Dean Baker: The High Priests of the Bubble Economy

Deregulation and laissez-faire orthodoxy bears much of the blame for the current economic mess we are experiencing. Dean Baker notes with chagrin that Barack Obama, who will take office as U.S. President shortly, has put some of the progenitors of deregulatory laissez-faire policy at the helm of his economic team (hat tip Marshall).

Below is a snippet of his post running on Talking Points Memo called The High Priests of the Bubble Economy.

Disclaimer: I happen to know Robert Rubin and think well of him personally. Therefore, I do feel somewhat conflicted by the dim view Baker takes of him here. However, the point still remains: a President Obama may not be willing to change the financial status quo as much as many of his backers would like including myself.

Those following the meeting of Barack Obama’s economic advisory committee could not have been very reassured by the presence of Robert Rubin and Larry Summers, both former Treasury secretaries in the Clinton administration. Along with former Federal Reserve Board chairman Alan Greenspan, Rubin and Summers compose the high priesthood of the bubble economy. Their policy of one-sided financial deregulation is responsible for the current economic catastrophe.

It is important to separate Clinton-era mythology from the real economic record. In the mythology, Clinton’s decision to raise taxes and cut spending led to an investment boom. This boom led to a surge in productivity growth. Soaring productivity growth led to the low unemployment of the late 1990s and wage gains for workers at all points along the wage distribution.

At the end of the administration, there was a huge surplus, and we set target dates for paying off the national debt. The moral of the myth is that all good things came from deficit reduction.

The reality was quite different. There was nothing resembling an investment boom until the dot-com bubble at the end of the decade funnelled vast sums of capital into crazy internet schemes. There was a surge in productivity growth beginning in 1995, but this preceded any substantial upturn in investment. Clinton had the good fortune to be sitting in the White House at the point where the economy finally enjoyed the long-predicted dividend from the information technology revolution.

Rather than investment driving growth during the Clinton boom, the main source of demand growth was consumption. Consumption soared during the Clinton years because the stock market bubble created $10tn of wealth. Stockholders consumed based on their bubble wealth, pushing the saving rate to record lows, and the consumption share of GDP to a record high.

The other key part of the story is the high dollar policy initiated by Rubin when he took over as Treasury secretary. In the first years of the Clinton administration, the dollar actually fell in value against other currencies. This is the predicted result of the deficit reduction. Lower deficits are supposed to lead to lower interest rates, which will in turn lower the value of the dollar.

Baker’s analysis is very good. Therefore, I encourage you to read the full post which is linked below.

The High Priests of the Bubble Economy – Dean Baker, TPM

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