Why this was the "Rubin Recession"

For anyone concerned about deficits and "fiscal responsibility" this piece by Wayne Angell, member of the Federal Reserve Board of Governors from 1986 to 1994, and a former Bear Stearns chief economist, is a MUST read. It may very well significantly alter how you view the relationship among taxes, spending, debt, and deficits.

It starts by making the case, as Robert Rahn has done, that the policies of the Clinton administration were responsible for the recent recession:

Robert Rubin will never admit it, but the recession that began in the third quarter of 2000 was the direct result of the Clinton administration's attempt to pay down the federal debt. The Clintonites did this, you'll remember, by leaving tax rates high enough from 1995 to 2000 so as to direct a larger and larger share of the surge in growth of personal income to be paid in federal taxes. In the four quarters from the second quarter of 1999 to the second quarter of 2000 individual income tax receipts of the federal government increased by 11.4% -- exactly twice the 5.7% growth rate of personal income.

Angell then points out the relationship between federal debt and business and household debt:

The "pay down the federal debt" advocates, led by Mr. Rubin, apparently did not understand in 1996 and do not understand in 2004 the first principal of macroeconomics -- output growth is not sustainable without a growth of total credit and debt. If federal debt grows more slowly than total debt then household and business debt must compensate by accelerating their growth rate above the desired rate of output growth. If federal debt is to be paid down the necessary increase in household debt would sooner or later increase household debt as a share of GDP to levels that would not be conducive to a continuation of the growth of household spending on goods and services. Whenever financing household debt becomes too burdensome to sustain household spending then a reduction in the rate of household spending would be followed by a plunge in the rate of increase in business debt.

In other words, when we retire federal debt we essentially shift the debt burden from federal to household and business debt--as has been demonstrated by the data. By diverting revenue to pay off federal debt that could have otherwise gone to taxpayers in the form of tax cuts, the Rubin/Clinton team were responsible for the slowed GDP growth, that bottomed in the recession, and merely shifted the debt burden from the federal level to the household and corporate level. As Angell puts it: "Does it make sense for politicians to say we must not leave this federal debt to our children and grandchildren when in fact it is only a question of whether the debt is federal, household, or business debt?"

Angell goes on to say "For the sake of my children and grandchildren I hope for a less hysterical view of debt -- an understanding that high debt levels compared to the ability to service the debt is a disadvantage to households as well as to governments." In other words, what matters most is not the debt levels but our ability to handle the debt. And this means fostering economic growth. Therefore Angell's real area of concern is federal spending because "Government spending tends to crowd out private spending whether it is financed by taxes or by borrowing."

What matters is the relationship between federal debt and household debt, which was thrown out of whack by the Rubin policies. As Angell puts it: "The concern for now is that interest rates are likely to remain too low to motivate more thrifty responses."

Far too many people, in my opinion, including conservative, are hysterical about the deficit, to an irrational extent in which they believe that tax increases are the desirable solution. But this is a solution that is worse than the problem. As Angell concludes:

Only hysteria, an outburst of emotion and fear, could produce the irrational response of the Congress and the public to the supposed danger of federal debt left to our children and grandchildren. Save your outbursts for reining in the growth rate of government spending. Then we will be able to keep tax rates conducive to faster increases in output and thereby add to both the well-being of our people and to future tax receipts available to the Congress.