January 26, 2004
LIKE A BUTTERFLY, A WILD BUTTERFLY:
By Deficit Obsessed (James K. Glassman, January 22, 2004, Washington Times )
Rubinomics, the prevailing theory in the Clinton years, held that the economy boomed because 1993 tax increases turned the deficit into a surplus, driving down interest rates. In fact, long-term bond rates were 7.3 percent the in 1992 and 8 percent in 1994 after which something quite different may have lowered rates and lifted the stock market: the election of a Republican House. [...]History also refutes Rubinomics. During the Reagan years, debt rose, but interest rates fell. During the Clinton years, debt fell, but interest rates stayed the same. During the Bush years, debt rose, but interest rates fell.
It's not that deficits don't matter just not at these levels, or at any level that's truly feasible. Our government debt, at about 50 percent of GDP, is far lower than that of Europe and Japan. Unless deficits truly get out of hand (and we're far from that), other things, like taxes, matter much more. President Bush said that tax cuts would leave more money in the pockets of Americans, who would spend and invest to lift the economy. That's happened. As the economy gets better, revenues will rise, and the deficit will shrink.
Certainly, all is not rosy. We need to reform Social Security and Medicare to prepare for the retirement of baby boomers. Now, there's an issue for the campaign. But Democrats who want to win in November would do well to ignore Rubin's obsession with the deficit. This time, he's all wet.
Indeed, during the period when we had a budget surplus the Fed raised interest rates repeatedly, suggesting at least a psychic, if not a material, disconnect of debt from interest rates. Posted by Orrin Judd at January 26, 2004 3:47 PM
Rubin takes credit for all the heroics in helping the Mexican and Asian financial crises, but part of the solution was making the dollar stronger - why doesn't he comment on that?
Posted by: jim hamlen at January 26, 2004 3:49 PMI think one of the Fed's concerns was cost-push inflation. If the US unemployment rate goes much below 4%, that means, effectively, full employment. In a country the size of the US, about 3% of the people are moving between jobs at any given moment.
Now whether the Fed was right to worry about companies getting in a bidding war for labor, I don't know. But, if I remember correctly, that was one of the things on their collective mind.
Posted by: Jeff Guinn at January 26, 2004 4:24 PMYes, they were very wrong in thinking that companies had any room to move prices higher just because workers might cost more.
Posted by: oj at January 26, 2004 4:30 PMJeff,
I had heard 5% was the magic number. During the period you mentioned finding qualified help was becoming a major issue, as I remember.
Posted by: Genecis at January 26, 2004 4:33 PMOJ: Nice allusion, by the way.
Posted by: Chris at January 26, 2004 5:21 PMAnother factor was that the soaring stock market created big capital gains which flowed in to the Treasury. When the market busted. The gains went away.
With rates so low why aren't they issuing 30year bonds again?
Posted by: Robert Schwartz at January 27, 2004 1:37 AMThis is the same Glassman that predicted the Dow at 36,000. But hey I don't want to be picky.
Posted by: h-man at January 27, 2004 7:11 AM