South-Western College Publishing - Economics  
And the Award For Best Director Goes To
Subject Economic Growth
Topic Fiscal Policy
Key Words Expansion, Economic Growth, Deficit Reduction, Federal Reserve
News Story

The current economic expansion started in March 1991. While this is a remarkable performance, the longest expansion ever, there is some argument over who is responsible for orchestrating it. The top candidates are Bill Clinton and Ronald Reagan. Some people would argue that the Federal Reserve deserves most of the credit, while others would throw in Jimmy Carter as an important actor.

President Clinton's performance is indeed noteworthy. His two terms of office have overlapped this period of prosperity. The Clinton Administration sponsored the deficit-reduction package that was pushed through Congress and was central to reducing long-term interest rates. Increased business investment led to productivity increases that kept inflation in check and created vast numbers of new jobs. The deficits that plagued previous Administrations have disappeared. Inflation is low and millions of new jobs have been created.

Republicans counter that the expansion was nearly two years old when Clinton came to office. It was Reagan-era tax cuts and deregulation, they argue, that started the economic expansion in November 1982. The reduction in income tax rates and the release of some industries from price controls and other regulations started the burst of entrepreneurial spirit that has continued today. Except for two brief recessions in 1990 and 1991, coinciding with the Persian Gulf war, this expansion is simply an extension of Reaganomics, which started the economy moving. Republicans also claim that it was pressure from them that caused Clinton to abandon big spending programs and to turn his attention to deficit reduction.

Advocates for Jimmy Carter point out that deregulation began under his watch and Carter appointed Paul A. Volcker as Federal Reserve Chairman. Mr. Volcker is credited with breaking the high inflation period that had crippled the economy.

There are a number of other factors that help explain our current prosperity. The Federal Reserve has conducted monetary policy with great skill and efficiency. The freeing of international trade has promoted competition and kept prices in check. There have been significant advances in computer technology that has made the workforce more productive.

Whether Clinton or Reagan deserves credit for the expansion is not simply an issue of egos. Gov. George Bush, like President Reagan, has stated that he will push for a big tax cut if he is elected because it will stimulate economic growth. Vice-President Gore is pushing a platform that closely resembles the programs of the Clinton Administration.

(Updated March 1, 2000)

1. The Kemp-Roth tax bill, approved shortly after Reagan came to office, provided for sharply lower marginal income tax rates. The Republicans argue that the lowered tax rates stimulated individual effort and the economy as well. Explain their position.
2. Another important development that both Republicans and Democrats take credit for is the increased trade among the industrial nations. What role(s) does free trade play in stimulating the economy?
3. Explain how deficit reduction could be responsible for stimulating the economy.
Source Richard W. Stevenson, "The Battle of the Decades," The New York Times, February 8, 2000.

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