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November 2002, Volume 20, Number 11

Who is at Fault?

William L. Anderson

As the markets continue to wallow in bear territory, and as consumer—and, more important, investor—confidence falls, writers and commentators of all stripes have weighed in to give their two cents’ worth concerning the key question: who or what is at fault? 

Not surprisingly, Democrats have claimed that the economic downturn is entirely the fault of the Bush administration. Hillary Clinton told a party gathering that the government headed by her husband had provided prosperity and “fiscal restraint,” and that this latest downturn in the market was caused by the modest tax cuts Bush had pushed through Congress in 2001. 

Not to be outdone, her husband himself placed the blame squarely on his successor, claiming that the boom that occurred in the late 1990s was genuine prosperity that only came undone the minute Congress passed the tax cuts. Al Gore told supporters that the Clinton-Gore administration had created “the strongest economy in history.”

While I give no quarter in criticizing the Hooveresque Bush policies that have been totally wrongheaded, someone needs to answer the Democrats’ latest claims that they had provided a “permanent” prosperity that somehow became undone when Congress voted to cut some taxes. Granted, Democratic political operatives who pose as economists (i.e., Paul Krugman) have been saying the same thing, all of which proves once again that politicians and bad economists are natural bedfellows.

All together now, let us repeat the following: Bill Clinton did not, repeat, did not give us an era of permanent prosperity. Nor did his administration present the picture of “fiscal restraint” that we are now being told was the state of affairs in Washington a few years ago, and that includes the vaunted budget “surplus” that was nothing more than a sham set of numbers reflecting the built-in Social Security surpluses that had been planned for the system all along.

Let us begin with Clinton’s “prosperity.” Yes, during the late 1990s, unemployment was low, and the stock market was booming. The problem was that this boom was driven by unwarranted expansion of credit by Clinton’s new political ally, Federal Reserve Chairman Alan Greenspan, and was in no way sustainable. 

For Greenspan’s part, he has taken to shifting the blame away from the central bank over to human nature itself, which he says is inclined toward bubble mania. There is nothing the Fed could have done to have stopped it, he says, without tipping the economy into recession. As for the recession, he says, the Fed fought it at every step through lower and lower rates, and it came anyway. 

In fact, by 2000, the boom already had run its course, and the markets were showing weaknesses. The massive number of new regulations the Clinton administration placed upon business activities—especially on the environmental front—were sure to become even more burdensome once a slowdown hit the economy, and would also impede any recovery.

That the boom was driven by the Fed’s credit expansion is obvious. The accompanying chart demonstrates money growth from 1983 to 2000, and we can see that growth in M2 and M3 was especially steep, particularly after the 1994 elections when the Republicans took both houses of Congress.

Even more telling is the growth of debt from 1995 to 2000, as household debt rose by 46.4 percent, corporate debt by 62.8 percent, and state government debt by 19.5 percent. For households, mortgage debt rose by 94 percent during that period.

Granted, there were real investment opportunities that arose during this period, something that was lost in much of the “” hype that engulfed the markets during the late 1990s. First, deregulation of transportation and telecommunications, a process that began during the late 1970s, made certain sectors of the economy more attractive to investment, something that would have happened even without Greenspan’s credit expansion.

Second, near-exponential developments in computer technology again opened new avenues for investment. However, because the Fed chose to open the money spigots, the amounts of new money pouring into the above-mentioned sectors was far greater than could be sustained in a profitable manner. Yes, a number of investors benefited early in the process, but as the bubble in technology stocks increased, it became clear that the markets could not continue to absorb all of the new cash, and the bubble finally burst. 

Finally, the Clinton administration’s anti-Microsoft jihad put the finishing touches upon any hopes for the technology sector to be able to profitably deal with all of the new investment. In other words, it was clear that malinvestments were occurring on a massive scale in the US economy, and it was only a matter of time before the inevitable liquidation process had to begin. 

In one sense, it would have been poetic justice for Gore to have won the 2000 election, in that his administration would have been the one in power when the crash finally became reality. He would have had no Republicans to blame for the mess.

Unfortunately for Bush, however, the brunt of the crash has fallen upon his shoulders, and he has done little to make things better. Yes, his administration pushed through modest, back-loaded tax cuts in 2001, although the cuts were marketed as an economic “stimulus” when they should have been touted as a way to unburden the economy from the shackles of government.

Moreover, while he has recently spoken of the financial bubbles that occurred during the Clinton presidency, neither Bush nor anyone else in his administration has the knowledge or training to articulate anything that approximates an Austrian business cycle theory. This would be a golden opportunity for someone at the presidential level to explain what really happened. Instead, we get a bad mixture of Keynesian claptrap (tax cuts as a “stimulus” package and vast increases in government spending) and Herbert Hooveresque maneuvers like new tariffs on steel and lumber.

As for increasing the burdens of the state, Bush is doing it in style. In order to retaliate for the September 11 attacks that probably cost, at most, about a million dollars to carry out, he is leading the charge for the US government to spend hundreds of billions of dollars in new taxes for military operations and a war that even he says is likely to last for our lifetimes. In other words, Bush has brought back out-of-control government.

The burden of government does not extend just to spending. Instead of pointing out that the latest attacks upon the business community are going to have long-lasting negative effects upon investment and economic growth, Bush has entered into a “race to the bottom” competition with Democrats to see who can most vociferously demonize investors and businesspeople.

Clinton and his acolytes are dead wrong: the economic downturn was an inevitable end to years of financial bingeing that was the product of government’s unholy alliance with the Federal Reserve System. Had Clinton made it to a third term, or had Al Gore prevailed in Florida, we still would have had a recession.

Bush’s response to this whole mess, however, has been absolutely disheartening. He has made wrong choices at every turn, and the economy will pay. He is making sure that the political classes will prosper, and that the economic burdens upon the rest of us will grow. The president could have done the right thing. Instead, he has taken a bad situation and made it worse. .FM


William L. Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University (


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