Hillary Clinton Wants To Bring Back The '90s Economy. Here's What She's Missing.

It's all about the Federal Reserve.
Then-first lady Hillary Clinton in May 1998, a period of booming job growth. Clinton has said she would strive to recreate th
Then-first lady Hillary Clinton in May 1998, a period of booming job growth. Clinton has said she would strive to recreate the era's shared prosperity if elected president.

Hillary Clinton is pointing to the economic growth during her husband's presidency in the late 1990s as a model for her own economic plans.

The period during President Bill Clinton's administration saw well-distributed economic gains that lifted the fortunes of marginalized communities of color.

But if Hillary Clinton is to revive the best aspects of that era of prosperity, she should acknowledge the pivotal role of the Federal Reserve, liberal economists argue. Clinton hasn't said how she'll choose Federal Reserve Board governors or otherwise indicated how she would like the Fed to act.

“You know, at the end of the '90s, we had 23 million new jobs. Incomes went up for everybody,” Clinton said at the Univision-sponsored Democratic debate this week in Miami. “We were talking earlier about what needs to be done for Latinos and African-Americans. Well, we were doing it by the end of the '90s. Median family income went up 17 percent. For minorities, it went up even more.”

As Clinton accurately pointed out, the economy created more than 23 million jobs from 1993 through the end of 2000, according to the Bureau of Labor Statistics -- a period that spans Bill Clinton’s presidency.

Widespread wage growth followed robust job creation as high demand for labor forced employers to raise pay to compete for workers. As a result, median household income rose nearly 15 percent in 1999 from its low point in 1993.

Demand for labor was so high that the gains reached workers on the lower end of the earnings spectrum -- something that was virtually unheard of since the early 1970s, and has not been replicated since.

As Clinton noted, the booming job market was especially beneficial to workers of color, particularly African-Americans.

By 2000, black unemployment had fallen to 7.6 percent, the lowest rate in recorded history, according to an Economic Policy Institute analysis. The median wage for blacks rose even faster than for whites, propelling a higher percentage of African-Americans into the middle class than in any economic recovery since 1982.

It's understandable why Hillary Clinton is pitching her presidency as a return to the halcyon 1990s.

But Clinton neglects to mention that the economy cannot grow to the levels it reached in the 1990s if the Federal Reserve does not permit it.

When the Fed raises the benchmark interest rate, it deliberately puts downward pressure on the job market to head off a rise in prices.

In the late 1990s, Fed Chair Alan Greenspan repeatedly refused to raise the interest rate, which many economists say is what ultimately permitted the unemployment rate to dip below 4 percent in 2000.

The mostly liberal economists who laud Greenspan for staying out of the way during that growth period argue that the Fed's restraint was a rare bright spot in a decades-long trend of the central bank unduly prioritizing inflation concerns over job creation.

Then-Fed chair Alan Greenspan testifies before Congress in 1998. Many economists credit Greenspan for allowing the era's
Then-Fed chair Alan Greenspan testifies before Congress in 1998. Many economists credit Greenspan for allowing the era's job growth to occur.

Hillary Clinton, however, hasn't said whether her aim to recreate the days of job growth and wage growth would influence who she appoints as Federal Reserve Board governors.

The economy section of Clinton’s campaign website, subtitled “a plan to raise Americans’ incomes,” does not mention the Fed at all.

A spokesman for Clinton’s presidential campaign did not respond to a request for comment on how the Fed fits into Clinton's economic agenda.

The president has the power to appoint the seven Fed board governors, including the chair, who must then be confirmed by the Senate. The governors occupy the Fed’s 12-person Federal Open Market Committee, which is responsible for adjusting the key interest rate. 

Two governors' seats have remained empty in recent years as the Obama administration has struggled to get the Senate to confirm appointments.

Some analysts have criticized the Obama administration for not pushing harder to fill the vacancies. The openings mean that the five seats reserved for the unelected presidents of regional Federal Reserve banks have more influence over monetary policy than they otherwise would.

The Fed bank presidents tend to have close ties to the financial community, which has an interest in tamping down inflation. Four regional Fed presidents have worked for Goldman Sachs, for example, including William Dudley, who is currently on the FOMC. (Dudley, as president of the New York Fed, has a permanent seat on the FOMC, while other regional Fed presidents alternate serving one-year terms.)

Josh Bivens, research and policy director of the Economic Policy Institute, said he would "love" for Clinton to speak out about prioritizing filling the two vacant seats on the Fed Board of Governors.

"She could even talk about it in terms of the late 1990s," Bivens said. "There are reasons to feel warmly about that period and a big part of that is the Fed did not take away the punch bowl too early."

There are reasons to feel warmly about that period and a big part of that is the Fed did not take away the punch bowl too early. Josh Bivens, the Economic Policy Institute

Dean Baker, co-director of the Center for Economic and Policy Research, a progressive think tank, and co-author of the book Getting Back to Full Employment, lamented Clinton’s reticence on the topic.

“If the Fed is not on board, they are going to have a hell of a time,” Baker said. “What are they are going to do if the Fed is raising interest rates?”

Clinton has not weighed in on the Fed’s decision to raise its key interest rate in December.

Sen. Bernie Sanders (I-Vt.), Clinton’s rival in the Democratic presidential primary, condemned it, arguing that the Fed should wait until unemployment is below 4 percent.

It was not an especially radical stance. Lawrence Summers, a former top economic adviser to President Barack Obama, who nearly became Fed chairman in 2013, opposed the Fed rate hike on similar grounds.

The Fed Up campaign, a coalition of grassroots groups mobilizing low-income workers to push for progressive Fed policies, emphasized the rate hike's disproportionate impact on African-Americans and Latinos.

If the Fed is not on board, they are going to have a hell of a time. Dean Baker, the Center for Economic and Policy Research

The endemic difference in employment opportunities for black people and white people of comparable education levels points to widespread racial discrimination in the job market. A Fed that keeps interest rates low -- erring on the side of full employment rather than inflation -- is essential, Fed Up and many economists argue, because when demand for workers grows to a certain level, employers can no longer afford to discriminate based on race.

The other problem with using the late 1990s as an economic model is that the era’s jobs boom was driven in large part by an unsustainable stock market bubble. The Fed’s refusal to put on the brakes was nonetheless a good thing, according to many economists, because it reflected the right balance of job growth and inflation. The stock market bubble, they say, could have been avoided through other means, such as better regulation.

But it does mean that the engine of growth cannot be recreated as easily as Clinton sometimes implies.

The most ambitious piece of Clinton’s job creation plan is a five-year, $275 billion investment in infrastructure.  

Bivens called Clinton’s plan “pretty good, not small potatoes.” But he said he doubted it would be enough to counter the gap in demand for goods and services left over from the recession, and the depressing effect of forthcoming Fed interest rate hikes.

Baker expressed a similar view. He also argued that reducing the U.S. trade deficit with countries like China by prioritizing their currency devaluation policies during trade negotiations would spur high-value job growth.

Ultimately, Clinton may be able to benefit from Americans’ fond memories of a prosperous economy if she embraces the complexity of the 1990s.

“I would love to see the late 1990s loom a lot larger in policy discussions -- both the upside and the downside,” Bivens said. “The upside is that it showed we can have full employment without inflation reaching dangerous levels. And the downside is that it showed we need a stronger foundation for economic growth.”