Reflecting on Rubinomics

George Will
Posted: Jan 04, 2004 12:00 AM

NEW YORK -- Return now to those stirring adventures of yore, when the world was menaced by . . . the Thai baht. That, for those who have forgotten the summer of 1997, is a currency, then rapidly losing value.

Few Americans noticed the knife edge the world economy teetered on when Thailand triggered an Asian economic infection that threatened global convulsions. One reason that did not happen was U.S. leadership, as recounted by the treasury secretary at that time, Robert Rubin, in his memoir, "In an Uncertain World: Tough Choices from Wall Street to Washington."

His first crisis as secretary, the near default of Mexico's government, involved U.S. financial backing for Mexico that he says "amounted to the largest nonmilitary international commitment by the U.S. government since the Marshall Plan." It was done without congressional consent, which might have been unobtainable, and almost certainly could not have been obtained in time.

In both the Thai and Mexican rescues, Rubin, having come from the world of investment banking, was acutely aware of the problem of "moral hazard," which exists when government policy creates incentives for bad behavior. Bailing out nations whose imprudent policies have been abetted by banks' reckless lending might convince banks that recklessness is risk-free. That is, large losses will be cushioned when there is an international consensus that a borrower's default is too dangerous for everybody.

Today, Rubin's Citigroup desk overlooking Park Avenue is piled with copies of his memoir awaiting his autograph. It is a primer for this or any election season. As economic facts are filtered by both parties through the distorting prism of presidential politics, Rubin's experiences and, even more, his temperament present the following paradox: When he became President Clinton's White House coordinator of economic policy, and then treasury secretary, the country made so much money that a noun was born -- Rubinomics. But Rubin's stance toward life, which his Washington service reinforced, precludes him from distilling his experiences into a doctrine -- expressing Rubinomics in the certainty of axioms.

In a Harvard philosophy course he acquired a severe case of epistemological skepticism. Nothing, he believes, is certain. Therefore, to govern is to constantly make choices on the basis of imperfect information. What Harvard taught Rubin about life, life has taught everybody about economics: causal relations confidently assumed just a generation ago no longer seem clear.

Is inflation, as it seemed to be in the 1970s, the systemic disease of democracy? Does the proclivity of democracies to spend more than they raise in revenue produce a perpetual incentive to repudiate part of the resulting debt through currency debasement? And do democracies have pain thresholds so low they cannot endure measures to wring out inflation? Events since the early 1980s suggest not.

Does full employment -- say, unemployment under 5 percent -- cause inflation? It did not in the 1990s.

Does inflation still result when excess domestic capacity is gone? Or does globalization -- excess capacity and cheap labor overseas -- suppress inflation? Evidently. Inflation remained negligible after the third-quarter growth of 8.2 percent -- three months during which the U.S. economy increased in size by more than Poland's annual gross domestic product.

Do large government budget deficits cause interest rates to rise? Not now, with the core inflation rate (excluding food and energy prices, which are volatile) just 0.8 percent in November, as in September. Those were the two smallest monthly increases in the 44 years that monthly data have been reported.

At this moment of discredited rules, Rubinomics is fiscal policy as psychotherapy. Rubin believes that a key predicate of the 1990s boom -- America's longest uninterrupted expansion -- was the mild Clinton tax increase of 1993. The income tax increase affected only the top 1.2 percent of income earners but reassured markets that Washington was disciplined.

The measurement of, and, even more, the manufacture of "confidence" is an uncertain science. But because Rubin so stresses the prevalence of a state of mind -- uncertainty -- it is not surprising that he thinks fiscal policy should aim to produce a countervailing state of mind: confidence. Policy should minimize government borrowing, thereby minimizing the danger of its "crowding out" borrowing for private investment.

Rubinomics is more Republican than Republicans have recently behaved. In 2003, the first full year since 1954 that Republicans controlled the appropriations process at both ends of Pennsylvania Avenue, the result, Rubin notes dryly, was not parsimony.

Will today's deficits derail the economy? And how much of the 1990s boom derived from the first President Bush's deficit-reduction measures, and spending restraint by Congress after the Republican surge in 1994? The answers to both questions are, as Rubin would be the first to insist, uncertain.