Two economic roads have diverged in an American wood. Fortunately, America has been able to travel both.
Today, July 1, the U.S. economy entered into its record-setting forty-first consecutive quarter of expansion, surpassing only the forty-quarter boom of the 1990s. What will become a quick clip in the twenty-four-hour news cycle should instead be a moment of historical reflection. Let’s compare the two periods of unmatched U.S. economic expansion: March 1991 to March 2001, & June 2009 to the present—namely in that despite their similar lengths, the mechanisms of the booms have nearly nothing in common. The economic conditions of the 1990s were an incubator for expansion; by contrast, the last ten years in America have provided no such environment, yet expansion has occurred anyway.
Travel back to March 1991, where the expansion was seeded from a minor recession. As inflation began to increase in 1986, the Federal Reserve raised interest rates to stabilize prices.[1] Coupled with the oil shock of 1990, the economy contracted for eight short months. Then in March 1991, five consecutive quarters of Fed rate cuts and oil price normalcy had begun the gentle seeds of a boom.[2]
Enter Mr. Clinton, whose Omnibus Budget Reconciliation Act of 1993 raised taxes in a variety of ways: new (and higher) tax brackets were created, the top individual tax rate and the corporate income tax increased, fuel taxes increased, and the portion of taxable Social Security benefits increased. Likewise, the bill cut $255 billion in federal government spending over a five-year period.[3] The ratio of debt held by the public to GDP—the usual measure of the federal debt—fell from 47.8% in 1993 to 33.6% by 2000.[4] Keynesian economics at its finest.
Meanwhile, globalization was underway. The Cold War had ended, allowing previously restricted governments access to the global market. Further, the North American Free Trade Agreement was established in 1994, liberalizing continental trade.
Fast-forward to today and one will see drastic differences in America’s current expansion. Unlike the boom of the 1990s, it was seeded by financial disaster—risky lending and degrading standards from rating agencies led to the collapse of the subprime mortgage market. A Democrat likewise rose to the presidency near the trough of the cycle, but Mr. Obama’s domestic strategy had little relation to Mr. Clinton’s. The administration’s economic stimulus package continued Mr. Bush’s tax cuts at a price of $288 billion. Government spending flourished. The ratio of debt held by the public to GDP increased from 52.3% in 2009 to 76.0% in 2016.[5]
More recently, Mr. Trump’s election brought upon tax cuts and increased military spending in the boom of the cycle—that is, precisely anti-Keynesian economics. Likewise, globalization is waning. In a recent article the Economist hailed the period of 1990-2010 as the ‘golden age of globalisation,’ and our contemporary economic life as that of ‘slowbalisation’.[6] As the Economist noted, “The cost of moving goods has stopped falling. Multinational firms have found that global sprawl burns money and that local rivals often eat them alive. Activity is shifting towards services, which are harder to sell across borders.”[7] This pattern comes as a silhouette to Mr. Trump’s ‘America First’ bent.
All booms must bust—this we know. Yet we also know that no expansion ends identically. The expansion of the 1990s ended as the dotcom bubble highly overvalued internet stocks, leading to a loss of over $5 trillion for investors.[8] Today the chief danger seems to be tariffs stagnating the global market. Historically speaking, protectionism has not been a friend to expansion.
In all, the two record-breaking expansions are quite the opposite. Mr. Clinton mostly presided over the first; Mr. Obama and Mr. Trump have each taken turns over the second. Keynesian economics ruled the 1990s; today, taxes have been slashed and federal spending has exploded. Globalization has been replaced by mild protectionism.
Today, perhaps the takeaway should be a reiteration of the obvious: different origins of expansions warrant different policies. Moreover, we find that starkly different policies can lead to similar and relatively prosperous outcomes. In June 2009, it would have been ill-advised to hike taxes and slash government expenditures, as Mr. Clinton did in 1993. Likewise, in 1993 the correct fiscal policy would not have been a massive stimulus package. Therefore, perhaps in today’s era it is indeed unwise to allow globalization to persist, so long as countries like China take advantage of American leniency.
Of course, that conclusion is premature. Regardless, now that the U.S. has notched its forty-first consecutive quarter of growth, the country should marvel at the human ingenuity behind our massively complex economy that has paved way for two entirely different paths to prosperity.
It will be curious to see how far the two paths can, or will, diverge. At the moment protectionism seems to signal a sharper bend in the road. And despite the current expansion, we should remember that amateurs and professionals alike have flipped cars around especially tight turns.
[1]Kimberly Amadeo. “Fed Funds Rate History with its Highs, Lows, and Charts.” 2019. https://www.thebalance.com/fed-funds-rate-history-highs-lows-3306135
[2]“Open Market Operations Archive.” Board of Governors of the Federal Reserve System. 2019.https://www.federalreserve.gov/monetarypolicy/openmarket_archive.htm
[3]“Budget Reconciliation Measures Enacted into Law: 1980-2017.” Congressional Research Service. 2018. https://www.everycrsreport.com/files/20180222_R40480_da64c3eb56723d21f0dc63e43c4f70c3e35ca9d4.pdf
[4]“The Budget and Economic Outlook.” Congressional Budget Office. 2019. https://www.cbo.gov/publication/51129
[5]Ibid.
[6]“The steam has gone out of globalisation.” The Economist. 2019. https://www.economist.com/leaders/2019/01/24/the-steam-has-gone-out-of-globalisation
[7]Ibid.
[8]Kalen Smith. “History of the Dotcom Bubble and How to Avoid Another.” Money Crashers. 2015. https://www.moneycrashers.com/dot-com-bubble-burst/
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