Brad DeLong is a smart guy and a good economist. He makes the best argument one can that Bill Clinton and Bob Rubin did the best economic-policy job they could have under the political circumstances of the 1990s. But it does not convince.
The "double-or-nothing" social-democratic alternative, says Mr. DeLong, was politically infeasible. This, of course, is the classic political conversation stopper. But as the probabilistic thinking of Rubin that Mr. DeLong so admires tells us, nothing is certain. Political feasibility is in the eye of the beholder. In recent years, Ronald Reagan and George Bush Senior managed to ram through right-wing agendas that the conventional Washington wisdom told us were infeasible. Anyway, isn't making things feasible the function, and the test, of leadership? Clinton and Rubin gave so much to the Republican agenda -- on welfare, trade, regulation, and privatization, just to name a few. Couldn't Rubin's vaunted negotiating skills have been used to get something for the Democratic agenda in return?
And what's with this "double-or-nothing?" language? Tarring the modest social-democratic alternative with the same brush as George W. Bush's radical reactionary program wildly distorts the options that were available. My quarrel is not with the attempt to bring the deficit back under control. It is with the administration's obsession with proving itself to Wall Street by moving from deficit reduction to balanced budgets to surplus ... to eliminating the entire federal debt! If anything was double or nothing, it was the gamble that this process would, in some unspecified way, create space for what most of us saw as the Clinton administration's historic mission: to rebalance America's economic priorities after 12 years of conservative rule.
Probabilistic thinking -- yes, it does seem to be an overwrought term to rationalize one's decisions, but taking it at face value provides some insights here -- apparently was not applied to assessing the risks of failure to achieve the Democratic agenda. Indeed, Mr. DeLong lectures us on the evils of government spending crowding out "productive" (i.e., private) investment. Missing is any mention of how fiscal austerity crowds out
productive public investment. Does anyone believe that more investment in health care and education would have been less productive for the American economy in the 1990s than yet more private investment in financial derivatives or shopping malls increasingly loading up consumers with imported toys and unsustainable debt?
"Would it have been good for the country if Clinton's inauguration had been followed by year after year of slow growth?" Mr. DeLong asks. Certainly not. But as the National Bureau of Economic Research tells us, the recovery was, in fact, on its way throughout 1992. Yes, the recovery was slow, but the analytical point is that the economy was expanding at a time when it seemed unlikely that neither a re-elected George Bush Senior nor a "liberal" Bill Clinton would get the budget under control. So from the perspective of the financial markets, it appears that the probability that the budget deficit would not be tamed was not enough to stop the growth. Indeed, Mr. DeLong acknowledges that the contribution of the Clinton-Rubin policies might be as low as 20 percent.
In contrast, the probability that the austere federal budget would strangle the social-investment agenda upon which Clinton was elected increasingly became 100 percent. Once on the balanced-budget path, progressives started asking, "Where's the beef?" We were then told that social investments would have to wait until the federal government's balance sheet was clean enough to start borrowing for the baby boomers' retirement -- 20 years from now!
But if it was all about saving Social Security, why did we need this elaborate story about being credible to Wall Street in order to make room for progressive policies? This shift in rationale kindles some suspicion among we social democrats that there never was any intention of revising the basic Reagan priorities. Tragically, it also probably motivated disappointed progressives in New Hampshire and Florida to vote for Ralph Nader in 2000.
There is not enough space here to go into the Social Security problem, but the probability of the program not fulfilling its obligations to retired workers in 2020 is about zero. Certainly there are plenty of ways to solve the impending trust-fund deficit without forgoing investments in the education and training of the next generation of workers, which of course will make the problem even worse. Isn't probabilistic thinking supposed to assign probabilities to all of the options?
Moreover, given the experience with the Reagan-Bush Senior regimes, wouldn't there have been an extremely high probability that sometime in the next two decades the next Republican administration would loot the surplus carefully built up by the sacrifices of the Democratic constituencies and use it to reward its own -- as George W. Bush has done? Wouldn't serious probabilistic thinking have had someone estimating those odds?
The last line of defense is that Rubin did a masterful job in dealing with the various financial crises that erupted in the '90s. Even though I never had the inspiring experience of seeing Rubin resolve one of these crises by raising his eyebrow, I will concede the point. Just imagining our present treasury secretary in the same situation makes me tremble for my country.
But we have to connect the dots between Rubin's role in pushing for business deregulation and the subsequently unleashed speculative behavior that inevitably led to crisis. The repeal of Glass-Steagall is but one of the financial land mines Rubin left in the road that will surely one day explode in our face -- with the probability that a less talented treasury secretary will have to deal with it.
Thus, for example, Rubin's book appropriately gives him credit for the ingenious 1995 Mexican peso rescue. But it ducks any acknowledgement of his role as a champion of the North American Free Trade Act (NAFTA), the overselling of which created a speculative bubble in Mexican assets and drove up the peso to unsustainable heights. Even without the aid of probabilistic thought, it wasn't hard for many observers, including this one, to assign a high probability that the combination of an overhyped agreement, an overvalued currency, and a group of crony capitalists running Mexico would blow away the peso after NAFTA was signed.
Rubin's rescues -- foreign and domestic -- bailed out the very class of financial speculators whose unregulated herd behavior created the mess. It's an outcome Rubin says he regrets, but the market made him do it. Rubin was a financial fire chief with a talent for putting out fires and a policy of encouraging speculative pyromania.
The great thing about probabilistic thinking is that it allows one to escape responsibility for what actually happened. It's not so much what you did that counts, it's how you did it. The operation succeeds and the patient dies. In this case, what died was the hopes of millions who had worked for, voted for, and elected a smart, talented Democratic president who filled his administration with smart, talented people -- who then starved their constituency's and their country's needs. Unwittingly, and with the
best of intentions, to be sure, they set the table for the reactionary Republican feast that followed.
Jeff Faux is the founding president, and now distinguished fellow, of the
Economic Policy Institute in Washington, D.C.
I find it hard to disagree with my esteemed semi-adversary Jeff Faux. He says so many reasonable and intelligent things. However, let me pick a nit. Mr. Faux writes: "Some deficit reduction was reasonable. After all, a fiscal deficit that was rising faster than income is ultimately unsustainable. But the Clinton-Rubin buy-in to a 19th-century Republican economic agenda was clearly over the top."
To those of us who did buy in to the go-for-a-surplus agenda, it was not a 19th-century Republican economic agenda that we thought we were buying in to. It was a 21st-century Democratic economic agenda. We were looking forward to 2020 or so, when the baby-boom generation retires and when Social Security, Medicare, and Medicaid expenditures start to rise rapidly as shares of the gross domestic product. Running surpluses now, giving the country the debt capacity to finance these forthcoming rises in social-insurance expenditures, seemed to us a wise policy. The alternative -- to merely stabilize the debt-to-GDP ratio and make no special provision for the generational future -- seemed to us likely to create a situation in which a) the elderly programs eat the rest of the social-insurance state alive and b) they then self-destruct.
Truth be told, however, relatively few people ever bought the "surplus" policy as a positive good rather than as a necessary evil. Robert Rubin bought it. Lawrence Summers bought it. Those of us who carried spears for them bought it. The Concord Coalition bought it. But the rest? Nah. Nearly all Democrats would rather have had
moderate deficits -- a stable or slightly declining debt-to-GDP ratio -- and expanded social-insurance spending. Nearly all Republicans would rather have had large tax cuts for the $200,000-plus-a-year crowd, deficit be damned. But in the late 1990s, Republicans preferred surpluses to expanded social-insurance spending. And Democrats preferred surpluses to big tax cuts for the $200,000-plus-a-year crows.
Would we have had a '90s boom with a slightly higher deficit? Yes. The big benefits probably came from shifting the United States from a deficit path that was clearly unsustainable to one in which investors and money managers could look to the future and see a U.S. government that had its finances stable. Beyond that, each percentage point of GDP shaved off the deficit had benefits -- a 0.1 percent per year acceleration in the rate of economic growth, or perhaps a 0.2 percent per year acceleration? -- but not ones that would have justified additional pruning of the federal government.
Would Alan Greenspan have cooperated and tried to keep interest rates low if the Clinton administration's attack on the deficit had been less enthusiastic? I believe that he would have, even without dire hints about the unlikelihood of his reappointment. After all, four times in his tenure he has gone against the central-banker consensus and kept interest rates much lower than his peers thought proper: in the aftermath of the 1987 stock-market crash; during 1993, in an attempt to provide support for deficit reduction; in the late 1990s, as he bet that the new economy was real and that potential output was growing much faster than his staff believed; and again today, when the United States has the fastest growth rate and the lowest interest rates of the North Atlantic economies.
The curious thing to me is how Greenspan has managed to retain his reputation as an inflation hawk given his demonstrated propensity to take monetary policy risks in order to achieve faster growth. Fear of Greenspan was a good reason not to acquiesce in a budgetary policy with an exploding debt. Fear of Greenspan was not a reason to push for a surplus rather than for a stable (or slightly declining) debt-to-GDP ratio.
Bradford DeLong is a professor of economics at the University of California,