Tuesday, May 29, 2012

Rubinomics Redux: A Grand Bargain?

       Robert Rubin,, former Clinton Treasury Secretary-Mr. Rubinomics himself-thinks that the building blocks for a grand bargain are here right now in a unique opportunity:

       "Congress's failure to reach a fiscal "grand bargain" last summer manifested the deep economic-policy divide separating Democrats and Republicans. Fortunately, the so-called fiscal cliff will soon create an extraordinary second opportunity for a breakthrough compromise."

      He does make the good point that this time doing nothing doesn't maintain the status quo:

      "there is no choice available to Congress that does not involve significant changes to taxes and spending that members of each party will oppose. Unlike any situation I remember, Congress cannot simply maintain the status quo by failing to act."

     "Doing nothing means tax increases and massive cuts in defense and nondefense spending. Kicking the can down the road requires compromising with the other party on taxes and spending. And biting the bullet on the hard choices will necessitate compromises and action as well. The compromises required for constructive action are substantially harder than the compromises necessary to punt, but taking the easy way out requires actions that come with their own set of political costs. And, the longer you avoid tough choices, the deeper the hole gets, the greater the resulting crisis is and the harsher the necessary measures necessary to reestablish confidence and recover."

     I do agree there's a lot more on the line this time. I think the biggest difference is that many things the GOP really doesn't want to see will happen if there is no action. Rubin goes through the list at what each party stands to lose if there is no agreement:

    "The 2001 and 2003 tax cuts for middle-class and upper-income taxpayers, and the payroll tax holiday, will expire at the end of 2012. The dramatic mandatory reduction in spending ("sequestration") required by last year's debt-ceiling deal will take place in January 2013. And the debt ceiling will need to be raised again in late 2012 or early 2013."

     "Each of these events is unacceptable for one or both political parties. Sequestration includes deep cuts to nondefense spending that Democrats oppose, and similarly deep cuts to military spending that make Republicans (and many Democrats) recoil. Republicans oppose the expiration of tax cuts on upper-income Americans, Democrats oppose the expiration of the payroll tax holiday, and members of both parties oppose the expiration of middle-class tax cuts."

     I can't help but wonder if this time that failure to get a deal would make more things happen that the Republicans really hate than Democrats. I mean sure, I would rather the tax cuts for the middle class don't expire but I also can't hep but reflect that the rates in this event would be what they were during the Clinton 90s-the age of Rubin's Rubinomics and I don't remember great suffering. To the contrary the 90s were the largest peacetime expansion in US history:

    Rubin lists the terrible things that will happen to the economy if we don't do something:

    "Washington's continued failure to get our fiscal house in order poses five basic risks. One, government borrowing risks crowding out private investment. Two, our unsustainable fiscal outlook undermines business confidence by creating uncertainty about future policy, economic conditions and our ability to govern, which in turn dampens investment and hiring."

     "Three, deficits constrain our capacity to make the public investment critical to competitiveness, growth and widespread income gains. Four, deficits hamper our financial ability to cope with economic weakness or geopolitical events. And five, our fiscal position creates a strong potential for some form of severe macroeconomic distress at an unpredictable time: high inflation, high interest rates and low confidence in the future that produce an extended period of slow or negative growth, or a harsh financial crisis."

      Looking at this entire list it strikes me that Joe Stiglitz is right that Democrats learned all the wrong lessons from what he calls the "Roaring Nineties." Stilgitz like Rubin was a Clintonite but Stiglitz is rare in that he understands this. A large part of the myth of stimulative austerity comes from the wrong lessons being learned from the Roaring Nineties.

      Of all his risks only risk 3 do I have any sympathy with at all and even here it's less that "deficits matter" contrary to what Dick Cheney said but more because of politics. On the other hand worries about high inflation, interest rates much less a loss of Krugman's Confidence Fairy are pure chimeras.

    But yes I do agree with Rubin about the need for more public investment in infrastructure and education. And I do like what his priorities are regarding any bargain-grand or otherwise:

    "I believe the three principal criteria should be economic impact, fiscal effect and progressivity. We should increase the top rate, reform the alternative minimum tax to create greater fairness without penalizing the middle class, and increase capital gains and dividend taxes to levels that best satisfy those criteria. There are also opportunities presented by revising tax credits and deductions, but the impacts are complicated and the potential may be limited."

     Certainly agree with the focus on economic and fiscal effect and progressivty. Because he does take fiscal effect in consideration he agrees that the deficit reduction shouldn't start till after the recovery is finished. Still he doesn't consider how much of the deficit will disappear once the recovery is finished. Of the current $1 trillion dollar deficit $400,000 billion is due to the Bush tax cuts and military spending in Iraq and Afghanistan.

    The principle of Starve the Beast is that the American people must never see the government do anything positive. In this sense deep budget cuts are self-sustaining as the more cuts the less effective government is and the more calls to cut it further seem justified. 

    Look in  a perfect world I'd rather keep the middle class tax cuts and just raise the top rates a long with raising the top rates for capital gains and dividends as Rubin rightly calls for. Rubin may well be right that the GOP is so loath to see all the Bush tax cuts end along with the military cuts that they will finally be forced to negotiate. However if they still aren't having all the cuts expire is acceptable.

     PS I appreciate as well that Rubin says that closing "loopholes" has effects that are "complicated" and potential that is "limited." It's important to bear in mind that while cutting "loopholes" may sound very salutary in the abstract what such "reform" actually has in mind is cutting mortgage deduction-the major refundable tax credit most middle class Americans benefit from-and the Earned Income Tax Credit that is the main refundable credit most of the working poor benefit from. Rubin's pessimism and skepticism about them is a welcome sign that the groundswell for them-which was at an insitutional high among policymakers during last Summer's debt ceiling fiasco and largely informs Simpson-Bowles


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