Robert Rubin Is Still Wrong And Joseph Stiglitz Is Still Right
Robert Rubin and Joseph Stiglitz are going public on jobs and the deficit, in what looks very much like a re-run of a major policy debate during the Clinton era. The dispute is simple—should the government focus on putting people back to work, or should it try to cut the deficit? Stiglitz wants to see more jobs, Rubin wants to shrink the deficit. Policymakers should listen to Stiglitz.
Rubin is the Democratic Party's Alan Greenspan. In the 1990s, he was heralded as a genius for making policy calls that ultimately wrecked the economy. Rubin pushed for deficit reduction instead of a jobs policy in the Clinton years, and was the driving force in the Clinton administration's devastating moves to deregulate Wall Street. For several years, Rubin's policies looked good. Despite the focus on the deficit instead of jobs, the Clinton years saw a huge boom in employment. Wall Street profits were through the roof, and the economy was roaring.
But at the end of Clinton's second term, it was clear that all of these good times had been fueled not by sound economic policy, but by a reckless and unsustainable Wall Street bubble. Banks were backing every dot-com business plan brought their way, and when everybody figured out that Pets.com was not going to be the next Home Depot, things fell apart. The economy slipped into a mild recession, which would have been devastating had policymakers not inflated a housing bubble to "rescue" the economy from the dot-com fallout.
Rubin was Clinton's Treasury Secretary, while Stiglitz served as Chair of Clinton's Council of Economic Advisors. Stiglitz fought all of Rubin's wrong-headed policies, but ultimately lost. Stiglitz was able to fend off some of the most outrageous financial deregulation, but when he left office, Rubin pounced and pushed through the repeal of Glass-Steagall, a Depression-era law that prevented banks from gambling in the capital markets casinos with taxpayer money. Facilitating that banking excess was a key cause of the 2008 financial collapse, and it was Robert Rubin's brainchild.
So why should anybody take Robert Rubin's advice on economic policy? On virtually every important decision during the Clinton years, Rubin got it wrong, and getting it wrong put the global economy on a path to destruction.
Well, here we go again, only this time, conditions are worse. Instead of unemployment hovering around 8 percent, it's near 10 percent, and nobody sees any sign of it abating significantly over the next year. Once again, instead of promoting a jobs agenda, Rubin wants to focus on the deficit. It's an instinct shared by most of Rubin's Wall Street colleagues (Rubin is a former co-Chairman of Goldman Sachs, and served on Citigroup's board in the years leading up to Citi's monstrous bailout). The same banker buddies who wrecked the economy and forced the government to spend trillions rescuing the banking sector.
By contrast, the deficit looks pretty good. Deficits are only an immediate problem when investors are worried about default or inflation, and demand a very high interest rate to compensate them for this risk. So if the deficit were a big deal right now, we'd see high interest rates on U.S. Treasury bonds. But we don't see that at all. Yesterday, the rate on the 10-year bond fell to 2.77 percent. During George H.W. Bush's presidency, the rate routinely eclipsed 9 percent.
But mainstream news anchors are giving Rubin a platform to spew Wall Street buzzwords in order to gin up support for a deficit reduction program. Fareed Zakaria interviewed Rubin on his CNN show this weekend, where Rubin had this to say:
I wouldn't do a major second stimulus because I think...we run a risk that it could be counterproductive in creating a lot of additional uncertainty and undermining confidence.
"Confidence" here means "investor confidence in the ability of the United States to pay off its debts." This is empty spin language. Investor confidence is measured by interest rates. Investors are currently signaling that they have more confidence in the United States' fiscal rectitude than they have had in decades. Borrowing money for new stimulus would not be punished by the market, and the cost of borrowing that money is at its lowest to the Treasury in decades.
If we don't spend money to create jobs, the private sector isn't going to be able to take care of it on its own. Businesses aren't hiring because there is no demand for their products. Put another way, since everybody is broke and out of a job, nobody can afford to buy things, which means businesses have no customers. Without any customers, businesses have no reason to hire people.
So in the near-term, jobs and deficit reduction are in direct conflict. If you go after the deficit, you are going to hammer the unemployment rate. What's more, recent efforts by countries to cut their deficits by reducing spending have actually been counterproductive. Ireland slashed social programs, only to see its deficit increase, because the spending cuts hurt economic growth so much that the government's tax revenues declined dramatically.
Rubin wants to implement a deficit reduction plan now that would take effect in two years. Long-term deficit reduction isn't the end of the world economically. The biggest threat to U.S. fiscal stability is the increasing cost of health care, which drives up Medicare expenses. A program designed to bring down the cost of health care over the next couple of decades would in fact be a good idea (Contrary to Republican attacks, President Barack Obama's health care bill actually does cut health care costs and will reduce the deficit over the long-term. Nevertheless, more could be done.).
The trouble is, there is very little evidence right now that the economy is going to be okay in two years, and Medicare isn't going to bankrupt the government in two years. Cutting spending while the economy is still weak means hurting jobs and slowing growth. Even the Federal Reserve is clearly worried about the prospect of a double-dip recession, which is why it embarked on a new program yesterday to lower interest rates further in order to make borrowing money cheaper for American citizens and businesses.
Stiglitz sees things differently. If we want a healthy economy, we have to have financially healthy households. That means getting people back to work, and it means spending serious money to create those jobs. He was right in the 1990s. He's right today.