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Why Obama Can't Bring Back the '90s Economic Boom


Here are four major reasons to doubt that we'll relive the 1990s under any of the plans -- Obama's or the Republicans' -- that are meant to trim the deficit.

When selling his tax hikes to the public, President Obama often advertises the economic gravy train that chugged through the Clinton-era as proof that higher taxes won't derail growth.

Bill Clinton in 1993 raised top marginal rates on the wealthiest to 39.6%, the same level Obama wants to restore them to as part of the fiscal cliff talks with congressional Republicans. The administration's nuanced argument-backed by a spate of economic studies-is that the economy can easily weather the increase, but statements from Obama and his deputies occasionally insinuate that boom times will return if only patricians paid the IRS more money.

"Remember, that was a time of remarkably good economic growth, in this country-very strong private investment, strong job growth, strong broad-based growth in incomes," Treasury Secretary Tim Geithner said this week on Fox News Sunday. "It was a good time for the American economy. It makes a lot of sense."

These kinds of comparisons to the 1990s annoy economists like Douglas Holtz-Eakin, who has advised GOP presidential campaigns and now runs the American Action Forum. Affluence during the Clinton era derived in large part from forces that had little to do with changing taxes: Demographic trends, the rise of the Internet, the tech stock bubble, and phenomena that are divorced from some of the dominant traits in the economy as it is now.

"The free lunches on productivity from then are all gone now," Holtz-Eakin said. "I understand the politics of it, but it's shoddy empirical research. I would flunk a freshman who did that."

Here are four major reasons to doubt that we'll relive the 1990s under any of the plans-Obama's or the Republicans'-that are meant to trim the deficit:

SHRIVELING WORKFORCE – Two major factors steer economic growth: population and productivity. The labor pool essentially exploded under Clinton. Baby boomers hit peak earning years, as their children started climbing the career ladder. When Clinton first took the oath of office in 1993, the employment-to-population ratio was 61.5%. It peaked toward the end of his tenure at 64.6%-the highest quarterly reading since the Bureau of Labor Statistics began recording this ratio in 1948.

Baby boomers are now retiring after weathering an annihilative financial crisis. The employment-to-population ratio has been flat at 58.5% for the past four quarters, even as the unemployment rate improved.

"Labor force participation was still climbing in the 1990s when tax rates were higher," said Robert Stein, a senior economist at First Trust Advisors, "which means we won't get the same real GDP growth at those tax rates [now]".

CHINA BELONGS TO THE WTO – Clinton never had to contend with an industrial behemoth like China. The Asian power exported just $31.5 billion worth of goods and services to the United States in 1993, a figure it now surpasses on a monthly basis by more than $6 billion, according to the Census Bureau.

Americans buy clothing, furniture, laptops, and smartphones from China. Increased trade can help consumers with lower prices, but it also contains hidden costs that unfold over time. The Obama administration filed complaints with the World Trade Organization-an entity China didn't even belong to during the Clinton administration-for violations on solar panels, wind turbines, raw materials, tires, and auto parts.

The trade deficit with China is on pace to top $330 billion this year, subtracting roughly 2% drag from the US Gross Domestic Product. To put that in perspective, the entire economy grew at a 2% clip so far this year.
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