The Great Unraveling | 1, 2, 3, 4, 5

The Good Years

T TOOK QUITE A WHILE before people realized that things had really turned for the better. You might say that pessimism had become a national habit. As late as the winter of 1995-96, despite a steadily falling unemployment rate, the newspapers were full of alarmist headlines about job loss and downsizing. In the 1996 presidential campaign, Bob Dole's economists attacked the Clinton administration for what they claimed was a sluggish, below-par economic recovery. Less partisan economists knew better, but they remained cautious, having seen too many false dawns. Yet eventually the evidence became too strong to deny: the U.S. economy really was on the mend. And so, it began to seem, was our society.

Given our current state of renewed disillusionment, it's tempting to dismiss everything that went right in the Clinton years as a mirage. Indeed, the manic optimism of the late 90s got ahead of the reality. But the nation's real achievements were spectacular.

First and foremost for the lives of most people, by the end of the 90s jobs were plentiful-more plentiful than they had been for decades. Between 1992 and 2000, U.S. companies added 32 million workers to their payrolls, driving the unemployment rate to a 30-year low. Full employment meant jobs, and a chance of escape, for families that had been caught in the poverty trap: poverty rates fell sharply, for the first time since the 1960s. Partly as a consequence, social indicators like crime rates showed spectacular improvement: by the end of the 90s, New York City was as safe as it had been in the mid-1960s.

If job growth was impressive, the increase in productivity- the amount produced per worker-was even more impressive. In the 1970s and 1980s, low productivity growth-barely 1 per-cent per year-was the greatest failing of the U.S. economy. Poor productivity performance was the most important reason why living standards stagnated for typical American families: an economy without productivity growth can't deliver a sustained rise in wages. But during the 1990s productivity took off; by decade's end it was rising faster than ever before in American history, and wages had ended their long stagnation.

Why did productivity surge? The main answer, probably, was that information technology had come of age: all those computers and networks were finally showing what they could do. But business leaders, understandably, took much of the credit. As Japan faltered, American business regained its confidence, and American businessmen became heroes. It was the age of the CEO as superstar. And if those superstars took home super-sized paychecks, why not? America, it seemed, had devised a system in which big incentives produced big results.

Then there was the stock market. At the end of 1992 the Dow investors felt like losers: they had missed out on the really big gains, as tech stocks made many people instant millionaires. Not since 1929, and maybe not even then, had quick wealth seemed so attainable. And authoritative-sounding voices assured us that there was more to come, that the Dow would soon reach 36,000.

There were stock market skeptics; I was one of them. (I also had some initial doubts about the U.S. productivity miracle. By 2000 I was a believer, but I still thought stock prices were way out of line.) And those of us who followed foreign economies also worried a bit about what would happen when the stock market rediscovered the law of gravity. There were some undeniable similarities between the U.S. economy in the late 90s and Japan's "bubble economy" a decade earlier-and after Japan's stock market bubble collapsed, the seemingly unstoppable Japanese economy fell into a profound funk, which has continued to this day.

Yet the 90s had given us reason for optimism, even if the bubble burst. For the problems of Japan had been exacerbated by poor leadership-and the economic leadership of the United States was exceptionally good.

In the early years of the Clinton administration this wasn't clear to everyone. I myself was a pretty harsh critic of the new president's economic team, in the days before the ascendancy of Robert Rubin was fully established. But by decade's end "Rubinomics" was triumphant. First, Bill Clinton dared to raise taxes to help close the budget deficit-an action that was dou-bly brave. His predecessor, George Bush, had been vilified for his own tax increase (though even Ronald Reagan had retracted part of his own tax cut); and conservatives predicted that the Clinton tax increase would sink the economy. Nonetheless, he did the right thing-and got a booming economy and a budget surplus as his reward.

Moreover, Washington proved itself flexible and effective in dealing with crises. When the Mexican peso plunged in 1995, the administration-again braving harsh criticism from the right-came to our neighbor's rescue. Then an even bigger financial crisis erupted in Asia. In the fall of 1998 the crisis spread to the United States, as Russia's default on its debt led to the downfall of Long-Term Capital Management, a huge hedge fund. Financial markets briefly seized up: borrowing and lending came to a virtual halt. I was at a meeting in which one Fed official briefed us on the situation; when asked what we could do, he replied, "Pray." Yet Rubin, together with Alan Greenspan, managed to exude a sense of calm-remember what it was like when people actually admired the Treasury secretary? And the markets recovered. Early in 1999 the cover of Time featured Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and Deputy Treasury Secretary Larry Summers, whom it dubbed-cornily, but with considerable justification-the "committee to save the world."

At the beginning of the new millennium, then, it seemed that the United States was blessed with mature, skillful economic leaders, who in a pinch would do what had to be done. They would insist on responsible fiscal policies; they would act quickly and effectively to prevent a repeat of the jobless recovery of the early 90s, let alone a slide into Japanese-style stag-nation. Even those of us who considered ourselves pessimists were basically optimists: we thought that bullish investors might face a rude awakening, but that it would all have a happy ending.

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