Rubin’s unhelpful fiscal exhortations

November 3, 2010
agree to start blogging more about economic journalism than I find this op-ed from Robert Rubin in the FT.

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Oh dear, what have I signed up for? No sooner do I agree to start blogging more about economic journalism than I find this op-ed from Robert Rubin in the FT. It’s a pretty sorry specimen, and I do hope it’s not representative of the genre.

The op-ed, which is written in borderline-unreadable technocratese, has a simple structure: there are headwinds in the economy. What should we do about them? Spending more might be problematic. Expansionary monetary policy likewise. So what should be done? The administration should be more business-friendly. And it should put together a “serious fiscal plan”.

Rubin is long on assertion and scaremongering, and short on actual argument:

A major new stimulus could well be constructive, if it is tied to real, trusted and enacted long-term structural deficit reduction. Otherwise, a major new stimulus is likely on balance to be counterproductive, initially or over time. It could seriously increase business uncertainty about future economic conditions and policy, or change market psychology unexpectedly and dramatically, causing serious market disruptions.

It’s really hard for me to see how Rubin gets to his “likely on balance” conclusion that stimulus will be counterproductive. Does Rubin really think it probable that the announcement of extra government spending would cause some kind of crazy market crash? And “business uncertainty about future economic conditions and policy” is a pretty weak replacement for the bond vigilantes against whom Rubin so happily fought during the Clinton administration. The bond vigilantes were real, and powerful: they could and did determine the rate at which the US could borrow money.

Rubin fought those bond yields down: the 10-year bond yielded more than 7.5% when he became Treasury secretary, and less than 6% when he passed the reins on to Larry Summers. But that yield is just 2.5% today, making the specter of enormous interest payments much less scary.

You really need to be Bob Rubin to be scared by his new boogieman, “business uncertainty”. Rubin seems to be asking us to give up investment today on the grounds that it might cause business uncertainty tomorrow: it’s a tough case to make, and he doesn’t really come close to making it. Instead, he basically just says that any administration should work hard to give the business lobby anything it wants:

The administration’s response to the financial crisis, last year’s stimulus, and this year’s financial reform have, on the whole, been sound and effective. Nonetheless, there is strain between business and the administration, which could be reduced by each better understanding the other’s perspectives and difficulties. Relatedly, the administration, business, and all other interested parties, should work together more effectively on regulatory issues, to promote strong protection while also taking into account the effects on economic activity.

Most of us would agree that the Bush and Clinton administrations were, with hindsight, far too friendly to business in general and finance in particular. If the Obama administration wanted to move back to something more optimal and less business-friendly, that’s naturally going to create “strain between business and the administration”. That’s a feature, not a bug. And of course the first thing that the business lobby does when any government does something it doesn’t like is to complain about negative “effects on economic activity”. Unless and until there’s a remotely empirical basis for believing in the existence of those negative effects, this kind of rhetoric will always ring hollow.

In any event, Rubin is incredibly light on the specifics of exactly what he means by “real, trusted and enacted long-term structural deficit reduction”:

The administration and Congress should work over the next six months to enact the first phase of a serious fiscal plan, to take effect in two or three years, that must also include room for critical public investment. This first phase of deficit reduction should work towards a gradual decline in the debt/GDP ratio, not just stabilising it at a relatively high level that will inevitably ratchet up. The long-term objective, in a later phase, should be a balanced budget.

Even this “first phase” will be difficult. But it can buttress business confidence, reduce shorter-term market risks and start building the fiscal base for longer-term economic success.

This kind of thing means whatever you want it to mean. Does Rubin want the debt/GDP ratio to start declining in 2-3 years, or does he just want us to be “working towards” that decline? And how exactly is the government meant to achieve all this? Rubin wants to see “public investment and reform in economically critical areas, such as education, healthcare costs, infrastructure, immigration and others”; he gives no corresponding list of areas which might see spending cuts. And his list of tax hikes is limited to letting the Bush tax cuts on income over $250,000 a year expire. Which is all well and good, but is hardly going to move the needle on the debt/GDP ratio.

Rubin ratchets up the unintended irony in his conclusion:

Despite substantial legislative actions over the past year and a half, there is widespread and serious concern about the willingness to work across party and ideological lines and to make the tough decisions, necessary to meet our challenges.

Well yes, Bob. But how do you expect the government to make tough decisions if you, a semi-retired technocrat with no public office at all, can’t even bring yourself to name them? It’s all well and good to talk about fiscal prudence in the abstract: the difficult thing is enacting it in reality. And you’re not being remotely constructive on that front.

(Cross-posted at CJR.)


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