When the new president and Congress take office in January, they will face some daunting economic challenges. The country is still recovering from the pandemic-induced recession, unemployment remains slightly above the historical average and the U.S. fiscal position is abysmal. However, assuming the GOP retains control of the Senate, this won’t be the first time a Democratic president and a Republican Senate will have inherited such unfavorable economic and budgetary conditions.
When Bill Clinton was inaugurated in 1993, unemployment stood at 7.3%, the country was in the midst of a sluggish recovery from a recession in 1990–1991 and the budget deficit was 4.5% of GDP. Yet following the Republican takeover of the House in November 1994, a divided government was able to help create conditions that quickly led to budget surpluses, lower unemployment and greater overall economic prosperity. This success should be a lesson and a model for the incoming administration and Congress.
Divided Government and Spending Restraint?
The same year Clinton entered the White House, he set ambitious goals, proposing a budget that cut the federal deficit in half in four years, mostly through spending reductions (against the baseline). But it was during the six years of divided government—when the president largely worked with GOP Speaker of the House Newt Gingrich (pictured together)—that government spending as a share of GDP was reduced from 33% to 29%, while debt held by the public as a share of GDP was reduced from 48% to 33%.
As President Clinton said in 1999, “We have now cut up Washington’s credit card. Now we can pay off the debt; by 2015, this country can be entirely out of debt.” Clinton added, “The surplus is the hard-earned product of our financial discipline . . . freeing our nation from the shackles of debt so that we can have long-term sustained economic prosperity.”
While President-elect Biden’s spending plan far exceeds anything that any incoming president has set out (making Hillary Clinton circa 2016 look like a fiscal hawk), the important similarity with governance in the 1990s lies in the fact that if the Senate remains in Republican control, both sides will be forced to compromise if anything significant is to get done. If we look back over the past three decades, when the president was a Democrat and the Senate was controlled by Republicans, average annual spending growth was 4.1%, and just 3.4% during the six years of divided government under the Clinton administration. By contrast, periods of divided government with a Republican president and Democratic Senate oversaw average annual spending growth of 6.2% (not adjusted for inflation).
These patterns of spending are likely the result of a notable phenomenon of governance in the United States—that conservatives are only fiscally conservative when they don’t hold the presidency. In fact, during years of united Republican governance, spending grows faster than it does with united Democratic governance. Perhaps this is because Republican politicians advocate for spending restraint and tax cuts when in opposition, but once elected they tend to implement only the latter and largely ignore the former, resulting in larger budget deficits.
We saw this phenomenon play out in 2017 when Republicans, after spending almost a decade lamenting the need to restrain federal spending, passed the Tax Cuts and Jobs Act, while continuing to increase federal spending levels. The result was ballooning budget deficits.
Divided Government and Economic Growth?
It has long been noted that economic growth, unemployment levels and even equity markets perform better during periods of divided government. Deadlock prevents bold plans for expanding government in ways that could harm economic dynamism, while the need to collaborate and compromise often means that both parties are restrained from picking their favored winners and losers through the budgetary process.
And, ironically, a divided government can also be a time of policy innovation. For instance, welfare reform, or the Personal Responsibility and Work Opportunity Act, was signed into law in 1996 after negotiations between President Clinton and Republican lawmakers. The law required unemployed welfare recipients to reenter the labor market. During this time, the poverty rate dropped precipitously, from 13.7% in 1996 to 11.3% at the turn of the millennium.
Another example of how the government promoted productivity and growth was its hands-off approach toward the technology sector during the late 1990s. In 1996 and 1997, the Clinton administration won passage of Section 230 of the Communications Decency Act and developed the Framework for Global Electronic Commerce. As Adam Thierer explained in his 2016 book Permissionless Innovation, “The Framework was a succinct, market-oriented vision for cyberspace governance that recommended reliance on civil society, contractual negotiations, voluntary agreements, and ongoing marketplace experiments to solve information-age problems.”
Section 230 is a brief sentence that provides immunity for website publishers from third-party content and has been referred to as the 26 words that set the internet free and allowed it to flourish.
This hands-off approach toward the technology sector sparked technological innovations that resulted in productivity growth in the late 1990s that was almost three times faster than that of the early 1990s, and in marked contrast to the low productivity growth in the 1970s and 1980s. Along with increased productivity came higher wages, with average annual wage growth of around 5% in the late 1990s. On top of this, more jobs were created during the two terms of Clinton’s presidency than under any other U.S. president. This job growth was driven by a thriving private sector.
Lessons for the Incoming Administration
As Biden is sworn into office and as Republican senators rediscover their “cyclical” sense of fiscal prudence, policymakers on both sides should note the successes of the divided government in the 1990s. Like the 1990s, the 2020s should be the decade when we reestablish fiscal prudence, champion free trade by removing the tariff and nontariff barriers imposed by the Trump administration and allow for “permissionless” innovation in artificial intelligence, robotics, driverless cars and commercial drones.
The coming years also offer an opportunity for both sides to work together in undoing the harmful immigration restrictions enacted in recent years, creating a path to citizenship for DACA-eligible immigrants and lifting the annual caps on skilled migrant workers to support the U.S. economy. A divided government also could collaborate in seeking avenues for phasing out regulations that disproportionately affect low-income households. The president and Congress should also take aim at the discriminatory effects of cronyism and economic favoritism, such as corporate handouts or picking winners and losers through industrial policies.
Ultimately, both sides should refrain from ceding ground to ideas of the progressive left or nationalist right, and instead look to the governance outcomes that traditionally have made Americans better off.