In April 2004, AFL-CIO president John Sweeney grew concerned that John Kerry was getting too much of his economic advice from the Wall Street wing of the Democratic Party. Kerry had just completed his primary sweep. In the general election, he would need the unions. Sweeney proposed a private meeting to discuss living standards as a campaign issue, and the candidate invited the labor leader to his Beacon Hill home. Sweeney arrived at the Kerry manse, bringing his policy director, Chris Owens, and Jeff Faux of the Economic Policy Institute. There, seated in the elegant living room, were Robert Rubin and two longtime lieutenants: investment banker and former Rubin deputy Roger Altman, and fellow Clinton alum Gene Sperling -- Kerry's key economic advisers.
In a three-hour conversation, the group discussed the deficit, taxes, trade, health care, unions, and living standards. The labor people urged the candidate to go after Wal-Mart's low wages. Rubin countered that a lot of people like Wal-Mart's low prices. Kerry eventually announced that the meeting needed to wrap up, because "Bob has to get back to Washington." Rubin responded that, no, he could stay as long as Kerry wanted. Sweeney and his colleagues were ushered out the door; Rubin, Altman, and Sperling remained. "Wall Street was in the room before we arrived," says Faux, "and they were there after we left."
Now, more than two years after Kerry lost a winnable election, the Democrats have taken back both chambers of Congress, running on an economic platform far more populist than Kerry's. With the strongest field in decades, they could win the presidency in 2008. Though Hillary Clinton is running as an economic centrist, a ticket led by John Edwards, Barack Obama, or Al Gore (if he gets in) would probably run a robust campaign on pocketbook issues. But if the Democrats do take back the White House, they are likely, once again, to find Bob Rubin in their living room.
Formerly co-chairman of America's top investment bank, Goldman Sachs, Rubin now chairs the executive committee of the country's leading commercial bank, Citigroup. In between, he served as head of Bill Clinton's National Economic Council, then as treasury secretary, and he continues to be the party's preeminent economic guru. Other men have stood at the pinnacle of Wall Street. No one else has simultaneously been at the pinnacle of the Democratic Party.
Of course, there have been other influential Wall Street Democrats. John J. Raskob, the party chairman and senior executive of General Motors and DuPont, was a powerfully conservatizing influence on the pre-Roosevelt Democratic Party. The treasury secretaries under Democratic presidents Roosevelt, Truman, Johnson, Kennedy, and Carter all were fiscal and regulatory conservatives, as were such Democratic Party leader-cum-lobbyist types as Bob Strauss and Tony Coelho. But none combined Rubin's power on Wall Street, his admiring press, and his broad sway over the party's economic posture.
A man of nimble intellect, self-effacing charm, and professed concern for America's downtrodden, Rubin functions as what once would have been called a power broker. But that label doesn't attach to Rubin, because he is so seemingly public-minded, so socially liberal, and so genuinely nice. David Bonior, among the most pro-labor of Democrats when he was House Democratic Whip and now John Edwards' campaign manager says, "Of all the people I dealt with in the administration, he was the most accessible, engaging, and the least arrogant. We often didn't agree, but you could always have a dialogue."
And it was a dialogue that Rubin usually won. Rubin's rise is not just personal but structural. It reflects, and reinforces, the increasing influence of finance on the American economy and polity, through both deregulated financial markets and campaign money.
Rubin's extraordinary power reflects the synergy and networking of his multiple roles -- as fund-raiser, gatekeeper, banker, certifier of fiscal soundness, and as the man reputedly responsible for the boom of the 1990s. Rubinomics, of which more shortly, is credited with balancing the budget, broadening prosperity, and redeeming the Democrats as fiscal stewards.
Rubin enjoys unparalleled reach into the overlapping worlds of corporate and Wall Street boardrooms, nonprofits, party organs, and senior Democratic politicians. The leading center-left Democratic-oriented think tank, the Center for American Progress (CAP), has Sperling as a senior fellow in economics. Despite bolder initiatives on health insurance and other issues, and some staffers to Sperling's left, CAP's core view of budget balance, regulation, and trade, are close to Rubin's. The Hamilton Project, founded by Rubin and based at the Brookings Institution, promotes free capital movements, fiscal balance, and small gestures toward greater equality. In April, Rubin will serve as honorary co-chair of the 25th anniversary gala of the Center on Budget and Policy Priorities, the most respected liberal think tank on fiscal issues. Rubin also serves as vice chair of the Council on Foreign Relations.
It was Rubin who promoted his protégé Larry Summers for president of Harvard, certified Summers' supposed new maturity, and resisted Summers' ouster. Rubin is one of only seven members of the Harvard Corporation, yet characteristically, when the Summers presidency exploded, little mud splattered on Rubin. And although he no longer raises large sums for political candidates himself, Rubin remains very close to others in the Wall Street Democratic money machine, and to its party conduits, particularly Senator Chuck Schumer, who heads the Democratic Senate Campaign Committee, and Representative Rahm Emanuel, Schumer's House counterpart in the 2006 campaign.
When the Democrats took back the House in 2006, incoming Speaker Nancy Pelosi advised the new Democratic caucus that its first two briefings would include one on defense, with three experts of differing views. On the economy, Robert Rubin would be appearing, solo.
Though widely regarded as a Wall Street liberal, Rubin has played the same fiscally conservative ideological role for more than two decades, first as a fund-raiser, then as a high public official. Rubin was one of the Wall Street donors who persuaded 1984 Democratic presidential nominee, Walter Mondale, to make his politically disastrous call for tax increases to balance the budget the centerpiece of his convention address. "I respected Bob a great deal -- still do -- and often drew on his thinking," Mondale recently confirmed to me.
As Clinton's top economic adviser, Rubin's dubious counsel included making the North American Free Trade Agreement (NAFTA) a priority over health reform (Hillary Clinton's objections notwithstanding), and pushing the budget all the way to surplus, protected from a Republican treasury raid only by a fictitious Social Security "lockbox." He did support expansion of the earned income tax credit and minor social-spending increases, but fiscal discipline was paramount. These views are not just those of a centrist policy kibitzer; they are exactly what you would expect of a leading banker.
Rubin's position as the Democrats' economic seer is unfortunate in several related respects. First, the vision Rubin is selling offers nothing for an economically stressed electorate. His theory is that budget balance, free capital markets, and low interest rates are both necessary and mostly sufficient for broad prosperity. We might like new social spending, but alas, the fiscal imperatives tie our hands. Rubin was a big supporter of pay-as-you-go-budget rules, now adopted by the Democratic congressional majority. These rules limit further Republican tax cutting, but they also hobble Democrats' ability to spend more than token sums on new initiatives.
Rubin contends that surpluses are required to prepay the coming costs of Social Security (which are in fact manageable) and of Medicare (which are not). But the absence of new public outlay in Rubin's fiscal design precludes bolder strategies, such as increasing efficiencies and containing costs by making health insurance universal. Despite soothing rhetoric, the Rubin program offers nothing to fundamentally alter the economic risk and stagnation afflicting the broad working middle class. If the Rubin doctrine again dominates the Democrats' pocketbook program, it will once again blunt the Democrats' (now resurgent) appeal as the party of the common American.
A senior liberal member of Congress told me, "It's fair to criticize Rubin on ideological grounds, but he's utterly sincere in his views." Rubin tends to get a free pass on actions that, in lesser men, would be seen as plain conflicts of interest. For example, Goldman Sachs, which Rubin left to join Clinton, was a prime underwriter of Mexican bonds both before and immediately after the passage of NAFTA, as Faux points out in his book, The Global Class War. Goldman was also the investment bank that underwrote the privatization of the Mexican national phone company, Telmex, in the late 80s. After NAFTA created a gold rush of foreign money into Mexico, enriching Goldman Sachs and its clients and triggering an unsustainable speculative boom followed by a crash, Rubin promoted the bailout of Mexico that made foreign bondholders whole. A little-noticed provision of NAFTA permitted foreign banks to acquire Mexican ones. In 2001, Rubin, back in the private sector, negotiated Citigroup's $12.5 billion acquisition of Mexico's leading bank, Banamex.
As Clinton's adviser in trade negotiations, Rubin's top priority was less a level playing field for American exports than rapid access for U.S. financial capital. In negotiations for China's membership in the World Trade Organization, then-Chinese Prime Minister Zhu Rongji came to Washington in April 1999 to consummate the deal. According to Joseph Stiglitz, former head of Clinton's Council of Economic Advisers, Zhu, a reformer, went home empty handed because he failed to satisfy Treasury's conditions on rapid financial market liberalization and on access for foreign banks, which Rubin pushed over the objections of the State Department and the U.S. trade representative.
Rubin's crowning achievement was the repeal of the 1933 Glass-Steagall Act, which had separated largely unregulated and more speculative investment banks like Goldman Sachs from government-supervised and -insured commercial banks like Citi, which play a key role in the nation's monetary policy. Glass-Steagall was designed to prevent the kinds of speculative conflicts of interests that pervaded Wall Street in the 1920s and helped bring about the Great Depression (and reappeared in the 1990s).
Glass-Steagall was steadily weakened by regulatory exceptions under three administrations going back to George Bush Senior. The premise was that tearing down the regulatory walls would promote competition. But the effect was to create greater concentration and renewed opportunities for insider enrichment.
Financier Sanford Weill gradually assembled the empire of insurance, commercial-banking, and investment-banking pieces that ultimately became Citigroup, helped by indulgent regulatory policies promoted by Federal Reserve Chairman Alan Greenspan and Rubin. When Congress formally repealed Glass-Steagall, in November 1999, the act was termed in some circles the "Citigroup Authorization Act." Rubin had stepped down as treasury secretary that July. His new job, announced in late October, was chairman of Citi's executive committee. Rubin's initial annual compensation was around $40 million.
In November 2001, as Enron was collapsing, Rubin phoned Peter Fisher, undersecretary of the treasury for domestic finance, and inquired whether it might be a good idea for the Treasury Department to suggest that credit-rating agencies delay a downgrading of Enron's debt. Enron owed Citi about $750 million. Fisher wisely fended off the pressure. When word of Rubin's lobbying leaked out, the Treasury and "a source close to Rubin" issued nicely complementary statements, so that Rubin's inquiry was treated by the press as tentative, hypothetical, and above all public-minded.
As a top Citigroup executive, Rubin uses his unequaled Democratic contacts to resist reregulation. In a recent interview, I asked Rubin whether he saw any need for tighter regulation of hedge funds, the massive, nominally private investment funds that enjoy a wholesale exemption from the system of financial disclosure that has kept financial markets tolerably transparent since the New Deal. "I don't know why you would single out hedge funds," Rubin replied, in a sincere tone that suggested genuine puzzlement at the question. Why, indeed? Citigroup has hedge-fund and private-equity subsidiaries, lends to hedge funds, places trades for hedge funds through its brokerage affiliates, and works with hedge funds through its investment-banking arms. "There is an immense [regulatory] cumbersomeness that we've created in corporate America," Rubin added. "It's not just that it's costly; it's the deterrent effect that it's created on people's willingness to take risks."
Rubin did volunteer that he is worried about the explosion of derivatives, that margin and capital requirements need to be increased. "That's not a very popular position on Wall Street," he chuckled. Quite so. However, neither Rubin nor Citigroup is promoting tighter regulation of derivatives.
As we were going to press, Rubin was speaking at a two-day U.S. Chamber of Commerce conference on the need to lighten the regulatory load. A New York Times story identified him as former treasury secretary, not as a current Citigroup executive. The potential conflicts in Rubin's multiple roles tend to be excused by many Democrats, in part because Rubin's stewardship of the economy in the middle and late 1990s is credited with producing the holy grail of Democratic economic policy: full employment, with rising living standards and greater income equality.
But for the most part, that credit is misplaced.
Supposedly, the gradual progress to budget balance that began in 1993 produced lower interest rates. Investment, higher growth, and full employment duly followed. The Clinton administration's embrace of this strategy began at a private meeting in the Arkansas governor's mansion in December 1992. There, Greenspan indicated that if deficits were reduced, the money markets would likely approve, and the Federal Reserve could deliver a somewhat looser money policy. A prime advocate for the Greenspan view was Rubin. In a key strategy meeting, Clinton famously exploded that his whole economic vision and political future were being held hostage by "a bunch of fucking bond traders." At another planning session recounted by Bob Woodward, Clinton declared with sarcastic disgust: "Where are all the Democrats? We're all Eisenhower Republicans & . We stand for lower deficits and free trade and the bond market. Isn't that great?"
Clinton did succeed in producing a budget surplus. To his and Rubin's credit, the budget included tax increases on the rich as well as cuts in spending. Interest rates did fall, and the economy did briefly reach full employment. But Clinton's initial skepticism was correct. The cause and effect did not follow the Greenspan-Rubin script.
The '90s saw declining inflation, looser money, and rising productivity growth, for reasons unrelated to Clinton's slaying of the deficit. The economy's previous investment in computers was belatedly raising productivity growth rates. With higher productivity growth, the Fed didn't have to "take away the punch bowl," as former Chairman William McChesney Martin famously put it, for fear of letting growth trigger price pressures. Greenspan let the recovery rip because he saw few signs of inflation, not because of reduced deficits. The weakness of unions and the globalization of the economy also damped down wage pressures, while foreign competition disciplined producer prices.
Supposedly, deficits raise interest rates because government borrowing "crowds out" private investment. But with the globalization of capital markets, there was no crowding out. Having foreigners supply most of the U.S. economy's capital is not sustainable in the long run, but in the 1990s it worked. In fact, it worked too well, and global financial speculation kept triggering runs on currencies. So Greenspan, despite worry that "irrational exuberance" was producing a stock-market bubble, declined to tighten money. The spigots were kept wide open, to bail out Mexico, and then much of East Asia. With credit cheap, and cooked corporate books exaggerating the good news, investors kept inflating the stock bubble.
As research by economists Dean Baker, Robert Pollin, and the Fed's research staff has demonstrated, the late '90s boom was mainly the consequence of the same stock-market bubble. At its peak in 2000, Baker calculates, "Households held approximately $5 trillion in bubble wealth in stocks." This paper wealth would be wiped out. But while it lasted, Baker computes, it produced $150 billion to $200 billion in additional annual consumption. So it was higher productivity, a compliant Fed, and consumption financed by a stock bubble that generated the bout of full employment. Budget balance deserves only minor credit (while Rubin's support for global speculation helped inflate the bubble).
In fairness, the deficits inherited from Presidents Reagan and Bush Senior did need to be reduced -- but not to zero. Rubin also gets credit for helping the Democratic Party escape its "tax and spend" reputation. But if there's anything more toxic for ordinary consumers and voters than tax and spend, it's tax and not spend.
Nobel Prize-winning economist Stiglitz wrote in 2003, "I believe we pushed deficit reduction too far." Instead, Stiglitz credited the 1990s boom to "the technological innovations -- the computer revolution -- and the process of globalization, changes in the economy that were proceeding before Clinton took office, and that would be little affected by deficit reduction." Stiglitz went on to wish, with hindsight, that instead of devoting tax revenues to deficit reduction, "Clinton had used the additional funds to finance more investments in R&D, technology, infrastructure and education. & GDP in the year 2000 would have been higher, and the economy's growth potential would have been stronger."
Thanks to Rubin's extraordinary facility at cross-fertilizing his multiple roles, his Republican contacts are as good as his Democratic ones. Hank Paulson, the current treasury secretary, is, like Rubin, a former chairman of Goldman Sachs. The ex-chief of George W. Bush's now-dormant National Economic Council, Steve Friedman, was Goldman Sachs' co-chair, with Rubin, in the early '90s. Goldman Sachs and Citigroup continue to be among the top 10 business donors to both parties. Bipartisan access doesn't get any better.
Discounting his mainly verbal support for a more equal America, Rubin's economic views are much as Clinton described: Eisenhower Republican. Rubin has personally pitched President Bush on his proposed grand fiscal bargain: The Democrats agree to cap Medicare and Social Security, the Republicans agree to raise some taxes, and a glorious future of budget balance ensues. Only Bush's resistance to tax increases has saved the Democrats from this ideological and political neutering. But Rubin continues to promote his recipe through his Hamilton Project.
The project, launched a year ago, began with several appealing premises. Its founding manifesto, written by Rubin, Peter Orszag, Altman, and Jason Bordoff, declared, "Prosperity has neither trickled down nor rippled outward." And government is part of the solution. ("Effective government can enhance economic growth.") Specifically, programs of economic security can help "by enabling people to take the risks that promote growth" and by "lessening calls for growth-diminishing policies like closing our markets to competition."
So far, so good. But the Hamilton Project's actual program does not advocate serious new social outlay, nor does it have a kind word for unions, wage regulation, or social norms for trade. With the exception of one early paper by Jacob Hacker on "Universal Insurance," Hamilton proposals are basically budget-neutral. I asked Rubin what level of net new social outlay the project envisioned. He declined to say.
Last July, at a Hamilton Project public program, The Washington Post's Steve Pearlstein mischievously asked panelists Rubin, Altman, and Summers why not take a "time out" on further trade deals until Congress passes some of the social buffers that the project keeps endorsing in principle. "To a man, they recoiled at the idea," Pearlstein reported.
Calling this posture "a perfect example of how the Democrats have lost the instinct for the political jugular and the ability to use policy disputes to political advantage," Pearlstein added, "The idea here isn't to kill free trade. It's to take it hostage." Lately, many Democrats in Congress have indeed been trying harder to hold the next trade deal hostage to more social protections. If they fail, Rubin's counsel will have played a key role.
As I observed in a recent review essay in these pages [see "Must Trade Kill Equality?" TAP, March 2007], the Hamilton Project is basically right that with adequate social investment, a nation can have both relatively open trade and a decent income distribution. The nations of the European Union manage this balancing act, but it costs about 15 additional percentage points of gross domestic product spent socially -- around $2 trillion a year by U.S. standards.
The small-bore programs advocated by Rubin and Hamilton offer little to economically stressed citizens. If Rubin is in charge of the Democratic economic program once again, the message will not rouse voters, because the policy will do next to nothing for the average American.
A blind spot in the usual story of the Democratic party's capture by "interest groups" is the failure to notice Wall Street as an interest group. In the usual media account, the obstacles to the party's modernization are such groups as abortion-rights advocates, blacks, gays, and unions. Candidates can score points with pundits for showing independence by taking on, say, the unions on school vouchers, or African Americans over inflammatory rhetoric (Sister Souljah), or civil libertarians over the death penalty (then-Governor Clinton's refusal to spare Ricky Ray Rector).
Such actions are said to show political courage by resisting "politically correct" politics and entrenched interest groups. But taking on the most powerful Democratic Party interest group of them all -- Wall Street -- is viewed as a sign of recklessness, unsoundness, demagoguery, and political suicide. A mark of Wall Street's ubiquitous power in defining the limits of the politically thinkable is that its power is hardly noticed. The personification of this power is Robert Rubin.
In reviewing published articles on Rubin going back two decades, I literally could not find a single feature piece that was, on balance, unflattering. The friendly press is a mark of the man's exceptional charm, which also helps explain his political influence. Rubin managed to beguile even the indefatigable William Greider, who bows to nobody in his grasp and criticism of Wall Street's dominant role in the economy. But in his generous Nation magazine profile of Rubin last July, Greider thought he detected heartening change.
"When Robert Rubin speaks his mind, his thoughts on economic policy are the gold standard for the Democratic Party. & So it's a big deal when Robert Rubin changes the subject and begins to talk about income inequality," Greider began. "More startling, Rubin now freely acknowledges what the American establishment for many years denied or dismissed as inconsequential -- globalization's role in generating the thirty-year stagnation of U.S. wages, squeezing middle-class families and below, while directing income growth mainly to the upper brackets."
However, in the full interview transcript, published by The Nation online, Greider did ask Rubin lots of tough questions. But Rubin pointedly declined to embrace policies to carry out his liberal rhetoric.
The only unkind piece I found on Rubin was a short column of press criticism in, of all places, Forbes, the self-described "capitalist tool," making fun of a page 1 Rubin profile that The New York Times ran not long after the exposure of Rubin's lobbying on behalf of Enron. Instead of going into the possible conflicts in Rubin's multiple roles, the fawning Times piece was headlined "Rubin Relishes Role of Banker as Public Man." As Forbes acidly noted:
The Enron angle was the only legitimate reason for putting this Rubin puff piece on page one, yet the story did not get around to Enron until the fourth paragraph. Even then, the story carefully noted that Rubin "spoke as a banker, and also as a former Treasury chief concerned about the risks to the markets." In other words, Rubin was not merely looking out for Citigroup's interests; he was acting as a public-spirited citizen & .
So how are Bob Rubin and Rubinomics positioned for 2008? All too powerfully, one suspects. The Hamilton Project will continue to turn out centrist policy papers trying to signal boldness with scant resources. Rubin will continue promoting his grand bargain to cap social insurance, raise taxes, offer token benefits, and further liberate global private capital. He will continue to have unparalleled influence with Democrats, and to receive an adoring press.
In presidential politics, Rubin is personally close to Hillary Clinton, but this trader covers his bets. His son, Jamie Rubin, is a major Wall Street fund-raiser for Barack Obama. His former deputy chief of staff, Karen Kornbluh, is Obama's chief domestic policy adviser, and Rubin is also close to Obama's chief of staff, Steve Hildebrand, who used to hold the same position for former Senate Democratic Leader Tom Daschle, another Rubin ally.
One candidate who might well reject Rubinomics is John Edwards, who is unlikely to raise large sums on Wall Street. And even Edwards is talking more about our duty to the poor, and less about the need to reregulate capitalism. However, should the populist Edwards be nominated, he will need a calming figure to reassure Wall Street that he is not an economic madman. Someone like Bob Rubin.
Robert Kuttner is co-founder and co-editor of The American Prospect.