"Rubinomics" Is Back, Part Two

The concept of “Rubinomics” seems to have generated some rather emotional responses, both for and against the basic ideas, as well as, for and against Robert Rubin. Therefore, I felt the need to follow up my earlier post (June 13, 2008) on “Rubinomics” with this post, “Rubinomics” Part Two.

First, it is perhaps destructive of an idea to tie it so closely to an individual. “Rubinomics” and Robert Rubin seem to draw a visceral response much as did “Keynesian” and John Maynard Keynes. Milton Friedman was lucky enough not to get his name tied to the prominent idea, which he promoted, “Monetarism," which did allow for the creation of an opposition title. Its proponents were called "Fiscalists" and not “Keynesians.”

Calling something by a person’s name can be used to draw together those opposed to the person and his/her ideas and as a term of derision. It can also be used to rally those that pursue similar ends. Oftentimes, the use of such titles direct attention away from the real issues at hand and the policies being proposed. Name-calling can be helpful, but it can also be destructive. In order for any productive discussion to take place, however, focus must be returned to the real issues at hand.

Ideas must be placed within their historical context. In the case of “Rubinomics,” we have to go back to the Paris Peace Talks following World War I. To create the economic situation at that time is very simple terms I will argue that there were two major conditions at hand. The allies disagreed in terms of what they wanted to achieve, and as a result, there were as many programs for the “new world order” as there were major nations involved in the discussions. In addition, the Russian Revolution had just taken place and there was great fear among the discussant nations that the threat to the future was labor unrest and the Bolsheviks, the proposed new order for the revolutionary world.

This was the world that John Maynard Keynes was involved in and his goal was to create a model of the world in which labor unrest could be avoided as much as possible so that the wave of revolution did not overcome the Western world, as he knew it. The fundamentals of his model were fixed exchange rates between countries that would allow each nation to pursue its own independent economic policy, and a government program to stimulate a national economy in order to avoid severe economic collapse and maintain high rates of employment.

As is well known, Keynes worked over the next twenty years or so to develop a theoretical model to support his perception of the world and to bring politicians and institutions to incorporate his ideas for low employment and peace. He then continued to work throughout World War II to create the international financial system that would actually implement his ideas.

So, for roughly fifty-five years efforts were made to try to create a world of fixed foreign exchange rates and the institutions and rules that could maintain such a system so that countries could operate their fiscal and monetary policies in a relatively independent manner. As history has shown, over the long run, this system proved to be because even in such a regime, nations cannot operate fully independently of one another. The post-World War II period was dotted with inflations and devaluations that periodically disrupted the system. In the early 1970s, the system broke down. (I am in the process of writing a book on this period and the theoretical and practical issues that were a part of this history.)

The next twenty years or so the nations learned to operate in a world that was becoming more global and integrated in nature. Nation after nation learned that in such a world that they could not operate independently of one another and that a firm discipline needed to be maintained in order to exert some control over their destiny. A lack of governmental discipline and the slight smell of inflation could set into play forces in international financial markets that would completely disrupt the internal policies that these nations were attempting to follow. Nation after nation had to bring their budgets under control and follow a strictly disciplined approach to their debt creation. In addition, these nations made their central banks independent of the national government and charged them with keeping inflation under control. This has become the foundation of the model for international cooperation on international trade and globalization.

The next fifteen years or so the world had to deal with a United States that was at first receptive to this new world financial order and then at odds with the system and even rebellious. It was within this context that “Rubinomics” was born. Again, putting things in relatively simple terms, to me, the fundamentals of “Rubinomics,” is the essence of the “new world order.”

• First, a country needs to get its fiscal affairs in order and minimize its creation of new debt.
• Second, the nation needs an independent central bank whose primary focus is on controlling inflation, and little else.
• Third, even though it may be the world’s only superpower, this country needs to operate as a partner within the world, and help facilitate the growth and interaction of nations into as fully an integrated world as possible.

It seems to me that this approach was attempted in the 1990s and was relatively successful. It seems to me that this approach was snubbed in the first decade of the twenty-first century and, as a result, we have substantial financial dislocation in the world and a fractured world community. It seems to me that “Humpty-Dumpty” needs to be put back together again.

Where do we start?

Paul Volcker (whoops, another name), I believe, was right in writing “a nation’s exchange rate is the single most important price in the economy.” (Paul Volcker and Toyoo Gyohten, Changing Fortunes: The World’s Money and the Threat to American Leadership (New York: Times Books, 1992), p. 232.) This is where the United States must start!

U.S. fiscal and monetary policy must be responsive to what the rest of the world is trying to tell us. If the value of the U. S. dollar has been falling for seven years or so, maybe the market is trying to tell it something. This is what happened in the 1972-1992 period to many other countries. (In my last post, I mentioned a book by Steven Solomon that reviews this period: The Confidence Game: How Unelected Central Bankers are Governing the Changed World Economy, 1995.) In the Clinton years, policymakers seemed to understand this message. In the years that followed, the policymakers seemed to go out-of-their-way to avoid hearing this message.

The United States needs to start listening again. The Federal budget must be brought under control and the nation must move ahead in a disciplined manner with respect to debt creation. The Federal Reserve System must not be charged with multiple responsibilities that distract it from what should be its main focus - inflation. This is more complex than just concentrating on the “flow” prices that are captured in the major price indices. I will write more on this topic in future posts.

There is no doubt that the United States government needs to review its fiscal programs and policies, its needed public investment. A lively debate must take place with respect to things like the war in Iraq and elsewhere, universal health care, the infrastructure, education, and so on. However, this discussion must take place within the constraint of what it takes to be a partner within the world community and operate according to the rules of membership. We may not like this since we Americans do not take well to the discipline of others. However, we are a member of the world community and we must be a GOOD member. Citizens of the United States must remember this.

We must also get away from the “Fundamentalism” that permeates both ends of the political spectrum. We cannot promote a left wing “Tax and Spend” fundamentalism any more than we can promote a right wind “Tax Cut and Spend” fundamentalism. We cannot be locked into past doctrine - we must be more pragmatic in practice. We cannot hold up politically correct tests of membership from the right or from the left. We must shake off these remnants of the past!

 

Comments

[Zee4Money]

Looking forward to the book. Hope to see you on John Stewart! Keep up the good work.

[ajhough]

How do we get a grip on $150 plus going to Iraq? We have done all of it on the credit card. We need to get a grip on the uncontrolled futures market, unregulated corporate greed, and the oil men in the executive branch.

[BerkeleyBob]

Excellent ananysis. Even prior to the present administration, there was a considerable disconnect between fiscal and monetary policy. The spiralling costs of our misadventure in Iraq represent misdirected resources. We get a grip on $150 per barrell oil by encouraging short and long term energy replacements and not by ethanol from corn.

[Skjellifetti]

"If the value of the U. S. dollar has been falling for seven years or so, maybe the market is trying to tell it something."

The market is telling us only that our Import:Xport ratio is greater than 1, nothing more, nothing less. While gov't fiscal imprudence is a contributor to this situation, it is not the only or even the most important factor. It also appears that the problem is self-correcting, or at least would be if we did not import so much oil. If I:X is too high, the dollar drops and I:X falls. So why is there so much hand wringing over the drop in the dollar relative to other currencies? Presitige? Bah! Who cares! Seems like the fall could have many useful side effects such as reversing or slowing the decline of American manufacturing.

[jlounsbury59]

I started in the 1980's to joke about the the political label "Tax and Spend" being only the spoken side of the equation; "Cut Taxes and Spend" was the other side. No other labels matched the reality of the times. I am pleased to see the recognition of this reality, although it is belated.

We have taken on debt (national debt) to pay for "living expenses". Economic logic dictates that debt is justified only as investment, when the future return justifies (and retires) the debt. For example, if we increased debt to develop lower cost renewable energy, the debt could be retired with the future savings on energy expense and increased productivity. Only investment with payback should be undertaken.

If a universal health care system saves cost in the total economic system, those savings can be applied against the cost of implementing and running the system. Any remaining debit balance would be paid with taxation and/or user premiums. Any other solution is unsound and digging a deeper pit for our future.

Can sound economic policies be supported by a populace that lives by systematically borrowing from home equity and nearly maxed out credit cards to maintain living style?

[Dusty]

Our primary problem is that the great majority of the population considers that everything said by the rulers or lawmakers or by the wealthy upper crust is a self-serving lie. Or at least a severe 'spin' on reality. Events generally validate this belief. AS: What really happened in Vietnam? How did this Iraq War come to be? What actually allowed the Telecom and Subprime Crashes? Why should we believe anything said about Peak Oil, General Over-extended Credit, Global Warming? From a walk-up 3rd floor apartment in the medium rent part of the city it is all taken as just noise from the rich who are trying to get richer: at (my) expense.

[icandoitdon]

letting the dollar continue to fall is worth considering. we could lower interest rates to 0 to help it along its downward path. oil and agricultural commodies could then continue to rise. but think of the benefits:

1. it would force conservation in both oil and food...god knows americans are too fat and drive too much anyway.

2. those who couldn't afford $6 or $8 gas could ride bikes. they probably need the exercise anyway.

3. we could bankrupt the airline, trucking and domestic auto industries...who needs em? they use too much energy and they're polluters. best of all we'd get rid of the hummer once and for all.

4. half the retailers in the country would go under because of shrinking disposable income. good riddance...too many stores anyway.

5. banks couldn't lend if they wanted to since there would be nobody creditworthy to lend to....except foreigners. no matter...everyone knows banks can't lend responsibly anyway.

6. it would stimulate investment by foreign companies...big time. they'd not only own our government but our assets too.

7. we could get rid of our illegal immigration problem. our standard of living and mexico's would soon be equalized. no need for them to come here. hell, we might even start to go there....

8. and for the big payoff.....we could sell lots of our crap to other nations that nobody here could afford to buy anymore. that would eliminate our trade deficit and help put to work all the people who lose their jobs in the airline, trucking, auto and retail industries. with nonunion jobs we'd even have shot at being the world's "low cost producer."

i know of a number of third world countries that have followed this same model with great success. sounds great doesn't it?