the odd couple
Source Jim Devine
Date 08/11/03/18:18

[this piece seems to presage the initial consensus -- and then the
later battles -- within the likely Obama administration. I'd predict
that Rubin's slant would win.]

The New York Times / November 3, 2008
No More Economic False Choices

(Robert E. Rubin, Treasury secretary from 1995 to 1999, is a director
of Citigroup. Jared Bernstein is a senior economist at the Economic
Policy Institute and the author of "Crunch: Why Do I Feel So

AS economists and policy advisers try to sort out where we are, how we
got here and where we must go for both the short term and the longer
term, we are surrounded by polarizing dichotomies: Fiscal recklessness
versus fiscal rectitude; capital versus labor; free trade versus

The next president, the prevailing wisdom goes, will have to choose
between these polarities. But how real are these differences? Our view
and we come from pretty different analytical perspectives is that
in many important ways, they are false, and serve as more of a
distraction than a map.

Fiscal rectitude versus stimulus and public investment: The Bible got
this right a long time ago (paraphrasing slightly): there's a time to
spend, a time to save; a time to build deficits up and a time to tear
them down. Though one of us (Mr. Rubin) is often invoked as an
advocate of fiscal discipline, we both agree that there are times for
fiscal discipline and times for fiscal largess. With the current
financial crisis, our joint view is that for the short term, our
economy needs a large fiscal stimulus that generates substantial
economic demand.

We also jointly believe that fiscal stimulus must be married to a
commitment to re-establishing sound fiscal conditions with a
multi-year program that includes room for critical public investment,
once the economy is back on a healthy track.

One of us (Mr. Rubin) views long-term fiscal deficits in combination
with a low national savings rate, large current account deficits and
foreign portfolios that are heavily over-weighted in dollar-dominated
assets as a serious threat to long-term interest rates and our
currency and, therefore, to our economic future. The other views these
economic relationships as much weaker.

At the same time, we both agree that our economic future also requires
public investment in critical areas like education, health care,
energy, worker training and much else. In our view, then, the next
president needs to proceed on multiple tracks, with both the
restoration of a sound fiscal regime and critical public investment.

First, under the $700 billion program to support the financial system,
the government will buy assets, whether in the form of equity
injections or the purchase of debt from banks. And the real cost to
the government is not the face value of those purchases but rather the
budget authorities' estimate of the subsidy built into the price of
those purchases given the risks that are involved. That number will be
some relatively limited fraction of the total amount paid. Congress
also included in the recent legislation an option for the next
president to consider levying a fee on the financial services industry
if the taxpayers' investment is not recouped. [a Tobin tax??]

Second, certain public investment can help us meet our fiscal
challenges. Most powerfully, the single largest factor in our
projected fiscal imbalances are the health care entitlements Medicare
and Medicaid, underscoring the fundamental importance of health care
reform that expands coverage to more Americans yet constrains costs.
While plans that would accomplish these goals have some cost, by
pooling risk and stressing cost effectiveness, they could more than
pay for themselves by reducing the growth trajectory of our health
care spending, in both the private and public spheres.

[the good news is that social security (OASDI) isn't lumped in with

One important policy question is what our fiscal objectives should be
in terms of deficits and of the ratio of the national debt to the
gross domestic product. In times like these, larger than normal budget
deficits will add to the national debt. In more stable times, a budget
deficit equivalent to roughly 2 percent of G.D.P. will keep the
debt-to-G.D.P. ratio constant, a legitimate fiscal policy goal. In
flush times, a smaller deficit would lower the debt ratio and that
might be desirable.

We both agree that individual income tax rates and other taxes for
those at the very top could be moved back to the rates of the Clinton
era. It's worth remembering that rates at this level helped finance
deficit reduction and public investment that contributed to the
longest economic expansion in our history. [how?]

In addition to restoring a sound fiscal regime, we could improve our
personal savings rate and expand retirement security by establishing
some kind of individualized account separate from Social Security,
financed by an appropriate revenue measure. [401k-type accounts? those
were a big success? why are these accounts needed when OASDI is doing
fine?] Also, we need to work with other countries toward equilibrium
exchange rates, as part of redressing our current account imbalances.
But the idea that we can't be fiscally responsible while undertaking
public investment at the same time is a myth.

[maybe the folks in DC could finance public investment using "bond
issues," the way we do in California, even using public referenda to
approve them??]

Capital versus labor: Here again, for all their alleged friction, our
dynamic and flexible capital and labor markets have combined to
generate impressive productivity gains in recent years. [compared to
what? not the 1960s or the 1970s.] The problem is that the benefits
of this productivity growth have largely eluded working families.
Though productivity grew by around 20 percent from 2000 to 2007, the
real income of middle-class, working-age households has actually
fallen $2,000, down 3 percent.

One factor behind this outcome is the severely diminished bargaining
power of many workers, and here the decline in union membership has
played a key role. A true market economy should have true labor
markets in which labor and business negotiate as peers. Many years
ago, the economist John Kenneth Galbraith argued that collective
bargaining was necessary so workers had the countervailing force they
needed to bargain for their fair share of the growth they're helping
produce. To re-establish that force, workers should be allowed to
choose to be unionized or not. [what a radical idea!]

Tight labor markets, the kind we saw in the 1990s, are another source
of bargaining power, helping to rebalance the claims of labor and
capital on growth. Sound public policy, like public investment in
education, health care, energy, infrastructure and basic research,
financed by progressive taxation, can also drive strong growth and
business confidence to invest and hire. Moreover, the policies that
are requisites for strong growth also increase wages by better
equipping workers to succeed in a global marketplace and by
encouraging businesses to create jobs.

Free markets versus regulation and protection: We both feel strongly
that there are important lessons to be learned from the disruptions in
our financial system, and that significant reforms are needed. The
objective ought to be to optimize the balance between increasing
consumer protection and reducing systemic risk on the one hand, and
preserving the benefits of a market-based system on the other. [which

We know, too, that Wall Street and Main Street are intimately
connected. The consequences of the financial market crisis are
profound for Americans in terms of lost jobs, lower incomes and
reduced retirement savings. Measures to reform and strengthen the
financial system should be evaluated by this measure: Do they
ultimately translate into improving the jobs, incomes and assets of
working Americans?

With respect to trade, the choice is not trade liberalization versus
protectionism. Instead, as trade expands, we must recognize that
protecting workers is not protectionism. We must better prepare our
people to compete effectively and help those who are hurt by trade
not just dislocated workers, but those who find their incomes lowered
through global competition. This means investing more of the benefits
of trade in offsetting these losses, through more effective safety
nets, including universal health care and pension coverage.

Beyond that, while we share a commitment to helping workers deal with
our new global challenges, one of us (Mr. Bernstein) would advocate
provisions in trade agreements that are intended to protect workers,
both here and abroad, and the other would have considerable skepticism
about the likely effectiveness of those provisions for our workers.

Public policy in all these areas and a host of others has been
seriously deficient in recent years. It has led to a great increase in
federal debt, inadequate regulatory protection against systemic risk
and underinvestment in our people and infrastructure. Regressive tax
policies have increased market-driven inequalities that could have
been offset through progressive taxation.

False choices, grounded in ideology, have kept us from effectively
addressing all these issues. The next president must do his utmost to
avoid being drawn into these Potemkin battles. At this critical
juncture, we face both the most significant economic upheaval since
the Depression and the long-term challenge of successfully competing
in the global economy. We have no choice but to move beyond such false
dichotomies and toward a balanced pragmatism whose goal is broadly
shared prosperity and increased economic security.

Copyright 2008 The New York Times Company

[View the list]

InternetBoard v1.0
Copyright (c) 1998, Joongpil Cho