Hillary Embraces "Rubinomics"; Market Fundamentalism Lives

Editor's note: An earlier version of this article appeared in The Nation.

With Senator Hillary Clinton firmly cemented as the front-runner for the Democratic Party's nomination, Rubinomics--named after former Treasury Secretary Robert Rubin, who shaped economic policy under President Clinton--has re-emerged as a critical issue. This is because Senator Clinton has firmly embraced it. Rubinomics rests on faulty economics and embodies bad politics. Progressive Democrats and the nation need to understand this. Here's an explanation.

The central proposition of Rubinomics 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 fell to historic lows over the past several years, a time of large deficits. That 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, and corporations have been net buyers of stock on the back of record profits.

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. Japan and Germany also disprove the argument as they have run large trade surpluses and budget deficits for many years. Rather, the U.S. 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 trace 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.

Instead of continuing down a mistaken path that focuses on the budget deficit, proponents of a progressive economic policy should focus on increasing investment, which is key to productivity growth and full employment. Rising wages and full employment, in combination with a fairly valued dollar, create a favorable investment climate. That sets the stage for a virtuous circle of shared prosperity. Investment raises productivity, which raises wages and profits, thereby increasing demand and drawing more investment. This is the real basis of a rising tide that lifts all boats. With regard to the trade deficit, the solution is to revalue exchange rates, raise wages abroad so that foreign workers can consume more of what they produce and have countries adopt coordinated policies that stimulate the global economy. That would benefit all, and it is why labor standards and exchange rate provisions must be in all trade agreements.