I joined Brad DeLong and Noah Smith for their extremely dorky economics and sci-fi podcast. You can listen to the whole thing here, but I want to elaborate on Brad's discussion of the Clinton years, because I think it provides some useful color for 1) how Democrats talked themselves into a debacle and 2) how Biden can avoid one.
Neoliberalism played out much like Milton Friedman's career -- as an intellectual front for hard-right politics. But during the 1980s and 1990s, it wasn't obvious to many well-intentioned people in the Democratic Party that this would turn out to be the case.
There weren't any Democrats in the Clinton years who went the Full Friedman, declaring that progressive taxation had put us on the road to serfdom and the like. But as Brad details in the podcast, there were a lot of people who believed that neoliberal reforms were essential for generating high levels of investment -- research and development spending, equipment upgrades, implementing new technology, etc.
You don't have to be a neoliberal to believe that high levels of investment spending are a critical building block for social progress. Keynes believed it, John Kenneth Galbraith believed it, and plenty of lefties believe it today. The logic of the Green New Deal rests on high levels of investment. That's because "high investment" basically means "upgrading the economy" and if you want to do something big and transformative, you probably need to upgrade the economy to do it.
The Clinton administration tried to coax the private sector into paying for this upgrade by slashing the federal budget deficit and deregulating everything in sight. Cutting the budget deficit, the thinking went, would bring down interest rates. Investors would stop betting on inflation or government debt default and accept a lower rate of return for Treasury bonds. This would translate into lower interest rates across the economy, making it cheaper for corporations to borrow and spend on those precious investments. Unshackling financial markets and implementing a deregulatory free trade program, likewise, would generate a ton of wealth.
As Brad emphasizes, a lot of people at the time thought this was a perfectly progressive agenda, so long as all of the wealth created by this high-investment, globalized economy was then redistributed to create a more egalitarian society. What's more, once the economy was really going, it would be politically easier to make the case for spreading the wealth. People would feel more secure about their own financial situation and wouldn't be quite so nasty about people one or two neighborhoods over getting a piece of the action.
Of course there were plenty of people in the Clinton administration who didn't really have a progressive social vision as we'd understand it today. The crime bill and welfare reform weren't about creating a high-investment economy, and neither was Clinton's tough-guy immigration program (viz. this Clinton ad ripping Bob Dole for being soft on "illegal immigrants"). And there were also plenty of corrupt bad actors circling the president everywhere he went.
But I think Brad is basically right in arguing that the biggest problem for the Clinton administration wasn't cynicism or corruption -- the biggest problem for Clinton was that he and his top advisers believed things about the economy that were incorrect.
What did they get wrong? Four things, I think.
First, and least controversial: The politics. The Clinton years ended with the economy roaring, the budget balanced and inflation nowhere in sight. But of course the dream of redistributing all this wealth never materialized, because Republicans didn't want it to. They did a big tax cut and a big war and a big bank bailout instead. If Democrats want to fix inequality, they can't wait around hoping that it will be easier later, and they can't assume that delivering strong economic results will automatically generate electoral victory (pass a voting rights bill!).
Second, the Clinton team was wrong about the significance of the federal budget deficit. We've been running bigger and bigger deficits since 2001 and it just hasn't caused any measurable macroeconomic distress.
Third, they were wrong about how interest rates work. There is some interplay between financial markets and the Federal Reserve, but our experience since the financial crisis has shown pretty conclusively that the Fed is in charge, not bond vigilantes. If you want progressive monetary policy, don't appoint an Ayn Rand acolyte Fed Chairman.
Finally, (and perhaps most controversially), they were wrong about how to generate tons of private investment.
The Clinton economy did get an investment bump. Much of the digital economy was born in the 1990s. But it didn't last. We've been living with low levels of both public and private investment for a long time now, and the variants of private investment we've seen in the 21st century have been pretty unimpressive -- apps that addict us to our screens, Uber-Lyft gig economy stuff predicated on regulatory arbitrage, etc.
I read a lot of Keynes. I think the most likely culprit here is low aggregate demand. If your business can't rely on a large customer base with a steady income to be there for several years, then it doesn't make sense for your business to invest a lot today for a big payoff down the road. You focus instead on cutting costs and maybe making some small investments with a quick turn around.
Just as important, public investment begets private investment. Even that digital boom in the 1990s didn't happen in a laissez-faire vacuum. It piggybacked on a ton of public investment going back to the 1960s that created the infrastructure for what we now call The Internet. Since the early Reagan years, we've been shortchanging the economy by about $500 billion a year (today's money) in public investment relative to the 1960s and 1970s. That's a lot. And it means the private sector has less new stuff to work with when it tries to think of new things to make and do.
The key for Joe Biden is to recognize that in a lot of important ways the Clinton team got things backwards. You don't have to wait for your high investment economy to take off before you can deal with inequality. You generate the high investment economy by tackling inequality -- boosting incomes for working families. And when you're faced with pressing problems, don't just wait around for the market to save the world. Spend a ton of money and give the market something to work with.
There's a lot of stuff I wish Joe Biden would do that he hasn't proposed. I'd like to see much higher tax rates on the wealthy, and a broader definition of what constitutes wealthy (yes, if your household is bringing in $380,000 a year, you should be paying a marginal tax rate higher than 32 percent). I wish he wouldn't waste so much time courting Republican votes that he doesn't need and probably can't get.
But overall, Biden's economic agenda looks a lot like what a progressive-minded person would do after taking a long time examining the economic failures of the Clinton era. It's not just the multi-trillion-dollar scope of the Biden program, it's the design itself. Biden is directing a ton of money to working families in the form of childcare support, tax credits and other transfer payments, and a ton of money to create jobs for working people that actually pay well -- from care work to heavy manufacturing. Biden's infrastructure program is not just a list of roads and bridges to fix -- it's a pretty thorough overhaul of the transportation system -- electric vehicles, freight rail, public transit, you name it -- from a climate-friendly angle, along with some very serious green energy investments. In short, a very big dose of public investment to combat an obvious crisis.
It’s not a one-way ticket to utopia, but there's a lot more going on here than "stimulus" or an expansion of the welfare state. This is a significant change in the relationship between the state and the market that, if implemented, would reap major benefits for years to come. All Democrats have to do is vote for it.
One final point on something that I think the left-neoliberals in Clinton's orbit got right. There is real social insight to the idea that egalitarian social policies are easier to sell when the economy is doing well. There's a reason why dozens of countries around the world took a hard right turn after the financial crisis of 2008. People are not at their most broad-minded when times are tight. There is no credible single-economic-bullet theory for fixing American racism, but it's still easier to implement programs that benefit everyone when everyone feels financially secure. So a good way to help build support for helping the most vulnerable people in society is to include the not-quite-so-vulnerable, and not-quite-so-vulnerable again, and so on. The more people who benefit from a relief program, the more popular it's going to be.
This is not the most efficient way to target economic aid, and it won't turn the Proud Boys into the Rainbow Coalition. But I do think it's a more politically sustainable model for progressive change than programs that specifically target only the most economically insecure or only the most historically marginalized. Part of addressing American racism involves demonstrating that working people have a shared set of interests. One way to make that point is to establish public programs that address those shared interests together.
On that note, go frolic in some wildflowers like Pepper: