Even Stiglitz (spelling?),definitely not a deficit hawk , accepts that the 1993 bill was not harmful .

Here's what Blinder and Yellen say (p. 83). Judge for yourself:

. . . did the policy mix [tight government budgets and (relatively) easy monetary policy] really drive the investment boom of the 1990s? Our two macroeconometric models are doubtful . . . lower interest rates . . . also boost stock market values -- which in turn spur consumption (via the wealth effect) rather than investment. . . . The main impetus to investment, it appears, came from the surge in productivity.

Max, It definitely gets squishier as time unfolds. Since you, me, and Jared are probably the only three on here with access to their book (though people should feel free to order it at the link above), here's the critical passage from Blinder and Yellen's conclusion:

Lesson 1 [for policymakers from Blinder and Yellen's analysis] is the well-known point about the monetary-fiscal policy mix that we have made several times: tight government budgets and (relatively) easy monetary policy can create a pro-investment macroeconomic climate by holding down real interest rates. The resulting high rates of investment should then push up productivity and real wages. Economists have been preaching this gospel for decades. And it all seemed to work out according to Hoyle (actually quite a bit better) in the United States in the 1990s, when the 1980s mix of tax cuts and tight money was finally and decisively reversed.

But did the policy mix really drive the investment boom of the 1990s? Our two macroeconomic models are doubtful. One major reason is a channel that textbook presentations often leave out: while lower interest rates stimulate investment spending, they also boost stock market values--which in turn spur consumption (via the wealth effect) more than investment. Specifically, when we simulated the higher effects of tighter budgets--balanced by easier money to hold the time path of unemployment constant--most of the rise in government saving was cancelled out by lower personal saving, leaving the investment share of GDP up only slightly. The main impetus to investment, it appears, came from the surge in productivity.

The underlying reality, however, is probably messier than the models recognize. For example, while productivity growth undoubtedly spurs more investment and faster gdp growth, just as the models say, a rapidly growing, high-investment economy probably also speeds up (embodied) technical progress. Why else did the explosion in information technology--which was, after all, a worldwide phenomenon--yield such rich productivity dividends in the United States, but not Europe or Japan?

 

I'm not an economist, thank god, but given the enormous difficulties of sorting out causes and effects, I really think it's self-defeating to take the right's side on what happened in the 1990s. --Greg

The problem is their policy "lesson" -- tight budgets and loose money provide a good climate for investment -- doesn't seem to agree with what they write in the succeeding paragraph -- that their own models don't show much of an effect of Clinton fiscal policy on the '90s investment boom.

The last paragraph doesn't seem related to the debate over fiscal policy. So I don't see how what you quoted in any way contradicts Max's point.

The other thing is that progressives who criticize Clintonian fiscal policy are not "taking the right's side." The argument always has been that Clinton jettisoned needed public investment that itself would have contributed to productivity growth and an economic boom; deficit reduction should have been only one of the policy goals, not the overriding one, and it should have been implemented after a public investment/job creation initiative, not before.

If that had been done maybe the Democrats wouldn't have lost the Congress in 1994, as Reid Hundt has pointed out:

Raise Taxes, Cut Spending, Lose in 08

One thing Democrats don't want to be is the "eat your spinach" party. No, I'm not arguing for irrationality and for wild-eyed spending, but the way D's lost in 1994 was to insist too hard on raising too much tax revenue while doing too little to improve the quality and amount of public goods. And no, it wasn't the case that OBRA in 1993 was so far-sighted and well-motivated that the loss of Congress for a dozen years was a price worth paying. . . .

The lessons now therefore are that we should seek economic growth by adopting wise microeconomic policies . . . We should cut taxes on the middle class, especially taxes that discourage employment. . . . Any tax increases should be aimed at collecting revenue in out-years more than immediately, and that can be done by raising only the very highest marginal rates and that only by a little. The balanced budget to aim for should be in fairly distant out-years.

What we need is better efficiency from the federal government. The current levels of taxing, borrowing, and spending (roughly 18%, 2%, and 20% of GDP, respectively) are probably sustainable. What we should be demanding, though, are better results for that amount of taxing, borrowing, and spending. Prioritizing spending and improving management of government programs is what we should be focusing on. Look at Iraq and Katrina, for instance. Where should our priorities be--rebuilding Bhagdad or rebuilding New Orleans? And what results should we demand? What we've got so far from Bush or something better? The problem isn't the amount of money raised, borrowed, or spent--it's how ineffectively and inefficiently all that money is now being used.

Jared,

I am actually more sympathetic to your basic perspective than the Rubin/Hamilton folks about where we ought to go from here. My personal preference would be to push for a major reform of the tax code similar in thrust to the 1986 act, which would include taxing income from investments at the same level as earned income. As Mark Schmitt has argued, though, this time around the effort should bring in more revenue than the government collects now -- ideally to help pay for universal health care. But that's just my view.

My simple point is that politically it's extremely unpleasant to try to raise taxes, for whatever purpose. The '93 legislation provides an extremely helpful anchor to help sell any future tax increases, because we can mock the right for alarmism that wasn't borne out. But if people on our side are going to argue that those tax increases had little or nothing to do with the good economic news that followed, that will make it much easier for Republicans to undercut the effectiveness of references to '93 in support of raising taxes in the future. You can argue that circumstances today are much different now than they were back then, which they are, without emphasizing Bob Kuttner's questioning of the 1993 act's impact -- which plays into the right's hands. The capacity of economics to answer cause-effect questions at that level of difficulty is too limitied to justify shooting ourselves in the foot.

--Greg

My point exactly! --Greg