Which Bill should take the credit for US success?

The US economy is booming and Clinton's contribution to it will be much debated in election season

A pivotal question to be debated in this year's US presidential election is whether US prosperity has resulted from Clinton administration policies or from deeper changes arising from new technology and globalisation. In short, should Bill Clinton or Bill Gates get the credit for America's boom?

The economic successes of Clinton's eight years are undoubted. The United States enjoys its longest continuous economic expansion in history, now more than nine years old. Economic growth averaged 3.6 per cent per year between 1992 and 1999, far above the 2.9 per cent per year growth between 1980 and 1992. Fifteen million jobs were created between 1992 and 1999; the unemployment rate, now 4 per cent, is the lowest in thirty years. The stock market's performance is legendary, with capital gains totalling $7 trillion since the start of 1996.

No government, of course, could be fully responsible for such large trends. Still, the Clinton administration was more than a bystander. President Clinton took a favourable inheritance - the results of the policies of previous governments, as well as global trends and innovations in science and technology - and skilfully fashioned an economic governance well designed for a knowledge-based economy.

His administration deserves much credit, both for policies followed and mistakes avoided.

First the inheritance. A good starting point was the end of the Cold War, which enabled the US to reduce military spending by around 2.5 per cent of GDP (comparing 1990 and 2000), a saving worth around $225 billion per year. This helped Clinton reduce the budget deficit in a rather painless manner.

The second inheritance was a flexible, deregulated economy with fairly low marginal tax rates, a legacy of the Reagan-Bush era. The third inheritance was low inflation.

When Clinton came to office there was no need for heroic stabilisation policies. The battle against high inflation was won 10 years earlier. So Mr Clinton and the Federal Reserve Board under Mr Alan Greenspan could pursue economic growth without worrying about the economy overheating.

The first distinct accomplishment of the Clinton administration was to adopt some key mainstream choices of economic policymaking. When Mr Clinton came to office in 1993, he had to make several key choices:

1. Promote free trade, in line with policies of the Reagan and Bush administrations, or turn more protectionist as his trade union allies urged?

2. Reduce the budget deficit, in line with mainstream economic thinking, or boost government spending, as many left-of-centre economists were arguing?

In both cases, pressures from the Republicans as well as from centrist Democrats helped to pull the Clinton administration on to the correct track: supporting free trade despite powerful protectionist allies in the Democratic Party, and supporting budget deficit reduction instead of large fiscal spending programmes.

The Clinton administration's support for the North American Free Trade Agreement with Mexico, completion of the Uruguay Round on multilateral trade, and recent agreement to admit China into the World Trade Organisation, are all accomplishments in support of global trade.

More recently, Mr Clinton defended the economic mainstream against attack by conservative Republicans, who pushed for deep tax cuts that would undermine the fiscal surpluses of recent years. These conservatives also pressed for sharp cuts in government spending that would hurt the poor. Mr Clinton held the line against these excesses as well.

President Clinton's administration has done much more, however, than defend the economy against ideological extremists. It fashioned, bit by bit, a kind of "industrial policy" for the new knowledge economy.

Mr Clinton understood earlier than most politicians, and economists as well, that US economic strength derived from a combination of basic science, technological innovation and high-quality education. His administration therefore shaped a role for government that supported the generation and diffusion of knowledge in all spheres of knowledge creation.

First, the United States increased the level of government support for science, reaching a sum of around $85 billion in this year's budget. Government- supported research shaped scientific advances in information technology and biotechnology, two critical fields in which the US has the global scientific lead.

Second, Clinton policies fostered development and expansion of the Internet as a core strategy of economic growth. Mr Clinton pushed for, and achieved, a period of tax holidays on electronic commerce. His administration shaped the regulatory environment to achieve rapid adoption of Internet-based activities and championed government programmes to help get schools and libraries connected to the Internet. It even advocated liberalisation of work permits for foreign workers skilled in Internet technologies.

Third, Mr Clinton pushed expansion of various programmes to support higher education. The share of US students going on to higher education after secondary school is now 67 per cent, up 10 per cent over the preceding decade. The administration recognised that higher education was the sine qua non for a successful high-technology economy.

The basic lessons of US success should be recognised: macroeconomic stability; budgetary prudence; global trade; competition and de-monopolisation in telecommunications and finance; and an active industrial policy geared towards a knowledge-based economy, building upon science, research and development, information technology, and higher education.

All of this depends, as well, on a continuing reduction of global tensions. This is not to say that all is now right with US policymaking or that the path ahead is risk-free. The run-up in stock market prices in recent years was partly a financial bubble, and there may be a price to pay for it.

Moreover, despite US economic successes at home, the US has neglected its moral and practical responsibilities as an aid giver to poor countries. This is a sad counterpoint to American successes at home.

Jeffrey D. Sachs is Galen L. Stone Professor of Economics, and Director of the Center for International Development, Harvard University.