Robert Rubin was one of the architects of Clinton's economic program - an economic program that worked for the vast majority of Americans. The economy created 23 million jobs. Real incomes - incomes adjusted for inflation - increased as documented by the
Census Bureau, Federal Reserve and
Bureau of Labor Statistics. Total US Treasury debt issuance slowed dramatically - especially when compared to the "you can have your cake and eat it to" supply - side economic crowd.
In other words, when Rubin talks, you just might want to listen.
A few days ago, the New York Times published an editorial by Robert Rubin titled Attention: Deficit Disorder. The editorial is behind the NY Times firewall. The salient points are below.
First, a brief bit of history. Despite claims to the contrary, the deficit is nowhere near under control. According to the
Bureau of Public Debt, the US Treasury has issued over $550 billion in net new debt each year for the last 4 years. This indicates the Bush's public numbers are at best manufactured - primarily by using the Unified Budget. And despite
Kudlow's claims to the contrary, there has not been "an explosion of tax revenue." According to the
Bureau of Economic Analysis, tax receipts from individuals were $1.047.4 trillion in the first quarter of 2001 and $1.067.4 trillion in the second quarter of 2006. Over the same period, discretionary spending increased from
$649 billion to 947 billion. In other words, Bush has done just about everything possible to destroy the US' national finances.
This is the situation the Democrats will inherit if we win in the upcoming elections - something very close to the worst situation imaginable.
Rubin begins:
Most pressing is the 10-year federal deficit, which most independent analysts project at $4.5 trillion to $5 trillion, assuming that the tax cuts passed in 2001 and 2003 are made permanent and that the alternative minimum tax is adjusted to avoid unintended effects on middle-income taxpayers. And while 10-year numbers can be highly unreliable, deficits are as likely to be higher as to be lower. Over the longer term, Social Security has a 75-year estimated deficit of $4 trillion, while the different components of Medicare, including its new prescription drug benefit, represent a fiscal problem of roughly $20 trillion.
First, note the Rubin is using a realistic time horizon - 75 years or about a generation. He is also trying to implement a big picture time horizon. This, ladies and gentlemen, is what we are going to face in our lifetime. And it isn't going away.
To place the total $24 trillion in perspective, the US' total GDP was $13.197 trillion in the second quarter of 2006. So, the projected shortfall of Medicare/Medicaid and Social Security is 81% larger than the current US economy.
Virtually all mainstream economists agree that, over time, sustained deficits crowd out private investment, increase interest rates, and reduce productivity and economic growth. But, far more dangerously, if markets here and abroad begin to fear long-term fiscal disarray and our related trade imbalances, those markets could then demand sharply higher interest rates for providing long-term debt capital and could put abrupt and sharp downward pressure on the dollar. These market effects, plus the adverse impact of continuing fiscal imbalances on business and consumer confidence, could seriously undermine our economy.
All of the above scenarios and projections are standard economic thought. Simply put, when a country borrows large amounts (like $550 billion/year) over a long period of time, creditors start to demand higher interest rates as compensation for the increased risk of not being paid. In addition, every government bond issued and sold on the market drains money away from private investment - money that could be invested in better-paying jobs.
Rubin also notes the psychological importance of prudently managing national finances. There is no way to understate the importance of investor confidence. If people have confidence in an economy, they will invest in that economy. If people don't have confidence, they won't. If a country mismanages its finances, investors will put their money elsewhere.
We have managed to avoid these market effects so far because private demand for capital has been relatively limited, and because the central banks of Japan, China and other countries have provided large inflows of foreign capital. A change in either of those circumstances, or simply a change of market psychology for whatever reason, could, however, turn these interest rate and currency risks into a reality.
The central refrain from the Right Wing Noise Machine about the current federal and trade deficit is "nothing bad has happened yet. It must not be a problem," or "these governments will buy US debt forever because we are the greatest economy on earth." That theory works just fine - until it doesn't. Right now, the US is trading on goodwill from the rest of the world. But goodwill has to be managed prudently - which the current administration hasn't. And when foreign countries start to diversify away from the dollar (as many have over the last 5 years), it's a clear signal the US should seriously consider changing its financial ways.
The first priority should be to tackle the 10-year fiscal imbalances, which would also be the best way to promote economic growth and minimize the risks I have outlined. Using structural measures to address the 10-year deficits would address our long-term imbalances as well.
For example, if the tax cuts for those earning above $200,000 were repealed and the inheritance tax as reformed were continued rather than eliminated, the 10-year projected deficit would be reduced by roughly $1.1 trillion, or almost 25 percent, and the 75-year fiscal reduction would be roughly $3.9 trillion, or approximately equal to the Social Security shortfall. This course of action would be similar to the income tax increases that were combined with spending cuts in the 1993 deficit reduction program, which some predicted would lead to recession but which, instead, was followed by the longest economic expansion in our nation's history.
We should also begin a serious bipartisan process on Medicare to identify possible solutions and create public support for action, because doing so is absolutely key to our long-run fiscal health. Despite the focus in Washington today on Social Security, it is a smaller and less pressing problem, and our political system can bear only so much traffic at one time.
A talk of deficits would eventually lead to a discussion of Bush's tax cuts. History has demonstrated the sheer futility of Laffer Curve economics, as tax revenues have not increase by large amounts. After adjusting for inflation, tax revenues from individuals during Reagan's term increased 22%. Without adjusting for inflation, Bush's tax revenues from individuals have barely increased after 6 years. At the same time, neither Reagan nor Bush implemented the other side of conservative economic theory - the politically unpalatable idea of actually cutting or even controlling spending. After adjusting for inflation, Reagan increased discretionary spending 14% and Bush a whopping 39%. Only Clinton meaningfully controlled inflation-adjusted spending, which increased a little under 1% during his tenure.
Because Bush has not cut spending, his tax cuts are in fact tax deferrals - taxes will have to increase at some time to pay for Bush's excesses. It's that simple.
Rubin highlights what will be the most important fiscal battle of our lifetimes. He makes cogent observations and solid policy prescriptions. We have a choice: we can buy the Republican economic mantra hook, line and sinker, and in the process bankrupt the nation, or we can act like adults and accept the fact we must change our policy to suit the coming demographic storm.