December 14, 2003
HARMLESS (via Kevin Whited):
The
Contradictions at the Heart of Rubinomics: a review of In an Uncertain World: Tough Choices from Wall Street to Washington By Robert E. Rubin and Jacob Weisberg (R. Glenn Hubbard, November 18, 2003, Financial Times)
Rubin's argument has two steps. The first is that an increase in the federal budget surplus, credited to Clinton's 1993 tax increase, reduced US real interest rates, affecting investment decisions. There is something to this story: a decline in government borrowing by a large open economy like the US should exert modest downward pressure on the world's real interest rate. The key word is "modest". Calculations by the Clinton Council of Economic Advisers suggest an effect that is an order of magnitude smaller than Rubin argues. But here he asserts that the current real interest rate on 10-year Treasury bonds would be 90 per cent lower without the recent deficits. There is no sign the author questions the plausibility of this outcome.Moreover, as even Rubin acknowledges, surplus-enhancing measures signed by George Bush Sr, a decline in defence spending, and congressional spending restraint played a leading role in deficit reduction. According to 1996 numbers from the Congressional Budget Office, only Dollars 26bn of deficit reduction between 1992 and 1995 was the result of Clinton policies (and even this was after the "stimulus package" and healthcare plan had died in Congress).
More troubling is the second step in Rubin's explanation of the 1990s boom--the effect of interest rates on investment and growth--which exposes internal contradictions in the argument. Investment is importantly affected by the cost of capital, which depends on tax factors, the cost of financing and depreciation. But Rubin dismisses effects of changes in tax rates on behaviour and stresses the effects of interest rates: companies respond if interest rates drop and lower their cost of capital, but they do not respond if taxes drop. This view is unusual, to say the least. Most economic research suggests that both interest rates and taxes should matter, a few papers suggest that neither should, but no analysis documents Rubin's hypothesised asymmetric response. Such is the foundation of Rubinomics.
To the extent that Bill Clinton and his economic team deserve credit for the boom of the '90s that credit largely consists of not screwing up what they were handed. The most important thing they inherited from Reagan/Bush was the post-Cold War peace dividend--a halving of the defense budget that (along with economic growth itself) accounted for nearly the entire shift from deficit to surplus. In this regard, they were lucky that the tax hike they passed was so small as to be overwhelmed by the far more massive megatrends with which they had little to do. Secondly, they had the good sense to buck the Democratic party, signing the two trade agreements initiated by Ronald Reagan and passed by congressional Republicans. Not screwing up is a genuine accomplishment for any government, but the least we should ask for. Posted by Orrin Judd at December 14, 2003 09:57 AM
Clinton's success: a blend of
(a) "Not screwing up what they were handed ..." but
(b) screwing up enough to help elect an emboldened Republican House and Senate who provided adult supervision and handed him his more important victories : NAFTA, welfare reform, AND the the real turning point -- look at the charts -- in long-term interest rates that Rubin so much loves to take credit for.
Posted by: MG at December 14, 2003 10:37 AMRubin was on Tim Russert yesterday warning of higher interest rates and death-spiral deficits. No comment on how economic growth will shrink the deficits, and no comment on how the pressing problems of entitlement spending must be dealt with NOW.
Posted by: jim hamlen at December 14, 2003 12:32 PMAny comment on how the economy tanked as soon as we went into surplus and has come back as we grew deficits?
Posted by: OJ at December 14, 2003 12:37 PMOrrin,
I'm surprised missed the most direct cause of Clinton's economic success. The 1994 Republican sweep. (touched upon by some one above)
I carry around a graph of the stock market from 1960 through 1999-2000. The picture is dramatic. The Republican congressional sweep told the world that something big had changed.
The fact that Clinton got the credit is due in part to the natural effect of Presidents getting credit for what happens on their watch, but also the failure of Republicans to understand PR.
Posted by: Bruno at December 14, 2003 12:46 PMOrrin,
I'm surprised missed the most direct cause of Clinton's economic success. The 1994 Republican sweep. (touched upon by some one above)
I carry around a graph of the stock market from 1960 through 1999-2000. The picture is dramatic. The Republican congressional sweep told the world that something big had changed.
The fact that Clinton got the credit is due in part to the natural effect of Presidents getting credit for what happens on their watch, but also the failure of Republicans to understand PR.
Posted by: at December 14, 2003 12:46 PM"Not screwing up what they were handed ..."
Don't dismiss that out of hand. In a business where inaction is seen as failure, where continuing your predecessors' policies is seen as timidity, the willingness to leave things alone (or the inability to decide which bad policy to implement) should be commended.
"If it ain't broke, you're not tryin'..."
Posted by: Raoul Ortega at December 14, 2003 01:03 PMBruno:
Not certain that's something Clinton gets "credit" for, but you're right about the effects.
Posted by: OJ at December 14, 2003 01:10 PM