The economic policy of the Bill Clinton administration, referred to by some as Clintonomics, encapsulates the economic policies of president of the United States Bill Clinton that were implemented during his presidency, which lasted from January 1993 to January 2001.
President Clinton oversaw a healthy economy during his tenure. The U.S. had strong economic growth (around 4% annually) and record job creation (22.7 million). He raised taxes on higher income taxpayers early in his first term and cut defense spending and welfare, which contributed to a rise in revenue and decline in spending relative to the size of the economy. Those factors helped bring the United States federal budget into surplus from fiscal years 1998 to 2001, the only surplus years since 1969. Debt held by the public, a primary measure of the national debt, fell relative to GDP throughout his two terms, from 47.8% in 1993 to 31.4% in 2001.
Clinton signed North American Free Trade Agreement (NAFTA) into law, along with many other free trade agreements. He also enacted significant welfare reform. His deregulation of finance (both tacit and overt through the Gramm–Leach–Bliley Act) has been criticized as a contributing factor to the Great Recession.
Overview
Clinton's presidency included a great period of economic growth in America's history. Clintonomics encompassed both a set of economic policies as well as governmental philosophy. Clinton's economic approach entailed modernization of the federal government, making it more enterprise-friendly while dispensing greater authority to state and local governments. The ultimate goal involved rendering the American government smaller, less wasteful, and more agile in light of a newly globalized era.Jack Godwin, Clintonomics: How Bill Clinton Reengineered the Reagan Revolution (Amacom Books, 2009)
Clinton assumed office following the end of a recession, and the economic practices he implemented are held up by his supporters as having fostered a recovery and surplus, though some of the president's critics remained more skeptical of the cause-effect outcome of his initiatives. The Clintonomics policy focus could be summarized by the following four goals: To establish fiscal discipline and eliminate the budget deficit To maintain low interest rates and encourage private-sector investment To eliminate protectionist tariffs Invest in human capital through education and research
Prior to the 1992 presidential campaign, America had undergone twelve years of conservative policies implemented by Ronald Reagan and George H. W. Bush. Clinton ran on the economic platform of balancing the budget, lowering inflation, lowering unemployment, and continuing the traditionally conservative policies of free trade.
David Greenberg, a professor of history and media studies at Rutgers University, opined that:
Fiscal policy
Tax reform In proposing a plan to cut the deficit, Clinton submitted a budget and corresponding tax legislation (the final, signed version was known as the Omnibus Budget Reconciliation Act of 1993) that would cut the deficit by $500 billion over five years by reducing $255 billion of spending and raising taxes on the wealthiest 1.2% of Americans.Speech by President Address to Joint Session of Congress February 17, 1993 It also imposed a new energy tax on all Americans and subjected about a quarter of those receiving Social Security payments to higher taxes on their benefits.
Republican Congressional leaders launched an aggressive opposition against the bill by claiming that the tax increase would only make matters worse. Republicans were united in their opposition, and every Republican in both houses of Congress voted against the proposal. In fact, it took Vice President Gore's tie-breaking vote in the Senate to pass the bill. After extensive lobbying by the Clinton Administration, the House narrowly voted in favor of the bill by a vote of 218 to 216.U.S. House Recorded Vote – H.R. 2264 (Omnibus Budget Reconciliation Act of 1993) The budget package expanded the earned income tax credit (EITC) as relief to low-income families. It reduced the amount they paid in federal income and Federal Insurance Contributions Act tax (FICA), providing $21 billion in savings for 15 million low-income families.
Clinton signed the Omnibus Budget Reconciliation Act of 1993 into law on August 10, 1993. The law created a 36 percent to 39.6 percent income tax for high-income individuals in the top 1.2% of wage earners. Businesses were given an income tax rate of 35%. The cap was repealed on Medicare. Gas taxes were raised 4.3 cents per gallon. The taxable portion of Social Security benefits were also increased.
Clinton signed the Small Business Job Protection Act of 1996, which reduced taxes for many small businesses. Furthermore, he signed legislation that increased the tax deduction for self-employed business owners from 30% to 80% by 1997. The Taxpayer Relief Act reduced some federal taxes. The 28% rate for capital gains was lowered to 20%. The 15% rate was lowered to 10%. In 1980, a tax credit was put into place based on the number of individuals under the age of 17 in a household. In 1998, it was $400 per child and in 1999, it was raised to $500. The Act removed from taxation profits on the sale of a house of up to $500,000 for individuals who are married and $250,000 for single individuals. Educational savings and retirement funds were given tax relief. Some of the expiring tax provisions were extended for selected businesses. Since 1998, an exemption could be taken out for those family farms and small businesses that qualified for it. In 1999, the correction of inflation on the $10,000 annual gift tax exclusion was accomplished. By the year 2006, the $600,000 estate tax exemption had risen to $1 million.
The economy continued to grow, and in February 2000 it broke the record for the longest uninterrupted economic expansion in U.S. history.
After Republicans won control of Congress in 1994, Clinton vehemently fought their proposed tax cuts, believing that they favored the wealthy and would weaken economic growth. In August 1997, however, Clinton and Congressional Republicans were finally able to reach a compromise on a bill that reduced capital gain and estate taxes and gave taxpayers a credit of $500 per child and tax credits for college tuition and expenses. The bill also called for a new individual retirement account (IRA) called the Roth IRA to allow people to invest taxed income for retirement without having to pay taxes upon withdrawal. Additionally, the law raised the national minimum for cigarette taxes. The next year, Congress approved Clinton's proposal to make college more affordable by expanding federal student financial aid through Pell Grants, and lowering interest rates on student loans.
Clinton also battled Congress nearly every session on the federal budget, in an attempt to secure spending on education, government entitlements, the environment, and AmeriCorps–the national service program that was passed by the Democratic Congress in the early days of the Clinton administration. The two sides, however, could not find a compromise and the budget battle came to a stalemate in 1995 over proposed cuts in Medicare, Medicaid, education, and the environment. After Clinton vetoed numerous Republican spending bills, Republicans in Congress twice refused to pass temporary spending authorizations, forcing the federal government to partially shut down because agencies had no budget on which to operate."Government Shutdown Battle" – PBS In April 1996, Clinton and Congress finally agreed on a budget that provided money for government agencies until the end of the fiscal year in October. The budget included some of the spending cuts that the Republicans supported (decreasing the cost of cultural, labor, and housing programs) but also preserved many programs that Clinton wanted, including educational and environmental ones.
Deficits and debt
Below are the budgetary results for President Clinton's two terms in office: He had budget surpluses for fiscal years 1998–2001, the only such years from 1970 to 2023. Clinton's final four budgets were balanced budgets with surpluses, beginning with the 1997 budget. The ratio of debt held by the public to GDP, a primary measure of U.S. federal debt, fell from 47.8% in 1993 to 33.6% by 2000. Debt held by the public was actually paid down by $453 billion over the 1998-2001 periods, the only time that happened between 1970 and 2018. Federal spending fell from 20.7% GDP in 1993 to 17.6% GDP in 2000, below the historical average (1966 to 2015) of 20.2% GDP. Tax revenues rose steadily from 17.0% GDP in 1993 to 20.0% GDP in 2000, well above the historical average of 17.4% GDP. Defense spending fell from 4.3% GDP in 1993 to 2.9% GDP by 2000, as the U.S. enjoyed a "peace dividend" in the wake of the fall of the Soviet Union. In dollar terms, defense spending fell from $292B in 1993 to $266B by 1996, then slowly rose to $295 billion by 2000. Non-defense discretionary spending fell from 3.6% GDP in 1993 to 3.2% GDP by 2000. In dollar terms, it grew from $248B in 1993 to $343B in 2000; robust economic growth still enabled the ratio to fall relative to GDP.
The surpluses from 1998 to 2001 were attributed to a strong economy generating high tax revenues, tax increases on upper-income taxpayers, spending restraint, and capital gains tax revenue from a stock market boom. The pattern of raising taxes and cutting spending (austerity) in an economic boom coincides precisely with the advice of John Maynard Keynes, who stated in 1937: "The boom, not the slump, is the right time for austerity at the Treasury." However, the remarkable success did not stop conservative pundits from trying to discredit this achievement. Their argument essentially is that although debt held by the public was reduced, the surplus funds paid into Social Security were used to pay those bondholders, in effect borrowing from one pocket (future Social Security program recipients) to pay down the other (current bondholders), such that total debt rose. However, while this is true, this is also how the proverbial "math works" for all the other modern Presidents as well. It is not accurate to discredit the exceptional fiscal austerity of the Clinton era relative to other modern Presidents, which nevertheless coincided with a booming economy by virtually any measure. It is also relevant to point out that this booming economy occurred despite Republican warnings that such tax increases on the highest income taxpayers would slow the economy and job creation. Perhaps the boom would have been even greater if larger deficits had been run, but that was not the argument made at the time.
Welfare reform
On taking office in early 1993, Clinton proposed a $16 billion stimulus package, primarily to aid urban area programs favored by progressives. The package was quickly defeated by a Republican filibuster in the Senate.Elizabeth Drew, On the Edge: The Clinton Presidency (1994) pp. 114–122. Serious efforts at welfare reform required bipartisan support. With the landslide Republican win in the 1994 midterm elections, Clinton was forced to moderate policies; he adopted mostly conservative proposals supported by most Republicans and claimed the major credit for them.Bruce F. Nesmith, and Paul J. Quirk, "Triangulation: Position and Leadership in Clinton’s Domestic Policy." in 42: Inside the Presidency of Bill Clinton edited by Michael Nelson at al. (Cornell UP, 2016) pp. 46-76.