If there is one thing that most everybody agrees upon regarding the ideological legacy of the Clinton presidency, it is that there is none. President Clinton, left and right typically concur, is a man of polling and expediency, and almost infinite flexibility of viewpoint. A subset of this thinking, indigenous to the left, holds that Clinton does stand for something, sort of, but it's really nothing more than warmed-over Republicanism. A number of liberal economists have indicted Clinton's fiscal policies on these grounds, and even Clinton himself famously complained in 1993 that his administration had turned into "Eisenhower Republicans."
As a characterological indictment of Clinton, this is all true, alas. But the well-known fact of Clinton's political inconstancy has obscured a more complicated reality. Quite accidentally, and with little notice, the Clinton White House has given rise to a new economic synthesis on the center left. It does not have a name, but for the purposes of this article, we'll call it progressive fiscal conservatism because it combines the twin notions of modest economic redistribution and a restrained federal budget. And this economic doctrine, wholly separate from the administration's risible political doctrine, is a genuine and meritorious legacy.
Since Bill Clinton was elected in 1992, the economic predilections of the Democratic Party have been completely remade. Clinton's economic program is far more fiscally conservative than anything a president of either party would have dared propose any time in the past three decades. "When deficits disappear, capital, more than $1 trillion so far, is liberated to create wealth and jobs and opportunity at every level all over America," Clinton stated earlier this year. "The less money we tie up in publicly held debt, the more money we free up for private sector investment. In an age of worldwide capital markets, this is the way a nation prospers . . . by saving and investing, not by running big deficits." Subsequently he pledged to "make America debt free for the first time since 1835," and argued that "fiscal discipline has widened opportunity and created hope for all working people in our country."
Not long ago, a liberal economist would have considered such statements strange, if not outright nonsensical. How did such a radical transformation come about? The faction of liberals who are chagrined at this development tell the story like this:
In 1992 a populist Democrat captured the presidency on a platform of Putting People First, which meant spending money on infrastructure, education, and worker training to boost the productivity of the work force and raise hitherto stagnant living standards. But once in office, the newly elected president instead chose to emphasize deficit reduction above all else, shunting public investment for the sake of cooperating with Federal Reserve Chairman Alan Greenspan. Once detached from his ideological moorings, Clinton drifted steadily rightward, fell in with the likes of Dick Morris, and promptly balanced the budget and block-granted welfare. The culmination of this process came early this year, when Clinton went even beyond balanced budgeting to propose completely eliminating the national debt.
There is a lot of truth in this narrative, but it misses the essentially liberal nature of the new kind of fiscal policy that Clinton forged in 1993 and the way that his subsequent centrist lurch betrayed, rather than continued, that brand of economics.
It was not particularly unusual for a Democratic politician in 1993 to make deficit reduction his highest domestic priority. After all, most liberal economists had spent the previous decade decrying the enormous budget deficits rung up by the Reagan and Bush administrations. What was revolutionary about Clinton's decision to cut the deficit was that it gave birth to a new way of thinking about the government's role in promoting prosperity.
Modern liberal economic thought dates back to John Maynard Keynes. Keynes's central insight was that, contrary to the conventional wisdom of his day, market economies are not inherently self-correcting and, hence, the government must play an active role in promoting prosperity. If a downturn occurs, for example, the government should try expanding the supply of money, or, under more serious circumstances, it should spend money or cut taxes in order to bolster the demand for goods.
So in an economy in a slump—as America's was before World War II and seemed at risk of becoming afterward— generous deficit spending made a great deal of sense. But the easy liberal economic certainties started to run aground in the 1970s, when inflation and unemployment rose in tandem—a malady for which economics had no ready cure. The perplexity of "stagflation" was accompanied by a gradual realization that certain Keynesian assumptions about the budget, even if economically sound, were politically naïve. It would be nice if every time a recession loomed, Congress would fiddle with tax rates or spending just enough to smooth things out and then, when the danger passed, cut back its largesse just as quickly, with a long-term result being a budget that was balanced on average but with surpluses or deficits in any given year depending on circumstances. It became clear, however, that politicians had a natural tendency toward chronic deficits, to press the gas pedal harder than the brakes.
And then, in the 1980s, the massive Reagan tax cuts, coupled with a large boost in defense spending, unleashed a tidal wave of red ink. With enormous deficits threatening the very solvency of government, it was no longer possible to administer a fiscal stimulus. As the Democratic Party took control of the presidency for the first time in 12 years, the device favored by liberals for furthering economic growth had been rendered useless.
The Unexpected Breakthrough
All of these developments were known at the time, but they had not fully cohered when Clinton began to construct his first economic plan. The key decision was not whether to reduce the deficit—given its size, the White House had no other realistic option—but rather what effect this would have upon the economy. Everyone present assumed that raising taxes or cutting spending would, at least in the short run, dampen economic growth. White House economists gave serious consideration to the possibility that their plan would throw the economy into recession. The only way to avoid this dismal fate was if the Federal Reserve or the bond market would lower interest rates to spur economic activity and make up for the depressing effects of deficit reduction. According to Bob Woodward's account in The Agenda, Clinton replied to this news in a half whisper: "You mean to tell me that the success of my program and my reelection hinges on the Federal Reserve and a bunch of fucking bond traders?"
The question that so bedeviled the White House in 1993—can the Fed and the bond market overcome the effects of tight budgets?—is no longer in doubt, and therein lies the great transformation of liberal economics. Previously, even liberals who favored deficit reduction considered it a painful trade-off: Reducing government borrowing would free up more savings for private investment and, in the long run, improve productivity, but in the short run, it would slow or even halt economic growth and throw millions out of work. The White House accepted this bargain in 1993 and hoped it would work out for the best. Now fiscal restraint is seen not even as a trade-off but, rather, as a way of getting the best of both worlds. This does not mean that forbearance is the one true answer, now and forever. It merely suggests that, under the present economic and political circumstances, the interests of current and future prosperity both argue for reducing deficits or expanding surpluses.
That intellectual breakthrough forms the bedrock of progressive fiscal conservatism. The principles of this economic synthesis are eminently clear. It begins with a recognition that the Federal Reserve and the bond market wield an effective control over the economy and that these instruments, rather than deficit spending, have become the most effective levers available to government for promoting economic growth. At the same time, there is an understanding among liberals that the burdens of fiscal restraint should fall primarily upon those most able to bear it and that the government should make a special effort to ensure that the benefits of economic growth also flow to those at the bottom.
Clinton's 1993 budget bore out these tenets in their purest practical form. Its overall framework was deficit reduction, with the purpose of reducing interest rates and promoting economic health. It also had a strongly progressive tilt, raising the tax rate on the highest earners while expanding low-income subsidies such as the Earned Income Tax Credit (EITC) and Head Start. Six years later, Clinton and his advisers—and even like-minded economists outside the administration—continue to hold up the 1993 budget as their pinnacle achievement.
The theoretical grounding of this new ideology rests, in part, on the assumption that the 1993 budget contributed to the economy's performance over the past six years. The case for this, while circumstantial, is compelling. The administration argued that its 1993 budget would do three basic things to help the economy. First, as the federal government borrowed less money to finance its deficits, more savings would be available for private investment. Second, tighter fiscal policy would allow the Federal Reserve to keep short-term interest rates low. Third, a tighter budget would change the psychology of the bond market, lowering long-term interest rates. All these factors, in combination, would increase business investment and, hence, boost corporate productivity and economic growth.
In the end, all of these things happened. That does not prove that the deficit package caused those things to happen; in order to establish that, we would have to go back in history and see what would have happened if Clinton's 1993 budget had failed. But the fact that all subsequent events have aligned in its favor should at least grant this theory a powerful benefit of the doubt.
The link between the 1993 budget and the performance of the economy is crucial for progressive fiscal conservatism because it is an ideology for prosperous times. It is easy to forget that liberal economics has been defined for a generation by particularly grim material conditions that no longer hold. Starting in the mid-1970s, incomes for workers at the bottom and middle have stagnated or declined, even while those at the top have enjoyed spectacular gains. Liberals often defined this as a problem of rising inequality, which was a true description, but the more troubling fact was that most people were not enjoying the rising standards of living that previous generations of Americans had taken for granted. In this context, the main project of liberal economics was to improve the lot of those who had been left behind.
Exactly that is now happening. In the past few years, strong economic growth and low unemployment have substantially improved living standards for low- and middle- income workers. The giddiness of the late 1990s is not confined to stock owners and fat cats, but it is also for the sort of people liberals want most to help. The income of average households, after stagnating for years, has risen smartly. Since 1993 the after-tax income of the poorest fifth of all families has grown by an average of 2 percent per year. About one-seventh of that growth is due to the expansion of the EITC, and the rest is attributable to higher wages. Government transfers, such as the EITC or subsidized health care, can raise living standards for the poor and middle class, but not as effectively as economic growth. Liberals have always understood that low unemployment is the best social program; the difference is that, for the first time in two-and-a-half decades, it is actually happening.
To be sure, this does nothing to redress income inequality. Inequality in earnings (and perhaps also in total income, though the data are less clear) is no longer getting worse, but neither have the pernicious effects of the previous two decades' trends been reversed. Yet inequality is far less troubling in the context of a rising tide. The gains of the wealthy, insofar as they do not come at the expense of everybody else, produce tax revenues that can be put to beneficial purposes. It is not illiberal to forgo some measure of redistribution in the name of economic growth if the fruits of that growth are widely shared. This is not to say that public investment and transfers have no role; a willingness to contemplate expanded roles for government is what separates progressive fiscal conservatives from conservative fiscal conservatives. It is simply that the calculation has changed. Liberalism no longer requires a transformation in the basic direction of the economy.
This proposition sounds suspiciously conservative. But in the current political context, this very modest sort of status quo economics is actually quite liberal. The reason that this is true is that the transformation of the economics of the Democratic Party has occurred along with—and, in part, because of—a concurrent transformation of the economic ideology of the political right.
In the decades that followed the New Deal, economic conservatives believed that budget deficits cause inflation and sap capital from businesses, and should be avoided under normal circumstances. Conservatives did not always oppose taxes—in fact, Republicans sometimes proposed tax increases in order to stem inflationary deficits. All that changed in the late 1970s, when the GOP embraced supply-side economics, a radical and quite unconservative notion that paid little attention to inflation or budget deficits. The now-familiar idea behind this doctrine was that economic growth depends almost entirely upon tax rates, especially for upper-income earners.
Supply-side economics remains at the heart of Republican dogma, but the intellectual rationale has changed in an important yet little-noticed way. Since the time of Reagan, conservatives have justified tax-cutting on the grounds of expanding the size of the economic pie; it didn't matter if those whose taxes were cut all resided at the upper crust, the claim went, since the fantastic economic effects of unleashing the pent-up vigor of the entrepreneurial classes would ultimately benefit one and all. The salient point about this claim was that it was fundamentally utilitarian, purporting to stand for the interests of the whole society. In 1993, for instance, Republicans argued against Clinton's tax hike on the wealthy not on grounds of fairness, but on grounds of efficiency: It would cripple the economy and thereby inflate the budget deficit, making even the nonwealthy worse off.
Contrast this kind of reasoning with the arguments put forth this past summer regarding the use of the budget surplus. Instead of justifying tax cuts on the grounds of economic growth, the right now argues that since the budget surplus was caused by higher income tax receipts, it rightfully belongs to the taxpayers—and since the wealthy disproportionately bear the burden of income taxes, it is only natural that they will receive the lion's share of any such tax cuts. Taken together, these two arguments require Congress to give the surplus to upper-income earners as a matter of basic fairness and moral desert. "The only reason for this surplus is because taxpayers are paying too much," said House Ways and Means Committee Chairman Bill Archer, "which is why they deserve a refund." This is a purely moralistic assertion, divorced from any consideration of the efficient distribution of goods. Not only has the economics of conservatism ceased to be conservative; it has ceased even to be economic.
The result is a strange reversal of historic roles. Republicans, who are traditionally associated with the notion of a rising tide lifting all boats, have taken to arguing in the language of distributional justice. As House Speaker Dennis Hastert put it, "We see the surplus as the best opportunity to bring some fairness to the tax code." And while Republicans employ the moral logic of populists—a strange and perverse kind of morality, to be sure—Democrats sound like investment bankers, fretting over deficits and inflation and the warnings of Alan Greenspan. The turnabout has been mutual. As Democrats have embraced an economic growth strategy, Republicans have been left with no complaint except on grounds of fairness. And as Republicans have abandoned any pretext of safeguarding economic growth, Democrats have taken it up.
Growth is the governing concern that the Clinton administration has applied in apportioning the budget surplus. Over the past two years, Clinton has steadfastly insisted that the proposed surpluses be saved rather than spent. The reasoning is identical to that employed in 1993. Running a budget surplus, after all, has the same economic effects as reducing a budget deficit. It allows savings that would have been used to finance government debt to fund increased business investment instead, and it allows the Federal Reserve to maintain lower interest rates.
There is also in this a frankly political calculation. Liberal economists understand that private investment is not always more productive than public investment. For instance, we could just as well prepare for the retirement of the baby boomers by boosting funding for education or science research, and hence improving the productivity of future workers, as by reducing federal debt. Liberals also understand that there are certain kinds of spending that have a clear moral necessity, such as expanding health insurance coverage, even if they might not raise productivity. In an ideal world, it would be possible to boost federal spending in key areas and still run substantial surpluses.
Unfortunately, political circumstances (mainly Republican control of Congress) do not allow for the perfect choice. The administration has proposed, in its fiscal blueprints over the past two years, to preserve the bulk of the budget surplus and to offset the cost of new spending with tax increases on tobacco and other things. This insistence on paying for new spending, rather than financing it out of the surplus, makes it less likely that the ideal level of spending will actually be enacted (since tax increases are not politically popular), but it at least ensures that the entire surplus is used in a productive manner. The alternative—proposing to pay for new spending out of the surplus—would probably result in more new programs but at the cost of draining away a large chunk of the surplus for a Republican-oriented tax cut.
Henry Aaron, an economist at the Brookings Institution, reckons it the following way: "If I had to decide between $5 billion for Pell Grants or children's health insurance versus $5 billion for debt reduction, I would take Pell Grants or children's health. But in the current political climate, the price for that would be $20 billion in tax cuts skewed to the upper income brackets, and I would say the price is too high. In that case, I would rather use the whole $25 billion to pay down the debt."
This political assumption has proved the most controversial element of progressive fiscal conservatism, at least among liberals. Robert Kuttner has argued in this magazine that a policy of permanent surplus to pay down the public debt would needlessly constrain public spending, and that it was more restrictive than necessary if the purpose was to reassure money markets and the Federal Reserve. And, indeed, there is a potential danger that the rhetoric of forswearing deficits and debt could go too far, paralyzing affirmative government.
Yet any single notion can be taken to a dangerous extreme; the fiscally conservative rhetoric of the Clinton administration shows little sign of going too far. While he has decried deficits, Clinton has not denigrated public investment. The administration frequently cites spending programs, mainly education, as an essential point of difference with congressional Republicans. There is a legitimate criticism, to be sure, that the White House's actual achievements on public investment do not match its rhetoric, but this shortcoming is hardly likely to discredit government spending. The White House's most recent budget has simply proposed that any new spending be "paid for" with offsetting tax increases rather than by tapping into the surplus.
Moreover, some of the strongest arguments for maintaining, rather than spending, the surpluses actually have a strong Keynesian bent. Remember that Keynes's main lesson was not that the government should spend like a drunken sailor but that it should "lean against the wind," running surpluses in good times and deficits in bad times. We have been enjoying good times now for more than seven years. If we can't sock some money away now, we never will. Even more important, the economy faces a fiscal shock in 15 years or so when the baby boom generation retires and places a huge strain on Medicare and Social Security. Running surpluses now will improve the fiscal position of the government and help it to deal with those crises as painlessly as possible.
But doesn't all this talk of running surpluses play into a puritanical fear of deficits and reinforce the simplistic notion that budgets must be balanced all the time? Actually, it is just as likely to have the opposite effect. The conservative insistence that the budget deficit be zero every single year is a fetishization of an economically meaningless number. It used to be an excuse for mindless budget slashing, and now that there is a surplus, it has become an excuse for mindless profligacy—any surplus is an "overcharge," say Republicans, that must be dissipated immediately. Contrarily, the proposition that we should save money during prosperous times inherently presupposes that we can spend the money when we need it. As Treasury Secretary Larry Summers has put it, "The time to reload the fiscal cannon is now." The point of loading a cannon, of course, is to have the ability to fire it.
The Surprise Winner
There exists among liberals a tendency to view Clinton's economic policies as a part of his larger political machinations. Out of sheer expediency, Clinton has co-opted Republican ideas until the scantest differentiation remains. According to this critique, while Clinton's brand of fiscal conservatism may be slightly more benign than the Republican version, the two form an essentially compatible worldview—what Barry Bluestone calls a "Wall Street-Pennsylvania Avenue Accord."
It is true that the White House deficit hawks would have much in common with the Republican Party of a generation ago. But the GOP is now seized by a fiscal dogma that values tax cuts for the wealthy above all other considerations. On grounds of budgetary soundness as well as equity, the economic disposition of the right is utterly diametrical to the tenets of progressive fiscal conservatism.
What, then, accounts for Clinton's vacillation, the continual narrowing of difference, the hemming and hawing? The vagaries of his domestic policy can be sensibly understood only if we separate his economic and political strategies. Clinton has wavered not because of his economic policy, but despite it. Fiscal conservatism has never been thought of as a political winner. Voters might prefer austerity as an abstract proposition, but they actually favor politicians who deliver concrete benefits—or so most political observers believe. Republican strategist Jude Wanniski has called this the "dueling Santa Claus" theory—Democrats played the spending Santa Claus, Republicans the tax-cutting Santa Claus.
Clinton's campaign for the presidency certainly conformed to this thinking. He promised to reduce the deficit but did not emphasize the point, and he promoted a middle-class tax cut. While necessity forced him to abandon this latter pledge and concentrate on the deficit in his first year, after the Republican congressional landslide in 1994, he abruptly switched directions once more. Clinton began to listen to Dick Morris, an adviser inclined toward conservatism, rapprochement with the GOP, and general political amorality. During this Morris-influenced period, Clinton turned away from the kind of economics he set out in 1993. In 1995 Clinton reissued his promise of a middle-class tax cut and then set out a conciliatory line toward Republicans in Congress that culminated in his signing the 1997 Balanced Budget Act.
Many economists who consider Clinton's 1993 budget to be the pinnacle achievement of his presidency—including many who have worked for his administration—also regard the 1997 deal as anathema. The central conceit of the agreement, balancing the budget within five years, was a symbolic goal that would be achieved by mandating that future Congresses allow for unrealistically low levels of domestic spending. Worse still, the deal reduced estate and capital gains taxes, another economically dubious move that overwhelmingly benefited the very rich. These compromises by Clinton were an attempt to re-ingratiate himself with suburban, upscale voters.
Yet amid this ideological drift and retrogression, a progressive trend had already begun. In the summer of 1996, encouraged by the administration, congressional liberals successfully pushed bills to increase the minimum wage and to bar "pre-existing condition" exclusions from private health insurance. These reforms, though all of the small-beer variety, showed that the public still had an appetite for federal activism. After signing the Balanced Budget Act, Clinton proposed a series of initiatives—mostly bite-sized, oddly constructed, tax-credit sorts of things in the familiar Clinton way, but still laden with the symbolic import of renewed government activism. And in returning to fiscal conservatism, Clinton has insisted that the cost of all these measures be offset by new taxes, so as to preserve the surplus for debt reduction.
The traditional pattern of politics would seem to dictate that such counsels of forbearance must inevitably fail, that as the magnitude of the projected surpluses grew apparent to the voters, the two parties would inevitably devolve into a bidding war. Certainly it appeared this way this past spring. Republicans proposed a massive tax cut, and Clinton countered that he would accept a smaller one but was open to negotiation. The process seemed to be heading on a predictable course as the GOP leadership set out into the countryside to sell their constituents on the merits of a tax cut. They did so—in keeping with what their economics had become—in the manner of game-show hosts. House Speaker Dennis Hastert waved a handful of dollar bills before a crowd of factory workers, and Republic National Committee Chairman Jim Nicholson arrived in New York toting a suitcase filled with $10,000 cash, which, he claimed, represented what his tax cut was worth to the residents of that state.
And then a wonderful thing happened. In crowd after crowd, and in poll after poll, the populace insisted that it did not want a tax cut. Some expressed a view that, in good times, the government, like an individual, should begin to pay off its debts. Surprisingly large numbers also stated that the government should spend more on education, on the poor, and on retirement programs. Perhaps it was born of the unprecedented prosperity of recent years, but there nonetheless seemed to be an unusual feeling of generosity: People preferred that tax dollars go not into their pockets but toward some kind of public good. In this sentiment there is—just maybe—a political majority waiting to be born.