Tackling the Issues

What was the most important economic issue that the Clinton administration confronted when you came in? The deficit?

I think so. I would put it differently. It was how to get the U.S. economy on a path which would take away what economists call a "structural" deficit problem. The issue was that, of course as a result of the savings and loan crisis and the war with Iraq, the deficit had gotten much bigger than anyone had predicted. It was $290 billion. That was one concern. But the real concern was that, even if you predicted the economy's growth path as a positive growth path, the deficit predictions were getting larger, not smaller, which is not a sustainable position. And it had been a position which the U.S. had been in from the early 1980s.

I remember sitting in the conference room of the Institute of International Studies with a bunch of economists and political scientists from Berkeley when Ronald Reagan was elected president. We talked about how the consequence of his election was going to be big tax cuts, a big increases in military spending, and a huge deficit. And that is what happened. It really was only in the 1990s, more than a decade later, really with President Clinton's leadership, that the U.S. took action to bring that problem under control. So yes, it was the single largest problem.

And are you surprised by how remarkably positive what you did was?

Sure. I think we did the right thing, but I think all of us were surprised and continue to be surprised at how well the economy has done. There are a lot of things going on here that we don't entirely understand. Why is the inflation rate so much lower? Why can the economy have an unemployment rate that's on average below 5 percent and not have cost pressure coming from the labor market side? Why does productivity growth look like it's increasing? Our logic was fairly simple and it was that if you reduce the deficit in a credible way you will support more investment, you will create a climate more conducive to investment and which is good for the economy in the long run. But we were very careful to tell the president that there might not be any dramatic benefits in the short run. And then things went much better than expected.

Were you surprised by the constraints on the administration, for example in dealing with the international bond market? Or was this something that, through your study and work, was not surprising to you? Or were you that constrained?

I understood it differently. I think you can see the power of global financial markets today in Asia. We have a world in which tremendous flows of capital move across borders. They respond to their interpretation of what nations are doing. The U.S., from about the mid-1980s until about 1994, was considered by the rest of the global community to be behaving in a very irresponsible way. Why should the richest nation in the world become the largest debtor nation in the world? Why were we not saving and lending to the rest of the world rather than borrowing from the rest of the world? That kind of perception can become a very powerful source of action. We believed that the U.S. government was probably paying a premium in terms of its borrowing costs because of expectations that its borrowing needs were going to get greater over time. So we believed we could bring long-term interest rates down, get that premium out of there. We frankly were also concerned that if we didn't do it, at some point (no one could predict when), there might be a real move against U.S. Treasury bonds and a real decline in the dollar, and a real spike up in interest rates. The U.S. version of a financial crisis, which was out there as a possibility.

So in a way it related to the symbolic dimension.

Well markets ... since we're sitting in the middle of a financial crisis in Asia, one of the things that these kinds of situations demonstrate so clearly is that so much of this is about confidence, and so much of the confidence is based on perception rather than on actual knowledge. People invested heavily in Asia up through the third quarter of 1997. It was the same systems. Whatever you think of the systems (I happen to think they're very strong, good economic fundamentals) -- but now when you read about them, you wonder how could anyone have been foolish enough to put their money there? Well, the perception through the third quarter of 1997 was that these were great places to put money. Then investors lost confidence and everybody headed for the door. You have got to be careful to do the right thing and to describe what you're doing, because you could lose that confidence, and once you lose it, it's very hard to get it back.

Before we talk about the Asia situation, I would like to ask you about two fronts on which, as a liberal Democratic administration or a moderate Democratic administration, the Clinton administration did not succeed, or was not able to complete its agenda: resolving the issues of health care reform and income inequality. I don't know if the two are related, but are there some general thoughts about the limits of reform and addressing issues that an administration like this confronted?

Tyson at the White House with President Clinton, VP Gore, Tom O'Donnell, Joe Stiglitz, and Alan Binder.

I think the reasons for an inability to address these issues are different.

In health, I think, since health care is about 14 percent of the American economy, there are vast economic interests that are wedded to the current configuration [of the health care system]. We can see that now in the pressures that are playing out over managed care -- doctors are threatening to unionize and managed care providers are under attack and [being questioned about] preventing necessary procedures. So the point is that there are huge vested interests in this part of the economy. If you decide to take it on completely, in one fell swoop, you are going to handle Medicare, Medicaid, the uninsured, cost containment, and the federal government's budget deficit all at once. You are going to have to have a very elaborate plan, and you are going to mobilize a very large number of opponents. So we did both. We had a very elaborate plan that was very hard to explain to anyone. And one of the things that you certainly learn, it goes back to our discussion about perception, is the importance and power of message in political life. It's not just, do you have a good policy? It is, can you explain the policy in a very short period of time, in essentially a sound bite period of time? We did not have such a policy. The second point is that we did mobilize every possible group against us. We thought we were going to have leaders of large American corporations because they were suffering from high health care costs, but then they looked at the proposal and said, "You know, we may end up here having to give up our own efforts to cut costs and the government may be less successful, so we're not going to support this." We thought we were going to get the absolute outstanding support of the Medicare population because we were going to give them prescription drug coverage. But the Medicare population, while they decided to be supportive, were actually kind of concerned because we were going to cut Medicare and then put the money back in a different way. And I could go on and on, the insurers, the doctors, the hospitals.

All arrayed against you. What about income inequality?

Let me just say on health, I think we approached it the wrong way. I think a lesson here, and it's also a lesson from the Republican "revolution" of 1994 then playing out in 1995, is if you overreach, if you try to do too much at once, then you may end up accomplishing very little. Our system is one of checks and balances and marginal steps. And except in crisis situations (and the health care situation is not a crisis in the United States, it's a serious problem), I don't think our system is really organized to make big steps. Since that time of course, as you know, the administration has achieved some successes on health care in smaller steps. Greater coverage of children, insurance market reform to help with issues of excluding restrictions which make it difficult for people to get health care. The administration increased the tax deductibility of health care spending for the self employed. So there are a number of things which have helped. Now of course we have this proposal to extend Medicare down in age to cover people who are not retired but can't get health insurance another way. And we did protect the Medicaid as a guarantee. So there really were some accomplishments in health. But they're marginal. That is, not marginal in their entirety but incremental.

Income inequality is a much different issue. The reason it's hard to deal with is that no one entirely understands its causes, and the causes we do understand are very hard to do anything about, at least in the short run. So the theories about why income inequality has increased in the United States range from trade and immigration pressures, which have probably played some role though not nearly as large a role as people think. Now what does that mean? It means that people, particularly with just a high school education or less, have been competing with unskilled workers around the world and with unskilled workers who have moved to the United States, so it's put downward pressure on their income.

A second factor, and a much more powerful factor it seems, is the changing demands of technology. Having a high school education used to be a path to a good middle income life; that path is closed off. You can't do it. That would have been primarily through manufacturing jobs. Manufacturing productivity has increased dramatically, but the number of people who are therefore in manufacturing jobs has not grown rapidly. People are moving into service sector jobs and there there's a bifurcation. You can have a good service sector job if you're computer literate or you're a software engineer, or anything to do with computers, frankly. If you're not, it's much harder. Then you're going to get into retail services, you're going to get into household services, where the wages are simply not attractive relative to high-wage jobs. So you have these changes in technology, changes in global competition, which are huge forces, they're operating everywhere around the world. And there's not that much that a national policy environment can do.

I think we actually did a number of things. We cut taxes for the bottom 20 percent through an expansion of what's called the earned income tax credit. We managed to get Congress to pass, after they said they would never do it, a significant increase in the minimum wage. There is much more devoted now to spending on educational opportunity, really focused at after high school. In a way the focus has been on certain critical moments in the educational life of an individual (now it's coming to preschool) that matter to their long-run ability to get the skills needed for modern technology.

And the increase in the minimum wage relates to the weakening power of the unions.

The weakening power of the unions is a real issue. Again, the reasons for that have a lot to do with the change in the composition of the work force, because the manufacturing sector is much more unionized than the service sector is. Now the relatively new AFL-CIO leadership is trying to do more unionization among service workers, and frankly I think stronger unions, on balance, would help address this problem of income inequality. On the other hand, I think that the American union movement is really in the wrong place on issues of international trade. So I want them to be successful because I think that they have been a powerful force for compressing inequality over time, but I hope they become a little more forward looking on trade issues.

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