Just in time for the presidential campaign, former Clinton Treasury Secretary Robert Rubin has published a new book, "In an Uncertain World," in which he contends that the Clinton tax increase on middle-income Americans was "tiny." Rubin writes that he encouraged the tax hike because he thought it would "give us credibility in the markets." Here we have the essence of "Rubinonomics," a kind of New-Age social science premised more on feel-good psychology and business/consumer confidence than economic fundamentals.
On the presidential campaign trail, Democrats, and particularly front-runner Howard Dean, are embracing Rubinonomics, blaming the Bush tax cuts for the escalating deficit projections and proposing tax hikes. Dean, for example, has put forward a tax plan that would reinstate the marriage penalty, resurrect the death tax and increase taxes on a typical middle-class family of four by almost $2,500 a year, according to Steve Moore of the Club for Growth. Moreover, the governor has the audacity to call himself pro-business while pushing for raising the tax rates on capital gains and dividends, increasing the cost of capital, which is decidedly anti-business.
The fact is, with the economy growing at rates not seen in 20 years, governments at all levels will soon see a substantial rise in tax revenues. The real cause of short-term deficits is a witch's brew of recession and out-of-control federal spending. The real cause of the long-term fiscal imbalance is not insufficient revenues but ill-conceived tax-and-transfer entitlement programs that will collapse of their own weight unless they are reformed to allow workers to invest while they are young to build up annuities to pay for their retirement needs.
"Rubinomics," ironically, has its roots in the old conservative canard that government borrowing crowds out private investment. The so-called "crowding-out" hypothesis holds that when the government borrows money to finance spending it competes with private companies that are also seeking to borrow money, thus increasing demand for credit and causing interest rates to rise. Higher interest rates increase the cost of doing business and therefore reduce economic growth. If the government raises taxes to reduce deficits or run surpluses, then, the conjecture holds, interest rates will decline, the cost of business will fall and economic growth will rise.
The problem with Rubinomics is that the empirical evidence contradicts its predictions. Both sound economic theory and the historical record demonstrate that it is government consumption of private resources - i.e., government spending whether tax-financed or debt-financed - that crowds out private investment and retards economic growth.
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