A Patriot's History of the United States: From Columbus's Great Discovery to the War on Terror (161 page)

More important to the financial markets, after the Republicans gained control of Congress, the message was that, indeed, the era of big government
was
over. Or so it seemed. At any rate, the financial markets reacted. Although Wall Street had crept upward from 1992 to 1994, the Dow Jones flew into the stratosphere, climbing further and faster than the market had at any time since the Great Depression. Individual Retirement Accounts (IRAs) swelled in value as yuppies, or young urban professionals, entered the stock market in growing numbers through their retirement plans. More Americans than ever held securities and paid attention to the markets—not as speculators, but as investors in their retirements and college tuition for their children.

Already on the defensive after the Oklahoma City bombing, Republicans nevertheless thought they could rebound by refocusing on the 1995 budget. Gingrich hoped to impose an austere but reasonable spending plan on Clinton, unaware that the president had already determined to use the budget impasse to close all nonessential government services and blame it on the Republicans. Documents later leaked out showing that in the summer, several months before the shutdown occurred, Clinton administration officials had met with leaders of the federal employee unions to ensure that they would side with the White House. When the GOP submitted its plan, Clinton refused to sign the bills and allowed all nonessential government services—parks, libraries, citizen assistance bureaus, museums, and all noncritical offices—to shut down. The media cooperated fully, having already characterized Gingrich as Dr. Seuss’s Grinch with the headline
The Gingrich Who Stole Christmas
, portraying the shutdown as a disaster, despite the fact that Defense, the IRS, and other essential federal offices continued to work. Television talk shows featured laid-off park rangers or private-sector entrepreneurs who supplied the government with goods—all of whom suddenly had no income. At the end of a few weeks, the media had convinced the public that the Republicans were to blame.
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The shell-shocked congressional Republicans did not recover their confidence for years. Portrayals of the Republican House members set new low marks for distortion, deception, and fear mongering in American politics. But it was effective. After 1995, many Republicans drifted to a more moderate position to avoid incurring the wrath of the Washington press corps.
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Still, Clinton’s own polling told him the issue of fiscal responsibility that the GOP had advocated was warmly received in the heartland, and he could not ignore it. Clinton spoke with greater frequency about balancing the budget—a phrase uttered only by Republicans in the previous sixty years. He admitted that the robust economy had generated such tax revenues that with a modicum of fiscal restraint, the United States could balance the budget in ten years, or in seven years, or even sooner. Such talk only further accelerated the markets. By the time Clinton left office, the Dow had broken the 11,000 mark; and although it was already in retreat in Clinton’s last six months, it produced consistent federal budget surpluses. Yet it would not be completely accurate to ascribe the exceptional economic growth of the 1990s entirely to the tax cuts of the 1980s, to the elections of 1994, or to Clinton’s support of NAFTA. Powerful economic forces coalesced to contribute to the creation of such fantastic wealth.

Computer chip prices had plummeted at an annual rate of 68 percent since the 1980s, to the extent that by the year 2000 “the price of a bit is…close to a millionth of a cent as the billion transistor device—the gigachip—is introduced.”
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A single production line could fabricate 1.6
trillion
transistors in twenty-four hours, and in 1999 alone, 50,000 trillion transistors were produced, providing such a surplus that Americans used them to play solitaire or to keep the interior temperature of Cadillacs at 65 degrees. Equally impressive, in 1999, Internet traffic and bandwidth doubled every three months, traveling over fiber cable that carried 8.6 petabits per second per fiber sheath, or a number equal to the entire Internet traffic per month carried in 1995. Indeed, the computer had spread more rapidly to one quarter of the population than any other technology in American history, except the cellular phone (sixteen years compared to thirteen).
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That remarkable democratization of technology would quickly be eclipsed by yet another computer-related product, the Internet, which spread to a quarter of the population in merely seven years.
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Naturally, such stunning increases in productivity caused the value of tech companies to soar. Qualcomm, a company few people had even heard of prior to 1999, saw its shares rise in value by
2,619 percent
in less than two years! Brokerage and finance firms grew so fast they defied traditional accounting and measurement tools: employment only doubled in the brokerage business between 1973 to 1987, yet the number of shares traded daily exploded, from 5.7 million to 63.8 million. Although the Bureau of Labor Statistics recorded a 50 percent drop in productivity costs of computers from 1992 to 1994, in fact the costs had fallen at a rate closer to 40 percent per year, and those price declines only accelerated.

Astonishingly, Clinton actually sought to interfere with this growth. In 1993, the Clinton Justice Department initiated a campaign against the nation’s largest operating systems company, Bill Gates’s Microsoft, for allegedly bundling its Internet browser with its Windows operating system. In May 1998, the department’s Antitrust Division filed suit against Microsoft. Nineteen states, seeing a new gravy train alongside tobacco litigation, joined the suit. The Justice Department contended that the bundling required consumers to buy both products and gave Microsoft an unfair advantage over Netscape and other rival companies. Yet Netscape was the industry
leader,
and there was no evidence that Microsoft met any of the traditional criteria that defined “restraint of trade.” For example, Microsoft’s prices on its products were falling, and its service was good. There were no barriers to entry into the browser market—indeed, Netscape dominated that market. But Americans seldom get worked up when the wealthy are targeted by government, and although consumer surveys showed that upward of 90 percent of Microsoft customers applauded the company, competitors were visceral in their anger toward Gates, who many claimed had stolen others’ ideas.

Whereas monopoly theory posits that competitors should benefit from litigation against a monopolist, exactly the opposite happened with Microsoft. Every time the government advanced in the case, the stocks of virtually all of the computer companies—especially Microsoft’s main competitors—fell.
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Each time Microsoft gained ground, the share values of all Microsoft’s competitors rose. Thus, while the federal and state governments engaged in an attack on a major American business in the name of promoting competition, in reality the market judged that the Microsoft suit was damaging the entire computer industry. An ominous reaction occurred in the wake of the Microsoft antitrust announcement when markets slowed, then as the case drew to a conclusion, turned downward.

By that time, some analysts had lumped these businesses into a catch-all phrase called the new economy, which included medical, optics, fiber, aviation, computers, software, telecommunications, and any other field that they could fit into the digital revolution. Computers produced remarkable increases in virtually all related fields and started to pull away from the otherwise impressive gains made in low-tech industries, at least until the year 2000.

A second contributing factor to the business boom of the nineties was the opening of markets in the former Soviet bloc. As Eastern European countries for the first time since 1939 engaged in free trade with the West, the resulting flow of goods and services eastward resembled the American entrance into western Europe at the end of World War II. U.S. entrepreneurs, oil experts, bankers, computer geeks, and academic consultants poured into Hungary, Romania, Poland, Ukraine, Russia, and the Baltic Republics. American overseas trade to those areas grew accordingly.

Still another part of the economic equation—low energy prices—played a role in sustaining the boom. The Gulf War had secured Middle Eastern oil at low prices, and although American oil companies, drillers, and refiners operated on thin profit margins, the cheap energy costs spilled over into almost every sector of the economy. Any products made with petroleum became cheaper to make; everything that was shipped by rail, truck, or aircraft was cheaper to transport, and the portion of manufacturing cost dedicated to energy plummeted. Even if goods did not seem cheaper on the rack or at the store, corporations reallocated resources within their firms toward research and development, turning out new products and adding value.

That did not guarantee that the rich got richer, especially when it came to businesses, where only thirty-four of the top one hundred firms in the
Wall Street Journal
in 1990 were still on the list in 1999. This trend was confirmed in the international arena (where, again, American companies were heavily represented): there was a 25 percent turnover among the top one hundred multinational firms from 1990 to 1997.
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At the same time, the share of total corporate assets held by the top five hundred industrial firms fell by 20 percent, and the employment by those same firms fell 29 percent.
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The share of gross domestic product generated by those firms plummeted 39 percent in thirteen years. With the economy growing, the expansion showed two clear trends. First, the growth came from small companies and new entrepreneurs; and second, there was tremendous turnover at the top, indicating extremely high levels of competition. Both trends were highly favorable for a vibrant economy.

Throughout the Bush and Clinton presidencies, Alan Greenspan, a disciple of free-market economist Friedrich Hayek and an avid reader of Ayn Rand, had served as chairman of the Federal Reserve Board. Greenspan had lived through the Ford/Carter inflationary years and had watched with concern the rise of federal deficits in the 1980s. Early in Clinton’s term, while interest rates remained low, the president took an action that dictated the behavior of the Fed and its chairman for the entire decade. In order to show rapid progress against the “Reagan/Bush deficits,” Clinton refinanced large chunks of the national debt at the lowest rates possible, regardless of the length of maturity. Much of this consisted of short-term bonds; but it had the effect of reducing the interest paid by the government on the debt, thus giving the appearance of reducing the deficits. By doing so, Clinton refused to refinance the debt in much longer term securities at a slightly higher rate. As long as inflation, and therefore, interest rates, stayed low, it was a good deal for the country. But the slightest uptick in inflation would add billions to the national debt and raised the specter of a massive refinancing of the debt at much higher prices.

Clinton’s action in essence locked the Fed into a permanent antiinflation mode. Any good news in the economy—rising industrial production, higher employment figures, better trade numbers—might cause prices to go up, which would appear on Greenspan’s radar detector as a threat. The chairman found himself raising the prime rate repeatedly, trying to slow down the stock market. It was a perverse situation, to say the least: the most powerful banker in America constantly slapping the nation’s wage-earners and entrepreneurs for their
success.
Worse, Greenspan’s actions resulted in a constant underfunding of business, a steady deflation affecting long-term investment. Although few spotted it (George Gilder and Jude Wanniski were two exceptions), the nation suffered from a slow-acting capital anemia.

Home prices continued to rise, though not at levels seen in the 1970s. As Americans invested in both homes and the stock market, wealth levels grew as never before. The 1990s saw more millionaires made than at any other time in American history, and at the same time, the “wealth gap” between the top 20 percent and the bottom 20 percent grew. Some of this was to be expected: in any growing, thriving economy, that gap should expand as rapid leaps of innovation and invention make entrepreneurs rich overnight. There was some disconcerting evidence, however, that the 1990s, much more so than the 1980s, was a decade of greed. For example, American family debt levels soared faster than ever, and the ratio of debt to equity in family homes rose steadily. A robust economy also provided Clinton with one of his main selling points—a claim to have provided budget surpluses resulting from his economic policies.
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In fact, Clinton and Congress could enjoy (and spend) the fruits of a roaring economy provided by Reagan’s policies and numerous other factors over which they had no control at all. Indeed, no genuine “surpluses” existed if one included the Medicare and Social Security trust funds that had long ago been folded into general revenues. But the balanced budgets helped insulate Clinton from attacks on his ethics and character, providing him with the critical flak jacket he needed late in the decade.

Prosperity, undergirded by liberty, continued to act as a magnet to draw people from all over the world to America’s shores. Increasingly, Asian and Indian engineers populated the engineering departments of major American universities; West Indian and Jamaican immigrants carved out thriving restaurant and grocery businesses in Atlantic seaboard cities; and former “boat people” from Vietnam populated the fishing fleet on the Gulf Coast. The success of immigrants changed the look of America, and in the 2000 census individual Americans for the first time could mark their descent from more than one race, creating some fifty-seven new categories of ethnicities.
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As early as 1990, the fastest-growing racial category on a census form was “other,” in part representing a genuine feeling that people saw themselves as multiethnic, but also reflecting the position that one’s race was only one of many determinants of self-identity. Already, multiracial groups composed 8 percent of Hawaii’s population and 10 percent of Oklahoma’s. Although traditionalists worried that such distinctions would open a Pandora’s box of mixed-race claims, in fact it portended the genuine “end of racism” as author Dinesh D’Souza had prophesied almost a decade earlier.
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