During the past decade, a critique of neoliberalism has become widespread in the progressive wing of the Democratic Party. During the 1970s, the argument goes, many Democrats espoused the pro-market, antigovernment views long associated with opposition to the New Deal and the modern welfare state. In the name of efficiency, growth and lower prices, the Carter administration deregulated airlines, trucking and other sectors. The Clinton administration espoused free trade and the unfettered flow of capital across national boundaries. In response to the Great Recession, President Obama’s economic advisers focused on the health of giant banks and tolerated a grindingly slow recovery.
The problem, critics allege, is that these policies ignore disadvantaged Americans who do not benefit from broad market-driven policies. Markets, they say, are indifferent to equitable outcomes. The focus on aggregate growth comes at the expense of fairness, which requires benefits and opportunities targeted to marginalized groups. Through regulations and wealth transfers, government must lean against markets to achieve acceptable results.
In this narrative of the past half-century, critics often mark the Clinton administration as the moment when establishment Democrats capitulated to the ideology of the unfettered market. Poor and working-class Americans paid the price, they charge, with lower pay, diminished job security, and the collapse of entire sectors exposed to trade competition.
The historical record tells a different story.
Begin with the economic aggregates. During eight years of the Clinton administration, annual real growth in gross domestic product averaged a robust 3.8% while inflation was restrained, averaging 2.6%. Payrolls increased by 22.9 million—nearly 239,000 a month, the fastest on record for a two-term presidency. (Monthly job growth during the Reagan administration averaged 168,000.) Unemployment fell from 7.3% in January 1993 to 3.8% in April 2000 before rising slightly to 4.2% at the end of President Clinton’s second term. Adjusted for inflation, real median household income rose by 13.9%.
Mr. Clinton inherited a substantial budget deficit. Despite this, one group of administration officials, headed by Labor Secretary Robert Reich, urged him to propose a major stimulus package to accelerate economic growth and reduce unemployment more quickly. He refused, focusing instead on reducing inflation and interest rates to create the conditions for long-term growth. (I worked in the White House at the time but had no role in economic policy.) During the administration, federal spending as a share of GDP fell from 21.2% to 17.5%, and federal debt as a share of GDP fell from 61.4% to 54.9%.
What about the North American Free Trade Agreement, which Mr. Clinton pushed through Congress over the objections of a majority of his own party in the House? Didn’t it eviscerate the manufacturing sector? No doubt the agreement reduced jobs in some areas, but manufacturing jobs increased during Mr. Clinton’s eight years. The collapse occurred during George W. Bush’s administration, when 4.5 million manufacturing jobs disappeared and have never been regained. (Manufacturing employment in April 2022 is about where it was when Mr. Bush left office 13 years ago.)
What about the poor? The poverty rate declined during the Clinton administration by nearly one quarter, from 15.1% to 11.3%, near its historic low. And it declined even faster among minorities—by 8.1 percentage points for Hispanics and 10.9 points for blacks.
What about the distribution of gains from economic growth? Income gains for working-class households equaled the national average, and gains for the working poor rose even faster. White households gained an average of 13.9%, but minorities gained even more: 22.0% for Hispanics and 31.5% for blacks.
In sum, during the heyday of neoliberalism, Americans weren’t forced to choose between high growth and low inflation or between aggregate growth and fairness for the poor, working class and minorities. This helps explain why Mr. Clinton’s job approval stood at 65% when he left office.
We can’t go back to the 1990s, but there are lessons from the past. Deregulation can go too far, but so can regulation. The market doesn’t automatically produce acceptable results for society, but neither does government. In these and other respects, policy makers need to find a reasonable balance, the location of which depends on ever-changing circumstances. No algorithm can substitute for good judgment guided by study and common sense.
In our effort to respond to the pandemic generously and humanely, we lost our balance. We have learned the hard way that demand doesn’t automatically create its own supply and that bad things happen when too much money chases too few goods. As we struggle to regain equilibrium, the critics of neoliberalism have much to learn from an administration whose economic performance will be hard to beat.