Clinton's Legacy        Jan.  2001 - Issue 5

  
In his final economic report to congress, President Clinton summarized that his term in office had depicted eight years of prosperity and progress and warned those in the new administration and congress, that the proposed tax cuts and spending plans should not be so large as to call his fiscal discipline into question. The Emperor has finally departed with a nation convinced that budget surpluses will stretch into the years ahead.

Let us just look at the background of the Clinton years and endeavour to gain some pointers as to the future.

  
He inherited a strong nation with a growing economy, albeit that there had been a global recession in the early 1990's. George Bush senior handed over a strong and secure America. Saddam was fenced in after an American led strike; Russia had been beaten down over the Reagan/Bush years and had finally accepted that a form of capitalism would return and Europe was growing, aided by a re-unification between East and West.

The United States is neither as strong nor secure as Clinton leaves office. He claims to have eliminated over ¼m federal jobs and to have reduced red tape and the roll of government. What he does not say is that 75% of the job cuts were defence related, all part of a 49% fall in defence spending, leaving a demoralized military force. There was always going to be a 'peace dividend' arising out of the Reagan/Bush achievements but it has been pushed a little too far. The world has become a much more dangerous place. Whilst Russia has defaulted on foreign debt payments it has managed to modernize their military capability, possibly aided by arms sales to Iran, China and elsewhere. When Clinton entered office, the Arabs and Israelis appeared to be closer to achieving lasting peace but as he departs there is talk of a possible war.

As for reducing Government spending, the figures speak volumes. Since 1993 the federal governments monthly payroll has increased by 25% to $7.5Bn. Overall costs have reached 20% of US GDP, an increase of 50% on 1990 levels. Last year fifty-four agencies, employing 130,000 people, spent over $18 Bn writing and enforcing regulations. The competitive Enterprise Institute estimates that the total federal regulatory burden cost the typical American family $7500 PA. The tax burden of running big government has ballooned. Federal taxes consume 26% of the average American family's income, with state and local taxes taking a further 13%. None of these of course are included in the consumer price index. The federal governments take, from personal income tax, now exceeds the previous record, set at 9.4% of GDP at the height of the second world war in 1944.

When Clinton entered office he pledged to save social security and Medicare. Instead he has robbed the social security trust fund to declare victory on reversing a budget deficit to a surplus. It is called 'smoke and mirrors'. 

Medicare's health insurance trust fund is already paying out more in benefits than it collects in taxes, with certain analysts predicting its insolvency as early as 2008 unless action is taken.

In the not too distant future, demographics suggest that the work force contributing to these funds, will be about one third of the retired population, who will be drawing benefits from them.

Although the problem may seen years away, the solutions cannot be, and are unlikely to be painless, witnessing a combination of tax increases and benefit reductions.

So just what is George W Bush inheriting from Bill Clinton? He has become heir to a nation weakened on the military front, as global tension increases; he receives social security funds robbed of cash to project illusionary surpluses; left with IOU's and problems that need addressing now; a deeply divided public, and an equally divided congress.

All this at a time when the economy is faltering, financial markets are falling, and with an increasing number of US citizens and corporations falling deeper into debt. The structural imbalances that we have previously observed, including the massive trade deficit and a dependence on foreign capital, threaten to turn a slow down into a slump.

I fear that Clinton's legacy, currently viewed via rose tinted glasses by most, may haunt us for many years to come!