"Rubinomics"--Two

The concept of “Rubinomics” seems to generate some rather emotional responses…for and against the basic ideas…for and against Robert Rubin. Therefore, I felt the need to follow up my earlier post (June 13, 2008) on “Rubinomics” with this post, ““Rubinomics”—two’.

First, it is perhaps destructive of a idea to tie it so closely to an individual. “Rubinomics” and Robert Rubin seem to draw a visceral response much as did “Keynesian” and John Maynard Keynes. Milton Friedman was lucky enough not to get his name tied to the prominent idea which he promoted, “Monetarism”…which did allow for the creation of an opposition title…proponents were not called “Keynesians” but “Fiscalists”.

Calling something by a person’s name can be used to draw together those opposed to the person and his/her ideas and as a term of derision. It can also be used to rally those that pursue similar ends. Oftentimes the use of such titles direct attention away from the real issues at hand and the policies being proposed. Name-calling can be helpful…and it can be destructive. In order for any productive discussion to take place, however, focus must be returned to the real issues at hand.

Second, ideas must be placed within their historical context. In the case of “Rubinomics”, we have to go back to the Paris Peace Talks following World War I. To create the economic situation at that time is very simple terms I will argue that there were two major conditions at hand. The allies were very divided in terms of what they wanted to achieve…there were as many programs for the “new world order” as there were major nations involved in the discussions. In addition, the Russian Revolution had just taken place and there was great fear among the discussant nations that the threat to the future was labor unrest and the Bolsheviks, the proposed new order for the revolutionary world.

This was the world that John Maynard Keynes was involved in and his goal was to create a model of the world in which labor unrest could be avoided as much as possible so that the wave of revolution did not overcome the Western world as he knew it. The fundamentals of his model were fixed exchange rates between countries so that each nation could pursue its own independent economic policy and a government program to stimulate a national economy so as to avoid severe economic collapse and maintain high rates of employment.

As is well known, Keynes worked over the next twenty years or so to develop a theoretical model to support his perception of the world and to bring politicians and institutions to incorporate his ideas for low employment and peace. He then continued to work throughout World War II to create the international financial system that would actually implement his ideas.

So, for roughly fifty-five years efforts were made to try and create a world of fixed foreign exchange rates and the institutions and rules that could maintain such a system so that countries could operate their fiscal and monetary policies in a relatively independent manner. As history has shown, this system proved to be unworkable in the long run…because even in such a regime, nations cannot operate fully independently of one another. The post-World War II period was dotted with inflations and devaluations that periodically disrupted the system. In the early 1970s the system broke down. (I am in the process of writing a book on this period and the theoretical and practical issues that were a part of this history.)

The next twenty years or so the nations learned to operate in a world that was becoming more global and integrated in nature. Nation after nation learned that in such a world that they could not operate independently of one another and that a firm discipline needed to be maintained in order to exert some control over their destiny. A lack of governmental discipline and the slight smell of inflation could set into play forces in international financial markets that would completely disrupt the internal policies that these nations were attempting to follow. Nation after nation had to bring their budgets under control and follow a strictly disciplined approach to their debt creation. Also, these nations made their central banks independent of the national government and charged them with keeping inflation under control. This has become the foundation of the model for international cooperation on international trade and globalization.

The next fifteen years or so the world had to deal with a United States that was at first receptive to this new world financial order and then at odds with the system and even rebellious. It was within this context that “Rubinomics” was born. Again, putting things in relatively simple terms, the fundamentals of “Rubinomics”, to me, is the essence of the “new world order”. First, a country needs to get its fiscal affairs in order and minimize its creation of new debt. Second, the nation needs an independent central bank whose primary focus is on controlling inflation…and little else. Third, this country needs to operate as a partner within the world…even though it may be the world’s only super power…and help to facilitate the growth and interaction of nations into as fully an integrated world as possible.

It seems to me that this approach was attempted in the 1990s and was relatively successful. It seems to me that this approach was snubbed in the first decade of the twenty-first century and, as a consequence, we have substantial financial dislocation in the world and a fractured world community. It seems to me that “Humpty-Dumpty” needs to be put back together again.

Where do we start?

Paul Volcker (whoops another name), I believe, was right in writing “a nation’s exchange rate is the single most important price in the economy.” (Paul Volcker and Toyoo Gyohten, “Changing Fortunes: the World’s Money and the Threat to American Leadership, (New York: Times Books, 1992), p. 232.) This is where the United States must start!

United States fiscal and monetary policy must be responsive to what the rest of the world is trying to tell us. If the value of the U. S. dollar has been falling for seven years or so, maybe the market is trying to tell it something. This is what happened in the 1972-1992 period to many other countries. (Last post I mentioned a book by Steven Solomon that reviews this period: “The Confidence Game: How Unelected Central Bankers are Governing the Changed World Economy”, 1995.) In the Clinton years, policymakers seemed to understand this message. In the years that followed, the policymakers seemed to go out-of-their-way to avoid hearing this message.

The United States needs to start listening again. The Federal budget must be brought under control and the nation must move ahead in a disciplined manner with respect to debt creation. The Federal Reserve System must not be charged with multiple responsibilities that distract it from what should be its main focus…inflation. Note that this is more complex than just concentrating on the “flow” prices that are captured in the major price indices. There will be more on this in future posts.

There is no question that the United States government needs to review its fiscal programs and policies, its needed public investment. A lively debate must take place with respect to things like the war in Iraq and elsewhere, universal health care, the infrastructure, education, and so on. But, this discussion must take place within the constraint of what it takes to be a partner within the world community and operate according to the rules of membership. We may not like this…we Americans do not take well to the discipline of others. But, we are a member of the world community and we must be a GOOD member. Citizens of the United States must remember this.

We must also get away from the “Fundamentalism” that permeates both ends of the political spectrum. We cannot promote a left wing “Tax and Spend” fundamentalism any more than we can promote a right wind “Tax Cut and Spend” fundamentalism. We cannot be locked into past doctrine…we must be more pragmatic in practice. We cannot hold up politically correct tests of membership…from the right or from the left. We must shake off these remnants of the past!