TCS Daily

Deficit Deceptions

By James K. Glassman - January 22, 2004 12:00 AM

Robert Rubin, Bill Clinton's Treasury Secretary, is back -- and he's everywhere. He's written a book. He's delivered a paper before the prestigious American Economic Association. He's giving loads of TV interviews. Among Democratic candidates who realize the election will turn on the economy, he's a popular guy. His endorsement is worth more than anyone else's -- even Clinton's. He could be the next Fed chairman.

There's a lot to like about Bob Rubin, who is a graceful, intelligent person. Contrast him with George W. Bush's first Treasury Secretary, Paul O'Neill, who turns out to have been not simply an inept screwball but a treacherous and vindictive one as well.

"Bob Rubin is so thin he walks between the raindrops," one of my Wall Street friends once said. It's true; he's spotless. Even when Rubin is wrong, he makes his case with such conviction and charm, he sounds utterly convincing.

That's the problem. The case he makes lately is that, because of tax cutting, the U.S. economy is headed for "a day of reckoning that I think will be very, very serious." On this subject, Rubin is very, very wrong, and his influence is poisonous -- for the economy as well as for Democrats, who are doomed if they run on Rubinesque tax hikes.

After he left government in 1999, Rubin went to Citigroup and generally kept his head down. He surfaced on Feb. 11, 2001, because Bush's proposed tax cut was such "a serious error that I felt a need to speak." He predicted the cut would raise deficits, "increase interest rates and recreate [a] loss of consumer and business confidence."

Indeed, the deficit rose -- though mainly because a recession that began under Clinton lowered revenues to Washington and because the 9/11 attacks boosted defense spending neglected during the 1990s. And Rubin was way off on interest rates. They fell -- to levels not seen since the 1960s. Confidence rebounded, and in 2003, after a second tax cut, the stock market soared. The 10-year Treasury bond still yields just 4 percent and mortgages are under 5.5 percent.

Rubinomics, the prevailing theory in the Clinton years, held that the economy boomed because 1993 tax increases turned the deficit into a surplus, driving down interest rates. In fact, long-term bond rates were 7.3 percent the in 1992 and 8 percent in 1994 -- after which something quite different may have lowered rates and lifted the stock market: the election of a Republican House.

Still, policymakers of both parties shouldn't flatter themselves. It's the private sector that is responsible for prosperity. Don't forget it.

The fixation on deficits -- rather than the real problem, too much unproductive government spending -- has already turned the Democrats into a party of mindless skinflints, like Republicans before Ronald Reagan turned the GOP toward growth and optimism.

But if the government needs money, won't it have to raise rates to attract cash from investors? Not necessarily. The U.S. Treasury is not the only borrower. There is $22 trillion in debt outstanding in the United States, but only $4 trillion is owed by the federal government. By contrast, $7 trillion is owed on home mortgages; another $7 trillion by businesses.

Federal borrowing rose about $400 billion last year, but in a globalized financial market, where demand and supply come from all over, that's less than 1 percent of total debt. A pebble in the ocean.

History also refutes Rubinomics. During the Reagan years, debt rose, but interest rates fell. During the Clinton years, debt fell, but interest rates stayed the same. During the Bush-42 years, debt rose, but interest rates fell.

It's not that deficits don't matter -- just not at these levels, or at any level that's truly feasible. Our government debt, at about 50 percent of GDP, is far lower than that of Europe and Japan. Unless deficits truly get out of hand (and we're far from that), other things, like taxes, matter much more. President Bush said that tax cuts would leave more money in the pockets of Americans, who would spend and invest to lift the economy. That's happened. As the economy gets better, revenues will rise, and the deficit will shrink.

Certainly, all is not rosy. We need to reform Social Security and Medicare to prepare for the retirement of Baby Boomers. Now, there's an issue for the campaign. But Democrats who want to win in November would do well to ignore Rubin's obsession with the deficit. This time, he's all wet.


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