Tilting at Windmills - How the Economy Worked

Posted by Ian Welsh, I can hardly wait for the next chapter -- law

The Clinton economy of the 90's was the doppleganger of the Bush economy. It existed to solve the same problems that the Busheconomy attempted to solve. It's methods were similiar. The first was labor arbitrage, which was not invented in 2000. Labor arbitrage helped keep inflation under control - the US imported goods from low cost domiciles after shipping the production of those goods there. It paid for the goods with dollars and the rich of those nations promptly shipped those dollars back into the US - and then some.

They did so because the US offered two things - fantastic investment opportunities in the bleeding edge industries of the day; and a stable regime with a strong, indeed usually appreciating, currency. The Asian currency crisis taught everyone who didn't already know, why you didn't want to keep your money at home, even if you thought your economy was pretty strong. The money flooded back into the US but it was largely sterilized because it flowed into the equities and bonds and thus had much less effect on the economy than it would have otherwise (though it certainly had some, as those who lived in San Francisco at the time can attest.) Because it was going into largely paper assets, it didn't generate real world inflation and because it was going into paper assets it didn't generate much in the way of increased energy use. It was also necessary to have assets that foreign investors could buy, because Clinton wanted to work on the federal deficit - so foreign investors had to have some other way to park their money in the US.

The IMF and the World Bank, along with the WTO, continued their long term management of the world economy. They opened up markets to US agricultural goods, they extended US intellectual property laws overseas to ensure that the US got paid for what what it was producing (a pattern which should be familiar to those who have studied Britain in the late nineteenth century) and they encourage commodity producers to increase production and use the money the earned to buy goods from the developed world (notably agricultural goods). In other words, the world trade regime was used to push commodity prices down and open up markets to the two main things the US still sold – intellectual property and certain agricultural items.

Meanwhile the other leg which had to be managed was energy. Put simply, growth faster than energy supplies grew couldn’t be allowed. If demand was allowed to outstrip supply for energy (most importantly in oil, but also in natural gas) then producers would regain pricing power. The 70’s had taught the world what happens when oil producers have pricing power and the Clinton administration didn’t want a repeat.

The last twenty years had seen the amount of oil required to support a dollar of constant GDP drop significantly. The goal was to continue that trend. This was done in three primary ways. The first was the equity boom – Wall Street doesn’t use a lot of energy, flipping electrons and selling shares and bonds generates dollars without increased energy inputs significantly. The second was to allow growth overseas – not only did you get the deflationary effects of labor arbitrage but improving standards of living in Asia used less energy than such production would have done here – North Americans are notable energy hogs. The third was the great internet gamble – the bet was that the virtual economy wouldn’t use up a lot of energy – flipping bits around doesn’t. That bet is one the Clinton administration lost, because what people decided to use the internet for (other than porn) was for storefronts. They sold people stuff on the internet – then shipped physical goods to them.

But, overall, it worked. It was based on labor arbitrage. It was based on making sure oil producers didn’t gain pricing power. It was based on having a way of sterilizing excess money which didn’t generate excess inflation in the economy proper (they shoved it into the internet bubble – an asset bubble with as few real-world effects as they could manage), so that monetary expansion could be pursued and that was based on having both a technological sector which everyone wanted in on and having a stable polity where people felt safe parking their money.

When the Bush administration came in they looked at the Clintonian economy and they decided to make some improvements. I’ll discuss those in a follow-up article.

Tilting at Windmills - How the Economy Worked


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