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That 70′s Show

Senator Hillary (NLN) has a ringside seat for today’s testimony of Fed Chairman Alan Greenspan. Not content to do what freshmen Senators traditionally do (sit down, shut up and learn sumpin) she has taken this opportunity to burnish the image of fiscal responsibility of the Clinton Mal Administration. Picking up on Greenspan’s recent remarks in San Francisco, she is hell bent on torturing Greenspan’s remarks to endorse the latest incarnation of Hooverism. The new Democratic mantra which I have dubbed Rubinism.

Rubinism takes as its predicate that budget deficits are per se bad because they lead to higher long term interest rates. Like Hooverism Rubinism cloaks wrong headed economic policy in a mantle of responsibility which in reality is a cheap suit of clothes. In 1979, under President Jimmy Carter, the United States government ran a budget deficit of $65 billion. Under the economic conditions then prevalent (unemployment over 10%, oil prices nearing $30 a barrel, price inflation nearing 10% and industrial production falling through the floor) long term interest rates, reflected in the 30 year Treasury bond reached over 18%. This was the interest rate that the government needed to offer investors to get them to buy long term commitments of the federal government.

This level was unheard of for the United States. Arguably the most powerful nation in the world was hawking long term paper (backed by the full faith and credit of Uncle Sam) on terms that would make a Mafia don smile. The cause and effect of this aberration, in the world of Rubin would then incline one to conclude that the prospect of further deficits caused the buyers of government bonds to draw a logical conclusion: the probability that the bonds would be reduced in value by inflation were high. Thus the risk premium demanded by purchasers was high. It was a market vote of no confidence in the President and the US Congress. And that logic follows as far as it goes but does not take into account that the future is unknowable.

When Ronald Reagan assumed office the federal deficit, a manageable $65 billion under Carter mushroomed to over $200 billion per year. Following the logic of Rubinism interest rates should have gone north of 20%. But they didn’t, instead by 1984 the dollar had strengthened against the mark and other euro currencies by 75%. Interest rates, headed to a stratospheric 25%, had fallen to less than 8%. Clearly a miracle had occurred somewhere, but where?

The answer was quite simple, but has several parts.

The Federal Reserve had increased interest rates to a level so high that inflation was throttled out of the economy. The inflation premium demanded by bond holders evaporated overnight.

Unlike the Carter administration, committed to ever greater government control of the economy, the Reagan administration de-regulated the energy markets, and combined that policy with an improvement in ties with Middle East oil producers.

Reagan’s strategy of cutting taxes laid the basis for a revival in economic output and growth.

What’s odd about this history is that Robert Rubin, swashbuckling bond trader at Goldman Sachs seems to have forgotten his own participation in this economic revival.

Instead Rubin, who became Treasury Secretary under Bill Clinton, adopted a monetary and fiscal outlook that would have been familiar to the Federal Reserve Governors who deflated the economy of the 1920s and caused the Great Depression. Instead of using the limited foresight he had gained on Wall Street, he became nothing so much as a photo copy of the prototypical small town banker who prefers to lend money only to those who don’t need it. Rubinism became the official religion of the New Democrats. The Democrats had finally found a Wall Street type who could say with a straight face that fiscal discipline was a fundamental principle of Democratic economics.

And that worked for a while. The corrupt bargain the Clinton Mal Administration made with Rubin was that tax increases would lead to reduced deficits because the Democrats spending programs could be accommodated while preaching fiscal responsibility. That magic worked for a time. The economy had suffered a short and sharp recession during the run up to the Gulf War. This was Clinton’s celebrated and much bruited "worst economy in 40 years" and of course he had the answer. A counter intuitive tax increase on the "wealthiest" Americans. What was conveniently omitted from the discussion was that wealthy was defined so as to include folks whose combined family income was over $75,000 per year. That’s correct , many two income middle class families were just one bonus check away from being "wealthy".

Not only has Rubinism become doctrine it is perilously close to dogma. Ask the average Clinton crony how the economy was able to grow at above trend rates from 1995 to 2000 and you will discover that much of this growth is attributed to the Clinton tax increase of 1993. (thank you, Al "deciding vote" Gore). Fortunately for Republicans this is about as deep as Democrat thinking goes on economics. In the search for proximate causes of economic growth Democrats give short or not shrift to the Republican takeover of Congress in 1994:

  • the increased use and adoption of technology for quality control and inventory management
  • the low price of energy, a windfall directly attributable to our victory in Desert Storm
  • the collapse of Japan as an economic competitor
  • the elimination of the Savings and Loan bailout (which cost US taxpayers over $200 billion)
  • the rigorous creative destruction of the 1980s
  • the end of the Cold War (remember the peace dividend, well the government spent it!)
  • the emergence of the US as the leading producer of all forms of sophisticated technology

No, it was all due to the historic and "courageous" tax increase of the Clinton Mal Administration.

A funny thing happened on the way to the never never land, where tax revenues rush into the Treasury and all children are above average. While Clinton and Rubin staved off efforts of the Republicans to cut taxes by waving the red shirt of fiscal responsibility, the economy reached a peak and then fell over the cliff. And it happened on Clinton’s watch, with an assist from the Federal Reserve which suddenly discovered that their accommodative monetary policy had led to gambling in the stock market. Just like his oily doppelganger CPT Reynaud , Clinton pocketed his winnings and left the casino shocked that the economy had gone into a tailspin.

Now we are left with this malodorous wrong think called Rubinism. The budget must be balanced to satisfy the bond traders and bankers, but only at the expense of the tax paying citizens. The government has been irresponsible and now someone must pay. The citizens who worked hard, saved and invested during the 90s, the very people who were told that balanced budgets were objectively good will now pay the price for the fiscal mismanagement of the federal budget. The economy must be stimulated to reduce unemployment and improve growth. The Rubinistic means are to give money to those who do not pay taxes (a refund for non payment of taxes), to pay corporations to provide health care for laid off workers and to provide a 1% tax cut for those who are in the 25% income tax bracket. This policy is guaranteed by Rubin and his acolytes to not spook those Wall Street types who just might force the government to pay more in bond interest for borrowed funds.

This will all be accomplished by revoking the promised tax cuts made just last year.

It’s all very simple, unless of course you are a tax payer. But don’t fret. Sometime in the future you will get your tax cut. That time will come when all the pet programs of the Democratic Party have been enacted into law, old ladies will have their free drugs, health care will be universal, the minimum wage (an unfunded mandate if there ever was one) will be a living wage and all our air and water will be clean. Then you will get your tax cut.

Unless, of course, you were planning on collecting your Social Security check. But that’s another essay..

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