Why Rubinomics Worked


Tough Choices from

Wall Street to Washington

By Robert E. Rubin and Jacob Weisberg

Random House -- 427pp -- $35

At a time when best-seller lists are dominated by Clinton-haters, Bush-bashers, and ideologues of the right and left, Robert E. Rubin's In an Uncertain World comes as calm, thoughtful relief. The title itself conveys the tone of moderation and pragmatism that characterizes this insightful account of decision-making and crisis management in the Clinton Administration. To appreciate what former Treasury Secretary Rubin and co-author Jacob Weisberg have wrought, it is not necessary to agree with his policy of "Rubinomics," which led to the first federal budget surplus in decades. Rather, there are lessons large and small for anyone who faces the ticklish task of combining policy with power to accomplish important goals.

But it is Rubinomics, of course, that made Rubin a target for both conservatives and liberals. It was Rubin who persuaded President Clinton to start his first term by raising taxes and cutting the budget deficit, rather than lowering taxes and boosting government spending on social programs as candidate Clinton had promised. Conservative supply-siders predicted economic disaster and pointed to Ronald Reagan's tax cuts and the strong growth of the 1980s as proof of Clinton's -- and Rubin's -- folly. Then-Senator Phil Gramm (R-Tex.) called it "a one-way ticket to a recession." Liberals said it was a betrayal of the voters who elected Clinton.

Both conservatives and liberals, of course, turned out to be wrong. Growth averaged 3.2% during the '90s -- a rate as rapid as that of the 1980s, but one that was accompanied by record low levels of unemployment and poverty. Productivity rose much faster in the '90s than in the '80s. And that scourge of America, welfare, was mostly eliminated -- an underappreciated achievement of enormous importance.

Why did Rubin turn out to be correct? The answer is critical, since a debate now rages in Washington over how the deepening long-term budget deficit will affect U.S. growth. Rubin credits his success to a serious knowledge of markets, thanks to his decades of Wall Street experience at Goldman, Sachs & Co. He doesn't take an ideological approach to markets -- either completely believing in or mistrusting them. Instead, Rubin views markets pragmatically, with a special eye toward the role of psychology in their ebb and flow.

Indeed, Rubin argues, confidence always plays a key role in getting investors to take risks. This is the heart of his argument on why Rubinomics worked. "In important ways, the deficit had become a symbol of the government's inability to manage its own affairs...," he writes. When Clinton raised income taxes on the richest 1.2%, "the view that fiscal discipline was being restored contributed to lower interest rates and increased confidence, and that led to more [private] spending and investment, which in turn led to job creation, lower unemployment rates, and increased productivity." Improved market confidence sparked greater risk-taking during a period of considerable innovation in high tech. This combination triggered a surge in growth and corporate profits.

And, of course, in wealth. In the end, the loss of income caused by the hike in rates was offset by the sharp jump in prices for equities and housing -- the two major sources of wealth in the U.S. Asset wealth rose not only for the rich but also for the middle and working classes. In fact, Rubin says that he was struck by how few of the rich people he knew complained about their income taxes rising.

Today, there are again growing fears about runaway government spending. Democrats say that long-term deficits will hike interest rates and kill growth. Republicans say a fast-growing U.S. economy will attract all the money it needs for the deficit from overseas. (Supply-siders used to say that tax cuts pay for themselves with higher growth and tax revenues but now concede that they don't.) Rubin argues that all such views are wrong. It is market psychology that affects risk-taking, investment, rates, growth, and wealth. And the spending spree now under way in Washington isn't instilling confidence in anyone, anywhere in the world.

For those who care little about left-right doctrinal disputes, economic or otherwise, this account also provides a wonderful window into U.S. politics. In one veil-raising tale, Rubin describes how much money it takes to buy a place at America's political table. Before Democrats would take him seriously, he had to come up with $100,000 in pledges from friends -- big money in 1984 -- and host a dinner that took in a further $1 million. Only after a decade of such fund-raising did he get to offer his financial opinions, as a member of Clinton's Administration. The rest is history.

To be sure, Rubin's interpretation of the '90s is subject to debate. Still it provides important guidance as the U.S. moves into yet another Presidential election season laboring under a burdensome budget deficit.

By Bruce Nussbaum

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