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Home Publications Blogs Beat the Press Can We Cut the Crap on Robert Rubin and Deficit Reduction

Can We Cut the Crap on Robert Rubin and Deficit Reduction

Saturday, 16 February 2013 12:01

Robert Rubin is best known as the man who pocketed more than $100 million as a top Citigroup honcho as it played a central role in pumping up the housing bubble that sank the economy. However, because of the incompetence (corruption?) of the Washington media, he is much better known as a great hero of economic policy.

Ezra Klein helps to feed this myth when he tells us of the great virtue of deficit reduction in the Clinton years.

"Back in the 1990s, we knew why we feared deficits. They raised interest rates and “crowded out” private borrowing. This wasn’t an abstract concern. In 1991, the interest rate on 10-year Treasurys was 7.86 percent. That meant the interest rate for private borrowing was, for the most part, much higher, choking off investment and economic growth.

"Enter Clintonomics. The theory was simple: Bring down deficits, and you’d bring down interest rates. Bring down interest rates, and you’d make it easier for the private sector to invest and grow. Make it easier for the private sector to invest and grow, and the economy would boom.

"The theory was correct. By the end of Clinton’s term, the interest rate on 10-year Treasurys had fallen to 5.26 percent — lower than it had been in 30 years. And the economy was, indeed, booming. 'The deficit reduction increased confidence, helped bring interest rates down, and that, in turn, helped generate and sustain the economic recovery, which, in turn, reduced the deficit further,' Treasury Secretary Robert Rubin said in 1998."

Okay, fans of intro economics know that it is the real interest -- the difference between the nominal interest rate and the inflation rate -- that matters for investment, not the nominal interest rate. The inflation rate in the first half of 1991 was over 5.0 percent. This means that the real interest rate -- the rate that all economists understand is relevant for growth -- around 2.5 percent.

Is that bad? If we take the last half year of the Clinton administration (and not some cherry picked low-point) the interest rate on 10-year Treasury bonds averaged around 5.7 percent. The inflation rate for the second half of 2000 averaged around 3.5 percent. This gives us a a real interest rate of 2.2 percent (5.7 percent minus 3.5 percent equals 2.2 percent).

So we are supposed to believe that the difference between the 2.5 percent real interest rate in the high deficit pre-Clinton years and the 2.2 percent real interest rate at the end of the Clinton years is the difference between the road to hell and the path to prosperity? This is the sort of nonsense that you tell to children. It might past muster with DC pundits, but serious people need not waste their time.

The story of the boom of the Clinton years was an unsustainable stock bubble. This led to a surge in junk investment like Pets.com. It led to an even larger surge in consumption. People spent based on their stock wealth, pushing the saving rate to a then record low of 2.0 percent (compared to an average of 8.0 percent in the pre-bubble decades).

Robert Rubin acolytes may not like it, but the deficit reduction was a minor actor in the growth of the 1990s. The bubble was the real story. That may not be a smart thing to say if you're looking for a job in the Obama administration, but it happens to be the truth. You have to really torture the data to get a different conclusion.

Comments (15)Add Comment
written by Chris Engel, February 16, 2013 4:51
That was a very problematic post by Ezra.

I actually e-mailed him about this to discuss that deficits don't drive the rates, inflation does.

There's a weird obsession by many in the media to pretend that we would default or go into hyperinflation, and that deficits threaten Treasury rates. Where the hell else are bondholders going to go? China? India? Brazil? No, Russia! Or, Gold!

Or then they think that the Chinese and Japanese have some viable option in selling their dollar-denominzed Treasury holdings (which would only weaken the dollar relative to the remnimbi, something China surely does not want, and Japan for the yen either).

The people we've bought stuff from and the domestic institutions that hold the debt to maturity are not going to sell off to cause rate spikes, and the Fed controls the mechanism when it comes down to it.
Hooray for Sock Puppets!
written by Frankly Curious, February 16, 2013 8:03
Why is everyone's favorite example of the dot-com bubble Pets.com? I don't have any pets, but I do have dozens of puppets. And the Pets.com sock puppet was a great boon to puppet lovers everywhere. Yes, there ought to be a government program, but until that I say: hooray for idiot investors.

Also: I remember that dot-com bubble very well, and Pets.com was nowhere *near* the stupidest investment. And none of them had nearly as cool a mascot!
Stiglitz on the 90s
written by DRDR, February 17, 2013 3:18
Have you never read Stiglitz on the 90s? Basically it was a fluke that deficit reduction worked. Banks were holding lots of long-term government debt due to unsound accounting rules in the aftermath of the S&L debacle. It was then a huge boon to their balance sheets when rates fell. Everyone got lucky.
A similar myth exists in Canada...
written by Anthony, February 17, 2013 6:45
Canada also had a large deficit in the early 1990s, and the new Liberal finance minister at the time, Paul Martin, followed Rubin's logic and slashed spending, gutting Canada's welfare and unemployment insurance programs in the process. He has become known as the "deficit slayer," and was similarly lauded internationally for righting Canada's economic ship. Of course, Canada's economy is so intricately tied to the US's that the bubble-driven growth south of the border elevated Canada's economy as well.

Martin's reputation is still intact--at the beginning of the economic crisis in Europe, he was called by the troika to give budget-cutting advice to Ireland, Greece, Spain and other troubled economies. His advice was taken to heart, I hear, and has had the intended effect.
I get slightly different numbers...
written by LSTB, February 17, 2013 7:21
...And I don't think it helps Klein's case:

former FCC chair
written by reed hundt, February 17, 2013 8:14
Actually the story of the 90s was a combination of fiscal prudence, income increases, and asset valuation increases. Yes there was an asset bubble, but it is also true that for all income quintiles wages went up, significantly, and unemployment was very low. It is a shame that many people put their wealth gains into silly stocks, did not diversify, and lost money. But it is also true that on a net basis Americans sold $2.1 trillion in stock. That is a net number. When you or I start a company and then sell the stock, we haven't thereby bought stock to bring down the net, but have created and captured wealth.
It is true that according to Alan Blinder and Janet Yellen, "The Fabulous Decade," the effects of OBRA had worn out and become modestly negative by 1995, when the take off began. Take a look at "The Politics of Abundance," an e book I co wrote with Blair Levin.
The Bubble Gave Us the Income Growth
written by Dean, February 17, 2013 9:58
There was good income growth in the late 1990s (not until 1996), but this was due to the low unemployment that was the result of demand generated by the stock bubble. We also had to be thankful that Alan Greenspan ignored the urging of Janet Yellen and fellow Clinton appointee to the Fed, Larry Meyers, both of him wanted to raise interest rates so the unemployment rate would not fall below 6.0 percent.
unknown real rate...
written by pete, February 17, 2013 11:05
no one knows the real rate. the 70s had largely negative real rates, ex post. in the 90s, with no predictable monetary policy (Greenspan claimed that monetarism could not work because no one knew the model anymore) how could anyone estimate what effective real rates wouls be.

Same is true today, completely untethered monetary policy...no one is quite sure what will happent to the $2T in new monetary base. Bernanke says he will buy it all back, which would raise real rates as the market is flooded with $2T in new debt. Some think it will stay there and be expanded into new M1 (e.g., the call for banks to lend their excess reserves out), i.e., be inflationary, lowering real rates, ex post.

written by reed hundt, February 17, 2013 12:54
Demand was overdetermined, and not a result merely of rising stock market valuations. Indeed, in terms of causation that gets the cart at least parallel if not ahead of the horse. I believe the charts show unemployment dropping and incomes rising before the stock market achieved bubble p/e's...although people can disagree on what constituted bubbleness. Greenspan thought the market was overvalued in late 1996, if I recall correctly without checking it, and then gave his irrational exuberance speech. It didn't work. He then became a convert to letting the bubble rise. In any case, income growth is income growth, wealth increase is wealth increase -- when the market bubble poppped, the resulting declines left the gdp and individual families meaningfully better off than prior to 1995. All knew, in any case, that the growth was somehow driven more by the Internet than any other thing, and that phenomenon was a result of a combination of technological breakthrough, smart productizing, and the government policies that aimed at rapidly decreasing the costs of Internet communication and enhancing exploitation of the new opportunities by means of unregulated competitive markets, rather than selecting regulated monopolies as the structure of choice and the structure that had typically been chosen for utilities in almost all countries on almost all previous occasions. That choice, it must be admitted, did increase volatility, risk, and temporarily wasteful capital expenditure. That's Schumpterian competition for you.
arithmetic Dean
written by joe, February 17, 2013 2:26
The clinton deficit reduction was due to the healthy economy, not the cause. Since the govt's deficit is the private sector's surplus (national income accounting equation), when Clinton got to a surplus, this means the private sector was running a deficit. So the private sector was willing to spend. Obviously, the govt surplus could not cause a good economy.
Unrelated question for Reed Hundt
written by Dean, February 17, 2013 2:43

Since you seem to be reading here, I've been very curious about Al Gore's sale of Current TV for $500 million to Al Jazeera. According to the press accounts, Al Jazeera has no interest in Current TV's programming. They just want its cable slots.

What I can't understand is how these can be worth $500 million? Isn't the cost of carrying an additional station on most cable networks close to zero? (In other words, once the network is set up, it costs the carrier very little to add an additional channel.) If that's the case, shouldn't there be very little value to Current TV's cable slots, since anyone should be able to just call up the carriers and arrange their own slots? If this is not the case, can you tell me why not?
written by crf, February 17, 2013 6:29
First para should start "Robert Rubin ought to be best known as ..."

You can't simultaneously be best known as X, and much better known as Y.
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Surpluses DO Count
written by D Snider, February 19, 2013 9:58
Randall Wray of the Roosevelt Institute has put up some figures.
I took the trouble to line them up.

Dates of US budget surplus and deficit reduction:







Date US depressions started:

1819, 1827, 1857, 1873, 1893, and 1929.

As a thought experiment, let’s juxtapose the dates.

1817-1821 1819

1823-1836 1827

1852-1857 1857

1867-1873 1873

1880-1893 1893

1920-1930 1929

Of course, the simple figures do not demonstrate causality, or post hoc ergo propter hoc, but the synchronicity (non-Jungian) is nonetheless compelling.


Clinton had a surplus 1998-2000 but no reduction in debt.

Republicans claim the Great Recession actually started in 2002.
The Bureau of Labor statistics say it was from Dec 1, 2007 to June 2009.


The 1973-75 recession was triggered by the Oil Embargo. (Remember the gas lines and the fistfights at gas pumps?)

The 1980-82 “planned” recession is blamed on Paul Volcker and his draconian (and justifiable) AND successful efforts to bring down inflation. (Remember 30-year mortgages at 16%?)

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.