wealthy families to have negative income if they make a bad investment; in each case their assets will be a better clue to where they really fit into the rankings. More important, however, wealth is in some ways a better indicator than income data of what is happening to the very successful-simply because it is so narrowly held: in 1989, the top 1 percent of families owned 39% of the wealth but received only ( a still impressive) 16% of the income.

A particularly striking statistic in Wolff's book should put an end to the still widespread tendency to discuss the growth of inequality in America by tracking the fortunes of the top 20 percent, or of college-educated workers. Between 1983 and 1989, while the wealth share of the top 20 percent of families rose substantially, the share of percentiles 80 to 99 actually fell. In other words when we say that America's rich have gotten richer, by the " rich " we did not mean the garden variety yuppies--we mean true plutocrats...

Many conservatives have probably stopped reading by now, or at least stopped being able to respond to this article with anything other than blind anger, but for those who are still with me let me make a crucial point about the statistics: they say nothing about who, if anyone, is to blame. To say that America was a far more unequal society in 1989 than it was in 1973 is a simple statement of fact, not an attack on Ronald Reagan. Think about the parable of the fishermen and prospectors: the greater inequality of the latter society did not come about because it has worse leadership but because it lives in a different environment. And changes in the environment--in world markets or in technology--might change a society of middle-class fishermen into a society with dismaying extremes of wealth and poverty, without necessarily being the result of deliberate policies.

In fact, it's pretty certain that this is what is happening in the United States . Ronald Reagan did not single-handedly cause the incomes of the rich to soar and those of the poor to decline. He did cut taxes at the top and social programs at the bottom, but most of the growth in inequality to place in the marketplace, in the pre-tax incomes of families. ( there is a wide range of opinion as to just what happened with the markets, though clearly technology and the changing international trade scene played key roles. ) furthermore, the upward trend in inequality began in the 70's under Nixon, Ford, and Carter and continues in the nineties under Clinton; similar trends, if not so dramatic, are visible in many other countries.

Yet income distribution is a politicized subject all the same. The reason is obvious: the question of inequality is relevant for policy-making. In the fisherman society, for example, people might feel that only invalids, widows, and orphans deserve public support. In the vastly unequal prospecting world, however, it is easy to imagine a broad public demand that those who have been lucky enough to find gold be required to share a significant fraction of their winnings with those who have not. Indeed it is hard to see how such a redistributionist program would not be popular--if the public understood just what was going on....


Context:

Where did the 50k number come from? _I_ don't make that much.


My Comment:

It's what you need to be "middle class" this year--smack in the middle of the third quintile of family income.

If you want to look at (pretax) average family incomes over time (in 2000 dollars; adjusted for inflation), you can look at the average incomes of the:

Year 2000 1973

Top 5%: $264K $154K

The next 15%: $113K $85K

The upper middle class (60%-80%): $73K $59K

The middle class (40%-60%): $50K $43K

The lower middle class (20%-40%): $32K $30K

The poor: $13.6K $13.6K

 

Now there are problems with these numbers. Briefly, they are pretty good numbers if you are trying to gauge a family's ability to purchase stuff that was made in 1973. But they don't take account of the fact that people in 2000 have available a lot of extra stuff that wasn't invented yet back in 1973. To the extent that people value the ability to buy all the new stuff that has been invented, these numbers understate economic growth: it is not the case that America's poor today have no higher real incomes than America's poor back in 1973.

On the other hand, since 1973 we have become a much more unequal country. If you and your family are lucky (and skilled) enough to occupy one of the top 5% slots in our country's labor-and-income market, you are 70-plus-the-value-of-newly-invented-stuff richer than your counterpart was back in 1973. If you and your family occupy one of the 20%-40% slots in our country's labor-and-income market, you are only 7-plus-the-value-of-newly-invented-stuff richer than your counterpart was back in 1973.

Now I don't think that the U.S. upper class is any more skilled or entrepreneurial or deserving or socially useful relative to the rest of the country now than it was back in 1973--certainly economic growth was faster in the 27 years before 1973 than it has been in the 27 years since, suggesting that today's upper class is less "deserving" than that of 1973 if your gauge of the desert of an upper class is how well the whole society does. Yet it is getting a much bigger share of the total economic pie...

 

Brad DeLong


Context:

Not to put too fine a point on it, but redistribution of wealth is only a mechanism of government, not the purpose of government. According to Locke, Government is (or should be) a reflection of the social contract among a nation's people. In America, the social contract was initially intended to guarantee freedom above all else


My Comment:

Not the case with William Bradford and John Winthrop: their aim was to establish a Godly society, and extremes of wealth and poverty were seen as inconsistent with that goal. They were the only ones who established *explicit* social contracts.

Also not the case with either Hamilton or Jefferson, both of whom wanted to use the government to shape the economy in their respective desired directions.

And Adam Smith as well believed that extremes of wealth and poverty--to guarantee to people the freedom to starve--were bad things for a nation:

"Is ...improvement in the circumstances of the lower ranks of the
people to be regarded as an advantage or as an inconveniency to
the society?.... Servants, labourers, and workmen of different kinds,
make up the far greater part of every great political society. But
what improves the circumstances of the greater part can never be
regarded as an inconveniency to the whole. No society can surely
be flourishing and happy, of which the far greater part of the
members are poor and miserable. It is but equity, besides, that
they who feed, clothe, and lodge the whole body of the people,
should have such a share of the produce of their own labour as
to be themselves tolerably well fed, clothed, and lodged..."

Brad DeLong


The Context:

>I admired your selection of links and thought maybe you had a few more
>on the minimum wage... I know the 'party lines' but was hoping you had
>something of a more nuanced argument that could be relayed in a less
>divisive way than simply 'business vs. labor'... your argument that
>workers are now paid only one-fourth of their productivity, I fear, may
>be lost on many. I am trying merely to frame the debate to
>non-economists. What are your feelings on the proposed increase? Or
>rather more bluntly, how can the proposed minimum wage increase be sold
>to conservatives?


My Comment:

David Card and Alan Krueger have a complicated argument about the personnel strategies of firms that pay low wages that leads them to their conclusion that increases in the minimum wage might well *increase* employment. My view is that their argument is much too clever to be correct, and that the best way to read their statistical results is that they are masking a small (but negative) effect of the minimum wage on employment.

On the other hand, if we want to keep America a middle-class country of patriots (as opposed to a Latin American-style country with sharp class divisions, and vicious and destructive class-based politics), we need to be taking steps to moderate the rise in income inequality that the market seems to be dealing us this generation.

The problem is that all of the programs to attempt to offset some of the rise in income inequality by lifting the boats at the bottom have defects. Handing out federal vouchers for education and training means that a lot of people will spend their vouchers on frauds and cheats; having the federal government contract directly for education and training programs is probably worse; the earned income tax credit takes the IRS, an agency designed to raise money from the rich through random terror, and transforms it into a social welfare agency which cannot be good for its long-term effectiveness; the minimum wage can keep firms from hiring workers (and, in countries like France, can destroy the low end of the labor market and create mass structural unemployment).

My view is that--given what the market has dealt us over the past generation--we ought to be doing somewhat more to offset the rise in the inequality of market income. My view is that at present we are probably spending a bit too much on the earned income tax credit, a bit too much on federally-contracted training programs, too little on the minimum wage, and too little on job vouchers.

But it's a hard problem. All of the options have drawbacks. And so you want to find that balance between them that does some good while minimizing the total amount of drawbacks...

Brad Delong


With respect to your "big government" discussion...

I think that President Clinton in his State of the Union address trying to buffalo you--or, rather, not you but his left-of-center supporters (like me) who actually think that the U.S. would be a better place if its government did a little bit more and was somewhat closer to a western European social democratic-style government.

When President Clinton announced $100 billion in new initiatives, I believe that he is counting up the cost of his proposals (which will not be enacted into law) over the next five years. Think of something like $20 billion per year--$70 per person per year--in new spending proposals instead, and compare that to the $9,182 billion forecast of GDP during the 2000 fiscal year. Total production in this country is something like $33,400 per person per year. Federal government non-interest spending) is some $5,570 per person per year.

Thus the $70 per person per year of which Clinton talked so much in his State of the Union Address is a marginal change--a marginal change that Clinton is trying to trumpet as bigger than it is to try to please his left. But it won't mark the return to big government.

We have big government--$5,570 per person per year in non-interest federal spending--already.

What is that $5,570 per person per year spent on?

Well, the big-ticket items are, in dollars per person per year:

$1,370 Defense, plus veterans benefits, plus military retirement, plus
international aid (the last of these a measly $70 per person
per year--the cost of empire, you might say; or the cost
of the national security state, others might say; or the cost of
the military that allowed our ideas time to win the Cold War, still
others might say.

$1,470 Social Security benefits--there are, I think, good reasons for
having a partly public pension. Social Security is not terribly
generous, and entirely-private systems like Chile seem to burn
up an awful lot of money in marketing and administrative costs.

$1,280 Medicare plus Medicaid--there are, I think, good reasons for
having large public health programs. The most important of them
is what the insurance people call adverse selection: you need
insurance in order to pay for treatment should something
horrible happen to you, but for-profit insurance companies
have every incentive to try to figure out who the bad risks
are, and to refuse to insure them at anything but high cost.
(But I don't think we get terribly good value for our Medicare
and Medicaid spending for a whole host of reasons.)

$540 Welfare broadly construed (food stamps + temporary assistance
to needy families + child nutrition + earned income tax
credit + foster care + other "income security" programs). A
little over 1.5 percent of domestic product.

These four add up to $4,660 per person per year. That is 80% of what the U.S. government does. And by and large I think it is reasonable. I think it is worth spending, and I think it is spent about as well as it could be, given the realities of how bureaucracies work.

If I were suddenly named Czar of the federal budget, I would probably cut 1/3 out of defense (the Cold War *is* over, after all), keep Social Security benefits about where they are, shift some of Medicaid over to public health and try to think hard about how to get better value out of the hospital sector, and boost welfare spending--especially because attempts to do welfare on the cheap in the past have left some horrendous penalties to enterprise and industry in the system, and because a frighteningly-large share of America's children are poor.

But I'm a social democrat...

 

The little-ticket items are:

$196 Civil service retirement.

$84 Unemployment insurance.

$149 Federal transportation expenditures.

$185 Federal education expenditures (including student loans).

$65 Science and space

$95 Health research and public health.

$81 Natural resources and environment.

$135 Justice and general government.

$100 "Other" domestic discretionary.

$25 Farm price supports.

$22 Universal service fund (Americorps).

Everyone can find at least three of these that should be zeroed out immediately, and at least one that should be tripled...

 

Sincerely yours,

 

Brad DeLong


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Professor of Economics J. Bradford DeLong, 601 Evans Hall, #3880
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