A Conversation With Robert Rubin

A Conversation With Robert Rubin

The former Treasury Secretary speaks candidly on the inherent inequities of globalization and the political, social and economic challenges that lie ahead.


Here are highlights from a June 26, 2006, conversation between former Treasury Secretary Robert Rubin and The Nation‘s National Affairs Correspondent, William Greider.

William Greider:

The most striking thing to me as someone who’s covered this debate for many years is your very direct and frank declaration of the problem of the inequalities that are accumulating and the political portents. I want to ask why you’re saying this now because, in general, the establishment has always more less denied these linkages with globalization.

Robert Rubin:

Well, I can only give you my personal answer. I can’t speak for anyone else. When President Clinton got elected, we had had a few years that were difficult…unemployment over 7 percent. The whole focus was on growth. Then you got further into the ’90s and growth looked like it had taken hold. Then in the last five years of the decade, the median wage started going up.

I actually don’t know what happened to inequality, but poverty was going down and incomes were going up. So it wasn’t like the ’80s, when the affluent were doing very well but most middle-income people had roughly stagnant incomes…although there were people like Bob Reich who thought there should be more focus on distributional issues. Bob and I used to have a discussion–if you could trade off some part of growth to have some better distribution, would you do that? I always said I wouldn’t, because I figured you want to get maximum growth and then try to figure out how to get the distribution. Bob used to feel–and look, it was a reasonable position, it wasn’t where I was–that if you have somewhat less growth and better distribution, that was a better place to be.

Did you change your mind about that?

No, because I still think that once you get the better growth, you can figure out the other part, the distribution. I still think I’d get the most pie I could and then figure how to get the distribution that results in everybody getting it–broad participation in it instead of the very limited participation we’ve had.

Now, what our project says, which is a next step in the discussion and which I have actually thought for a while but I don’t think I’ve articulated, is that these are actually consistent, reinforcing objectives. There are two parts of that, aren’t there? The measures that promote productivity promote growth and also promote broad participation in growth. Then take that one step further. Promoting broad participation in growth actually then feeds back into greater growth for two reasons, for it better equips people to get the education and healthcare and all the things that contribute to productivity. And also because it’s also the only way over time that you’re likely to have broad-based public support and therefore political support for trade, market-based economics and the rest.

But there was this pattern–except for this window in the last half of the 90s, when things began to line up again–that greater productivity doesn’t get distributed in growth too broadly. That’s why the inequality–wages don’t keep up with productivity…

Except for those years, you are correct. My recollection is, if you take the last thirty years, roughly speaking, that for twenty-five of them, real median wages have been stagnant despite rising GDP growth.

I don’t want to belabor it, but coming from someone of your influence and status, this is fairly new. I’ve covered this fairly closely and I regard it as significant for that reason.

As long as I was in Wall Street and I was very involved with markets and economics and from that perspective, I wasn’t much involved with that [inequality] from a policy point of view. I only started dealing with these distributional issues once I was involved in a policy type of job. For me at least, that only became part of my perspective once I got down to Washington….

I think another thing that changed, and I give President Clinton a lot of credit for this, is that people used to think of distributional issues in terms of transfer payments…. What President Clinton said is it’s not a transfer-payment kind of issue. I think he used the phrase “empowering people.” It’s investing in education, healthcare, infrastructure or whatever it takes to enable people to be more productive economically. Then you have your transfer payments for people who for whatever reason can’t function effectively in the mainstream economy….

But I think you’re right. Look, I do a lot of public speaking and, since I left Treasury, I’ve never charged anyone one nickel for public speaking. I’ve made that my rule since I left Treasury. And I most often in my remarks say that we have to focus not only on growth but on distribution. It’s not something people tend to hear. So I think you’re right about that.

In the aftermath of the ’90s and continuing today, is the outcome of the trading system quite different from what you and other members of the Clinton Administration expected…? We wound up not just with a trade deficit with Mexico and the job effects of that, but the trade deficits with China are huge and ballooning.

Well, I mean, certainly people didn’t think we were going to have the kind of deficits we’ve had…. I don’t think the deficits are quite the point because, after all, probably to a large extent, exchange rates wouldn’t be where they are if you had had flexible exchange rates all along the way. I mean the renmimbi and the dollar and not only the RMB but Asian exchange rates in general. You know, Asian countries don’t want to get too far away from the RMB for obvious reasons. It’s really a competitive system…. What’s happened is not a function of something to do with the nature of trade.

Yeah, but that was all known before the trade agreement with China.

No. Well, maybe. But I don’t think people thought–I’ll speak for myself–I surely never thought, if you have the kinds of imbalances you have today, you’d have the kinds of exchange rates we have today, that exchange rates would have substantial adjustments. To put it differently, I never thought in the face of very substantial trade imbalances, you would have inflexible exchange rates. I don’t think that was part of anybody’s anticipation. Another thing I don’t think anyone anticipated, though it’s a related thing, is that you would have these very large influxes of capital, which is what’s happening in this decade–it didn’t happen in the ’90s–that were designed to support the dollar in order to subsidize exports [from China and other Asian nations].

So all of that has occurred. I don’t think I expected the exchange rate system to work that way–I don’t think anybody did. If they did, I never heard anybody say it.

Well, leave aside what people thought…. We’ve now got a situation that you yourself describe as quite serious in both trade and current-account deficits.


Does that suggest something else should have happened in the design running up to the current situation?

I don’t think that’s a design issue. I don’t think that’s actually a trade issue. I think it’s a foreign exchange issue…. If you had had fully flexible exchange rates. Though I’m not advocating, by the way, that China go to that immediately because I think it might create a lot of chaos…. But I don’t think it’s anything in the design in the system. Maybe I’m missing something, but I don’t think there’s anything in the design of the system we would have done differently….

I don’t think it’s the trade deficits that are the issue. Yeah, it’s a big issue and it’s got to be remedied over time. But if we had higher savings rate, we’d have a lower trade deficit. But, of course, nobody in our term thought we would go back from substantial [federal budget] surpluses to substantial deficits. Nor should we have. Nor do we have to.

Were you surprised when the trade deficits took off and were ballooning at the very moment the Clinton Administration succeeded in achieving virtually balance in the federal budget, which is contradictory to what you and others have assumed?

Well. I think you have two different kinds of situations. You have trade deficits and the dollar exchange rates in the late ’90s that were driven by very large influxes of capital that was actually going into investment in our country. It wasn’t going to support fiscal deficits because you didn’t have fiscal deficits. It was going to sustain a pretty high investment rate and that actually can work out pretty well over time. The problem is when you have large inflows of capital to support either fiscal deficits or consumption, both of which we have now.

Right, but you spent eight rather tough years getting the budget deficit down to zero, then went into surplus. But the very moment those things were happening, the trade deficit itself expands ferociously. That’s got nothing to do with any structural problems in the trading system? It doesn’t refute your assumption that a balanced budget reduces the trade deficit?

No, because the trade deficit, by definition, is going to be the fiscal position, which as you say went to balance or actually surplus, plus investment, which got to be very high, minus your savings rate. So what we had was a fiscal surplus toward the end, very high levels of investment, which is good, and we had very low levels of personal savings. And all that worked because we had a lot of foreign investors who were investing in our economy because they thought they’d get better returns there. That’s very different from the inflows of capital that have occurred during this decade.

It left you with large trade deficits but those you could work out of through subsequent currency adjustments and by virtue of the heavy levels of investment we had in the late ’90s we had very rapid growth in productivity which was good.

You don’t attribute any of the trade deficits ballooning to the behavior of our trading partners or the industrial condition of the United States versus China or versus Japan, versus Europe? This is the essential difference, I think, in the way some of us look at it from the way you and others look at it. All those things [like currency differences or savings] are present and functioning factors, but underneath all that are different industrial policies and approaches by all these different countries and the United States is distinctively, even uniquely, vulnerable to the trade deficits because of our policies.

Well, you say vulnerable to the [trade] deficits. Our policies have resulted in having very good GDP growth for a long period of time and very low unemployment. In Europe today, you have unemployment give or take 10 percent. You have very low levels of growth. They’re cheering in Germany this year because they think they can grow 1.8 percent. We would consider growth that’s 1.8 percent as calamitous.

So, no, I think the evidence suggests our theory of the case is a pretty good case. But, right, it has a lot of problems associated with it. And there’s one problem you haven’t even discussed yet….

Which is?

That it-all-falls-in argument.

That is what I’m discussing actually. I’m coming from a different starting point, as you know, but that essentially is what my question is about. Is it possible that, given the differences and different strategies and policies of different countries, that an advanced and very effective country such as ours can become a loser in this situation? You noted that in your speeches. I was taken by that.

Well, I didn’t say “loser.” What I said is what [economist Paul] Samuelson said, which is a very different comment…. What Samuelson said, as I understand it, is what I by myself intuitively felt before I even read his article…. What he basically said was that trade creates a certain amount of incremental economic benefit–let’s call it GDP–and that gets divided amongst trading partners, and how it gets divided depends on their relative cost advantages and disadvantages. So what he’s saying is that China and India, having absolute cost advantages versus us in virtually everything they do that’s tradable, the benefits of trade are going to get redivided so that–I’m just making up the numbers–maybe instead of we get 80 percent of the benefits and they get 20, we each get 50 or they get 60 and we get 40. I don’t know.

Then he wrote a letter afterwards because a lot of people who are opposed to trade liberalization said Samuelson says we’re right. He says, no, you’re still better off with trade than without it. But your national income actually goes down because the benefits are redivided. In other words, you started with a GDP of 50 and then you add 20 points of additional because that’s your share of total benefit of trade. That may now be reduced to 15 because the other guys now get that additional 5, so you actually could have lower GDP than you had before and you’re still better off with trade than without.

Next question is about the global convergence of wages…that’s been under way for quite a long time. Americans, again, have been peculiarly vulnerable, working class and above. I read the Hamilton Project’s policy proposals, and I have a hard time understanding how any of those will have much, if any, impact on that downward, depressing trend for US wages.

Well, let’s say you put up big trade walls, that makes things much worse. I mean, the people who buy cheaper consumer goods won’t be able to get them. The manufacturers who get cheaper inputs won’t be able to get them to compete with other countries.

But back to the question: Can those proposals themselves have much, if any, effect on the forces that are now at work on wages?

Well, I think that’s a question to which nobody knows the answer. I think those proposals and the approach we are proposing are the way to get the best possible outcome for the United States in a complicated world. I think, in my judgment, that’s the honest answer to that question.

But whether that’s going to stop the global convergence of wages, I don’t know the answer to that. I would guess that the answer to that question is no…. This stuff is really interesting. Unfortunately, almost nobody in the press asks this stuff–no, I’m serious–or tries to do it in a thoughtful way. So there’s almost no public understanding of any of this stuff.

The question is: Will convergence happen because their wages go up or because our wages go down?

That leads right to my next question. I’m asking, as you must know, from the critics’ camp. If you go to the core of what reasonable, intelligent, rational people are trying to say from the labor-left-environmental camp, it goes like this: The world’s global trading system needs labor standards and worker rights and some mechanism that requires the poorer developing countries to build a rising wage standard in their economy–a minimum wage relative to their prosperity or poverty–so you won’t wind up with an endless convergence, in which the top comes down from middle-income wages in advanced countries and the bottom doesn’t rise as fast as it might. Because the world is huge and full of poor people and producers, multinationals and otherwise can constantly, continuously move their production to the next cheaper country.

Labor would say: If you are not going to stop the process of convergence, you are at least going to moderate it. Because you’ve forced rising wages at the bottom, you have some chance of not completely decimating high-wage, blue-collar labor in America or elsewhere.

Well, I guess there are two pieces to that. If you are saying what you want to do is improve the distribution of income in low-income trading countries and that will have advantage to everybody concerned, low-income countries and to us, I think that is in everybody’s interest. On the other hand, I’ve had exposure to people who make that argument and I think make it as a way to prevent trade liberalization…. But it is a complicated question. The one hope that 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 from the place that it’s now taking place and, if you require them not to take advantage of their labor-cost advantage, then you really have condemned them to poverty. It’s not so simple, I think.

What we have now in many parts of the world is manufacturers, multinational and domestic, moving their production to the next country. You go from Thailand to Shri Lanka or Cambodia because the textile workers in Thailand are organized and demanding higher wages. Our side would say that way is the “race to the bottom” for everybody, both for the workers in Thailand and for workers in advanced countries.

Well, yeah, but what makes it complicated is that it may be the only way for the people in Sri Lanka to get out of abject poverty. Now, having said that, you do want to wind up with a system where the benefits of economic activity are being divided up in some reasonable fashion. If you look at the situation in some developing countries today, that’s not the case.

But you do see the dynamic in the mobility of capital? They keep putting labor at new disadvantages.

Yeah, I think that’s right. But then the question is, would you say the people of Sri Lanka have to stay in abject poverty to keep that from happening? Or would you say: This a very legitimate issue that should be addressed in one fashion or another and, when Sri Lanka comes to benefit from this, the benefits should be divided up in some reasonable fashion between the employers and the employees?

That would be one way to make such a standard. To say: We want people to produce everywhere, including the very poorest countries, but they have to have some system within that country where wages rise proportionate to rising productivity and profit or whatever measure you use.

Something like that ought to be an objective of the global system. You know in some countries, I think that actually has worked pretty well. I mean, China and India have terrible poverty problems, but it’s also true their political systems are at least trying to address them.

I would argue some other countries I can think of, and I won’t mention names, but there are significant emerging markets where you’ve had a fair bit of growth…and you 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 the poverty, to the poor. Can I go off the record? [names a country where elites notoriously ignore the poor]

Boy, I’d like to put that on the record.

I bet you would.

But go back to what you said–“something like this ought to be the objective of the global system.”

Yeah, how you accomplish that, I don’t know.

The other side–labor and other liberals–would acknowledge that it has the potential just to be a simple protectionist measure but, if it’s done with genuine objective so that both ends of the system benefit, that is, workers, it is not beyond devising some set of rules. Would you be for that at least in principle?

I think it’s the right objective. But how you get there–I guess that’s one of the things that troubles me…. But I think the conception seems sort of right to me. So, conceptually, the answer is I think I would be. On the other hand, the problem is the people who try to design those rules always seem to be doing it in a way that stops trade liberalization rather than for the objective I just mentioned. Maybe that’s unfair, but it’s certainly struck me that way.

The critics of NAFTA, WTO and many subsequent trade agreements would say the global trading system by its design and not by coincidence favors capital over labor. It does so by allowing virtually no protections for labor. But the trade agreements are thick with very concrete investment and banking and economic management rules, many of which were designed by bankers, financiers, capital interests. Nobody says those are “protectionist” because the rules don’t shut down trade, but they do shut down investment. If the country doesn’t accept those rules, it doesn’t get to play. Is that fair?

Well, I guess it’s true. It’s the same thing with intellectual property rights. And you can say, why distinguish between those and labor conditions? I guess I would say these more directly go to the question of trade and economic activity and the labor conditions, the environmental rules even more, go to something that’s a little bit further removed. So to me there’s always been that distinction. But it is true that they’re both conditions and, if you don’t accept them, then you don’t get to play, as you put it.

Just to go back to the labor thing for a moment. I tend to think that what I said before is kind of what the system should look like. 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. If we were going to have a bilateral agreement with India and they refused labor standards, I still very much want to do the agreement.

On the other hand, I also think that everybody’s better off if you have a system where there’s some reasonable sharing of the benefits of economic activity, leaving aside the question of how do you define “reasonable.”

Here’s the basic problem, I think. I’d like it all to be market-based. But [John Kenneth] Galbraith wrote the book fifty years ago with that famous quote–“countervailing powers”–where he basically said, as I recollect, that if you have a big company negotiate with its workers and the workers aren’t organized, it isn’t real negotiations. Didn’t he say something like that?

If you believe in a market-based system, the system is a negotiation between two people who can really negotiate with each other. If one side has no negotiating power, that isn’t really a market-based system. Its an imposition of one on the other.

But that’s a breakthrough point for you to make.

What point?

The point being that the market-based system requires negotiating power and if one side doesn’t have that power, which is generally though not always the case in the global system, then there’s something wrong with the system.

Well, I think that’s right. I am not a labor lawyer. Look, I don’t want to push that. It’s kind of a tentative thought. I want to be sure what I have said because it is tentative.

I’m not going to make more of it than intended. Those words from you–tenative as they may be–are very important, given the evasions and denials we have had in this debate for so many years. Let’s have a discussion of that, as you say. And it’s very hard to do.

As a conceptual question, the discussion that is needed simply isn’t taking place. The labor unions start out in a very hard-nosed position in one place. A lot of trade people talk a very hard position in another place. No one ever wants to step back and discuss it. That’s my impression right now.

If someone came to the Hamilton Project and said, “I want you to pursue this question, I want to participate, I have some ideas,” would you be open to that?

Oh, yeah. In fact, we’ve talked a lot about that. The answer is 100 percent yes. The trouble is, the only people who come to us are either “Trade is great, let’s not work on anything else” or they come in and say, “We need to have labor and environmental conditions and trade is undermining workers and let’s not talk about anything else.” If we say it’s much more complicated, the way you and I just discussed, people don’t want to discuss that. But the answer is yes, the answer is absolutely yes.

On the Hamilton Project, your critics are already saying that when you take the basic agenda you’ve laid out, this is kind of “Rubinomics” all over again.

Well. [Laughs] You mean the Clinton economic agenda?


Well, the Clinton economic agenda, if you think about what it was, it was fiscal discipline, it was investing in people, having a healthcare system that works, an energy policy that works. And it was trade liberalization, foreign aid, deal with crisis, kind of a national agenda. I think that myself is a pretty good framework. The basic principles of sound economic policy I don’t think change. Now what has changed are the circumstances so you have to adjust your policy to deal with the circumstances.

On education, one of the big ideas. How can that have much, if any, impact on the condition of middle-income wage earners and what’s been happening to them in the context of Alan Blinder’s Foreign Affairs article, where he’s saying there are going to be “tens of millions” of well-educated workers and employees in the United States–skillful people, engineers, accountants, etc.–who are going to get rolled up in the years ahead by these forces?

Because I think, in the first place, there are no perfect answers to these problems and I think we are in a very unusual circumstance right now. But to your specific question, as growth goes on in China and India and the rest, wages will go up and, if the exchange rate adjusts as it certainly should, then their cost advantage is going to shrink. So the question is: How productive will our people be? And the more productive our people are, our engineers, our software people and every other kind of people, the larger piece of that pie we talked about before, we’ll be able to get.

So I actually think education is key. I’m granting, I think your point is right–in other words, the cost gap. But to some extent the cost gap, well, over time actually, will probably get partially solved by their increasing wages, hopefully as little as possible our wages coming down. Maybe they won’t come down at all, who knows. Let’s leave that aside just for the moment. The more productive we are, the better we can compete with them, the better piece of that pie we should be able to get.

How dangerous is the potential political climate if something doesn’t change in globalization?

As President Clinton used to say, and I think he was right, if you believe in market-based economics, believe in trade liberalization, you should powerfully support a domestic agenda that grows productivity and helps people who get dislocated in the domestic economy because, if the preponderance of people don’t benefit from those kinds of policies, that greatly reduces the chances they are going to support them. If they don’t support them, that greatly reduces the chance we are going to have political support for them….

How about the Democratic Party? I know this is not a partisan operation per se, but you will certainly have your strongest influence there. Yet you are proposing to reform teacher tenure, tort reform, entitlement reform.

[Rubin laughs.] Well, nobody said life was easy. Look, I don’t have a good answer for that. These are all very difficult issues, they’re difficult substantively and difficult politically. There’s no question about that. But I think we need to address them.

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