Born-Again Rubinomics

Born-Again Rubinomics

Is Former Treasury Secretary Robert Rubin’s new “conceptual framework” of economic reform an acknowledgment of neoliberalism’s failures or simply a repackaged version of Clintonomics?


When Robert Rubin speaks his mind, his thoughts on economic policy are the gold standard for the Democratic Party. The former Treasury Secretary, now executive co-chair of Citigroup, captured the party’s allegiance in the 1990s as principal architect of Bill Clinton’s governing strategy, the conservative approach known as “Rubinomics” (or less often “Clintonomics”). Balancing the budget and aggressively pushing trade liberalization went hard against liberal intentions and the party’s working-class base. But when Clinton’s second term ended in booming prosperity, full employment and rising wages, most Democrats told themselves, Listen to Bob Rubin and good things happen.

So it’s a big deal when Robert Rubin changes the subject and begins to talk about income inequality as “a deeply troubling fact of American economic life” that threatens the trading system, even the stability of “capitalist, democratic society.” More startling, Rubin now freely acknowledges what the American establishment for many years denied or dismissed as inconsequential–globalization’s role in generating the thirty-year stagnation of US wages, squeezing middle-class families and below, while directing income growth mainly to the upper brackets. A lot of Americans already knew this. Critics of “free trade” have been saying as much for years. But when Bob Rubin says it, his words can move politicians, if not financial markets.

Rubin has launched the Hamilton Project, a policy group of like-minded economists and financiers who are developing ameliorative measures to aid the threatened workforce and, he hopes, to create a broader political constituency that will defend the trading system against popular backlash. A strategy paper Rubin co-wrote defines the core problem: “Prosperity has neither trickled down nor rippled outward. Between 1973 and 2003, real GDP per capita in the United States increased 73 percent, while real median hourly compensation rose only 13 percent.”

Astorm is coming, Rubin fears. He wants a new national debate around these facts. In an interview, he explains the danger he foresees for global trade: “Where there’s a great deal of insecurity, where median real wages are, roughly speaking, stagnant…where a recent Pew poll showed 55 percent of the American people think their kids will be worse off than they are, I think there is a real danger of heightened difficulty around issues that are already difficult, like trade…. Look at the difficulty around immigration.”

Princeton economist Alan Blinder, a Hamilton participant and Federal Reserve vice chair in the Clinton years, describes the “difficulty” in more ominous terms: “I think the prospects for the liberal trade order are not great,” he says. “There’s a whole class of people who are smart, well educated and articulate, and politically involved who will not just sit there and take it” when their jobs are moved offshore. He thinks CNN commentator Lou Dobbs, who has built a populist following by attacking globalization and immigration, “is just the beginning–nothing compared to what’s going to happen in the future.”

What should we make of Rubin’s heightened concern for the “losers” who, he now recognizes, include a vast portion of the populace? Many view the Hamilton Project as just more talk-talk. I regard it as an important event–a “course correction” in elite thinking that, given Rubin’s influence, may reshape the familiar trade debate, at least among Democrats. Rubin’s central objective, however, is to control the terms of debate: to address the economic disparities globalization has generated but without disturbing anything fundamental in the global system itself.

His program consists mostly of familiar ideas that might soften the pain for displaced workers. But I doubt the Hamilton proposals will do much, if anything, to reduce the global forces that are depressing incomes for half or more of the American workforce. Even Rubin is uncertain. When I ask if his agenda will have any effect at all on the global convergence of wages–the top falling gradually toward the rising bottom–he says: “Well, I think that’s a question to which nobody knows the answer. I think the proposals and approach we are proposing are the way to get the best possible outcome for the United States in a complicated world…. But whether that’s going to stop the global convergence of wages, I don’t know the answer to that. I would guess the answer is no.”

Despite my skepticism about his policy ideas, I think Rubin is providing a significant opening for the opposition–a new chance for labor-liberal reformers to make themselves heard with a more fundamental critique of globalization. Up to now, the standard trade debate has been utterly simple-minded–“free trade good, no trade bad”–and anyone who opposes trade agreements or WTO rules is dismissed as a backward “protectionist.” The enlightened position, as major media always explain, is to support the “win-win” promise of globalization.

Only Rubin is departing a bit from that script, effectively accepting the opposition’s central complaint that “win-win” is a cruel distortion of what’s happening. If so many Americans are actually losing ground, Rubin asks, shouldn’t government do something about that? Yes, certainly, but that admission invites a different question: Are his establishment proposals actually likely to improve the American condition, or does the wage deterioration require more aggressive reforms?

Ideas do matter. My hope for more complex and honest debate may sound too wishful, but I was struck in our lengthy interview by Rubin’s willingness to discuss contrary propositions, and by his disarmingly self-effacing and reflective manner (the transcript is posted at Several times, I was taken aback when his comments made tentative concessions to the opposition’s argument. He even endorsed, though only in broad principle, some objectives for reforming global trade that his critics have long advocated.

I suggest that reformers test his sincerity. In the same spirit, they might try to initiate a conversation about what Rubin calls the “conceptual framework” for reform. He says he would welcome the discussion.

The Hamilton Project’s early policy output, I concede, doesn’t encourage a belief that reasoned dialogue with dissenters is what Rubin has in mind. Advisory board members see themselves as progressive-minded, but they do not stray from the mainstream’s conventional wisdom–lots of Harvard, Princeton and Berkeley, no one from the ranks of “free trade” skeptics. The twenty-five-member board includes thirteen investment bankers, venture capitalists and hedge-fund managers from Wall Street and the West Coast–guys who, like Rubin, do the investment deals at home and abroad.

There’s already a warm political glow. At the Hamilton launch in April, Senator Barack Obama hailed the group as “some of the most innovative, thoughtful policy-makers…the sort of breath of fresh air that I think this town needs.” Senator Hillary Clinton’s recent economic speeches are, not surprisingly, a good fit with Rubin’s thinking, since the pair’s political closeness is well-known. Washington’s Clintonistas-in-waiting embrace and amplify Rubin’s ideas. He helps them arrange financing for new projects, like John Podesta’s Center for American Progress. Democratic candidates seeking Wall Street campaign money hope for Rubin’s blessing, a seal of approval that can open checkbooks.

The “soft” ideas in the Hamilton Project playbook are mostly old ideas–improve education and retraining, provide “wage insurance” payments to dislocated workers, increase public investment in industrial development and infrastructure. All are worthy things to do, but they seem like tinkering around the edges. Ron Blackwell, chief economist of the AFL-CIO, observes, “What they’ve got going are these little ideas that sound like they are forward-looking and respond to the problem of living standards, but they don’t speak to power.”

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.”

Another debatable tenet in Rubin’s thinking is the familiar mantra that more education will save us in the long run–that is, improving Americans’ skills and knowledge will offset the low-wage competition. Rubin’s tone is sympathetic to workers, but some acolytes pushing this logic sound like they are “blaming the victim.” US educational attainment levels, after all, rose robustly during the last generation with no effect on job losses or wage stagnation. “I actually think education is key,” Rubin insists. “I’m granting I think your point is right–the cost gap,” the cheaper labor abroad, which may pull down US wages for another generation. But to some extent, he says, “the cost gap will, over time actually, probably get partially solved by their increasing wages [in China and India], hopefully with as little as possible our wages coming down…. The more productive we are, the better we can compete with them.”

There’s one large and looming problem with that logic: The number of “losers” whose jobs are outsourced to foreign labor markets is getting much larger than the establishment had envisioned, and the job losses are creeping up the income ladder to undermine people in well-educated, highly paid occupations. In a startling Foreign Affairs essay, Alan Blinder warned that “tens of millions” of job losses are ahead from outsourcing, not for the already decimated blue-collar workers in manufacturing but for accountants, software designers and other high-status professions. These are people who presumably did the “right thing” by getting advanced educations. How, I ask Blinder, does educational improvement help them, since they are already well educated? “I wish I knew the answer to that,” Blinder replies. “On balance, more education is better than less education, but it’s not a panacea.” He talks vaguely of changing the style of American schooling.

Blinder’s ominous forecast for high-skilled jobs is another belated recognition by establishment authorities that they were wrong, since the process of moving engineering work to Asia, where they could hire cheaper engineers, started two decades ago. Free-trade advocates like Blinder are complacent about the loss of manufacturing jobs, comparing it to the technological changes that wiped out agricultural employment a century ago. “It’s pretty inevitable,” he says. They seem more worried now that white-collar jobs are being wiped out. But they think it would be a big mistake to interfere. “It’s like global warming,” he explains. “If there is severe global warming, you may have to change the preparations for bad weather.” But Blinder’s “global warming” metaphor actually expresses the viewpoint of the other side. Like global warming, the trading system is not an act of nature. It is a set of man-made rules–protecting capital and ignoring labor. Finance and industry persuaded government to adopt these terms. But they can be altered, just as government can order industry to reform itself to curb the dangers of global warming. That difference–deference to the status quo versus a vision for reform–is the nut of the argument between the two sides.

When I asked Rubin to consider labor’s critique and its argument for global labor standards, I was pleasantly surprised that he did not brush off the question. Instead, we had an engaging back and forth.

Without global rights for workers to organize and some version of a minimum wage pegged to each country’s economic conditions, the “race to the bottom” is sure to continue, I suggest. When workers start mobilizing for higher wages, multinationals counter by moving production to the next available cheap labor market. Middle-class wages fall at the top, but the bottom does not rise as rapidly as it should. “But it’s a complicated question,” Rubin responds. Improving the distribution of incomes in poorer countries “is in everybody’s interest,” he agrees. “On the other hand, I’ve had exposure to people who make that argument, and I think they make it as a way to prevent trade liberalization…. The one hope some of these countries have to take people out of abject poverty is that their labor-cost advantage will result in a shift of production to their countries…. Would you say the people of Sri Lanka have to stay in abject poverty to keep that from happening?”

Labor rights, I counter, do not prevent the very poorest countries from developing on the advantage of their cheap labor, but reform would require all developing countries to operate so that wage levels can rise proportionate to the economy’s rising productivity and profit, however that is measured. “Something like that ought to be an objective of the global system,” Rubin agrees. But he says he has never seen a convincing model of how this might work. He remains skeptical. He admits it is disturbing that economic advances in some countries “still have had very little effect on the poverty rate, and middle-income people haven’t done all that well either. So the political economic elites had all this economic benefit, and they were indifferent to poverty, to the poor.”

The global system, I point out, protects capital by imposing dense rules on how a developing nation must treat investment capital, banking, patents and intellectual property rights. If a poor country doesn’t accept the rules for capital, it doesn’t get to play in the global system. Yet when organized labor seeks basic rights for working people around the world to organize unions and bargain collectively, they are denounced as “protectionist” and denied any recognition. Is that fair? “Well, I guess it’s true,” Rubin says hesitantly. “You can say, Why distinguish between those [rules for capital] and labor conditions?” Perhaps it is justified, he says, because labor and especially environmental rights are “a bit further removed” from trade. “I think it’s the right objective,” Rubin says. “But I still think it’s a very complicated question whether you put labor conditions in an agreement. I would not hold back from going ahead on a trade agreement because another country refused to accept labor standards.”

To my surprise, Rubin next recalls the work of John Kenneth Galbraith and his famous concept of “countervailing powers.” Market-based capitalism, Rubin explains, is kept stable, broadly prosperous and equitable because its excesses are checked by labor unions, government and other institutions with countervailing power. “If you have a big company negotiate with its workers and the workers aren’t organized, it isn’t real negotiations,” he says, adding, “If one side has no negotiating power, that isn’t really a market-based system. It’s an imposition of one on the other.” This is a startling statement: The man from Citigroup has articulated the essential reasoning that makes the case for including labor rights in the global trading system.

That conversation has convinced me that outgunned reformers ought to make use of Rubin’s musings. Knock on his door and try to initiate a dialogue. If the critics come forward and offer their ideas on a “conceptual framework” for reform, I ask, would the Hamilton Project be willing to discuss them? Rubin reiterates his doubts and reservations. “But the answer is yes,” he says. “The answer is absolutely yes.” Skeptical friends and kindred spirits will probably say to me, You have been conned. I would say back to them, What have you got to lose by talking to the man?

The Hamilton Project is a sophisticated example of what I call “deep lobbying”–developing well in advance of the 2008 presidential election an agenda that safely avoids critical challenges to the global system and defines the terms of debate in very limiting ways. Democratic hopefuls who sign on can gain the cover of Rubin’s respectability. Long before voters even know who the candidates are, the party’s debate might be over before it begins. Given this prospect for premature consensus, it might be a good idea to start the debate right now.

In some ways, Robert Rubin reminds me of the original Progressives of the early twentieth century, reformers drawn from the emerging middle class of managerial and professional people. They tried in various ways to reconcile the tumultuous conflicts between capital and labor but without getting blood on their hands. They were horrified by the greed and inhumanity of industrial capitalism but also wished to keep their distance from Socialists and the struggling labor movement.

Rubin is a “nice guy”–even adversaries say so–and I suspect he feels similar tensions. He sincerely would like to work things out–find some kind of reasonable balance–but without interrupting the creative destruction under way in the global system. The big difference separating him from the Progressives is that Rubin and his investment-banking colleagues are men of capital. At Goldman Sachs, Rubin was doing major deals in Mexico before he came to Washington to push NAFTA and balanced budgets. At Citigroup he travels to Beijing and Shanghai, promoting client interests. I don’t question his sincerity. But as a reformer, he has competing demands on his loyalty.

My hunch is that Rubin won’t succeed any more than the original Progressives in reconciling the competing forces (the New Deal eventually did). The tumult most likely will grow louder and possibly violent before reformers gain the political power to accomplish their serious goals. Meanwhile, if popular anger does erupt here and around the world, there won’t be much space left for “nice guys” seeking a reasonable discussion.

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