November 10, 2013
Along with Alan Greenspan, Robert Rubin is the person most responsible for the country’s economic downturn. He helped steer the country on a path of bubble-driven growth and massive trade deficits. The latter was the result of the IMF engineered bailout from the East Asian financial crisis. The outcome of this bailout was a rush by developing countries to accumulate dollar reserves in order never to have to be in the situation that the East Asian countries faced in dealing with the IMF. This sent the dollar soaring, making U.S. goods and services uncompetitive internationally, causing the trade deficit to explode.
The lost demand from the trade deficit was offset in the 1990s by the stock bubble. The wealth created by the bubble led to a boom in consumption. Also, the ability for hare-brained Internet start-ups to raise billions by issuing stock led to an investment boom in hare-brained Internet start-ups. The bursting of the stock bubble gave us the longest period without job growth since the Great Depression. However the economy did eventually recover on the back of the housing bubble. The collapse of that bubble has given us an even longer stretch without job growth, ruined millions of lives, and will likely cost us tens of trillions of dollars in lost output.
In addition to steering the country to disaster, unlike Alan Greenspan, Robert Rubin managed to directly profit from the calamity. He personally pocketed over $100 million from his stint as a top executive at Citigroup. Citigroup was at the center of the housing bubble and meltdown. It required hundreds of billions in below market loans from the government, along with implicit and explicit guarantees to stay afloat. Naturally we should value the economic opinions of such a person, hence the Washington Post gave him space for a column telling us how China and the United States can have a mutually beneficial relationship.
Not surprisingly much of what Rubin says is just flat out wrong. He tells readers:
“The United States criticizes Chinese interest-rate, land and other subsidies that support investment and exports, including a managed exchange rate (though that has less effect, for now, because China’s current-account surplus has declined substantially). U.S. officials also fault significant shortfalls in China’s protection of intellectual property rights, including cyber-appropriation.
“China has long expressed strong concern that U.S. fiscal deficits could lead to unduly high interest rates, a U.S. or global financial destabilization or, alternatively, serious inflation.”
The comments about U.S. fiscal deficits leading to a financial crisis or inflation seem at best confused. Whatever China’s concerns, there is no basis in reality for this one. The deficit at present is modest and in fact the budget would be nearly balanced if the economy were at full employment. The projections of longer term deficits stem from a broken health care system.
We pay more than twice as much per person for our health care as people in other wealthy countries. Serious people would focus on ways to reduce health care costs, rather than cutting government benefits. It is almost impossible to imagine the sort of financial crisis that Rubin seems to envision. It would certainly help readers (and possibly Mr. Rubin) if he tried to spell out what exactly he has in mind.
The fact that China’s trade surplus had fallen in recent years is good news for the world. However, it still has a substantial surplus. We would expect a fast growing country like China to be running a trade deficit. Relatively slow growing rich countries like the United States should be running trade surpluses as capital is supposed to flow to developing countries where it is in short supply and can be better used.
This is important for deficit hawks like Robert Rubin. As an accounting identity (i.e. there is no way that even rich and powerful people like Robert Rubin can get around it) net national savings are equal to the trade surplus. This means that if we have a trade deficit then we will have negative net national savings. That means that we need either negative savings on the private side or a budget deficit, or a combination.
Robert Rubin has told us repeatedly that he doesn’t like budget deficits. This means that if we have a trade deficit then must have negative national savings on the private side. In normal times, positive household savings have been roughly offset by negative corporate savings. The only notable exceptions to this story were doing the stock bubble and the housing bubble. This means that if China and other countries do not raise the value of their currency against the dollar, and we move back toward a balanced budget as Mr. Rubin proposes, then we should look for another bubble to drive the economy.
Rubin’s recipe for China is not any more appealing. He wants China to adopt U.S. type rules on patents and copyrights. This will mean, for example, that drugs that would sell in a free market for a few dollars per prescription will instead have government granted patent monopolies that will allow them to sell for hundreds or even thousands of dollars per prescription. As an any believer in markets would recognize, this government interference in the market gives drug companies enormous incentive to push their drugs for uses that are inappropriate and to lie about their safety and effectiveness.
In the case of high tech, our patent policy has led Apple and Samsung to compete at least as vigorously with patent suits as with product design. And, our entertainment industry is constantly trying to push legislation that would make the whole world into copyright cops, making us legally responsible for helping them to enforce their copyrights. That is the path Rubin proposes for China.
As a recipe for balanced economic growth Robert Rubin’s plan would not fare well. For developing a plan to redistribute more income upward, he would probably merit an “A.”
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