Before Democrats can begin to reverse a generation of laissez-faire policy dominance that has put corporations and CEOs ahead of working families, they must debunk Rubinomics, which makes the budget deficit the central focus of economic policy. This focus rests on faulty economics and stands to lock Democrats into confused policy messaging and a path of fiscal austerity that leaves no room for spending on infrastructure, alternative energy or education, among other needs.
The central proposition of Rubinomics–named after former Treasury Secretary Robert Rubin, who shaped economic policy under President Clinton–is that budget deficits reduce saving and increase interest rates, thereby reducing investment and lowering future living standards. However, the record shows that interest rates have fallen to historic lows over the past several years, a time of large deficits, which fits the common-sense observation that the Federal Reserve largely determines interest rates contingent on economic conditions. Meanwhile, a flood of savings has poured into financial markets from wealthy individuals and pension funds.
Nor does the “twin deficit” argument–that budget deficits cause trade deficits–make sense, as evidenced by the fact that in the late 1990s the United States ran record trade deficits as the budget moved into record surplus. Rather, the trade deficit is due to undervalued foreign currencies and export-led growth strategies by many countries that look to grow by selling to the United States while restricting purchases of American-made goods.
Despite these logical failings, Rubinomics still has great appeal because Rubin’s tenure as Treasury Secretary coincided with the 1990s boom. That appeal is misplaced. The rooster crows at dawn but does not cause the sunrise. Rubin was Treasury Secretary during the boom, but budget surpluses did not cause it.
The political origins of Rubinomics can be traced back to the 1970s, when conservative charges about big government and “tax and spend” liberals took deep hold on America’s political consciousness. Throughout the 1980s Democrats struggled to respond, eventually settling in the 1990s on a strategy of “fiscal responsibility.” That strategy was always transitional and defensive, aimed at blunting Republicans’ relentless attack on government and plutocratic tax cuts. The long-term goal was always an alternative narrative to free-market mythology.
The tragedy is that once a myth takes hold, it must be lived out to be disproved. That is the price paid for losing the war of ideas. This process has now worked itself out, and America is finally grasping the fallacies of market fundamentalism. That creates a historic opportunity, but Rubinomics risks a tragic second act. Rubinomics worked brilliantly as a political strategy in the 1990s. But its success was political, not economic. However, its supporters have lost sight of this and now credit it with causing the late-’90s boom. Consequently, they argue for sticking with Rubinomics, thereby missing the opportunity created by the dismal failure of Bush’s presidency.