The Wall Street Journal-20080115-Rubinomics R-I-P-
Return to: The_Wall_Street_Journal-20080115
Rubinomics R.I.P.
If our Washington, D.C., readers noticed a cortege of blue suits carrying a casket in front of the Brookings Institution last week, be not mournful. You were merely watching the leading economists of the Democratic Party burying the faith once known as Rubinomics. May it rest in peace.
Rubinomics is the concept of "deficit reduction" as growth policy: Lower the federal budget deficit and, as dawn follows night, interest rates will fall and prosperity will break upon the land. Named for former Treasury Secretary Robert Rubin, and much celebrated in the 1990s, the concept was embraced as gospel by nearly all Democrats as recently as a few weeks ago. But last week it officially expired, as those same Democrats reconverted to Keynesian deficit spending in the name of "economic stimulus."
Mr. Rubin's successor at Treasury, Larry Summers, started the bidding with a $65 billion tax rebate and spending plan. Hillary Clinton saw that and raised, and now wants $40 billion in tax rebates and $70 billion in new spending for unemployment insurance, housing assistance, home heating subsidies and green technologies. Barack Obama joined the fray Sunday, proposing a $75 billion "stimulus" that would have the government send millions of Americans a check for $250, plus another $250 in bonus Social Security payments.
But wait, what about those evil Bush deficits? Only weeks ago, Democrats claimed those were the road to perdition, even if the deficit had shrunk to 1.2% of GDP last year thanks to booming revenue growth. Remember the imperative of "pay as you go" budgeting? Ah, that was all before Iraq faded as a political winner and the economy became their favorite issue for regaining the White House. Now, all of a sudden, their motto is tax cut and spend.
"Stimulus shouldn't be paid for," declared Mrs. Clinton on NBC's "Meet the Press" on Sunday. "The stimulus, by the very nature of the economic problems we're facing, is going to require an injection of federal funding." And no less than the oracle himself, Mr. Rubin, appeared at Brookings last week to declare that a deficit-padding stimulus "can give the economy a timely boost in the face of great uncertainty and concern with the short-term economic outlook." The coroner will note that the cause of death here is suicide.
As a matter of policy, this passing is just as well. Rubinomics never did have much economic basis, and even casual observation over the last 25 years has exposed its illogic. As deficits rose in the 1980s, interest rates fell. In the current decade, deficits rose and interest rates fell for a time, then later deficits fell but interest rates rose.
Even in the 1990s, the facts never matched the theory. The rate on the 30-year Treasury bond did fall in 1993 amid the Clinton tax increases, but it slowly climbed again throughout 1994. The historic market turn -- in stocks and bonds -- came exactly on the day in 1994 that Republicans won the House of Representatives for the first time in 40 years. Interest rates move up or down based on multiple variables, such as monetary policy and global capital flows. Deficits within reasonable bounds are a bit player.
Another benefit of this Democratic disavowal of deficits is that we can now have a debate about what really "stimulates" an economy. The born-again Keynesians want to send checks to voters, who will spend or save the cash. Even if they spend it, however, any stimulus will be temporary, and in any case even a $100 billion "injection" will count for little in a $13 trillion economy.
But these Demogrants might be politically useful as part of a negotiation to pass some genuine stimulus. We're referring to a tax cut that increased individual or business incentives to work and invest. Our preference is for an immediate and permanent across the board cut in marginal income tax rates. Unlike the $250 rebate -- inflated upwards from Jimmy Carter's famous $50 version -- marginal rate cuts would help the economy enough that they'd "cost" the Treasury far less in lost revenue. This is the kind of political trade the White House should be working on if it really wants to pass a "stimulus" this year.
Yes, many will fret that these tax cuts would only increase the deficit. But now we have even Robert Rubin and Hillary Clinton instructing us that deficits don't matter. Somewhere, Dick Cheney is smiling.
(See related letter: "Letters to the Editor: Fiscal Stimulus Is Good for the Short Run" -- WSJ January 18, 2008)
