May 16, 1996

May 16, 1996 | Commentary on Federal Budget

ED051696b: "It's The Economy, Stupid," Circa 1996

Presidential advisor James Carville, the highly regarded Democratic political operative from Louisiana's bayou country, helped keep the 1992 Clinton campaign in focus and "on message" with a simple four-word phrase, "It's the economy, stupid."

If the White House is smart, this will not be its theme in 1996.

Though the White House and national media have been trumpeting the economy's "unexpectedly strong" (as The Washington Post put it) 2.8 percent first-quarter gain, this is modest growth by normal standards -- and voters remain uneasy.

Flash back four years: With the American economy just emerging from a two-year recession in the fall of 1992 and many Americans nervous about their economic prospects, Carville's one-note samba -- played over and over again throughout the campaign -- clearly helped propel Bill Clinton into the White House, forcing George Bush to retire to his beloved Texas.

Now it's Bill Clinton's turn to run for re-election. And though the economy is not moving backward (the definition of a recession), it's not setting any speed records either. Fifty percent of major U.S. companies trimmed their payrolls in the 12 months ending June 1995, some of them significantly. Indeed, from March 1995 to March 1996, 325,000 high-paying manufacturing jobs disappeared, according to the Bureau of Labor Statistics. The public -- especially the nearly 8 million people who are working two or more jobs to make ends meet -- know something is amiss. And they are concerned.

The administration's initial response was a mix of denial and cheerleading: the silly claim that the economy is the healthiest it's been in 30 years. The White House has had the good sense to back off a bit from this claim.

A new study shows why.

The study was conducted by economists William Beach and Scott Hodge using a highly reliable computer model of the U.S. economy.

What the model does is simulate economic activity. By feeding the many "variables" that affect the economy into the model -- from changes in tax and budget policy to data on population growth and other demographic factors -- a seasoned economic forecaster can predict future economic activity.

Beach and Hodge turned the clock back to January 1993, before the new administration pushed the $241 billion tax hike through the 103rd Congress. Without getting into all of the mind-numbing technical details, they then ran the model on "fast-forward," asking it to tell them what the economy would look like today if tax and budget policy had not been changed in 1993.

What they found was not good news for the White House.

They found that another 1.2 million Americans would have jobs today if the economy hadn't been saddled with the tax increase. They learned that the U.S. auto industry would have built and sold an additional 1.1 million new cars and light trucks. And they learned that the typical U.S. wage-earner would have taken home an additional $2,600 in after-tax income.

The big numbers are equally disturbing. For example: The overall U.S. economy would have grown an additional $208 billion between 1993 and 1996. And business investment -- the key factor in creating jobs -- would have been $42.5 billion higher.

While there has been some quibbling about the exact details of the Beach/Hodge findings, the overall thrust of their work remains unchallenged: Tax hikes hurt, and the huge 1993 tax hike hurt big time.

If the Clinton administration wonders why American workers are still uneasy about the economy, they should tell the White House: "It's the tax hike, stupid!"

Note:Edwin J. Feulner, Ph.D. is president of The Heritage Foundation, a Washington-based public policy research institute.

About the Author

Edwin J. Feulner, Ph.D. Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
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Related Issues: Federal Budget