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August 18, 2004
The Rubinization of John Kerry--and why that's a bad thing
Steve Forbes points out the flaws in John Kerry's economic plan--to the extent a coherent economic plan can be found. Just as the Clinton presidency has bizarrely been given a pass on its foreign policy record and how its action, or inaction, may have contributed to the problems we confront with terrorism and in Iraq and North Korea, the Clinton economic track remains similarly unexamined. Clinton came into office during an economic recovery, which he retarded by years due to his tax increases, and then left office with the country going into recession, exacerbated by the Rubinesque idea that it was better to pay of federal debts than provide tax relief so that individuals and businesses could pay off their household and business debts (which then began to balloon.) And, to the extent there were economic successes--such as NAFTA, welfare reform, a moratorium on Internet taxation, capital gains reform, etc.--these were primarily Republican initiatives. We should be aware of the history of this economic policy as we consider whether we want to repeat the mistake of Clinton and Rubin in the form of John Kerry. An excerpt from the Forbes article:
Alas, the Democrats are afflicted with the Curse of Robert Rubin. They think that Mr. Rubin persuaded Bill Clinton to boost taxes in 1993 and that, while the move was unpopular (it helped cost Democrats control of both houses of Congress for the first time in four decades), the tax hikes cut the deficit, which, in turn, reduced the "crowding out" of private investment by government borrowing, which, in turn, drove down interest rates. Result: a golden age of prosperity. The lesson: Raising taxes works! For Democrats, this is akin to a drunk hearing the news that more drinking means better health.Unfortunately for the country, Mr. Rubin's nostrums are nonsense. There is no correlation between budget deficits and interest rates. In fact, no sooner did Mr. Clinton sign that tax legislation than interest rates began a relentless climb. The 30-year Treasury bond went from 5.87% to more than 8% in a little over a year. The economy, which had begun a big recovery in the second half of 1992, hit the brakes. The economic growth rate for 1993 was less than it had been the previous year, when President Bush senior was running for re-election and Mr. Clinton was crying, "It's the economy, stupid." It was not until 1996 that the economy surpassed the growth rates it had achieved in the latter half of 1992.
The Curse also ignores the real factors that made the 1990s possible: the virtual elimination of inflation, which was the equivalent of a tax cut, particularly for capital gains; the 29% slash in the capital gains levy in 1997; the virtual elimination of capital gains taxes for most home sales (which triggered a housing boom that's still with us); the moratorium on Internet taxation; welfare reform (which Mr. Clinton twice vetoed and signed only when pollsters told him that his re-election chances would be hurt if he didn't); Nafta, which was a form of tax-cutting; and a new GOP-controlled Congress that would kibosh any more idiotic Clinton initiatives like national health care, and at least for a while, exercised real spending restraint. Being a bond man, Mr. Rubin himself has little understanding of entrepreneurial capitalism and the vital impact of tax incentives and disincentives.
No matter. John Kerry and his fellow Democrats are in Robert Rubin's thrall -- tax increases are the economic elixir.
Chris - wasn't it the Republican congress that pushed the balanced-budget idea? Wasn't it Gingrich playing around with the balanced-budget amendment?
I honestly think the whole WSJ op-ed crowd's repeated attacks on Rubinomics is pretty humorous - wasn't it the conservatives who used to argue for balanced budgets and fiscal restraint? And it just seems contrary to facts to argue that Clinton's tax increase acted as a drag on economic performance. Despite increased taxes on higher ratepayers, the entrepreneurs still seemed pretty motivated to try and make more money in the 90s, I would say.
Couple all this with Kerry doing his best Kissinger impression i.e. highlighting his foreign-policy "realist" stance (vs. Bush's Wilsonian "idealism"), and it appears the two parties have pretty much traded each other's rhetoric within the space of 10-15 years...
I'm all in favor of a balanced budget as long as we get there by lowering spending and increasing revenues though growth, not raising taxes. Spending restraint is my key priority because I feel that government is too big, intrusive, and wasteful. Keeping taxes high simply gives the politicians more money to spend and so lowering taxes may be best path to limited government. This has been core to Republican thinking for decades, thogh I'll admit that Bush is more of a big government Republican than I would like.
Also, debt reduction sounds nice, but it's not really debt reduction when you simply shift federal debt to business and household debt, which is what happened. Look at the data (I've linked to it before.) Reagan was right: the best way to overcome the deficit is to outgrow is by creating favorable economic policies, not by raising taxes.
Your counter-argument to the economic data showing retarded growth after Clinton's tax cut that "the entrepreneurs still seemed pretty motivated to try and make more money in the 90s" is not very persuasive. Anectdotally you will always find motivated entrepreneurs--even in the USSR--but the question is one of total aggregate growth and activity. Compare the level of activity from '93 to '96 versus after '96, when you had the various accomplishments of the Gingrich Congress, cited above. I was watching industry very closely in the '90s and there's no contest between the two periods.
On your foreign policy point, you are right that Bush is no Kissinger, but he's no Wilsonian either. We had a NEW foreign policy approach by a guy named Reagan, and I think Bush's FP is more Reagan-esque than anything. It's perhaps best describes as Democratic Realism: http://www.r21online.com/archives/000498.html
"Spending restraint is my key priority because I feel that government is too big, intrusive, and wasteful. Keeping taxes high simply gives the politicians more money to spend and so lowering taxes may be best path to limited government. This has been core to Republican thinking for decades"
You know, it seems like we've got enough empirical data to prove that low taxes aren't a restraint on government spending. I can see your point that government activity can be inefficient (debatable; for some areas of the economy such as health insurance, its actually more efficient but overall its not a bad point). But DC politicians like Bush basically have a free lunch. They get to cut taxes AND increasing spending, all done to reward their political patrons, financed by unlimited credit from our indulgent friends in China and Japan. So - when do "small-government" conservatives admit that tax cuts are not restraint to big government? You could see this in action right there onstage the RNC in New York last week: Bush promising more tax cuts AND many more spending initiatives.
"the best way to overcome the deficit is to outgrow is by creating favorable economic policies, not by raising taxes."
But...its was tax increases by Reagan, Bush 41 and Clinton, not some supply-side driven investment boom that attacked the deficit. Remember, Reagan instituted the biggest peacetime tax increase EVER when the deficit started rearing its ugly head. Thats one big difference between Reagan and Bush: Reagan actually responded to the deficit problem but Bush refuses to, despite the mushrooming of the problem due to his two massive tax cuts.
Personally I'm not against deficits if they're going into investment. But there's a point where it becomes untenable.
"and I think Bush's FP is more Reagan-esque than anything"
I'd agree since its virtually the same team in there implementing it. BTW I don't buy the "wilsonian idealism" as a practical matter - its just a cover story.
It certainly was NOT tax increases that lead to deficit reduction. It was growth prompted by tax CUTS. It was growth created by the supply-side economics of the Reagan presidency, from which we are still benefiting. Yes, Reagan raised taxes in the middle of his presidency, but that was after he LOWERED taxes aggressively, demolishing forever the top marginal rate of 70% and lifting us from the "stagflation" of the 1970s. Reagan left with lower tax rates than when he entered.
In terms of the fantasy that the Clinton tax increases were what got us out of the deficit, this is simply not borne out by the facts. Clinton came into office during a recovery of a recession--but due to his tax increases the growth of the second half of 1992 was not seen again until 1996. So there is ample evidence that his tax increases hampered growth and reduced government revenues. The boom of the late 1990s was what brought us to a surplus, only to be squandered by the Clinton recession--and there is a case to be made that that recession could have been avoided if Clinton had pushed through a tax cut rather than waiting for Bush to do it. People who are concerned about the deficit in priority to the national economy have it backwards. Balancing the national budget at the expense of the national economy is folly.
And BTW your statement that the government could run healthcare more efficiently than private industry is another total fantasy. Where is the evidence for THAT? Can you name me ANYTHING that government runs more efficiently than private industry? The reason healthcare is as inefficient as it is is due to the huge government intervention in ths industry as it is.
Just look at the administration costs for countries with national healthcare systems versus costs for private HMOs. HUGE difference.
IIRC the US spends as much of its GDP on healthcare as those other countries, and gets less services. How is it that government intervention is the problem with healthcare? The problem with healthcare is skyrocketing costs - I've even seen Newt Gingrich say its a matter of time before government steps in to do something about that.
As for government always being more inefficient, its my belief that in most cases private enterprise is more efficient, but in some, government can in fact be. For instance, I don't think consumers want to pay energy rates that fluctuate hourly. Some type of government price control makes that market work better than unfettered supply and demand, at least on the consumer side (not further down the supply chain). It depends on the dynamics of the industry.
Also, its hard for me to name a major industry that doesn't have major government intervention and assistance in the form of purchasing, helpful regulations (finance), subsidies, R&D assistance, tax breaks, import quotas on competition, etc. For instance, self-regulation in accounting has proven to be less than successful.
You are not correct about "US spends as much of its GDP on healthcare as those other countries, and gets less services." Other systems, such as Canada, control costs by denying and delaying care--which means they are just shifting costs, not reducing them. In countries with more socialized medicine, the trade off decisions are made by the government, not the individuals, providing less choice and less flexibility.
Costs aren't kept down through price controls--in healthcare, energy, renting, anything. PRICES may be kept down, but price controls don't do ANYTHING to keep costs down. They simply shift those costs around (there is no such thing as a free lunch!) and most cases, by reducing the financial incentive to create and sell goods and services that are price controlled and therefore reducing the supply, they ultimately have a negative impact on costs, and eventually prices. Rent control, for example, actually INCREASES rents (SF and NY, for example, two heavily rent controlled regions have some of the country's highest rent rates. Hmmm...) because it reduces supply.... and you know about that whole supply/demand curve, right?
I'll do some research on the numbers but my quick reply on this topic is that again administration costs for HMOs is way higher than that for single-payer style national healthcare. I think we could have such a system here which spent about the same amount we spend now without Canadian-style restrictions that stop wealthier consumers from having freedom of choice. The point is the US fed/state/local governments spends the money now in the form of crisis care, and spending smarter on prevention, as well as doing price-bargaining with providers and drug companies, could provide a more rational system. Costs are going up 10% per year - its untenable over the long term. Medicare in particular is going to go belly-up at this rate.
Right, that's what the Bush administration was saying all the way through the California energy crisis - right up until they implemented price controls and ended the "crisis" - which was basically profiteering and gaming the market by energy companies (made possible by the insane structure of the energy privatization, designed by industry lobbyists of course). Grandma Millie just isn't equipped to compete with smart energy traders.
The problem with your thesis here is that you assume that costs and prices are necessarily linked. Companies will happily mark up prices WAY over costs if they can get away with it. No company sits around and says "wow, we're making too much money. we'd better lower prices so our consumers are better off." Corporations are machines that maximize profit, that's all. Government needs to step into markets like healthcare and energy when the real-world pain inflicted on consumers by rational, profit-maximizing corporations is too high.
The problem is that in the real world, these markets are ALREADY heavily influenced by government actions. Lets take the Bush medicare drug bill. The bill, thanks to intense industry lobbying, prevents the government from negotiating lower prices with drug companies. Well - that's a choice the government makes, and if its Rubinomics to say that government should be more activist in representing the interests of consumers by negotiating lower prices, then so be it.
BTW I'd like to thank Hilary Duff for that important message about soma and kournikova.