Monday, December 1, 2008

Rubinomics Revisited and Rejected

There seems to be a lot of ideological, philosophical and institutional confusion going on at the moment as the new President is awaiting inauguration amidst an economic crisis. That may not be so surprising, considering the simultaneous seismic shifts in Washington and Wall Street, but if early indications are any guide, change and renewal seem to have been replaced by old patterns of behavior. The economic lessons of the 90s are seemingly being remembered, but rejected in favor of the attempts of the 70s. Both of these decades offered seriously misguided economic policies in this country, and those policies should not be recycled; they should be remembered and amended.

Robert Rubin was Bill Clinton’s Treasury Secretary, and he became famous for an economic formula, Rubinomics, that advocated the following:

1. Balanced budgets

2. Free trade

3. Deregulation

This formula was used by a number of governments, with significant variations, in the 90s, such as Great Britain, Germany and Sweden, in addition to the United States. The formula has often been seen as one that set the stage for sustained economic growth. It is not an easy formula to implement, because it is often unpopular with voters because of the spending restraint it requires. Germany’s Gerhard Schröder lost his position as Chancellor as a result of pushing for ever more reforms and spending cuts. The way that economic policies in the West manifested themselves in the 90s, whether the policies were directly responsible or not, was generally through: lower prices of goods, greater access to credit and lower government spending.

Obama has recently appointed, for the most important economic posts, three disciples of Robert Rubin, namely: Timothy Geithner, Peter Orszag and Lawrence Summers. The President is, after all, the policy maker, but these appointments nevertheless clearly make Rubinomics the most prominent current in terms of economic philosophy in the coming Obama administration.

However, the three goals that I mentioned above do not seem to correlate very well at all with Obama’s campaign issues with respect to economic policies, and even less so in light of recent statements and the evolution of ideas among commentators close to Obama. A renewed, composite view of what I believe to be Obama’s economic policies at the present time looks something like this:

1. Budget deficits (as a result of a much higher amount of government spending to stimulate the economy)

2. Less free trade (as a result of re-negotiations of free trade treaties, energy policies, new focus on domestic production, and more)

3. More regulation (which most people realize the United States needs like the desert needs the rain)

A lot of prominent economists, such as Paul Krugman, are currently calling for the government to run budget deficits and spend its way out of the crisis. The problem of the deficit can simply be dealt with later, it is felt. In a recent New York Times piece, Krugman describes these deficits as something completely benign, and money that “we owe ourselves”. He’s right about the last part, but is that so benign? No it is not, and at the current pace of incurring government debt, this almost amounts to the government taking out a sub prime mortgage. In the end, all the government can pay for, in this situation, is amortizations on its debts. It’s a simple question of plus and minus.

I believe that there are some important lessons to be learned from Rubinomics, and the most important one being fiscal restraint. Whether you’re left or right, everyone knows deep down that you can’t actually have the cake and eat it too (otherwise you really don’t understand the issue). Both the political left and right tend to run budget deficits to please voters. If you want real, lasting political change, or if you want any kind of coherent and long-lasting strategy for the future, the answer is not to shackle the country’s future to mortgage payments that will inhibit spending everywhere else. With large budget deficits, the government becomes cash poor, and hence unable to take effective action on all issues. Politics becomes the art of the permanent crisis management. So, again, whether you’re left or right, your government will not be able to realize your political dreams in a state of permanent budget deficits. “He who is indebted is not free”, said the Prime Minister of Sweden in the 90s, and proceeded to turn the country’s budget deficit into a permanent budget surplus.

With respect to free trade, that was one of the unique aspects of the 90s. After the end of the Cold War, a whole new world of trade opened up, and a globalization that had not been seen since before WW I created lower prices on many goods and commodities. Because of the unique nature of the 90s’ free trade opportunity, I believe that free trade as an economic factor tends to be exaggerated in models and discussions of policy. The main problem with the economic models that we have is that they can only look backwards, which is why they don’t work. Economists are currently pointing to the importance of free trade as a result of what happened in the 90s, which I believe was an almost unique, one-time occurrence.

Barack Obama has, rightly, during his campaign focused on increased local production of goods and services through infrastructure investment and other measures. I believe that much more goods could be produced well, and cheaply in the United States, as opposed to in Asia. This would create jobs, make products safer, reduce global warming, help local economies and housing prices and renew domestic infrastructure. Who said less free trade was such a sin?

I need not even speak of financial regulation to anyone but the most delusional reader. But to he or she who still believes that the unfettered markets can bring the answer to your prayers, I say:

- Financial deregulation is solely responsible for this crisis, which may lead to a depression. No matter what happens, we need a massive new wave of regulation to restore what has been destroyed, and expand regulation to protect us from ourselves in the future. If you know anything about people, you must know that voluntary self-restraint seldom works, especially not in the country of lavish spending and material dreams: The United States of America.

I offer, then, the blueprint for the future economic philosophy that I believe should guide Obama and his team over the next few years, with the same three-step plan:

1. Balanced budgets (“He who is indebted is not free”. In order to achieve a balanced budget, 2 things need to happen: 1. cut military spending drastically, and 2. increase tax revenue by taxing the rich)

2. Less international trade (as a result of a push to increase domestic production as a substitute for imports)

3. Much, much more regulation


Lisa M said...

Great article Jacob. Yours is the most sensible commentary I've seen anywhere on the economy and how it should be handled going forward.

I've been reading Krugman's recent articles in support of massive spending with disregard for deficits and I've always noticed that he fails to make a sound (and understandable) mathmatical argument for exactly why that will ultimately work out in the long term. He basically just says running our gargantuin national debt up even further is better for putting more people to work in the short term. But how on earth can we sustain such debt? Especially when we're producing less and less in our country and running such huge trade deficits. It seems to me on our present course the numbers (meaning the numbers regarding the military, social security and medicare, interest on the debt, etc. etc. etc.) would show that our economy is headed for collapse in the near future? I mean I hate to be so gloomy but isn't this the *real* reality? What do you think?

And in truth aren't we just talking about the best ways in which to put the inevitable disaster off?

Jacob said...

Thank you very much Lisa. In terms of a possible collapse, I don't think that a collapse on the Icelandic scale is possible here, but maybe one similar to that which California is facing right now.

As an example, Berlin has been in a more or less permanent state of fiscal crisis for over a decade, and though it's still a great town, the decay just continues. Also, New York City in the 70s serves as a good example. I think it's certainly possible that LA and NYC could go down that route.

Dave Dubya said...

Unfortunately the machinery of commerce has been engineered to work for the two most entrenched interests of US capitalism. The military/industrial complex and the financial/insurance complex will not relinquish their grip on our economy willingly.

This calls for more clarity of view of these interests and a corresponding public awareness.

This is where we absolutely need a well informed public to achieve democracy's potential.

It is essential to reverse the media conglomeration as well as regulate corporate power. It will be an uphill struggle to restore real journalism and accountability into this equation. This is part of the vital changes we must make.