The stock and bond markets should not be the only ones rejoicing at Larry Summers’s withdrawal from consideration to run the Federal Reserve. The nation’s workers should, too. Janet Yellen, the remaining frontrunner for the position, is no wimp on inflation. But she is the kind of economist America badly needs, one who cares about wages and employment at least as much as about appeasing bond traders. She also doesn’t think higher wages or a bit higher inflation will undo America. She is old enough to remember a pre-Clinton and pre-Reagan world.
Right now, that means she would leave monetary policy loose far longer than Summers would have. The job market is much too weak; many people are unemployed or have left the work force, and wages are not growing. Without fiscal help from Congress, the Fed is the only protector of growth and employment around.
The Clinton boom covered up Summers’s true conservative ideological bent. He’s a tough inflation fighter underneath it all. The main policy objective of the Clinton Treasury was to focus on the budget deficit. They successfully got a tax increase passed, for which they deserve kudos. But then they restrained social spending. They did at least expand the Earned Income Tax Credit, but they neglected public investment badly, and the flaws of welfare reform are now showing. They assiduously paid down debt instead of investing, even as tax revenues poured in.
It seemed to work. Inequality stabilized, wages rose, GDP soared. But a lot of the boom depended on the high-tech stock bubble—the famed wealth effect, inducing consumers to buy because they thought they were wealthy. The increase in tax revenues was temporarily stoked by capital gains taxes on stocks. Stocks were stoked by malfeasance amid deceptive sales practices.
Would wages have continued to rise rapidly under Clintonomics? Not likely. The stock market collapse, let’s remember, occurred under Clinton. The recession George W. Bush had to cope with in his first term was a Clinton recession.
At bottom, Summers is basically an inflation targeter, converted by the double-digit inflation and higher federal deficits of the 1970s like so many of his Democratic colleagues. This defined Clintonomics. He’d rather have more unemployment than a little more inflation, which of course could spook the markets.
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