When Treasury Secretaries Attack!

Last week, former Clinton Treasury Secretary Robert Rubin released an economic paper arguing that the ballooning budget deficit could cause a sudden financial crisis of confidence, which could lead to an abrupt downturn in the U.S. economy.

Now, former Bush Treasury Secretary Paul O'Neill alleges in a new book that the White House's political operation has completely taken over policy decisions within the Administration, leading to wrongheaded economic choices like steel tariffs, long-term budget deficits, backpedaling on entitlement reforms, and so on.

These two themes -- (1) that public confidence is an increasingly important driver of real economic behavior, and (2) that over-politization of public affairs is detrimental to confidence in the future -- are familiar to centrists.

Here is an excerpt from the "Centrist Manifesto," published by the website Centrists.Org:

"... the ability of a democratic government to responsibly address national problems helps build economic confidence, especially among businesses and investors.

In an era of sudden change and instant capital mobility, with global investors and consumers more forward-looking than ever, a nation's willingness to address big problems, and the ability of its government to make tough choices to resolve problems and adapt to changing circumstances, can create a sense of confidence that is, in turn, an extraordinary economic asset.

Long-term investors don't know what the future will bring. But they do know whether or not they have confidence in a nation's ability to solve the inevitable problems that do arise.

And they know that countries whose governments can't solve problems or adapt to a changing economic climate are not good places to invest."

Lack of confidence in the U.S. government, especially on economic and budgetary matters, is showing up in several ways. For one, it's sort of pathetic that the economy has absorbed such an enormous amount of economic stimulus (ultra-low interest rates and large federal budget deficits) without creating more jobs and sparking new long-term investments in expanded capacity.

We believe that the Bush Administration and the Federal Reserve were fundamentally correct to re-inflate early and vigorously. Quick tax cuts and interest rate cuts in 2001 will go down in history as an excellent and farsighted policy response to the bursting of the Y2K stock bubble and the corresponding over-investment in the U.S. technology and telecom sectors. Stimulative fiscal and monetary policies in 2002 and 2003 have helped the U.S. work through the corporate mismanagement and fraud scandals.

Moreover, we understand the dangers of persistent deflation as the global economy absorbs hundreds of millions of hard-working laborers and new investors from the old Communist states (especially China) and increasingly open economies like India.

We also know that national leaders need to focus on security and anti-terrorism efforts, even if that means economic matters sometimes get less attention.

Finally, we agree that bold proposals cannot get through Congress without a degree of compromise -- leaders sometimes have to "buy" their policies into place by promising to spend more or tax less to please certain factions. And we understand that sometimes nations just have to clean up budgetary messes later.

But the U.S. budget situation is descending from mess into madness.

Economic shortsightedness and hyper-partisanship are dimming the medium- and longer-term economic outlook in the U.S. (and therefore the world).

The long-term budget deficit is symbolic. It sends the world a message: The era of sacrifice in the public (and global) interest is over. Now the U.S. government is only worried about day-to-day politics, and the future be damned.

This is not only the fault of the Bush Administration, of course. Partisan Democrats certainly aren't paragons of responsibility these days either.

But with Republicans in control of the White House and Congress, the leadership will have to come from that side of the aisle. The U.S. Congress has to be told -- by the President -- that the deficit must be reduced, and that to do so will require tough choices, including rescinding some prized tax cuts and trimming some popular spending programs.

We should be especially wary of new unfunded promises, like attractive sounding long-term savings proposals that wouldn't cost the Treasury much now, but would reduce tax revenues at just the wrong time: after the baby boom generation has started to retire and draw entitlement benefits.

The media may focus on the more personal motivations for both Secretaries' books. Secretary Rubin is upset that his largely successful policy approach of deficit reduction has been overturned. Secretary O'Neill is upset that his ideas on Social Security reform and other items were largely ignored, and that his dismissal was handled tactlessly.

But the larger message -- that politics shouldn't dominate economic policy and that rapid swings in global economic confidence can have devastating consequences -- should not be lost. Brushing off the Secretaries' warnings as just personal would be foolish, and wrong.

Links:
Robert Rubin, Peter Orszag and Allen Sinai Sustained Budget Deficits: Longer-Run U.S. Economic Performance and the Risk of Financial and Fiscal Disarray (January 5, 2004)

Centrists.Org Secretary Rubin's Theory of Budget Deficits, Economic Confidence, and Financial Crises (January 10, 2004)

Centrists.Org A Closer Look at the Latest Jobs Figures -- Plenty of Stimulus, a Scarcity of Confidence (January 11, 2004)

Centrists.Org Preparing for CBO's Updated Baseline Projections and the President's New Budget (January 10, 2004)

Centrist Policy Network It's the Confidence, Stupid. (September 5, 2003)

Centrists.Org Centrist Policy Manifesto

Centrists.Org Issue Summary Budget and Tax Policy (Basics)

Posted by Jeff Lemieux at January 11, 2004 12:27 AM