In between long-winded platitudes about the U.S. economy (“We must pursue an international economic policy that continues global integration, especially multilaterally, and proactively addresses our other international economic interests”), former Clinton Treasury Secretary Robert Rubin took his turn promoting contradictory and false notions about the economy in a recent Wall Street Journal op-ed.
To begin, Rubin floated a favorite Keynesian tenet about the mythical wealth-effect that remains both false and contradictory at the same time. Explaining today’s “reasonably healthy GDP growth,” Rubin noted the “disposition of consumers to spend based on high housing prices and lower interest rates.” Aside from the fact that there must be others foregoing spending in order for homeowners to take out loans to spend, Rubin needed only a paragraph to counter the above assumption with his commentary about “personal savings rate(s) of approximately zero.” Though real estate investing does not qualify as saving in the classical sense, it has for a long time been a form of saving for many Americans.
But beyond the well-known truth that federal government measures of U.S. saving are highly misleading, it should be obvious to Rubin that Americans are great savers by virtue of his high position at Citigroup. That company presently employs 13,000-plus brokers, most of whom are based in the United States. Is it to lose money that Citigroup invests so heavily in people to gather the assets of the U.S. investor class, or are these assumptions about a low stateside savings rate blatantly untrue?
Further on in his opinion piece, Rubin advocated “a strong public investment program” to “help those dislocated by technology and trade, and to equip all citizens to share in our economic well-being and growth.” In short, at 4.9 percent unemployment, Rubin would like to help a small number of chronically unemployed Americans by making the rest of the working population worse off with higher taxes. To take Rubin seriously, we’re also supposed to believe that the same federal government that gave us Social Security, Medicare, and FEMA somehow has the inside scoop on the kinds of programs and investments that would actually help those in need.
Remarkably, Rubin went on to cite a recent study that forwarded the notion that Americans were better off during the malaise of 1979 compared to the present day. In particular, he would like to see policy measures that would reduce the “growing income gap,” presumably down to levels last seen in 1979. In Rubin’s view, compared to 1979, “our economy is not working for too many people, and that is a problem for all of us.”
Even if some truly believed this line of thinking about wage gaps and relative prosperity back in 1979, the assumptions are still irrelevant for the simple fact that the “rich” and the “poor” in the U.S. are moving targets with the majority of the “poor” eventually moving up the income scale. Of course, there’s an easy solution to that which so concerns Rubin — it would involve instituting something along the lines of a billionaires’ surtax to drive our most successful citizens out of the country. Lots of Americans would be worse if our most productive citizens produced elsewhere, but the income gap would surely be lower.
Regarding marginal tax rates, Rubin said “the proponents of supply-side theory who assert that tax cuts will wholly pay for themselves appear to be no more accurate now than they were in the ’90s.” While it would be easy to show how lower rates on income and capital gains did in fact enhance revenue collection under Coolidge, Kennedy, Reagan, Clinton, and George W. Bush, revenues to some degree are not the point.
Revenues are the “seen” in any tax equation, and merely speak to the willingness of people to work, produce, and invest despite the existing government-imposed penalties on wealth creation. A more realistic approach would be to consider the “unseen,” as in what entrepreneurial ventures don’t occur, what expansion plans are not executed, what investments are not made, and what productive jobs move offshore to escape the existing tax burden.
Let’s apply this thinking to the Rubin/Clinton era. While the economy did expand impressively in the 1990s despite a hike in marginal income-tax rates by the Clinton administration and the Democratic Congress in 1993, it should be noted that at the new rate of 39.9 percent, the top income-tax rate was still substantially lower than the 70 percent levy that the Reagan administration inherited in 1981. That Clinton and the Democrats didn’t dare approach the old rate is almost an implicit admission that the 1980s tax cuts increased economic activity. The question then is what would economic growth have been absent the Clinton tax increases? One might begin to answer that with another question: Would there have been a recession in 2000 had the top marginal rate not been raised from 31 percent to 39.9 percent in 1993? Chances are, no.
Moving to budget deficits, Rubin argued, “virtually all mainstream economists take the view that sustained long-term deficits will crowd out private investment, increase interest rates, reduce productivity, and reduce growth.” In truth, not all economists believe deficits drive up interest rates. as evidenced by a 2004 Cato Institute study by senior fellow Alan Reynolds that discredited Rubin’s thinking.
Importantly, it doesn’t take an economist to poke holes in Rubin’s debt/interest-rate assumptions. One need only look at Japan’s low rates and massive deficits, not to mention how U.S. interest rates fell in the 1980s alongside rising deficits, rose during the brief period of government surpluses in the late 1990s, and fell again to forty-year lows amidst the resumption of budget deficits in the new millennium.
But deficits themselves are arguably not the point either. If foreigners are eager to finance government spending at low rates of interest, this is seemingly a deal we should accept. Deficits are only a problem for the spending that occurs — as in the capital wasted on government programs that could be more productively invested in the private sector. Rubin apparently disagrees with this kind of thinking given his frequent calls for more “public investment in education, basic research, infrastructure and other requisites.”
Fittingly, Rubin concluded his op-ed with yet another platitude, writing that in order “to realize our bright future and to minimize the risk of serious difficulty, we urgently need our own sense of mission to meet the challenges facing our economy.” Here’s hoping his various policy prescriptions were lost and forgotten amidst his numerous longwinded asides.
–John Tamny is a writer in Washington, D.C. He can be contacted at firstname.lastname@example.org.