It Wasn't Deficit Reduction

The Roaring Nineties

By Joseph E. Stiglitz, W.W. Norton and Company, 379 pages, $25.95

Like many academic economists, Joseph E. Stiglitz went into government hoping to tutor as well as to serve. Unlike most, Stiglitz has significant doubts about whether markets usually work as advertised. His research in this genre won him the Nobel Prize. Stiglitz's four-year stint in the Clinton White House was marked by the tension between his own powerful views and the pressure on a high public official to be a loyal team player.

As chairman of Bill Clinton's Council of Economic Advisers (CEA), Stiglitz attempted to influence policy quietly from the inside, putting a brave face on policies he opposed. In his second government position, as chief economist for the World Bank, Stiglitz went public with his criticisms, and eventually was fired for his candor. Now Stiglitz is back in academia, at Columbia University, and he can tell us what he really thinks, as he does -- often insightfully -- in The Roaring Nineties.

He has written an important revisionist critique of the conventional view that budget balance and deregulation powered the 1990s boom. Even so, Stiglitz the critic and Stiglitz the loyalist are still somewhat at odds in this book, and he remains protective of Bill Clinton personally, blaming wrongheaded policies instead on Clinton's lieutenants.

When I first covered Stiglitz, then CEA chairman, his briefings for reporters never suggested the devastating criticism that would burst from him later. I had been the lead reporter for a series of articles on layoffs published in The New York Times in March 1996, the year Clinton was up for re-election. In response, the council produced a white paper that sought to shift public attention to the job market's strengths -- and away from the spreading layoff problem -- in an election year.

The white paper, which Stiglitz signed, argued that jobs were not only multiplying, which they were, but that most of the new jobs paid well, a questionable reading of the data. Layoffs were dismissed as insignificant in number, unless one noticed a brief caveat in the white paper. Mostly at the insistence of then-Labor Secretary (and current tap Chairman) Robert B. Reich, who also signed the document, the administration acknowledged that permanent layoffs had increasingly replaced temporary ones, and "the average real wage loss due to [permanent] displacement was significant and persistent."

Clinton wanted to focus on good news, and his lieutenants furnished it. Going against layoffs would have meant trying to restrict the behavior of the nation's executives, a confrontation that might have spared the nation the waves of layoffs that plague the workforce today. But instead of pushing for alternatives -- shorter hours, for example, rather than fewer workers -- or even attacking the practice, Clinton accepted layoffs. His administration, instead, would subsidize the retraining of some of the victims, for the next job and the next and the next (though the subsidies would be constrained by budget cuts). Intervention "would have been inconsistent with the deregulation policies of both parties," Stiglitz explained to me years later. In his loyalty to his president, Stiglitz the official spokesman ended up steering the public away from the kind of government intervention that Stiglitz the economist had so brilliantly advocated as a means of improving market outcomes.

A year after the white paper appeared, Stiglitz left the White House and the second aspect of his public persona came to life. From his new perch at the World Bank, protected by the bank's president, James D. Wolfensohn, Stiglitz opened fire on the shortcomings of the administration's economic policies and the Washington Consensus of fiscal discipline, market liberalization and debt collection imposed on poor countries. The public criticism persisted for two years until Wolfensohn, under pressure from the Clinton administration, told Stiglitz that he must either curb his outspoken views or resign.

Stiglitz resigned and kept talking. His first popular book, Globalization and Its Discontents, published last year, challenged the standard story about the benefits of speculative global capital markets. And now its sequel, The Roaring Nineties, gives us a revisionist assessment of the American economy in the Clinton years, and a fundamental critique of many Clinton policies.

The new economy, Stiglitz writes, was real. "The Internet was real. The innovations, advances in telecommunications, and new ways of doing business which followed were real." The stock-market bubble and the recession and weak recovery that followed are temporary setbacks. What remains, Stiglitz argues, is an enduring improvement in productivity. As the output of the American worker rose, the supply of goods and services exceeded the demand for them. The problem now is ratcheting up demand, to take advantage of the prosperity that the new efficiencies make possible, a potential prosperity no longer threatened by the shortages that breed inflation.

Most economists would agree that part of the recent boom was a result of rising productivity. Where Stiglitz departs from the standard story, however, is in his insistence that the credit belongs almost entirely to the higher productivity and not to the tax increases, spending cuts, resulting budget balance and bond-market reaction that usually get so much credit.

He may be right about productivity, or at least partly right. We don't really know definitively how much of the improvement is the enduring result of innovation and high-tech investment and how much is a temporary fix -- management squeezing fewer employees to work faster. But Stiglitz is certainly correct to debunk the view, so much promoted at the Clinton White House, that budget balancing generated the recovery by restoring the confidence of bankers and investors. Or, as he wryly puts it, "Thus reassured, business went back to investing in growth and innovation, consumers began spending again, and the recovery gained momentum. The agenda of the deficit hawks was clear: keep deficits low (even in recessions) and listen to what the financial markets want -- for if you alienate them, you are lost."

Stiglitz offers a different and more illuminating sequence of events, one that helps to free us from blind faith in deficit reduction and the endless pressure from investors and executives for deregulation and unfettered markets. The true sequence of events was largely fortuitous: The Federal Reserve, eager to recapitalize banks damaged in the massive loan defaults of the late 1980s and early '90s, encouraged banks to invest their deposits in U.S. Treasury bonds, and held down interest rates long enough to help make a risky venture less risky and ultimately successful. Later, in the absence of inflation and concerned about bank exposure to foreign defaults, Fed Chairman Alan Greenspan lowered rates again and the boom accelerated, bubble and all.

Stiglitz is properly critical of Greenspan for failing to act against the bubble, which Greenspan had warned about as early as 1996. He faults Greenspan in particular for not lobbying "behind the scenes against the huge capital gains tax cut of 1997, which sent a fresh torrent of investor capital into the markets at a time when a shift in the opposite direction" might have helped to subdue the bubble. But neither did the White House raise an alarm about the bubble, happy enough to have prosperity as a tailwind, whatever the reasons and the danger. Along the way, the overenthusiasm for deficit reduction and budget balancing damaged the economy, mainly through underinvestment in the public sector. In other words, while deficits on a scale wrought by Reagan or either Bush are damaging, there was plenty of room for moderate deficits and more social outlay, which might have helped productivity. The allegiance to deregulation turned out to be even more damaging, but the financial markets insisted and the Clinton administration complied.

stiglitz is particularly good at describing the failure to strengthen government's hand in a market economy. He shared a 2001 Nobel Prize in Economic Science for his pathbreaking contributions to the concept that markets function imperfectly, hurting many people, because the information available to market participants is inadequate. So government has to intervene, adroitly through rules and regulations, to make markets function properly.

The Roaring Nineties makes that case effectively in the scandal-ridden aftermath of the 1990s bubble. For Stiglitz, the repeal of the Glass-Steagall Act in the Clinton years was madness. No longer required to stay away from trading stocks and investment operations, the banks fell into the schemes that made the Enron debacle possible. Or, as Stiglitz put it with blunt simplicity, "Investment banks push stocks, and if a company whose stock they have pushed needs cash, it becomes very tempting to make a loan ... . Under the old regime, investors at least had some assurance that if a firm was in trouble, it would have trouble borrowing money. This provided an important check, which helped make the whole system work.''

Stiglitz the economist understood, when he joined the administration in 1993 -- first as a member of the CEA, then as its chairman -- the damage inherent in the deregulation that later took place on his watch, particularly the Telecommunications Act of 1996 and the freeing of electric power companies from government rules. In The Roaring Nineties, he explains the sequences that made disaster inevitable. He tells us that his warnings were ignored within the administration, including his caveat that cutting the capital-gains-tax rate was bad policy, and not just for its contribution to inflating the bubble but for its long-run damage. The cut would bulk up tax revenue in the short run as more people sold assets, particularly stocks, but it would lower revenues later. "If the government is concerned with its long-run deficit position, as it should be, the lowering of the capital gains tax rate," is bad policy, even chicanery, Stiglitz writes. His advice was ignored; with Clinton in agreement, Congress cut the rate.

Reading all this in The Roaring Nineties, one marvels that Stiglitz stayed for four years in the Clinton administration, and that he is still so loyal to Clinton personally. The policy failures that Stiglitz so effectively describes are blamed on a handful of advisers -- principally Treasury Secretary Robert Rubin and Lawrence Summers, his deputy -- who misled or misinformed the president more than once, Stiglitz tells us. Or it was the fault of the Republican congressional victory in 1994 that tied the president's hands, thwarting his "bold, broad-gauged agenda to address America's problems."

But Bill Clinton was a very engaged president, one who personally bought into the deregulation and the alleged efficiency of unfettered markets, sharing the views of Rubin and Summers. In his post-presidential years, Clinton's public commentary suggests that he still favors deregulation and budget balance. This book cries out for a chapter in which a former insider of Stiglitz's stature expressly challenges these views of his ex-boss -- policy errors that the current crop of Democratic presidential hopefuls are in grave danger of repeating.