Obama's Clinton Problem

Deregulation made the prosperity of the 1990s possible. Just ask Bill Clinton.

Republicans had many things going against them this election, but the financial market implosion in September proved to be the final blow that sealed their losses, as voters almost always associate the economy with the party in power. And when the credit crisis emerged as the top campaign issue, Sen. Barack Obama (D-Ill.) pounced on his opponent with two basic messages. One was to blame the policies of deregulation that Sen. John McCain (R-Ariz.) voted for. And the second was to hug former rivals Bill and Hillary Clinton as hard as he could and harken back to the prosperity and economic growth of the 1990s.

In the presidential debates, Obama charged that McCain "believes in deregulation in every circumstance" and claimed, "That's what we've been going through for the last eight years."

And as a contrast to the last eight years, Obama said in a speech that his administration would go back to the "shared prosperity…when Bill Clinton was president." When campaigning for the first time with Bill Clinton at a Florida rally in late October, Obama gushed that, "in case all of you forgot, this is what it's like to have a great president."

But now that he has won the presidency and must, as the cliché goes, shift from campaigning to governing, Obama and his economic team will have to face up to a paradox that most of the media overlooked during the campaign. Namely, the Obama campaign's twin messages of bashing deregulation and embracing the Clinton years were inherently contradictory. Bill Clinton signed nearly every deregulatory measure that John McCain backed—the same measures that are now being blamed (wrongly) for helping cause the current crisis. What's more, Clinton administration officials have credited these policies for contributing to the '90s economic boom—the very "shared prosperity" that Obama says he wants to go back to.

Late in Clinton's tenure, the White House put forth a document celebrating "Historic Economic Growth" during the administration and pointing to the policy accomplishments it deemed responsible for this growth. Among the achievements on Clinton's list were "Modernizing for the New Economy through Technology and Consensus Deregulation." That's right, a Clinton White House document credited part of the administration's success to that now dreaded d-word, deregulation.

"In 1993," the document explained, "the laws that governed America's financial service sector were antiquated and anti-competitive. The Clinton-Gore Administration fought to modernize those laws to increase competition in traditional banking, insurance, and securities industries to give consumers and small businesses more choices and lower costs."

Everything in those passages is true. All that's missing is credit to the GOP-controlled Congress elected in 1994 for passing most of the policies that led to the prosperity. But the Clinton administration, whatever its personal and policy flaws, should indeed be praised for signing and advocating this deregulation. These bipartisan financial policies, however, were the very same policies that Obama, running mate Sen. Joe Biden (D-Del.) and other Democrats attacked during the campaign. "Let's, first of all, understand that the biggest problem in this whole process was the deregulation of the financial system," Obama proclaimed in the second presidential debate.

But if Obama follows through on his campaign rhetoric on regulation, it will not be the Bush economic policies he will be overturning. In the financial area, ironically, Clinton was actually the more deregulatory president. As James Gattuso of the Heritage Foundation points out, while there may have been flawed oversight, there really was no financial deregulation under Bush. Indeed, Bush's signature achievement in the financial area was the signing and implementing of the costly and counterproductive Sarbanes-Oxley accounting mandates.

When it comes to overall regulation, as my Competitive Enterprise Institute colleague Wayne Crews notes in his study "10,000 Commandments," the Bush administration has set records with the tens of thousands of pages it put in the Federal Register. So to the extent that Obama has said he would reverse financial deregulation, what he would largely be overturning are the financial modernizations Bill Clinton signed into law and that Clinton administration officials agree led to the '90s prosperity.

To be sure, Obama hasn't been too specific on what exactly he would reregulate. He spoke vaguely, as did McCain, of more oversight and a regulatory framework for the 21st century. And McCain further blurred this distinction with his misguided attacks on Wall Street "greed" and on the short-sellers who actually should be praised for recognizing the mortgage market's weakness before other players did.

To the extent that Obama's campaign attacked the specific deregulation policies that McCain backed, Obama ended up doing more than just running against McCain and his advisers, such as the much-vilified former Texas Sen. Phil Gramm. Obama was also campaigning against Bill Clinton, Robert Rubin, Larry Summers and virtually all of the Clinton administration's economic officials. The same folks, it's worth nothing, that now often surround Barack Obama.

Take Gramm-Leach-Bliley, the 1999 law Clinton signed repealing the Depression-era Glass-Steagall Act, which had strictly separated traditional commercial banking from investment banking. Obama's supporters, claiming that getting rid of Glass-Steagall led to the credit blowup, have seized on the first name on the law, that of former Sen. Gramm, to bash it as a piece of Republican deregulation. Never mind that the Senate passed the legislation by a vote of 90-8, with many Democrats voting for the final bill, including Obama running mate Joe Biden.

Obama specifically bashed this bipartisan achievement in a March speech on the economy in New York. There he said, "By the time the Glass-Steagall Act was repealed in 1999, the $300 million lobbying effort that drove deregulation was more about facilitating mergers than creating an efficient regulatory framework."

But then-Clinton Treasury Secretary and now-Obama adviser Larry Summers had a different view. Summers told the Wall Street Journal in 1999 that the new law would spur economic growth "by promoting financial innovation, lower capital costs and greater international competitiveness."

What's more, Clinton himself defends the law to this day. In a recent Business Week interview with CNBC personality Maria Bartiromo, Clinton said plainly, "I don't see that signing that bill had anything to do with the current crisis." He even added that its lifting of barriers to financial service mergers may have lessened the crisis' impact, pointing out, "Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn't signed that bill."

Summers and Clinton were—and are—correct. The law benefited the economy by creating more choice and competition, and there is little evidence of Glass-Steagall's repeal playing a role in the mortgage crisis. As the American Enterprise Institute's Peter Wallison noted in The Wall Street Journal, "None of the investment banks that have gotten into trouble—Bear, Lehman, Merrill, Goldman or Morgan Stanley—were affiliated with commercial banks." He also pointed out that "the banks that have succumbed to financial problems—Wachovia, Washington Mutual and IndyMac, among others—got into trouble by investing in bad mortgages or mortgage-backed securities, not because of the securities activities of an affiliated securities firm."

Even stranger than the Obama camp's attack on McCain's support of the bipartisan Gramm-Leach-Bliley was their slap at his support for a bill that cleared barriers to interstate banking. This law, the Riegle-Neal Interstate Banking and Branching Efficiency Act, was passed in 1994, before Republicans even took over Congress. As the previously mentioned Clinton White House "Historic Economic Growth" document put it, "in 1994, the Clinton-Gore Administration broke another decades-old logjam by allowing banks to branch across state lines."

Riegle-Neal finally allowed the U.S. to have nationwide banking chains, as virtually every other developed country does. Anyone who remembers the inconvenience of not being able to access your own bank's ATM when driving into another state can attest to the benefits this law brought. Federal Reserve Governor Randall Kroszner has credited the law for a myriad of economic benefits including "higher economic and employment growth, spurred by more-efficient and more-diverse banks" and "more entrepreneurial activity, as the more bank-dependent sectors of the economy, such as small businesses and entrepreneurs, achieve greater access to credit."

Yet when McCain advocated letting individuals purchase insurance across state lines and wrote in a journal article that "opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products," the Obama campaign hit the roof. "McCain just published an article praising Wall Street deregulation," Obama's attack ad exclaimed. "Said he'd reduce oversight of the health insurance industry, too."

FactCheck.org lambasted this ad for quoting McCain "out of context on health care." But the greater worry is that the attacks on the bipartisan deregulation that led to prosperity appeared to be quite in context for Obama, at least during the campaign. But if President-elect Obama wants to pull the U.S. economy out of its rut, he must face up to the fact that '90s deregulation was an essential ingredient in Clinton's recipe for an economic boom. He also must recognize that substantially undoing the liberalizations that Clinton and the GOP Congress achieved would crimp recovery as well as create new problems

Deregulation has never meant non-regulation, and my boss, Competitive Enterprise Institute President Fred L. Smith, Jr., has stressed the "competitive regulation" that comes from market discipline. Creating a modernized regulatory regime for some of the new challenges we face would have been an urgent task of any new administration, but the key is what type of updating would be done. Good updating would take into account government subsidized institutions—such as Fannie Mae and Freddie Mac—that have weakened market discipline, as well as existing regulations that encourage perverse incentives, such as Clinton's expansion of the Community Reinvestment Act, an area where the administration was not deregulatory and actually encouraged bad loans to be made.

Nevertheless, the Clinton-GOP governance, despite the constant bickering and backbiting, ironically left a shining legacy of prosperity, which bipartisan deregulation was so much a part of. In terms of economic growth, there are few better examples of bipartisan success than this tenure.

John Berlau is director of the Center for Entrepreneurship at the Competitive Enterprise Institute.