The Myths of The Clinton Economic Recovery

President-elect Obama likes to tell people that his economic plan is similar to that of the one that President Clinton used to get us out of the economic funk in the early '90s.

The problem with that theory is that we were already in the middle of the Reagan Boom when Clinton became Pres. And even though there was slight downturn in 1991 by the time he was inaugurated the economy was already heading upwards. That's not to say that there was not another expansion at the end of Bubba's term but Obama has no Idea what caused that expansion.

By taking a look at the chart above you can see that there were 4 elements that created the economic boom in the Clinton Presidency:

1. The Death of Hillary Care
2. The Republican Take-over of Congress
3. Feds easing up on the money supply
4. A Cut in the Capital Gains Tax

Continue on to read more about the Myths of Clintonomics:

The Myths Of Clintonomics
By INVESTOR'S BUSINESS DAILY

Fiscal Policy: President-elect Obama says he's modeling his recovery plan on Clintonomics because it pulled the economy out of a ditch last decade. But that's an old myth — and a dangerous one at that.

"I've got an economic plan similar to Bill Clinton's," Obama has said, including tax hikes on the rich and Keynesian pump-priming, among other new government spending.

He rationalizes that Clinton raised taxes during a recession, and look what happened — average wages went up, along with economic growth and the stock market. And eventually the Treasury reported surpluses after decades of deficits.

Obama is even recycling Clinton's old economic team. Standing behind him at his first press conference were old Clinton hands Bob Reich, Laura Tyson, Larry Summers and Bob Rubin. The show of support was designed to calm the markets after the post-election stock sell-off.

But it hasn't worked, probably because Wall Street knows that Obama is also recycling myths about the Clinton years.

For starters, Clinton didn't turn the economy around. The recovery had already begun before he took office. In fact, the mild recession ended in 1991 — long before he was even elected.

Of course, that didn't stop candidate Clinton from trashing the "Republican economy" as "the worst in 50 years." Obama has echoed the demagoguery, calling this "the worst financial crisis since the Great Depression." (He changed his gloomy mantra to worst "in a century" for his victory speech.)

Clinton blamed the 1990-91 recession on 12 years of "trickle-down economics" started under the Reagan administration. But the recession was caused in part by the first President Bush reneging on his pledge not to raise taxes, which among other things amounted to a repeal of Reaganomics.

And the economic growth that began in late 1991 was reignited by entrepreneurial incentives left over in the system from Reagan's slashing of marginal tax rates.

The media assume the Clinton tax hikes somehow stimulated the economy, and are cheering on Obama's plan.

Obama would raise the top rate "back to where Bill Clinton had it at the time of the greatest bull market, the greatest economic growth in the history of the country," Best Life editor Jack Otter told CNN. "Bill Clinton's tax rate was not a punitive tax rate. It didn't harm the economy."

In fact, the economy grew in spite of, not because of, the Clinton tax hikes.

The bull market took off precisely when then-Fed Chairman Alan Greenspan took his foot off the brakes and hit the gas in 1995. It was also then that Republicans took control of Congress — further blunting the effects of the Clinton tax torpedo that had taken effect the previous year.

Clinton also benefitted from innovations long in the making, including the Pentium chip released in March 1993 and Microsoft's Windows program released in August 1995. These together made the Internet boom possible.

As for the budget surpluses, they came as a complete surprise to Clinton economic forecasters, whose static models only predicted their tax hikes on the rich would narrow the budget gap, not get it into the black.

Their "deficit-reduction plan" didn't create the surpluses at all. They were a direct result of a tidal wave of capital-gains revenues generated by the GOP-led stock boom.

Relieved that Washington would no longer threaten to take over 14% of the economy by socializing medicine or raise taxes even higher, the market took off like a shot at that point. And capital gains tax receipts exploded, flooding federal coffers.

Clinton's own long-term budgets predicted no surpluses of any kind during his administration and beyond.

In 1993, Clinton made his first five-year budget projections based on the new tax and spending programs he was proposing. He forecast a budget deficit of $202 billion in fiscal year 2000. In fact, the Treasury produced a record surplus that year of $236 billion.

That's a swing of more than $400 billion. So much for central planning.

Clinton either must admit to some of the worst forecasting in history or acknowledge that some other factors besides his record tax hike closed the budget gap. But he's copped to neither.

Let's hope Obama will recognize these other factors and think twice about dusting off Clinton's tax-heavy economic plan.

Clinton got lucky. His tax torpedo was absorbed by an already expanding economy, while Republicans deflected other torpedoes he'd planned to launch. Obama's tax torpedoes, on the other hand, would be a direct hit on an already sinking economy.