Monday, May 16, 2005

Rubin Disappoints

I have a lot of respect for Robert Rubin, Clinton's Secretary of the Treasury. By all accounts a tremendously intelligent and able man, he worked his way to up the the pinnacle of Goldman, Sachs - the preeminent US investment banking firm. You CANNOT be anything other than extraordinary to run Goldman. As SecTreas his performance was quite strong nowhere more important than his guidance during the Long-Term Capital fiasco in 1998 which could have, if managed badly, shaken the financial system quite severely. The Bush Cabinet has notably been weak in this regard, in today's complex financial environment a very good money man is much more important than a very good captain of industry.

That said, Rubin wrote an opinion piece on the budget deficit in Friday's New York Times that I found surprisingly disappointing. He does a good job of pointing out the fiscal imbalances and notes the Medicare shortfall is much larger than the Social Security one but fails to give any real prescription to meaningfully cutting the deficit while indulging in a bit of sophistry that could have been taken from the Democratic generic talking points.

For example, if the tax cuts for those earning above $200,000 were repealed and the inheritance tax as reformed were continued rather than eliminated, the 10-year projected deficit would be reduced by roughly $1.1 trillion, or almost 25 percent, and the 75-year fiscal reduction would be roughly $3.9 trillion, or approximately equal to the Social Security shortfall. This course of action would be similar to the income tax increases that were combined with spending cuts in the 1993 deficit reduction program, which some predicted would lead to recession but which, instead, was followed by the longest economic expansion in our nation's history.

Rubin basically argues that spending must be cut and taxes raised and he refers to the 1993 deficit reduction program as the model. Here are some figures for the 1993-2004 period:

year revenues growth outlays growth
1993 1,154.40 5.78% 1,409.50 2.02%
1994 1,258.60 9.03% 1,461.90 3.72%
1995 1,351.80 7.41% 1,515.80 3.69%
1996 1,453.10 7.49% 1,560.50 2.95%
1997 1,579.30 8.68% 1,601.20 2.61%
1998 1,721.80 9.02% 1,652.60 3.21%
1999 1,827.50 6.14% 1,701.90 2.98%
2000 2,025.20 10.82% 1,789.10 5.12%
2001 1,991.20 -1.68% 1,863.00 4.13%
2002 1,853.20 -6.93% 2,011.00 7.94%
2003 1,782.30 -3.83% 2,159.90 7.40%
2004 1,880.10 5.49% 2,292.20 6.13%

data: CBO

year GDP 2000 $ % growth prv yr.
1993 7,532.7 2.67%
1994 7,835.5 4.02%
1995 8,031.7 2.50%
1996 8,328.9 3.70%
1997 8,703.5 4.50%
1998 9,066.9 4.18%
1999 9,470.3 4.45%
2000 9,817.0 3.66%
2001 9,890.7 0.75%
2002 10,074.8 1.86%
2003 10,381.3 3.04%
2004 10,841.9 4.44%

data: BEA

If you look at the data a much more accurate description would be that the US economy prospered IN SPITE of the higher taxes thanks to an unusual confluence of events like the technology and internet boom, astonishingly high rates of productivity growth and the peace dividend which allowed spending to grow at much lower rates. Its important to not that it was only during the latter stages of that boom that the budget deficit swung to surplus as Treasury revenues spiked (10.82% revenue growth from 1999 to 2000!) due in part to higher wages and the big wealth effect of the exploding stock market. As a matter of fact, and this is partly due to the 2001 and 2003 tax cuts, revenue has only caught back up to 1999 levels while outlays are up some 35% in the same period due in great part to what the US has had to do internally and externally since September 11.

A better course of treatment would be fiscal discipline to trim spending where possible without endangering national security and a policy conducive to economic growth that will grow the base from which government can draw revenue. There isn't a panacea for the budget deficit and Rubin is careless in glibly proposing lower spending and higher taxes.

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