Tuesday, January 09, 2007

The 90s economy

Liberty Lover has a post up from a few days ago about the 90s economy:

Democrats have been citing the economic growth of the 1990's as a reason to duplicate those policies again. Of course, the policy they want to duplicate are the tax increases in the early 1990's. The tax increases brought down interest rates and allowed consumers and businesses to spend and invest. Not so fast.

So far he's absolutely correct. Liberals have been trying to claim Clinton's success as a vindication of their philosophy of government. The problem is that they cherry-pick his accomoplishments. For example, saying that the tax increase of 1993 was good policy, when a closer look at the 1993 deficit reduction bill shows that there was a dollar of spending cuts for every dollar of tax increases. Liberals don't want to hear about that part, much less repeat it. Moving on:

The problem with this thinking is that it ignores two one-time events during the 1990's. These events drove certain sectors of the economy, artificially increased growth, and would have occurred despite the level of interest rates.

Curiously, it gives all credit to the central planning of the federal government and the Federal Reserve. Still haven't learned.

Those two events were, one, the initial build-out and commercialization of the Internet and, two, the mandatory spending for the Y2K computer system conversion. Both events increased demand for computer hardware and software, communications equipment such as routers, and the technology professionals such as programmers to make it all work.

This PDF from the Bureau of Economic Analysis has lots of useful data. Chart 4 on page 3 shows the outsize spending on Real Nonresidential fixed investment in the entire 1990's and the 1995-1999 five year span in particular compared to previous periods. That five year span is especially important because that's when businesses and governments concentrated on converting their computers for Y2K. That spending was going to occur regardless of other events - their companies and agencies depended on it. Table 3 on page 11 shows the contribution of computer hardware sales to GDP growth.

These files (PDF, Excel) show a condensed view of all the numbers for the years 1990-2005. Table 7 shows GDP growth and its components. Notice the large increases in the 'Durable goods' 'Equipment and software' numbers in the late 1990's. That's where the IT spending shows up.

A normal spending pattern for these products and services would have resulted in slower economic growth.

Yes, there were many things that happened in the 90s that had nothing to do with the government. Most booms and busts have more to do with private sector trends than what the government is doing. But let's give credit where credit is due. When Bill Clinton entered office in 1993, we had a pretty large deficit. Greenspan told Clinton that the deficit had to be brought under control in order for the Fed to lower interest rates. Clinton did this by putting together a package whose goal was to cut the deficit in half over a period of years(five, if I recall correctly). The package involved about $180 billion in tax increases over that period, and $180 billion in spending cuts. This package signalled to the Fed that the government was finally getting its fiscal house in order, which led to a dropping of interest rates.

In turn, the dropping in interest rates made it easier for businesses and entrepeneurs to borrow money, which led to the huge increase in business investment and startups in the 90s. Interest rates are very important to the economy, and Clinton played a large role in ensuring interest rates went down.

Conservatives and libertarians should give credit where credit is due: by just villifying Clinton, while liberals try to expropriate Clinton's legacy for themselves, conservatives make the mistake they make on a host of issues. They concede the field of debate to only one side. Clinton proved that smaller government is good for the economy. If conservatives would recognize this and trumpet it, then conservatives would win that debate with the public. It should be smaller government that we fight for, not Republican political dominance.