Robert Rubin on Righting the Economy

Says the former Treasury Secretary: The likelihood of difficult conditions for longer than we expected has probably increased

Robert E. Rubin is back in town. Ever since the terrorist attacks on the World Trade Center and the Pentagon, the unflappable former Treasury Secretary has returned to his old haunts in Washington, huddling with Federal Reserve Chairman Alan Greenspan and his successor Paul H. O'Neill as well as testifying on Capitol Hill (see BW Magazine, 10/08/01, "Bob Rubin: Out of Office but in the Loop").

Although his day job remains chairman of the executive committee at Citigroup Inc., Rubin has emerged as the economic wise man for Democrats concerned about crafting a new fiscal stimulus package that is both effective and progressive. Recently, Washington Chief Economics Correspondent Rich Miller caught up with Rubin, a critic of President Bush's first round of big tax cuts, to talk about how the economic environment has changed since Sept. 11, and what future antirecession fiscal policy should look like. Here are edited excerpts from their conversation:

Q: What's your advice to Congress now?


I've thought [for some time] that the economy was more difficult than most people [realized] before Sept. 11. The likelihood of difficulty now is increased. On the other hand, I don't think one should jump to conclusions. You have to make your decisions in the context of what you think the long term is going be like, which I think shouldn't be materially affected.

In terms of the government, you already have the Fed rate cuts and rebates in the system. On top of that, you have a tremendous amount of federal spending [in the pipeline]. That's all fiscal stimulus related to Sept. 11. The Administration and Congress now have to decide if they want to have any stimulus program on top of that.

It seems to me that if they go ahead, those have to be things that will [have an] effect now, that give you the biggest bang for the dollar, subject to the caveat that no costs should be incurred [long term]. We've already hurt our fiscal position because of the [Bush Administration's] tax cut, but we want as much fiscal soundness as [possible] in order to minimize the negative impact on market interest rates now as well as later.

Everything should be temporary. Some of the federal spending inevitably won't be temporary. But if there is going to be a proactive program on top of that, the proactive program should be temporary.

Q: But people argue it won't have much effect on the economy if people know it's temporary.


That's probably right. But it can still have a substantial effect, and if you make it permanent, [the cumulative cost] for what you're accomplishing now is vastly more expensive. And you have the adverse fiscal effects.

You have $45 billion or $50 billion [of supplemental spending already approved by Congress after the terrorist strikes]. You'll probably see $80 billion to $100 billion, outside of any proactive program, before it's all over. Anything you do that affects the longer term can backfire in the short term.

Q: Let's talk about the consumer for a moment. What can Washington do to stoke consumer buying again?


Consumption has been the driving force in the economy during the softening period. I think they [policymakers] ought to focus on [giving tax cuts to] lower- and middle-income people who have the highest propensity to spend.

Q: What about other tax cuts?


I think a capital-gains tax cut is silly. And corporate-rate tax cuts would have very little effect relative to what you spend. It's a very poor use of taxpayer money for what you're trying to accomplish. A permanent one has all the adverse effects of what we were talking about before. If you lower the [corporate] rates from 35% to 25%, with debt service it costs about $900 billion over 10 years. You have a real threat of an adverse effect on long-term interest rates, which could adversely affect the stock market.

On the other hand, you do increase earnings, which is a positive. [But] companies are not basically cash-constrained. That's not their problem in turns of investment.

Q: What about accelerated depreciation or an investment tax credit?


Those make more sense. You get far more bang for your buck. But capital spending isn't weak because people don't have cash. It's because there isn't enough demand.

Q: You were gloomy before this?


The likelihood of difficult conditions for longer than we expected has probably increased.

Q: What about increased risk premiums throughout the economy?


Maybe. But I don't think it's going to be [a factor] that's material relative to the size of our economy over the long term.

Q: Is there a risk of banks pulling in their horns and cutting back on lending?


I don't think in the sense you're saying. The banks are going to be sensible as to credit extension.

Q: So there will be no credit crunch like in 1991?


I don't think so.

Edited by Douglas Harbrecht

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