Born-Again Rubinomics (Page 3)

The right-of-center tilt of Rubin's group is reflected in some secondary proposals that are sure to rattle Democratic constituencies: Reform education by weakening teacher tenure, linking it to student performance; reform the system for tort litigation to eliminate what Rubin describes as "vast excess today" (his own firm suffered from tort litigation when it had to pay billions to settle investor lawsuits for Citigroup's role in the financial fraud at Enron and other corporate scandals).

The "hard" economic propositions in Rubin's agenda are essentially the same ones he pushed successfully in the Clinton Administration: Balance the budget to boost national savings and thereby (Rubin assumes) reduce the country's horrendous trade deficits and enormous capital borrowing from abroad, where the creditors are led by China and Japan; advance more trade agreements if possible, but don't tamper with the trading rules or international institutions that currently govern the system.

In other words, born-again Rubinomics. Peter Orszag, the young economist who is Hamilton's director, doesn't quarrel with the label, saying, "This is almost like Clintonomics 2.0." Rubin says, "The basic principles of sound economic policy I don't think change." The script sounds a lot like the "putting people first" platform Bill Clinton ran on back in 1992, though in office he abandoned most public investment in favor of deficit reduction. Orszag calls it a "warm-hearted but cool-headed" agenda. But will it work? That's the question I would like to hear debated among Dems before they sign up for more Rubin magic. Clinton's second-term boom did temporarily reverse the downward wage trends, though economists still argue over the cause and effect. But balancing the budget again is unlikely to produce the same results, for lots of reasons. While increasing national savings is a very important goal, the world is now awash in surplus capital. And the United States is in a much deeper hole, borrowing $700 billion a year from abroad to sustain the domestic economy.

More to the point, Rubinomics in the 1990s did not reverse the long-term trend of rising trade deficits in goods and services or the deepening current-account deficits in capital borrowing from abroad, which could bring on a crisis if foreign lenders decide to pull the plug. In fact, both capital and trade deficits exploded at the very moment Clinton's budget was coming into balance. As the budget moved from deficit to surplus, the US current-account deficit nearly tripled, from 1.6 to 4.2 percent of GDP (it is now around 7 percent).

Rubin is sticking to his convictions, though respected conservative economists no longer believe in the "twin deficit" relationship. Studies by the Federal Reserve and the IMF found the relationship too weak to matter much. The IMF estimates that balancing the budget now would reduce the current-account deficit only slightly, while the required fiscal austerity would produce a five-year loss of more than $300 billion in economic output.

Rubin defends his thesis by blaming the rising trade deficit on inflexible currency exchange with China and other Asian nations. Correct that and everything will be fine, he says. Further, he explains that the capital deficits in the Clinton years were actually a good thing because the high-tech investment boom was drawing in more foreign investors. He neglects to mention that the boom included the high-tech stock-market "bubble" that collapsed a year later on George W. Bush's watch, with $6 trillion in losses for investors.

In any case, Rubin sees nothing in the trading system itself that needs fixing. "Maybe I'm missing something," he says, "but I don't think there's anything in the design of the system we would have done differently."

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