During the recent presidential election and in our current “fiscal cliff” debates over tax and spending policies, I’ve heard frequent reference to the economic boom years of the 1990s. Many have pointed out that the United States had higher tax rates and also high economic growth under the administration of President Clinton. If only we could go back to Clinton-era policies, the argument goes, we could return to prosperity. However, it seems to me fairly obvious that the economic benefits of that earlier decade were not produced by tax policy and that many of our current problems have their roots in the artificial prosperity of that time.
The two bubbles helped transform the American economy into one that was based heavily on finance, concentrating wealth, even while the mortgage bubble pushed poorer Americans into unsustainable debt. This type of speculation was clearly not a sound basis for an economy. Also, governmental efforts to increase home ownership became a classic case of unintended consequences: egalitarian policies that ultimately increased income inequality, created a greater burden of debt for poorer people, and helped transform the economic structure into one that offered opportunities for investors rather than for workers.
I don’t know whether we will go over the cliff and see taxes immediately go up and government spending immediately go down or not. But regardless of what happens at the end of this year, the ultimate goal should be to build an economy based on sound economic activity and not on speculation. Nostalgia for the Clinton prosperity is like waking up with a bad hangover after a drunken spree and saying, “gosh, I’d feel great if I were only soused again.”