Recession shock: economic analysts say it's time to name those responsible for bringing about the current U.S. economic recession: Bill Clinton and Arthur Levitt

0 Comments | Insight on the News, Dec 31, 2001 | by John Berlau, | Brandon Spun

For nearly 20 years it was the boom that couldn't end. Although Bill Clinton loved to take the credit, the prosperity of the 1980s was part of "one continuous boom since the early 1980s," says Brian Wesbury, chief economist at the brokerage firm of Griffin, Kubik, Stephens & Thompson in Chicago. From 1982 to 2000, save only for two quarters in the early 1990s, the United States experienced such economic growth and prosperity as she never before had seen. Almost 35 million new jobs were created. The Dow Jones industrial average rose thirteenfold, dramatically increasing the wealth of middle-Americans invested in 401(k) plans and mutual funds.

Then suddenly, a few months before George W. Bush took office, it all seemed to come to an end.

What happened? Conventional wisdom has it that much of the growth was a bubble in which Internet and technology stocks were bid out of sight by speculative mania. But some observers notice that something else was going on at the time the markets started to fall: The Clinton Securities and Exchange Commission (SEC), led by Chairman Arthur Levitt, was busy dismantling reforms from the Reagan administration that had made it easier for small businesses to raise money from the stock market.

Economist Lawrence Kudlow puts the time of the fall of the NASDAQ high-tech market as March 2000. This is almost precisely when, through a series of administrative rules, Levitt's SEC blocked small entrepreneurial firms from the access to capital markets that they'd enjoyed since the early 1980s, says Don Devine, senior scholar of the American Conservative Union's Task Force on Regulatory Reform and director of the Office of Personnel Management in the Reagan administration. "Unlike most of the rimes in the past, it looks like this was a stock-market-led recession," Devine tells INSIGHT. "Levitt and Clinton disrupted the markets, and then the [shocked] market led to the weakening of the economy."

With the Democratic Party preparing a national advertising campaign to bemoan the alleged "Bush recession," Devine, who is reputed to be as politically savvy as they come, thinks Republicans should set the record straight about what he calls the "Clinton-Levitt recession."

There are signs that some Republicans may be following his advice. In late June, the House Financial Services subcommittee on Oversight and Investigations held a hearing in which Devine and others testified on Levitt's effective repeal of Rule 504, which the Reagan SEC created to exempt small businesses raising $1 million or less on the stock market from most SEC regulations. Since, as is widely agreed, small business fueled the boom of the 1980s and 1990s, the SEC's move against this sector apparently helped move the economy into recession, says an aide to Rep. Sue Kelly (R-N.Y.), chairwoman of the subcommittee.

Levitt's regulations were "definitely a contributing factor" the aide tells INSIGHT. "As Mrs. Kelly will say all the time, small business is the engine of the economy. The ability of small business to raise funds and have access to loans or to the capital market is essential. With small businesses not having the capital they need, they're not able to make the investments they require to grow." And this, in turn, hampers growth in the overall economy, the aide says.

That was tough stuff, and the congresswoman decided to be careful. A Kelly spokesman now says Kelly doesn't agree with the aide's opinions that the SEC's actions contributed to the recession. But, she said in a statement sent to INSIGHT, "for a quick recovery, we must do all we can to create greater access to the capital markets for small business."

To many pundits the economy of the 1990s simply overheated, requiring a huge and painful cyclical correction. But Wesbury, former chief economist for the Joint Economic Committee, disagrees with the "cycles of greed and fear" theory, which he attributes to the influence of liberal economist John Maynard Keynes. "When I say there was no bubble, I'm not saying there weren't a number of companies, IPOs [initial public offerings] and funding that should have never happened," Wesbury tells INSIGHT. "But those dumb investments would have ended badly no matter what happened in the economy. What causes booms and busts in any economy is [government] policy."

Wesbury says recessions are caused mostly by "policy mistakes." He attributes the current slump to Federal Reserve Chairman Alan Greenspans tightening of interest rates beginning in May 2000, to taxes being at a record-high share of gross domestic product (GDP) and to the chilling effect on the technology sector of the government's pursuit of Microsoft Corp. He adds that the SEC regulations "could have easily contributed heavily to this.... Anything that inhibits the free flow of capital is a negative for economic growth in the long run or even in the short run."

Indeed, scholars have found that part of what got the 1980s boom going, in addition to Reagan's cuts in marginal income-tax rates, was his administration's reduction of obstacles to capital formation created by the SEC. When Reagan tapped John S.R. Shad, vice chairman of the brokerage firm of E.F. Hutton, to head the SEC, Wall Street had been in a slump since the early 1970s. "In the late 1970s, the prime rate was in the double digits," John Huber, the SEC's director of corporation finance from 1983 to 1986 and now a partner at Latham & Watkins, recalls to INSIGHT. "People were saying the Eurobond was the thing of the future. London was growing and building [its international financial markets].... The changes in the 1980s resulted in making American markets more efficient, in essence retaking the market that the Eurobond market had begun to take in the late 1970s."