Robert Rubin's Two-Edged Sword
January 24, 2006
If you have not yet read former Treasury Secretary Robert Rubin's article, "We Must Change Policy Direction" in today's Wall Street Journal , you've missed an important political moment. In the piece, Rubin recognizes many of the economic threats and inequality we have been sounding daily here on TomPaine.com, such as the trade deficit, the coming Medicare crunch, flat or decreasing median income and a national savings rate stuck at zero. Faced with these and other serious problems, Rubin calls for politicians on both sides of the aisle to set aside their orthodoxies and ideologies and change policy direction on many fronts. Finally, this current director of Citigroup outlines a framework of policies he believes is sufficient to anchor that change.
Rubin's piece is important for the alarm it sounds on these dangerous economic trends and for the emphasis he places on ensuring that all Americans can participate and succeed within our economy. Rubin, the architect of the Clinton-era deficit reduction plan, has previously been more circumspect of efforts to ensure that all Americans enjoy "adequate housing, nutrition, education, healthcare and much else." That he explicitly recognizes their central role in a healthy economy is good news.
That said, the rest of Rubin's argument fails to deliver the kind of clean break Democrats need to make with the tattered remnants of an economy designed 60 years ago when a vastly different set of conditions prevailed. Those conditions (really, assumptions)—cheap energy, suburban expansion, undepletable ecosystems and no economic competition—disappeared in the 1970s. But, as the East-West conflict could not tolerate macroeconomic questioning, we soldiered on, propping up an unsustainable economy until the Soviet Union collapsed.
President Clinton, advised by Rubin, continued to ignore these problems and chose instead to expand the boundaries of the Western economy to include China, granting them 'most favored nation' status even though China was pursuing a destabilizing export strategy. That, in turn, paved the way to some of the very crises Rubin now wants to address, such as stagnant or falling wages, employment insecurity and trade deficits. Bush, of course, exacerbated that problem an order of magnitude by cutting taxes, launching what Joe Stiglitz estimates will be a $2 trillion dollar war in Iraq and cutting social spending. Had Bush privatized Social Security, it could have been worse.
In this new article, Rubin does recognize the problems first created on his watch (though he does not admit blame)and since exacerbated by Bush's policies. Unfortunately, he still has his head in the sand when it comes to placing America on a sustainable macroeconomic path. Here are the four elements of his sandbox:
The great failing of Rubin's plan is that he assumes that the core engine of American prosperity is merely mismanaged rather than dysfunctional. His focus on deficit reduction, for example, implies either tax increases, program cuts, or both—a traditional remedy he continually pushes as a leader of the Concord Coalition . Certainly, there is space to repeal the worst of the Bush tax cuts, but the largest increases in present-day spending come from the combined national security budget: defense, homeland security, intelligence and the wars in Iraq and Afghanistan. Given the scale of the Medicare shortfalls, it is hard to see just what bullets Rubin would have politicians bite.
Perhaps his biggest oversight regards the energy sector, where Rubin's caution belies his worldview. America is facing terrorist, military, economic and environmental threats rooted in our fossil fuel dependence, but Rubin barely mentions it. When he does, he punts: Rubin ignores myriad off-the-shelf technologies that can place America on a path toward eliminating our dependence on the worst of these threats: oil. Instead, he merely calls for more research:
China's rise seems to provide the impetus and major justification for Rubin's article. Yet Rubin does not convince this reader that he has really grasped the scale of the challenge China poses to an American economy.
Energy, referenced above, is the tier one issue vis-a-vis China. Scarcity and security issues driven by rapidly rising Asian demand for oil and gas loom large over all economic prognostication. Second in line is finding a pathway toward sustainable growth that can deliver jobs and security for both America and China. Right now, our consumer economy is being hollowed out by cheap Chinese imports while income growth is accruing to only the top 20 percent—Rubin cannot seriously think this is good or sustainable over the long term. And yet, Rubin reprises the old 1990s mantra that increased trade and integration will somehow play to America's advantage, even in the face of the "competitive challenge of historic proportions" mentioned above. His plan is less than satisfying:
Does Rubin actually believe that we can hold back the storm surge of 1.1 billion Chinese citizens who have yet to enter the formal Chinese market economy (not to mention a nearly equal number of Indian citizens) through a levee built of productivity gains and safety nets? Productivity gains, while they increase a firm's economic competitiveness, tend to reduce overall employment. Safety nets, too, are inadequate to the task, as they must first be founded on an economic engine that serves the majority of the people, catching only those who fall through the cracks. I believe most Americans would agree that a future in which the top 20 percent of Americans provide an expensive safety net for the bottom 80 percent is not an appealing scenario. America needs a source of growth that resembles the post-war expansion, not the Internet boom.
Ironically, in a grudgingly worded statement toward the end of the piece, Rubin unlocks the door that may lead to a sustainable pathway. He says:
Ah, those pesky externalities —like the depletion of the earth's ecosystem, global warming or the nasty habit of energy competition leading to opaque energy reserve estimates and expensive wars. Externalities are, I would argue, the central challenge facing America and environmental regulation alone is insufficient to the task.
All in all, Rubin's plan suffers from the same disease that struck down John Kerry's candidacy: half measures and a denial of our true economic situation. Rubin, and the Democratic Party in general, have limited time in which to formulate an economic strategy for America that actually meets all the challenges we face.