Robert Rubin, the Treasury Secretary who resigned last week, must take a hefty amount of the credit for that. Even before taking up office in the Treasury, Mr Rubin put his stamp on the Administration's approach to policy, and it was part of his legacy that when he announced his resignation, the markets took fright only briefly before returning to normal. For it was Mr Rubin who taught the White House to respect the markets, and in the process made sure the markets respected him.
Delivering low interest rates, the key to growth, was not within his reach. That depended on Alan Greenspan, the Federal Reserve chairman, and the bond markets. Mr Rubin maintained the confidence of both. The former Goldman Sachs bond trader established a reputation as a free trader, free marketeer and independent thinker that helped set Wall Street's seal of approval on the Clinton years, even if it earned him the enmity of many of his White House colleagues.
Right from the start of the Clinton Administration, there was a tension between its socially liberal instincts and the conservative financial views of the main economic policy-makers. Mr Rubin spent many hours clashing with the President's political advisers in his early years in the White House, as head of the National Economic Council. The advisers pressed for more investment and less deficit reduction; Mr Rubin insisted that in the long term this would fail. Washington Post journalist Robert Woodward describes frequent run-ins between Mr Rubin and the others as he emphasised the role of the bond markets and they sought a more Keynesian boost to the economy.
Robert Reich, the former Labor Secretary, wrote that Mr Rubin lived in a "conceptual prison" where "the way out of all our economic problems is to cut the deficit and reduce government borrowing, regardless of what the borrowing is for". James Carville, Mr Clinton's sharp-edged political guru, called him "Nick" after Nick Brady, George Bush's Treasury Secretary, implying there had been no change in policy. He was never a member of the inner Clinton circle, even refusing to live permanently in Washington; he kept a suite at the Jefferson Hotel instead.
It was partly a question of presentation. Though Mr Rubin supported the President's proposed 1993 tax increase on the wealthy, he was very conscious of how it had to be explained. "You can't say we're going to make the rich pay more taxes," Mr Woodward quotes him as saying in one argument. "That sounds like it's coming out of the barrel of a gun." But it was also policy. He made the argument that credible, long-term reductions in the federal deficit would help increase confidence in the bond market, which would in turn reduce interest rates and generate growth. The same argument went for the strong dollar.
Mr Rubin always matched his fiscal and financial conservatism with at least a rhetorical commitment to liberal values. "We must deal with the problems of our public education system, the problems of our inner cities, the problems of our ever-worsening income disparity and the challenge of streng- thening and expanding the nation's middle class," he said after taking office as Treasury Secretary. He was criticised by the Right for failing to press for tax cuts, especially as the fiscal surplus grew.
Yet the record, for the most part, validates his approach. The aggregate figures for the US economy are impressive enough: unemployment was 7.5 per cent in 1992 and it is 4.5 per cent now, the lowest for decades. Yet inflation is, at 1.6 per cent, almost half the levels of six years ago.
Irwin Kellner, chief economist of CBS Marketwatch, notes that the expansion may be long but it is relatively weak compared with previous expansions. GDP has grown by 28 per cent in eight years, compared with 50 per cent during the 1960s; business payrolls have risen by 18 per cent, compared with 30 per cent; and consumers' buying power has grown by 23 per cent, half the rate of the 1960s. It was not until the first quarter of this year that real median wages reached the levels of 1989, the last business cycle peak. Of course, it is precisely that steady growth - never overheating, never exploding into inflationary pay rises - that has kept the bond and stock markets happy.
There is evidence, though relatively recent and still open to question, that the benefits of the boom have spread beyond Mr Rubin's New York banker friends. "Thanks to the tight labour market and the $0.90 increase in the minimum wage legislated in 1996, low-wage workers are finally gaining back some ground lost over the past two decades of real wage decline," wrote Jared Bernstein of the Economic Policy Institute (EPI) this month.
The poverty rate has fallen as labour markets have tightened and prosperity has fed into the long-term unemployed. Inequality has at least stopped increasing as wages have risen even at the bottom of the scale, and among minority groups. "For high- school-educated workers, the largest wage gain over the past year was experienced by African American workers, whose average wage grew by 4.5 per cent," the EPI pointed out. The level of unemployment among black Americans fell from 8.1 per cent to 7.7 per cent in April, the lowest since rates were first measured. Inner cities have started to revive as companies move back from the suburbs. It is this that has helped to underpin Mr Clinton's popularity.
But the EPI also points out that it has not been through economic miracles alone that America's working families have improved their lot: "The income growth generated among middle-income families has been driven largely by an increase of working hours - an additional six weeks annually for the typical family since 1989 - to make up for the long-term deterioration of wages. The economic realities facing the typical American family over the 1990s include increased hours of work, stagnant or falling income, and less secure jobs offering fewer benefits."
Meanwhile, the Rubin economy relied very heavily on three factors well beyond his or Mr Clinton's control. The end of the Cold War meant defence expenditure could easily be cut every year, helping to keep the deficit on track. Oil prices have been in a prolonged slide because of low world growth, new sources of supply and poor production discipline. And economic weakness in Europe and Japan meant there was little pressure on the US dollar, as cash flowed into US bond and stock markets in the absence of anywhere else to go. Oil prices have now recovered a little, and the war in Kosovo has prompted calls for a revival of defence spending.
The bond market was always the spectre that Mr Rubin raised against his White House foes, and it has turned in recent months as financial markets have become more concerned that inflation is building. They will be looking with keen apprehension to Mr Greenspan this week as the Federal Open Market Committee meets. It remains to be seen if the marriage brokered by Mr Rubin between progressive aims and conservative finances can hold together.Reuse content