Rubinomics Questions

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When I called Citigroup to ask Rubin this question, I was told he wasn't talking publicly. However, after speaking to people close to him, two things emerged: First, even before he was appointed Citigroup chairman, he had no intention of returning to Washington; "Been there, done that" is his attitude. Second, he believes the Bush administration has been very fortunate. In his view, it's only the Chinese buying of American Treasury bills and the unusually high corporate profits bringing in unexpectedly high tax revenues that have averted economic disaster. From 2004 to 2006, corporate tax receipts grew at an annual rate of more than 25 percent. Last year, they totaled $354 billion, compared with just $132 billion in 2003. At some point, those trends will end and large deficits will reemerge, forcing Washington to address tough challenges the Bush administration has ignored, such as reforming Social Security and Medicare, and the drift, inevitably, will once again favor Rubin. 

Rubinomics came to the fore in January 1993, when the newly elected Bill Clinton was planning to introduce a middle-class tax cut. At a meeting in Little Rock, Arkansas, Rubin and several other members of Clinton's economic team persuaded him to renege on this campaign pledge in favor of deficit reduction. They argued that tackling the deficit, which was then running at close to 5 percent of G.D.P., would impress the bond market, bring down long-term interest rates, and allow the Federal Reserve to cut short-term rates, all of which would boost investment and make the economy healthier. As Bob Woodward reported in his 1993 book, The Agenda, Clinton was initially skeptical of this argument. His face turned red with anger and disbelief. "You mean to tell me that the success of my program and my reelection hinges on the Federal Reserve and a bunch of fucking bond traders?" he said.

That is exactly what Rubin meant, and the success of the 1993 deficit-reduction program—long-term interest rates did come down, the Fed did keep short-term rates low, investment did pick up—greatly enhanced Rubin's standing, lending him a statesmanlike aura that persists today.

Rubin still plays an influential political role, and senators and congressional representatives from both parties seek his counsel. In April 2006, he helped found the Hamilton Project to promote deficit reduction and other economic reforms. "The idea that Rubinomics has been discredited is mistaken," says Jason Furman, a Harvard-trained economist who worked in the Clinton administration and at the World Bank before becoming director of the project. Furman notes that tax revenues are highly volatile. From 2001 to 2003, they were unusually low, he says, then unusually high from 2005 to 2007. In the long run, Furman estimates the country still faces an underlying deficit of close to 7 percent of G.D.P.

At the White House from 1993 to 1995, Rubin had an office three doors down from the first lady's, and they got on well. Although she shared some of her husband's political misgivings about Rubinomics, she supported the deficit-reduction strategy, and even today she remains an advocate of sound finance.

Assuming Rubin stays out of politics, his influence will nonetheless be felt during the presidential race. Hillary's most senior economic advisers are Gene Sperling, who served as his No. 2 at the National Economic Council, and Roger Altman, the former Lehman Brothers investment banker who was deputy secretary of the Treasury from 1993 to 1994. Altman and Rubin haven't always seen eye to eye—old Wall Street rivalries tend to linger—but last year they came together to launch the Hamilton Project. Altman would probably become Treasury secretary in a new Clinton administration, assuming he could survive the confirmation process. (The reason he resigned in 1994 was that he got caught up in the Whitewater investigation.)

In policy terms, Altman and Rubin have long shared similar views on the deficit. During the 1988 presidential campaign, they gave a presentation to a group of Democrats on the dangers that Ronald Reagan's deficits posed to the economy, prompting a senior senator to upbraid them: You guys have been saying this for years and nothing ever happens, he said, so shut up. Rubin and Altman declined to follow the senator's advice, but nothing was done about the deficit, which continued to expand. Then, in late 1989, the dollar weakened, long-term interest rates crept up, and the economy started to falter. With the markets rapidly losing faith in Washington, politicians from both parties got together in secret talks at Andrews Air Force Base and agreed on a multiyear budget deal that raised taxes and limited spending.

Privately, Rubin has mentioned the possibility that history might soon repeat itself. "Circumstances change," Rubin told an acquaintance recently. "That is the nature of the markets and the economy."

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