Clinton's 1990S and the Origins of Our Times

Home , Brooksley Born, Giant sucking sound, Ira Magaziner, Mandy Grunwald, Robert Reich, Rubinomics

A FABULOUS FAILUR Clinton’s 1990s and the Origins of Our Times

BY NELSON LICHTENSTEIN

38 WWW.PROSPECT.ORG WINTER 2018 A FABULOUS FAILUR illary Clinton’s loss of the industrial Midwest to Donald Trump sealed her fate on Elec- tion Day 2016. This defeat, both narrow and catastrophic, H had many architects, but one of the most consequential occupied the White House nearly 25 years before, when her husband faced an America whose stagnant economy, rampant deindustrialization, and giant trade deficit cried out for structural reforms to decisively break with Reagan- style laissez-faire and renew the allegiance of hard-pressed voters with the party of Roosevelt, Truman, and Johnson. But this was precisely what Bill Clinton failed to do. Many recall the 1990s as a moment of economic tri- umph with increasingly low unemployment, 4 percent annual economic growth, a booming stock market, even a balanced federal budget by the end of the millennium. Economists Alan Blinder and Janet Yellen called those years the “Fabulous Decade” in 2001, while a 2015 opin- ion piece in The New York Times bore the title “The Best Decade Ever? The 1990s, Obviously.” Although the Repub- licans had seized control of Congress in 1994, it is worth remembering that Ronald Reagan’s vice president, George H.W. Bush, took only 37 percent of the vote in 1992 while that stalwart Republican, Robert Dole, won just 40 percent in 1996. Politics were clearly in flux. The Clintons therefore had the historical moment to recast not just trade, investment, and health-care policies, but the regulations, norms, and expectations that would govern a post–Cold War version of U.S. capitalism. Their failure to take advantage of these fortuitous circumstances doomed any effort to build a more equitable economy or a political order powerful enough to sustain a dominant liberalism, a failure Donald Trump would one day seize. As he told an audience at a steel mill in Monesson, Pennsylvania, on June 28, 2016: “Globaliza- tion has made the financial elite who donate to politicians

WINTER 2018 THE AMERICAN PROSPECT 39 very wealthy. But it has left millions of our practiced in Germany, Scandinavia, northern the desire) to undercut the rest of the progres- workers with nothing but poverty and heart- Italy, Japan, and the East Asian “Tigers.” For sive program. Rubin, unlike the others, had ache. America became the world’s dominant example, economist Laura D’Andrea Tyson had begun his career in Democratic politics as a economy by becoming the world’s dominant studied Yugoslav economic planning at MIT donor and fundraiser. producer … creating the biggest middle class and had just published Who’s Bashing Whom? Clinton came face to face with the ideo- the world has ever known. But then America Trade Conflict in High-Technology Industries, logical power surrounding deficit reduction changed its policy. … We allowed foreign coun- a book that argued for a tough trade policy if at a January 7, 1993, meeting at the governor’s tries to subsidize their goods, devalue their the United States were to prevent Japanese mansion in Little Rock. There, Rubin, just currencies, violate their agreements, and cheat evisceration of those industries where the U.S. selected to head Clinton’s National Economic in every way imaginable.” had been an innovative pioneer but lagged in Council (NEC), and Panetta, the new chief of Trump’s rhetoric can never be taken at face low-cost manufacturing technique. the Office of Management and Budget, put value, but during the 2016 campaign he had All of Clinton’s advisers agreed with James forward the case for deficit reduction, sidelin- an uncanny ability to capture the angst and id Carville’s campaign catchphrase, “It’s the ing proposals for the large, innovative stimulus of those citizens and workers, many once solid economy, stupid.” Henceforth, the government that Clinton had advocated during the cam- Democratic partisans, now victimized and would offer a forceful set of interventions both paign. The deficit the Bush administration marginalized by the seemingly uncontrolla- to boost aggregate demand, as in traditional bequeathed to Clinton was roughly 40 per- ble financial and economic transformations of Keynesianism, and also use structural policies cent higher than the estimate just a couple of the last few decades. With some justification, to increase the productivity of capital and labor, months before. More important, stubbornly he called the Clinton era’s North American protect core industry sectors, and enhance the high long-term interest rates had convinced Free Trade Agreement the “worst trade deal” equality of American life. Or so it seemed. Wall Streeters, including Rubin, that a huge in history, and has opposed China’s entrance reservoir of investment money lay frozen and into the World Trade Organization. Indeed, THE CLINTONITES CONFRONT untapped. Interest rates on long-term bonds Trump was the first actual presidential can- THE BOND MARKET—AND RETREAT were now at above 7 percent. Lower interest didate of one of the two major parties—Ross But a revival and modernization of New Deal– rates would arguably free up investment and Perot ran on a third-party ticket—to assert style liberalism was stillborn at the dawn of the spending far beyond Robert Reich’s proposed that trade policy was both cause and symbol Clinton era. Just as Republican Dwight Eisen- $50 billion stimulus program. of blue-collar malaise. hower legitimized the New Deal by accepting But cutting the budget meant eliminating many of its accomplishments, Bill Clinton rati- much of the social investment raison d’être BILL CLINTON AND HIS MOMENT fied much neoliberal policy long before Newt promised during the campaign. Clinton cam- Although conventional historical and jour- Gingrich led the GOP to victory in the 1994 paign strategists like James Carville, Paul Beg- nalistic thinking places Ronald Reagan at the congressional rout or Clinton sought to trian- ala, Stan Greenberg, and Mandy Grunwald, center of the conservative turn in American gulate with his opponents in 1995 and after. as well as Hillary Clinton and Ira Magaziner, trade and fiscal policy, we know that ratifi- Key economic advisers put in place during were incredulous. There were no guarantees cation of such a policy turn takes place only the transition, notably Robert Rubin, Larry that shelving campaign promises would gener- when the ostensibly hostile opposition party Summers, Lloyd Bentsen, Leon Panetta, and ate a positive response from the bond market, accommodates and then advances this trans- Alice Rivlin, advanced a far more orthodox even if Federal Reserve Chair Alan Greenspan formation. And that is what the administration set of economic priorities than those on Clin- delivered easier monetary policy in exchange of Bill Clinton did—normalize key aspects of ton’s “industrial policy” left. They would soon for deficit reduction. An appalled Clinton, con- the Reagan economic worldview. As Clinton dominate. Despite his own initial opposition, fronted with reality according to Rubin, told famously put it in his 1996 State of the Union President-elect Clinton was persuaded to give his economic team, “You mean to tell me that address, “The era of big government is over.” up a major economic stimulus package, includ- the success of the program and my re-election That declaration came after the Democratic ing targeted investments, in exchange for the hinges on the Federal Reserve and a bunch of rout in the 1994 congressional elections, but low interest rates his advisers thought the bond fucking bond traders?” Carville would later much of that policy shift toward the right came market would sustain if only the deficit were remark that were he to be born again, he want- earlier, even before the GOP achieved legisla- tamed by a combination of constrained social ed to be reincarnated as the most powerful tive veto power. spending and higher taxes. thing in the world, the bond market. This Clinton capitulation was not inevitable. It was a tradition of Democratic presidents But it was Clinton himself who had appoint- The campaign’s manifesto, “Putting People to appoint Wall Street–friendly Treasury sec- ed deficit hawks like Rubin and Bentsen, the

First,” had been largely based on recent work retaries, to reassure the ﬁnancial markets. But new secretary of the Treasury, who in turn chose : scott applewhite / ap images

by Robert Reich, Ira Magaziner, and other under Roosevelt, Truman, and Johnson, these the orthodox Summers as a top assistant, later 38–39 “Friends of Bill” who tilted left. Many of Clin- appointees lacked the power (or in the case of to succeed Bentsen as secretary. Not everyone

ton’s advisers admired the economic statecraft FDR’s Treasury secretary, Henry Morgenthau, in the Clinton White House accepted this logic. pages

40 WWW.PROSPECT.ORG WINTER 2018 Writing to Rubin and Clinton in early February, both Council of Economic Advisers Chair Laura Tyson and council member Alan Blinder argued that “deficit reduction at the expense of public investment is self-defeating.” Blinder and Tyson wanted a gradual, multi-year program to lower the deficit, combined with “a shift in government spending toward public investment pro- grams.” Importantly, Tyson and Blinder argued that “any plan to bring down the deficit by large amounts—and hold it there—in the late 1990s and into the next century will require changes in our health care system.” Magaziner hoped that spending caps on health care and the intro- duction of a system of managed competition would indeed have a long-range impact on federal spending, possibly by 1996, mooting the need for other spending cuts. But the Clinton left was outgunned. Rivlin at the Office of Management and Budget, as well as Bentsen and Roger Altman at Treasury, wor- ried that an insufficiently tough deficit reduction plan would send the wrong political and fis- Going Right And Left: President Clinton with Treasury Secretary Lloyd Bentsen and Labor Secretary Robert Reich cal signal to Wall Street. The OMB argued that “a more vigorous deficit reduction plan” than an equally large amount of corporate prof- investment policy, ensuring that in Mexico, U.S. the one put forward by the CEA “is necessary” its, constitutes an admission that productive companies and banks could repatriate profits, because of its belief “that the Fed and the bond domestic investment opportunities are simply extend U.S. patent and copyright protections, markets will respond very favorably if we are not present or pressing in a deregulated, free- and once and for all end any Mexican govern- aggressive enough in our deficit reduction plan.” trade environment. ment temptation to expropriate their property. All this was a sophisticated wager that relied In their absence, capital flowed either off- Initially, Clinton had tried to straddle heavily on the mentality of a few thousand shore or toward a variety of speculative bubbles, the fence on a trade pact viewed skeptically traders in New York, Tokyo, Frankfurt, and encouraged by the repeal of the Glass-Stea- by organized labor and most congressional London. To this, Joseph Stiglitz, a member of gall Act in 1999 and the financialization of an Democrats. NAFTA had been negotiated dur- the Clinton CEA, retorted in his 2003 memoir increasingly large share of the economy. And ing the Bush administration but required a of the 1990s: “I have become convinced that the indeed, much of the boom of the late 1990s legislative vote to go into effect. The Clinton confidence argument is the last refuge of those turned out to be a bubble. Hence the dot-com campaign endorsed NAFTA in October 1992 who cannot find better arguments.” Financial bust of 2001, the housing bubble of the first but sought to make it palatable by including markets, of course, are often mistaken, as the decade of the 21st century, and the subsequent labor and environmental protections. These collapse of 2000 would prove. But at the very financial collapse and Great Recession of 2008 proved exceedingly weak, which turned the dawn of his administration, Clinton opted to to 2009. A tripling of the stock market since that AFL-CIO and much of the Democratic Party trust markets more than activist government. collapse suggests that such speculation has not base against the agreement. Aside from any This course would set the tone for later deci- been eliminated. But the real cost—economic long-term employment consequences—the sions defining Clinton as a neoliberal rather and political—of such an investment deficit “giant sucking sound” made famous by Ross than the heir to FDR and LBJ. has not been found on Wall Street, but rather Perot—Clinton made a disastrous political Whatever their source, low interest rates throughout the nation, and not just in the old miscalculation when his administration chose by themselves could not actually encourage Rust Belt, but in municipal governance, higher to undermine labor-liberal unity and scramble or direct investment in the most productive education, health provision, and infrastructure. the partisan landscape by pushing NAFTA fashion. From the late 1990s onward, a failure through Congress with more Republican votes to find profitable and productive investment TRADE POLICY AND POLITICS than Democratic. opportunities has distorted the political econ- Trade policy constitutes a version of industrial This was the kind of mistake Reagan had omy. The trillion-dollar rise of corporate stock policy. The North American Free Trade Agree- never made. Although free trade was official

marcy nighswander / ap images ap / nighswander marcy repurchases, along with the offshore stash of ment had far less to do with trade than with Reagan ideology, his administration actually

WINTER 2018 THE AMERICAN PROSPECT 41 orchestrated an ad hoc industrial policy that Liberal Democratic Party appeased key political and economic constit- (i.e., conservative) rule uencies. Many complaints came from older there. It failed. But Mex- industries like textiles, steel, auto, and motor- ico was another story. cycles, long bastions of GOP or Dixiecrat sup- Unlike Japan, which was port. They were being inundated by East Asian then the second-largest and especially Japanese imports. Reagan’s industrial economy in the Commerce Secretary Malcolm Baldrige and world, Mexico’s GDP was his deputy, Clyde Prestowitz, therefore chal- but 4 percent that of the lenged the free-trade orthodoxy still favored United States. The U.S. by the State Department, which was willing had more of a free hand to sacrifice U.S. industries in order to sustain there, and ratification of Cold War allies in Asia. the trade pact late in 1993 The Reagan administration slapped a generated a template for quota on Japanese motorcycles during the U.S. approaches to global- first term that did much to save Harley- ization and the incorpora- Davidson, after which Treasury Secretary tion of many developing James Baker negotiated a dollar devaluation nations in that new order. in 1985, the so-called Plaza Accord, that made The Democrats were all manufacturing exports more competitive. profoundly divided about Reagan’s trade negotiators also pioneered a NAFTA. Many in the way forward in one of the world’s most strate- administration, even lib- gic industry sectors. Americans had invented erals like Reich, thought the semiconductor, but a strategy of continu- globalization inevitable ous innovation did not lead to manufacturing and that the best defense competitiveness. American chip makers were of American living stan- stand-alone enterprises, while in Japan, large, dards would come through capital-rich companies invested in computer domestic investment in a chips as but one part of a larger high-tech- high-skilled workforce, a nology endeavor. By the early 1980s, they had hyper-productive set of penetrated the U.S. market to devastating industries, and the social The Great Piñata: Clinton promotes NAFTA, to the chagrin of most Democrats. result. Intel’s Robert Noyce estimated that and supportive physical between 1984 and 1986, chip manufacturers infrastructure. Reich believed labor-inten- ed States,” asked the widely quoted indus- lost $2 billion and laid off 27,000 workers. sive textile and apparel manufacturing would trial relations expert Harley Shaiken in 1993, In response, the Defense Department ponied inevitably leave the United States. In their “when a high-skill, low-wage strategy is avail- up half a billion to fund a new research con- place would arise high-productivity, high- able in Mexico?” sortium, Sematech, in effect a government- wage manufacturing and service industries, House Majority Leader Richard Gephardt sponsored cartel that dampened domestic because “the fundamental fault line running shared that outlook. He came out of a still competition and stressed manufacturing through today’s workforce is based on educa- industrial, still highly unionized St. Louis, and prowess. Meanwhile, Prestowitz and other tion and skills.” The problem with this per- Gephardt harbored presidential ambitions— trade negotiators adopted a tough bargaining spective was that while productivity, as well one reason why in the last years of the George posture that stopped Japanese dumping of its as education, was indeed low throughout most H.W. Bush administration, he reluctantly chips on the U.S. market and mandated that of Mexican—and Asian—manufacturing, key and cautiously backed “fast track” authority, Japanese companies must purchase 20 per- export-oriented firms in the developing world hoping that a new, more liberal administra- cent of all their chips from foreign producers, had demonstrated the capacity to produce tion might include labor and environmental most in the United States. high-quality goods with low-wage and poorly side deals with real teeth. Bill Clinton kept Clinton proved unwilling to build upon this educated workers. Because of a devaluation of such hopes alive when on October 4, 1992, he Reagan-era precedent. Although his admin- the peso in the early 1980s, Mexican wages endorsed NAFTA, but insisted that the trade istration tried to open Japan to American in real purchasing power terms had actually deal had to be part of a “larger economic strat- products, agricultural ones in particular, this declined some 30 percent by the end of the egy” designed to raise the incomes of American effort encountered fierce resistance from those decade. “Why should companies invest in a workers and protect their jobs and environ-

rural agricultural interests that bulwarked high-skill, high-wage strategy in the Unit- ment. During the next year, Gephardt worked images ap marquette/ joe

42 WWW.PROSPECT.ORG WINTER 2018 closely with the AFL-CIO to make NAFTA’s stops, making side deals to get the votes of icy vacuum engendered by liberal disarray. labor clause something more than an assertion representatives with citrus, flat glass, wine, Newt Gingrich and a new cohort of freshmen that each nation should enforce its own, often and other interests that might be harmed by Congress members moved the GOP decisively inadequate, labor laws. competition from Mexico. And when the flam- to the right, Perot ran for president once again, “NAFTA, with the addition of the supple- boyant and erratic Ross Perot became the face and on the extreme right pundit Pat Buchanan mental accord, is a groundbreaking agree- of NAFTA opposition, the White House was offered a foretaste of Donald Trump when he ment,” U.S. Trade Representative Mickey not displeased. deployed culture war rhetoric to denounce a Kantor said in announcing the completion of The House passed NAFTA by a vote of 234 Bush-Clinton “New World Order” that stood a NAFTA deal on August 13, 1993. “For the first to 200 on November 17 and the Senate fol- for globalization, multiculturalism, and a time a free trade agreement covers workers’ lowed three days later with 61 in favor and 38 devaluation of American nationality. rights and the environment.” The devil was against. In both chambers, more Republicans in the details. The United States extracted voted for the trade agreement than Democrats, MISJUDGING CAPITAL: FAILURE OF HEALTH a nonbinding commitment by the Mexican an ominous fissure in liberal ranks. Edward INSURANCE AND LABOR LAW REFORM government to tie its minimum-wage struc- Kennedy backed Clinton, declaring, “All of the Although the Clinton left had been defeated ture to increases in productivity and growth problems that working families face … will be when it came to a Keynesian stimulation of in the Mexican economy. Fines for violation even worse if NAFTA is defeated.” But other the economy or construction of a managed of labor rights were possible at the end of a trade regime with Mexico and other nations, long process of consultation, but the tribu- they believed reform of the immense health nal set up by NAFTA would have no power to Clinton considered system as well as the increasingly calcified compel a government to pay or penalize a par- labor relations regime was still possible. In ticular employer. Within hours of the Kantor NAFTA to be both instances, policy entrepreneurs like Ira announcement, a coalition of labor union lead- a marvelous Magaziner, Robert Reich, and Hillary Clin- ers, consumer advocates, and environmental bipartisan victory, ton thought American capitalism had been groups had denounced the accord. handicapped by declining productivity and Gephardt too called the side agreements but Rust Belt voters embedded inefficiencies that required state “not supportable,” and in a speech to the and their elected action to redress. Both initiatives constituted National Press Club on September 21, 1993, he representatives an updated version of New Deal corporatism. announced that he would vote against the pact. Both failed in part because the Clinton admin- Gephardt argued that genuinely fair trade spurned the trade istration misjudged the power and perspective was a contradiction in terms when applied to compact. of key sectors of American industry, especial- nations whose social structures and economic ly the booming retail, fast-food, finance, and policies were incompatible; the wage differen- high-tech sectors, all of which were hostile to tial across the Rio Grande was 8 to 1. In the liberals like Senator Don Riegle of Michigan unionism and state regulation. absence of significant outlays for retraining voted no, concluding, “This is a jobs program Its architects considered the Clinton and job creation, Gephardt warned of “down- for Mexico, and my Lord, we need a jobs pro- health-care plan an ingenious hybrid of mar- ward pressure on wage agreements, holding gram for America.” Clinton thought he had ket competition and regulation. Regional down our standard of living. And they face secured a marvelous bipartisan victory, but “health alliances” would have overall (“glob- that argument not only from Mexico, but from Rust Belt voters and their elected represen- al”) spending caps on insurance and hospital China and other places around the world.” tatives spurned the trade compact. Clinton costs, approaching some of the efficiencies of Labor-liberal opposition to NAFTA would “seriously split the electoral base of the Demo- a single-payer system but preserving competi- therefore be staunch in Congress, backstopped cratic Party and has alienated swing voters,” tion among private insurance companies. All by polls showing that a majority of Americans concluded Lawrence Mishel and Ruy Teixeira large employers would have to provide health opposed the agreement. More importantly, of the progressive Economic Policy Institute. insurance, either directly or via the health alli- the Clinton administration was at the very More than two decades later, NAFTA was still ances. Other workers and citizens would get least divided on timing, with Hillary Clinton, a resonant and unpopular symbol for Trump subsidized insurance through alliances, from among others, pushing for a postponement to use against the Clintons. well-regulated insurers. of the NAFTA fight until after the congres- Dozens of Rust Belt Democrats were defeat- The sponsors made two serious miscalcu- sional health-care battle. But Bill Clinton ed in the 1994 elections, dragging down others, lations. First, they did not involve key legisla- pushed ahead. The White House set up a war including Tom Foley, the House Speaker, who tive players in the early design of the complex room, headed by William Daley, a banker and had sided with the White House on NAFTA. hybrid bill, which proved too government-led youngest son of Chicago’s legendary mayor. Capturing the House for the first time in 40 for some and too far from single-payer for oth- The administration soon pulled out all the years, GOP conservatives stepped into the pol- ers. Second, they underestimated the ideologi-

WINTER 2018 THE AMERICAN PROSPECT 43 cal opposition of organized business to a major Bill Kristol wrote a memo to GOP legislators sector but in the workforce as a whole. But expansion of the federal role, even if corpora- and activists that remains perhaps the single by 1993, Dunlop-style social bargaining was tions stood to save some money. most important document laying out the ratio- already a relic of an earlier time. Most corpora- The Clintons counted on support from nale for wall-to-wall conservative opposition to tions did not want dialogue with labor, much business sectors that already provided health health-care reform, both in the early 1990s and less with labor unions. They wanted control. insurance: The new employer mandate would in the years since 2009. Kristol argued that any The key deal Dunlop and others, including reduce their outlays by spreading insurance Republican compromise with Clinton would some in the labor movement itself, hoped to costs among all employers. American auto not only “make permanent an unprecedented pull off was an exchange: Companies would companies paid more for health insurance federal intrusion into and disruption of the get the right to create workplace productivity than for steel, but Walmart, Marriott, and American economy” but also advance Demo- and engagement organizations, softening the thousands of other low-wage, service-sector cratic electoral prospects because a successful Wagner Act’s ban on company unions, while firms shifted the health-care costs of their Clinton plan “will revive the reputation of the real unions would get some labor-law reforms employees to the state, to charity, or to other party that spends and regulates, the Demo- that might have made organizing easier. But firms’ payrolls. Walmart, with nearly a mil- crats, as the generous protector of middle-class this deal was doomed from the start. It won no lion workers at the end of the 20th century, interests.” Republicans had to therefore “adopt traction from any wing of the employer com- provided a health insurance package that was an aggressive and uncompromising counter- munity, neither old-line manufacturing, then so burdensome and inadequate that less than being battered by imports, nor Silicon Valley, 50 percent of its employees subscribed. “Right nor even unionized high technology companies now, big companies pay all of the health costs Clinton presided like Xerox, whose otherwise liberal CEO, Paul of small companies that are not providing Allaire, served as a Dunlop Commission mem- insurance,” argued one pro-reform business- over a generational ber. And of course, the same labor-intensive, man. “It’s another form of tax.” changing of the service-sector employers who sabotaged the But American capitalism had transformed governmental Clinton health-care reform were even more itself dramatically since the last era of health- adamantly hostile to any labor law deal that care reform in the 1960s, and low-wage, low- guard, but not the hinted at more employee voice. In the service benefit companies in the swollen service sector, emergence of a new sector, higher employee productivity was on especially restaurants and retailers, bitterly social movement the way, not via a new era of labor-manage- resisted employer mandates. A service-sector ment cooperation, but as new and more intru- revolt generated something close to a coup or the revitalization sive versions of electronic Taylorism made their within the U.S. Chamber of Commerce, which of an old one. way to the checkout counters, hospitals, eater- had initially favored Clinton’s reform at the ies, and logistic hubs that were then leading the behest of many big, old-line manufacturing U.S. employment surge. companies like Chrysler and Bethlehem Steel. strategy” to “delegitimize” the Clinton plan and Once the health-care initiative collapsed Likewise, a set of smaller insurance compa- bring about its “unqualified political defeat.” and the Republicans won a decisive congres- nies, who made money by “cherry-picking” the By the late summer of 1994, when the Clin- sional victory in 1994, employers knew they most healthy and profitable clients, feared that ton health plan expired in Congress, that fail- held the upper hand. Jeff McGuiness, president the system of “managed competition” champi- ure proved an ideological victory for the likes of the management-side Labor Policy Asso- oned by the Clintons would put them at a dis- of Bill Kristol and laid the basis for Republican ciation, which was actually one of the more advantage in a fight over market share with the capture of the House of Representatives for moderate employer groups to engage with the big five insurance firms of that era, which were the first time since 1946. A long era of hyper- commission, told the press, “All deals are off, willing to turn themselves into something close partisanship was upon us. all swaps, whatever deals there might have to a utility in return for millions of new gov- An effort to secure worker rights, not by been are now off.” ernment-mandated customers. Organized into reinforcing the right to unionize guaranteed the Health Insurance Association of America, in the oft-violated Wagner Act but by pro- FINANCIAL DEREGULATION these smaller firms sponsored the infamous but moting greater labor-management collabora- While the reform of health provision remained highly influential set of “Harry and Louise” TV tion, became the heart of the administration’s stymied during the 1990s, a radical restruc- ads of 1993 and 1994, which equated employer policy on labor. A commission on the future turing of American finance proceeded with mandates and cost controls with a cumbersome of worker-management relations, chaired by little opposition. By the mid-1990s, nearly and intrusive federal government. John Dunlop, was the signature early initia- all of Clinton’s advisers (notable exceptions The ideological stakes in this fight were tive. Greater collaboration would presumably being Joseph Stiglitz and Brooksley Born) graphically highlighted in late 1993 when generate productivity gains and improved repeatedly reassured him that the decision journalist and sometime Republican adviser earnings to match, not just in the unionized to let Wall Street dismantle regulatory pro-

44 WWW.PROSPECT.ORG WINTER 2018 tections erected during the Great Depression nothing to hamper this decay of bank regula- would seem to have confirmed Born’s appre- simply represented inevitable modernization. tions; instead, Rubin’s Treasury pushed the hensions, but she nevertheless remained a near As John Podesta, who would soon become White House to formalize the new banking pariah on the Hill, at the Fed, and in the West Clinton’s chief of staff, put it in a 1995 memo, investment regime by backing GOP deregula- Wing. At the behest of Rubin and Greenspan, “The argument for reform is that the sepa- tory efforts in the Congress. Congress passed a moratorium prohibiting her ration between banking and other financial Repeal of Glass-Steagall late in 1999 spurred agency from regulating most derivatives and in services mandated by Glass-Steagall is out of a wave of megabank mergers and enabled them the waning days of his administration, Clinton date in a world where banks, securities firms to plunge headlong into the business of buying, signed the Commodity Futures Modernization and insurance companies offer similar prod- securitizing, selling, and trading mortgages Act, which exempted the most financially con- ucts and where firms outside the U.S. do not and mortgage-backed securities. Indeed, one sequential derivatives from federal regulation. face such restrictions.” such merger had already been carried out well The fuse had been lit for the implosion that The remarkable influence of Robert Rubin, before passage of the legislation, the $72 billon would engulf Wall Street and the world just in both the White House and on Wall Street, deal which brought together Citibank, the big- a decade later. symbolized and encapsulated this perspec- gest New York bank, and Travelers Group Inc., tive, to which the term “neoliberalism” was the huge insurance, brokerage, and financial- THE TRAGEDY OF THE Clinton administration now firmly attached. Unlike Greenspan, a dis- services company. The merger was in clear vio- is that none of this was inevitable. Bill Clinton ciple of Ayn Rand, Rubin was an attractive lation of Glass-Steagall, but such was the Wall and most “Friends of Bill” were not neoliber- and seductive personage—a Democrat whose Street confidence that Congress would repeal als, yet they ended up presiding over a political charm, social liberalism, and persuasive intel- the old law that Travelers boss Sanford Weill economy that advanced that ideological and lect shielded him from criticism and enlarged and Citibank CEO John Reed had no hesitation financial project. Their first instincts called his influence, not just in terms of one policy or in concluding negotiations. Repeal of Glass- for a novel form of managed capitalism, not another, but as ideological leader of a species of Steagall in November 1999 was termed the markets, to revitalize the domestic economy, neoliberalism, dubbed “Rubinomics.” He men- “Citigroup Authorization Act” in some circles. reform health care and labor relations, and tored a generation of Clinton-era policymak- Rubin, who had stepped down as Treasury ameliorate the social disruptions engendered ers, later with echoes in Obama appointees, secretary in July of the same year, had become by globalized commerce. But they caved before creating a Democratic policy establishment chair of Citi’s executive committee in October. those, within the administration and without, that no longer took its cues from unions and The only Clinton regulatory official who who had a firmer set of ideological prescrip- consumer advocates, but saw an outlook con- stood in the way was Brooksley Born, chair tions. This was most notable in the emphasis on gruent with Wall Street as synonymous with of the Commodity Futures Trading Commis- deficit reduction, in the seemingly gratuitous the general welfare. And the long boom of the sion. Her defeat and demise are telling. Born decision to drive NAFTA down the throat of a 1990s, whatever its actual origins, seemed to warned that the explosion of derivatives that resistant Democratic majority in Congress, and ratify the wisdom of such an outlook and the took place in the 1990s created a gigantic the radical deregulation of financial markets. statecraft that gave it legislative substance. moral hazard that was difficult for either gov- The Clintons presided over a generational Although the Glass-Steagall Act was not ernment regulators or the banks themselves to changing of the governmental guard, but not formally repealed until 1999, the separation measure. Unlike stocks, bonds, and options, no the emergence of a new social movement or of commercial and investment banking had clearinghouse for derivative instrument trades the revitalization of an old one. They thought already been severely weakened by Federal actually existed; without a transparent record, the solution to U.S. social and economic prob- Reserve rulings that increased bank size and such trades could become a source of dispute, lems could be a corporatist “win-win,” when allowed commercial banks, through subsid- uncertainty, conflicts of interest, and fraud. It in fact the answer was closer to “zero-sum.” iaries, to underwrite many types of securities. was a “black” market. But Born’s Cassandra- The prosperity that would come in the latter In 1994, with the Democrats still in control like warning was vociferously opposed by the half of the decade was therefore built on a set of Congress, Clinton signed the Riegle-Neal Fed’s Greenspan, by Rubin, and by Deputy of fortuitous circumstances without the insti- Interstate Banking and Branching Efficiency Treasury Secretary Larry Summers. When tutional foundation necessary to make that Act that eliminated restrictions on branch word got out that Born proposed to issue a half-decade of rising living standards capable banking and thereby increased the sway of “concept paper” urging regulation of deriva- of withstanding the external shocks and politi- the big banks. Then in 1996, the Fed allowed tives trading, Summers placed a furious call: cal reverberations that were sure to come in bank subsidiaries to earn 25 percent of their “I have 13 bankers in my office, and they say the new century. revenue from securities operations, up from if you go forward with this you will cause the 10 percent. And that same year, the Fed over- worst financial crisis since World War II.” Nelson Lichtenstein is a professor of history hauled its regulations to make it easier for Four months later, in September 1998, the at the University of California, Santa Barbara, banks to gain approval to expand into new collapse of Long-Term Capital Management, where he directs the Center for the Study of activities. The Clinton administration did which held a trillion dollars in derivatives, Work, Labor, and Democracy.

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