The Credit Writedowns Interview with President Bill Clinton

With a pressing unemployment problem depressing growth in the US, former president Clinton plans to demonstrate his five-year old public service community can create jobs in America while still implementing projects that achieve results globally. His focus during an almost two-hour long discussion with a small group of bloggers in New York made this clear.

Former President Bill Clinton is in New York for the annual meeting of the Clinton Global Initiative (CGI), the public service organization he started in 2005 to combat world’s most pressing problems through a collaboration of the private and public sectors. CGI has focused on four areas: education, economic empowerment, global health and environment and energy. While last year’s conference was dominated by the aftershocks of the financial crisis, this year’s economic events have brought domestic unemployment and underemployment into focus for CGI.

Mr. Clinton stated that he has asked the CGI community to develop initiatives that also create jobs domestically. But, more than that, the tone of the discussion demonstrated how focused Mr. Clinton is on American jobs as the discussion was dominated by the domestic economic situation.

The Middle Class Squeeze

During the talk, President Clinton’s economic focal point was on middle class America. He said the middle class has been under stress since America left the gold standard and had the first oil crisis nearly 40 years ago. In all that time, real hourly wages for the bottom 20% in America only grew during four years (the years of his second term in Office) – and this slight increase he believes is largely due to containing health care spending. Bottom line: the middle class has been squeezed for at least a generation now.

Voter Anger and the Tea Party

In his view, many voters – especially in the Tea Party – appear to be angry during this election cycle. And this anger stems from their frustration that the squeeze is still ongoing even while "big business has done well and people who caused the financial turmoil are already back in the saddle – they’re doing fine. And the government that gave them the TARP bailout – you’re doing fine; you’ve got a job, you can send your kid to college, you’ve got healthcare…The middle class squeeze is basically occurring to non-government private sector workers… [They’ve been squeezed] by both big business and government." That drives voter anger and the Tea Party movement, Mr Clinton said.

The question for him is how to channel that anger in a way which leads to a better outcome. He says, regarding the fundamental economic issues facing the country, "no one is talking about this in ways that people can understand. We just say ‘oh, people are just too mad to think.’ That’s insulting to people. ‘They’re too apathetic to care.’ That’s insulting." Mr Clinton said he thought it was positive that President Obama has done town hall meetings. "You gotta let people get all that out. Legitimize their anger and tell them don’t let it cloud their judgment," Clinton says.

Those thoughts led the former President back to the Tea Party. Now, it should come as no surprise to hear that President Clinton believes the Obama Administration has done more than it gets credit for. But,regarding the mid-terms, this is irrelevant. Mr. Clinton views the Tea Party movement’s origins in the anger about the middle class squeeze. He sees the Tea party anger directed at differences they perceive in how elites both in government and the private sector have fared versus ordinary Americans.  Clinton said  "I’m sympathetic with these Tea Party folks… American public and private systems need to be modernized and changed so they’re more accountable to people and they help the middle class more… I 100% agree with that. They’re right."

The question, however, is whether the financial backers of the Tea Party share the same concerns. Mr. Clinton believes they do not. He says the walking around voters on the ground "are being used by people whose real goal is to dismantle the government and empower the most ideological private economic [forces]."

Parallels to 1994

In this, Mr Clinton sees the Tea Party movement as fundamentally different than the independent movement which brought Ross Perot to political prominence. The former President said Ross Perot’s ideas certainly had real legitimacy "but there was also the idea that anybody who could run this big complicated company around the world could run the government and we would have people with real [management] skills elected." Perot, as one man, embodied the movement. On the other hand, the Tea Party movement is more diffuse and the candidates are often unknown.


So what are Mr Clinton’s ideas for the economy? These are clearly centered around jobs. We did talk about taxes and deficits. Nevertheless, most of the conversation was related to jobs. He sees three areas as crucial where CGI could also add value.

  1. Small Business
  2. Manufacturing
  3. Clean energy

Clinton mentioned that the overwhelming majority of the funds left over from the stimulus bill were in the clean energy arena. What I found interesting here was his points about job openings. He said that the one piece of information he found most important in the last jobs report was that new job openings were going up twice as fast as new hires. The question is why. His take: more than 10% of Americans live in homes worth less than their mortgages. This really restricts labour mobility.

Aggregate demand or Skills mismatch?

Moreover, the former President believes there is a "skills mismatch" in which unemployed workers in the U.S. are not skilled up for the jobs of the future to which the U.S. economy needs to move. His statement seemed to contradict what economists like Paul Krugman are saying about the centrality of aggregate demand to this economic slump. Krugman wrote today:

it’s a weak labor market for everyone out there, and businesses have no trouble finding the workers they need; they just don’t know what to do with those workers, given weak demand.

The evidence, then, is overwhelmingly in favour of a demand story. But the mismatch people don’t want to hear that — and they have substantial influence. And so the slump goes on.

What gives? I asked President Clinton about this. And he said. "In general, Krugman is right… And the bond market has voted with Krugman."

The re-calculation story does not preclude AD

How do I parse this? Well, just an hour before the meeting with President Clinton, I sent an e-mail to Mike Konczal, who wrote the research on which Krugman’s post was based saying:


I wanted to start a discussion on aggregate demand because I didn’t really find that your last piece ruled out the skills or re-calculation argument of joblessness despite the wonderful statistical analysis.

Here’s how I would put the recalculation story:

Over the last quarter century, the US economy has become increasingly reliant on the FIRE economy which includes financial services, insurance and real estate. At one point, these sectors accounted for 40% of the profits in the S&P500. While many felt this transformation was desirable before the financial crisis, we have now come to appreciate the volatility inherent in a reliance on FIRE. Put simply, returns in finance are correlated to the leverage one can take on. The more leverage, the greater profit. But also the greater instability.

The resource allocation in the United States was fundamentally imbalanced leading to the accumulation of debt in the financial and household sectors and a widening income distribution. The collapse of the FIRE economy has been averted but its significance has been permanently diminished. The knock-on effects of job losses in these sectors has caused tremendous job and output loss throughout the economy. This has created a pervasive and widespread loss of aggregate demand.

However, if we were to concentrate solely on aggregate demand rather than resource allocation, it will continue a misallocation of resources as concentrating on demand in the aggregate risks a partial return to the status quo ante. Going forward, there will be fewer financial services jobs, fewer home building positions, fewer mortgage lending jobs.  As people leave these sectors and occupations, the economy must recalculate and this process takes time.

In sum, I see nothing in that story which is inconsistent with a widely dispersed and deep retrenchment in employment across different sectors or occupations of the economy. The fact is the sectors which were devastated by the downturn were so massive, the knock-on effects elsewhere were necessarily large. I still see this as an aggregate demand story that has a huge recalculation component. Focussing on AD to the exclusion of the recalculation story is a mistake both economically and politically in my view. Ignoring the very real and permanent downsizing of the FIRE economy is going to make stimulus ineffective.

In my view, this explains both what President Clinton is saying and what economists like Arnold Kling are saying (see here and especially here). Again I see nothing inconsistent about acknowledging the need to reallocate scarce economic resources while putting the need to deal with a shortfall in aggregate demand to the forefront of economic policy. The two ways of thinking are not mutually exclusive. I sense that those favouring the AD story are concerned that the "skills mismatch" story is just an excuse to block stimulus.

Why eastern Germany is relevant

I should add that my story on the failure of stimulus in eastern Germany was a recalculation story. Let’s remember that eastern Germany was pummelled by a loss of export markets within the Soviet sphere while simultaneously dealing with a significant currency revaluation which lowered their workers’ relative productivity levels. In my view, this re-calculation away from export markets to the east is not unlike what we are witnessing in Spain in housing and construction or in the US in the FIRE sectors right now despite points from Paul Krugman to the contrary.)

So, it’s not that investments weren’t made. They were. Trillions were spent to upgrade infrastructure and create a modern environment in Eastern Germany. Eastern Germany has beautiful new airports and roads, which are better in many places than in the western states. Hundreds of Billions went into constructing and upgrading housing in eastern Germany too – so much so that housing is now being demolished due to the inventory overhang. Lots of money went into subsidies for aquatic resorts to boost tourism. For instance, in the state of Brandenburg alone, "close to €170 million in subsidies had been spent on swimming pools by 2005."

And then there are the Arbeitsbeschaffungsmassnahmen, one of the longest words you will ever see. This is the German word for public works programs. And they were maintained in droves in the former DDR…

Yet, per capita output is still less than three-quarters of that in the West – this, despite a large outflow of population from east to west.

70% output per capita is certainly better than 40% which is where eastern Germany started relative to the west. Moreover, recent evidence shows that eastern Germany is closing the gap further. And I certainly think stimulus and job guarantees played a large role in closing the gap in eastern Germany. They could play a large role now in the US as well. But If you think stimulus and jobs programs alone solve this recalculation problem – and quickly – or that there won’t be waste, you are fooling yourself.

Perhaps, we will hear more on this from Cowen, Konczal, Kling or Krugman in the near future. Hopefully, they can talk more about technology, off-shoring, outsourcing, and global wage arbitrage as the major contributing factors to middle class wage pressure.

I will provide more from the interview with President Clinton in future posts.

  1. Callahan says

    Interesting stuff. Did you ask him to renounce Robert Rubin and all his works and embrace Warren Mosler? That would have been quite a coup. :o)

    “Again I see nothing inconsistent about acknowledging the need to reallocate scarce economic resources while putting the need to deal with a shortfall in aggregate demand to the forefront of economic policy”

    You sound like Truman’s economic adviser Leon Keyserling (which I mean as a compliment). “In 1950 Keyserling, then chairman of the Council of Economic Advisers, published a five-year indicative national plan for the United States designed to balance total national output and total demand for the years 1950-1854 as the economy grew at the annual rate of three percent”.

    The indicative planning section starts on page 57 of the linked doc and is written in French (just kidding, its called Pathways to Economic Growth).—1950-Economic-Review

  2. Bryan Kauffman says

    In regards to the skillz shortage, so should everybody run out and get accounting degrees and nursing degrees and chemistry degrees? So what happens to the employment rate for those people when a flood of new workers appears for their jobs?

  3. Cstarliper says

    Great interview, Edward. I was not a Clinton fan per se, but he sure seems to have better command of the issues than 99% of the hacks in Washington. Also, excellent commentary on aggregate demand versus recalculation, as you put it. That brings in two sides of the coin that are often looked at in isolation.

    1. Edward Harrison says

      Thanks. @Cstarliper. I am trying to forge a middle path that actually can act as a hybrid Austrian-Keynesian view. It will be difficult to gain traction I suspect, because crisis increases the appeal of the extreme not the moderate.

      Note, Paul Davidson, a Keynesian economist has some fairly negative things to say about the whole skills mismatch argument. He sees this as a largely political argument. his arguments are coming as a post later today.

      1. Callahan says

        You should read David Colander, He wrote a piece called “Integrating Sound Finance and Functional Finance” which sounds like where you are. Besides its early work with Abba Lerner (towards the end of his life Lerner worked with Colander to amend the rules of functional finance to address inflation control), Colander’s made his mark as a first rate economic historian.

        His work with Lerner is dealt with in “Functional Finance, New Classical Economics and Great Great Grandsons” and “A Real Theory of Inflation and Incentive Anti-Inflation Plans”. His grad school adviser William Vickrey was a fan of their anti-inflation plan and made it a central part of his “chock-full employment” proposal. At his website, Colander has pdfs of all his papers, including (naturally) a positive retrospective of Vickrey’s work.

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