December 20, 2003

Thoughts on Rubinomics

J. Bradford DeLong
Director's Cut Version [a much-shortened version will be appearing in the American Prospect]

1702 words

The "Reagan Revolution" did not shrink the size of the federal government: in 1980 when Ronald Reagan ran for president federal spending (gross of offsetting receipts) was 22.7% of GDP; in 1992 when Bill Clinton ran for president federal spending was 23.2% of GDP. The "Reagan Revolution" did change the shape of federal spending: one-third of domestic federal spending outside of the entitlement programs went missing between 1980 and 1992, replaced primarily by debt interest and secondarily by higher military spending. (A truly amazing fact, and testimony to the strength of the military-industrial complex: defense took a higher share of GDP in 1992 after the collapse of the Soviet Union than it had taken in 1980). Higher debt interest came from the huge debts run up to finance Reagan's unfunded tax cuts. Debt held by the public amounted to 48% of GDP in 1992, compared to 26% of GDP in 1980. The 4.7% of GDP deficit of 1992 was a structural one: forecast--given then-current policies--to persist and grow as far out as the eye could see (my own winter of 1993 forecasts saw a then-current policy debt-to-GDP ratio of 72% of GDP by 2000).

This was the climate in which Bill Clinton assumed office--and Bob Rubin moved to Washington--at the start of 1993.

There were, broadly speaking, two domestic policy strategies possible for the incoming Clinton administration. The first was a double-or-nothing Social Democracy strategy. Republicans had created a big deficit? Fine. Let solving the deficit problem be the responsibility of some future Republican administration. Keep the deficit constant (or maybe rising a bit) as a share of GDP while pursuing Democratic priorities: restructuring health care so that even Americans who were not comfortably off could afford to go to the doctor, expanding social insurance to provide better benefits and real retraining for workers who had lost their jobs, repairing the large gap in infrastructure, restoring public investment priorities, making sure the $200,000+ a year crowd paid their fair share of taxes, providing real incentive--like a carbon tax--for industry and the economy to rest lightly on the environment.

This potential strategy had two problems. The first problem was Congress. The Democrats had an organizational majority, but not an ideological majority. Many Democratic members of Congress thought like Republicans (Billy Tauzin, for example), but were still Democrats because substantial voting blocks had not yet forgiven their state's occupation by union troops under General "Beast Butler" and could not yet bring themselves to vote for the Part of Emancipation. Was there sufficient Democratic support in Congress for a Social Democracy--particularly given the fact that many Democratic Congressional leaders believed that Mr. 43% from Arkansas had no business asking for deference and were totally, utterly clueless about what the political consequences would be if they failed to enthusiastically support President Clinton. The failure in the spring of 1993 of the Clinton short-term economic stimulus program was one indicator of the lack of "centrist" Democratic Congressional support for Social Democracy. A second indicator was the extraordinarily rapid collapse of "centrist" Democratic Congressional support for the budget's environmental policy component--the BTU tax--which melted like snow when the American Petroleum Institute brought in its lobbying heat lamps.

The second problem was the economic risk associated with the double-or-nothing let-the-deficit-alone strategy. The economic growth trend underlying the business cycle had slowed markedly in the late 1970s and stayed low throughout the 1980s. Only by the most egregious cherry-picking of start and end dates could ideologues like Robert Bartley claim to find "seven fat years" in the 1980s--and even then the years were not fat, but merely not emaciated. Governments that run large and persistent structural deficits find, first, that their appetite for cash diverts spending that would otherwise flow into productive investment. They find, second, that investors get nervous and capital starts to flee the country--further diminishing the flow of spending into productive investment. Low investment means low output growth, stagnant productivity, and static real wages not just around a recession but over the entire business cycle. Would it be good for the country if--as seemed likely to those of us making forecasts of the interaction of the deficit and the economy--Clinton's inauguration were followed by year after year of very slow economic growth? And what would be the chances of passing any Democratic legislative priorities if the macroeconomic news was never very good?

Hence Bill Clinton rejected the Social Democracy strategy in favor of the second possibility--call it the "Eisenhower Republican" strategy. Make economic growth the first priority. Attempt to get the Federal Reserve to be dovish on interest rates in exchange for seriously reducing the deficit. Take other steps, like trade liberalization, to try to boost growth. Reform rather than expand the social insurance state so that you can argue that taxpayers are getting good government value for what they are buying. Hope that these policies will boost the flow of spending into investment, and make the Clinton expansion a high-investment high-productivity growth expansion. And hope that in 1997 or 2001 a decade of relatively rapid productivity and salary growth coupled with a resolution of the deficit problem would create an expanded set of politically-realizable possibilities.

It was this strategy that Bob Rubin executed as Bill Clinton's first lieutenant for economic policy, both as head of the National Economic Council and as Treasury Secretary. And nearly everyone agrees that Bob Rubin--given that this was going to be the economic policy strategy of the Clinton administration--did a superb job, close to the very best job that could be done. How did he manage to do such a good job?

Reading Rubin's memoir, In an Uncertain World,* we can begin to see why. First, the title page states that the authors are "Robert Rubin and Jacob Weisberg." How often in a political book does the person who crafts the prose get his or her name on the cover? And not with a mere "with." This may be the most important part of Rubin's success: he is not shy about giving credit to the people who work for him, and he is not shy about listening to the people who work for him. He doesn't believe that he can or has to burnish his own reputation by hogging credit. And he doesn't believe that he gets any smarter or makes any better judgments by failing to listen to people--even very young people--who know more about an issue or a situation than he does.

Rubin himself credits as most important his habit of "probabilistic thinking": always asking questions like "what else might happen?", and "what if we're wrong?"; looking at the full range of possible outcomes rather than the most likely or the most comfortable; and recognizing that just because things came out well doesn't necesssarily mean that you made a good decision, and that just because things turned out badly does not necessarily mean that you made a bad one.

But "probabilistic thinking" was not Rubin's only secret weapon. As important was a presidential boss who cared deeply about not just politics but policy--and who was usually willing to be convinced (except on a few issues like welfare reform) that what was good policy would turn out in the long run to be good politics (or, at least, that such was not an unreasonable bet). Rubin's people management skills are truly out-of-this-world: I have never seen anyone else able to guide a meeting to the consensus he wanted by occasionally raising his eyebrows and by saying little other than, "That's very interesting, very important. Now I think we should hear what X has to say." And not having spent time in Washington may also have been a considerable help. One can think of administrations staffed exclusively by Mayberry Machiavellis in which the object is to get favorable airtime on CNN, or a paragraph of praise from David Broder. All these plus a ruthless pragmatism--a willingness to mark his own beliefs to market as often as possible--made him the ideal first lieutenant for economic policy.

Where, if anywhere, did Rubin go wrong? Errors were remarkably few. In the set of issues of particular concern to the Treasury Department, he certainly placed a lot more trust in markets as devices for monitoring and disciplining corporations--especially financial corporations--than in regulators. Hence the repeal of Glass-Steagal and his distrust of regulations that restricted financial corporations. You can argue (and, on odd-numbered days, I do) that these left him blind to the problems of large-scale corporate fraud that surfaced in Enron, WorldCom, Adelphia after the bursting of the NASDAQ bubble, and that these left him blind to the gathering international financial storms in first Mexico, then East Asia, and then Brazil. But on even-numbered days I think that when international financial crises did surface that Rubin's reactions were swift, powerful, and well-thought out, and I think we have ample evidence of government failure as well as market failure in modern finance, and we are hunting for an appropriate point of balance.

But there is a bigger question. The Clinton-era economic policies that Rubin played such a large role in devising certainly contributed substantially to the economic boom of the 1990s, and we economists do and will argue about whether they deserve 20%, 40%, or 60% of the credit. But the resolution of the deficit problem did not widen the set of politically-realizable possiblities--or widened them, but not in the way we hoped. Rubin's policies made it possible for George W. Bush to return us to the budgetary ground zero of 1992 through enormous tax cuts for the $200,000+ a year crowd and through big boosts to federal spending--a lot of which looks like Republican pork...

Is there a chance that the Social Democracy laissez-deficiti strategy might have been better for the country in the long run after all?


*Robert Rubin and Jacob Weisberg (2003), In an Uncertain World: Tough Choices from Wall Street to Wshington (New York: Random House: 0375505857).

Posted by DeLong at December 20, 2003 11:51 AM | TrackBack

Comments

What difference did the election of the Republican Congress in 1994 make to the Clinton economic policy record? Surely, as Congress passes the budget, they deserve at least a share of the credit for any improvement in America's fiscal position in the 1990's? And what about Greenspan and the Fed?

Posted by: PJ on December 20, 2003 12:09 PM

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Greenspan deserves a lot of credit for the nineties, yes. As for the Republican Congress... Well, we've seen what it can do over the past three years, haven't we? Compare the change in projected deficits over the two years 1993-1994 when the Democrats held all three houses with the change in projected deficits starting in 2001...

Posted by: Brad DeLong on December 20, 2003 01:01 PM

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J. Bradford Delong, ah knew you wus just being lazy! But I didn't know you could write things like "...the BTU tax--which melted like snow when the American Petroleum Institute brought in its lobbying heat lamps."

Me has a question, maybe two:

What was the status of budget surplus at the beggining of the second Clinton term and if it was good, why didn't Mr. Clinton use it to expand / start / improve social programs? Was it a Republican dominated Congress that prevented it? If yes, isn't Congress Republican dominated at this time as well and why aren't they preventing such large deficit -- nearly half a billion and I understand Iraq cost is only about 150 billion?

Posted by: Bulent Sayin on December 20, 2003 01:06 PM

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Bulent, Congressional Republicans are going along with deficit-spending now because of arm-twisting from a Republican White House. Note the allegations of bribery that got the Medicare bill passed in the House.

Back when a Democrat was president, Republicans played politics by pursuing things like impeachment instead.

Posted by: Dimmy Karras on December 20, 2003 01:16 PM

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"Is there a chance that the Social Democracy laissez-deficiti strategy might have been better for the country in the long run after all?"

"Advice is a dangerous gift, even from the wise to the wise, and sometimes all courses may run ill."

It might have made things better for the current few years. Or, on the other hand, made the 2000 election even worse. But the whole reactionary panic we are now experiencing has been on course since at least the Reagan "revolution." Which, like Lenin's, had some hope to it. But Stalin was waiting in the wings. The real nightmare, though, isn't these years; these are still transitional. But what comes after, when all those time bombs being planted in legislation now go off and the judiciary is packed with ogres.

For more on ogres in the judiciary see
http://www.nealskorpen.com/MM001.html

Posted by: Randolph Fritz on December 20, 2003 02:57 PM

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Clinton tried a few different things in the beginning, some worked and most did not. Than he just let things take care of themselves - which they did. If they were giving medals for benign neglect he sure deserves one. The argument that he was ever serious about social-democratic agenda is, imho, not proven.

Posted by: Leopold on December 20, 2003 03:20 PM

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I know Bill Clinton. Bill Clinton is not a friend of mine, but he was *very* serious about the social democratic agenda...

Posted by: Brad DeLong on December 20, 2003 04:27 PM

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Well, it is impolite to argue with the host so I won't :) I could point out however that many people saw things in Clinton that they wished to see. I feel your pain. On the evidence as far as I remember he pushed through a modest tax increase and than just went along with the flow. Hard to beleive the President would be so afraid of big bad Republicans he did not try to do anything to advance his social-democratic agenda between 1994 and 2000 - assuming he had it.

Posted by: Leopold on December 20, 2003 05:08 PM

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"Compare the change in projected deficits over the two years 1993-1994 when the Democrats held all three houses with the change in projected deficits starting in 2001..."

Well I just did and it's rather interesting.

The '93-94 changes knocked the deficit for 1995 down from the $284 b (4.1% of GDP) expected in 1993 to $176 b (2.5% of GDP) expected as of early 1995.

But they left the deficits growing perpetually after that.

And what's interesting is that this budget course with escalating deficits thereafter projected to larger deficits after 2001 than we've actually incurred even with a recession and the cost of a new war and rearmament (neither of which are considered in the projections, obviously) plus all the Republicans' spendthrift schemes too.

Deficits then were projected for 2002 at $322 b (3.2% % of GDP) compared to the real $158 b (1.5%); and for 2003 at $351 b (3.3 of GDP%) compared to the real estimated $401 b (3.7% of GDP).

Those are an actually substantially larger-than-reality deficit for 2002, plus one for 2003 that when adjusted for recession and war costs is a good bit larger than our reality too.

So the Democrats *believed* at the end of 1994 that their budgetary changes put us on course to be in an even worse budget situation today than we are actually in, with bigger deficits than we actually have, and an additional trillion dollars on the national debt.

The boom-and-bubble surprise is looking more fortuitous all the time ... for everybody!

Without it the Democrats couldn't now claim even to have put the deficit on a diminishing course, much less to have balanced the budget.

And if the Republicans had come in in 2001 with a 3.1% of GDP deficit to start with (as projected in 1995) instead of a surplus, where would we be now as a result of their spendthrift ways?

(All numbers from contemporary CBO reports)

Posted by: Jim Glass on December 20, 2003 06:28 PM

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"What difference did the election of the Republican Congress in 1994 make to the Clinton economic policy record? Surely, as Congress passes the budget... "

One should maybe start by asking the same thing about the Democratic Congress that refused to pass the Democratic spending agenda: stimulus package, national health care, etc.

It's not as if when the controlled the White House and both houses of Congress they didn't have plans to spend a lot more money than they did -- they just couldn't get themselves together to do it.

"... many Democratic Congressional leaders believed that Mr. 43% from Arkansas had no business asking for deference and were totally, utterly clueless about what the political consequences would be if they failed to enthusiastically support President Clinton."

I think this perhaps a bit of a one-sided view -- the White House's side.

E.g., my admittedly fallible recollection is that one of the first things Bill Clinton did was promise the Western Congressional Democrats that he would back them when they took heat on the btu tax. Then, when he took the heat, the WH decided the expedient thing was to drop it, leaving the Western Democrats swinging out a limb -- and the excellent relationship with Congressional Democrats was off to its start.

Then there was the management of the relationship with Congress re the health care plan, which is documented elsewhere on this site.

And didn't one high WH operative famously say that they were going to run over Sen. Moynihan "like a truck" if he didn't do what they wanted? He was only the Chair of the Finance Committee, through which all they wanted had to pass. And he had a good deal more experience in DC than, well, almost all of them put together had, so they might have valued his input and judgment instead.

So maybe there is something to be said about fault on both sides.

I mean, personally I think that if one party controls the WH and both houses of Congress, then if it can't get something like the btu tax thru to blame it on a lobbying group is pretty lame.

A party leadership is supposed to know its members and be able to make a judgment about whether it can get them to agree to something like this or not. There's no opposition party able to block it, so that's all there is. If they try to get it through and fail, somebody inside the party screwed up. Either they didn't know their own membership and what they would support or they screwed up working with them. But they sure as heck knew what the lobbyist was going to do when making their judgment -- so don't blame the lobbyist, please.

And the btu tax wasn't like it was national health care. Though it was a tipoff of what was coming. The health plan legislation looks like it was the same type of exercise only 100 times worse.

One thing that constantly puzzles me is how some people can take pains to point out all these operational dysfunctions inside their own party, say the other party is much much *worse*, and then say of course we want these very same people in *both* parties to take over running the nation's health care and whatever else is needed to create a Social Democracy, because then everything would run with so much more efficiency and justice.

Posted by: Jim Glass on December 20, 2003 07:29 PM

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Jim,
Everyone knows that you cannot use the CBO numbers straight without making the adjustments. CBO is constrained in its analysis to making predictions based on CURRENT law, not on what is most likely to happen. The CBO figures always have to be adjusted.

For a majority of Americans the answer to the question, "Are you better off today than you were 4 years ago" is "No".

Are you saying that Mr. Bush and the GOP are doing a marvellous job of managing the Federal Budget? I know of a bridge for sale....

Posted by: bakho on December 20, 2003 07:58 PM

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On running the nation's health care:
I am not aware of anyone seriously proposing the national health care service European-style. What many people would like to see is single-payer system Canadian-style. In fact, it is almost inevitable - American-style system is quickly becoming unsustanable (great example - Wal-Mart's problems).

Posted by: Leopold on December 20, 2003 08:29 PM

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Hmm. From http://www.connectusa.org/news/articles/081902.htm not quoting:

Telecom bubble left private sector debt of USD 470 bn (as big as budget deficit), along with seven years' excess inventory in telecom gear, valued at USD 160 bn (equal to cost of Iraq war). Telecom jobs expanded by some 300,000 after deregulation in 1996 till the peak in 2000, and then shed 500,000 jobs since then. That's several times as fast as auto industry labor shedding of 1970s; 750,000 in twenty years.

And from http://www.bizjournals.com/denver/stories/2003/05/26/story6.html quoting:

"Two years ago, 90 percent of the tents, heaters, ventilators and other equipment Englewood-based Pelsue Co. manufactured and sold went to the telecommunications and cable market. ...Now, 60 percent of the business is telecom and the growth is in the industry of safety and homeland safety markets...Pelsue is taking its tents ... to trade shows that concentrate on countering weapons of mass destruction.... Pelsue tents were showcased at an April training session, which mimicked the aftermath of a dirty radiation bomb attack,... "


Now comments yours truly:

The American system responds to opportunities quickly. But sometimes it chases mirage in a big way. "Weapons of mass destruction" is also a form of mirage, a ghost, even perhaps a hoax, to some extent.

European system moves slowly but surely. Investment decisions in Europe are made in a more collective fashion. (And that is a big part of what I mean by "collective ownership of capital" any way -- after all I am very much aware that "you can't take it with you" and I am thinking as Bill Gates does about leaving money to your children; too much of it is not good for them.)

Transition to direct democracy in all sectors and at all levels would, I think, speed up the European system and reduce mirage chasing and big mistakes in the American system.

But transition to a form of collective ownership of capital is also necessary, along with universal coverage in social safety net and higher education.

Let me finish this message with figures from http://www.fransgroenendijk.nl/index.php?id=C0_9_1

"The Top 200 corporations' combined sales are bigger than the combined economies of all countries minus the biggest 9; that is they surpass the combined economies of 182 countries. . Their combined global employment is only 18.8 million, which is less than a third of one-hundredth of one percent of the world's people."

Frans Groenendijk the blog owner thinks company size should be limited by law. Me thinks transition should be made to collective ownership and direct democracy.

Posted by: Bulent Sayin on December 20, 2003 09:21 PM

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> (A truly amazing fact, and testimony to the strength of the military-industrial complex: defense took a higher share of GDP in 1992 after the collapse of the Soviet Union than it had taken in 1980).

You can't expect your peace dividend the very next year. Military spending eventually dropped from 5-7% of GDP to 3% a year.

> The '93-94 changes knocked the deficit for 1995 down from the $284 b (4.1% of GDP) expected in 1993 to $176 b (2.5% of GDP) expected as of early 1995.

> But they left the deficits growing perpetually after that.

> And what's interesting is that this budget course with escalating deficits thereafter projected to larger deficits after 2001 than we've actually incurred...

This point by Jim Glass makes it look entirely accidental that Clinton managed to reduce the deficit. Maybe Mr. Bakho can elaborate on what he thinks is wrong with Glass's use of the CBO forecasts.

Posted by: Noumenon on December 20, 2003 10:39 PM

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"I am not aware of anyone seriously proposing the national health care service European-style. What many people would like to see is single-payer system Canadian-style."

By European-style I think you mean British-style. Most (all?) euro nations are farther away from the Brits than even the Canadians. Both the British and the Canadian systems are bothe often cited as among the more poorly designed (lots of queues.) I don't know enough to say if it's true.

Posted by: DAvid Weman on December 21, 2003 02:42 AM

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The only thing I did not get about this essay was the last sentence (question), but I really don't get much of the criticism for a similar reason. The reason goes to the virtue of reigning in the deficit in order to keep national savings from further eroding (as it did in the 1980's). Yes, we can argue about government spending but we cannot argue that the GOP ever had plans to reduce it. So the Bush41 & Clinton tax increases were necessary. And the Bush43 tax cut has undone the good things from the 90's. Then again - maybe I just understand the closing question in this essay after all.

Posted by: Harold McClure on December 21, 2003 07:03 AM

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I think a lot of the credit needs to go to the 1990 Budget Enforcement Act. AFAIK that was essentially a compromise between Bush I and Democrats.

Certainly any *honest* argument about Clinton and deficit reduction should also take into account the damage to the economy inflicted by the bubble---the bubble giveth tax revenue, but the bubble also taketh it away (and did quite a bit of damage to the economy).

I don't think Clinton is responsible for the bubble...but that takes away credit for the revenue from the bubble.

BDL---I'd be interested in hearing what Rubin says about welfare reform. Strangely, he was one person in the Clinton admin who opposed it.

Posted by: Stephen J Fromm on December 21, 2003 07:23 AM

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Bulent Sayin wrote, "Transition to direct democracy in all sectors and at all levels would, I think, speed up the European system and reduce mirage chasing and big mistakes in the American system."

I couldn't disagree more. The Founders were quite correct in relying on indirect, representative democracy. (Not that I think we should keep things like the electoral college.) Look at the craziness in California (not just the recall, but a string of bad policy decisions going back to Proposition 13).

Posted by: Stephen J Fromm on December 21, 2003 07:27 AM

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While many of the statements I see here are valid critisms, they do not change the basic point that the fundamental change of policy towards reducting the deficit was a significant policy improvement that contributed to the 1990s boom.

The biggest problem I have with the article, Brad
is the ending. In my mind it does not make the points you want to make clearly.

The other point of issue in the comments is the
idea that the govt should try to prevent the excess of bubbles like we had in high tech in the 1990s. First, it assumes that the govt or someone can clearly tell when a bubble is a bubble. To a great extent I agree with Greenspan that public policy can not properly
identify or control a bubble. The free market system is like Churchhill said about democracy,
it is the worse form of govt except everything else we have tried. Free market economies are not efficient, they always overshoot on both sides, it is inherent to the system. I'm a great believer in the old comment that shortages everyone sees down the road never materialize. But attempt by the govt to prevent overshooting are unlikely to improve the situation even if they could demonstrate that their is an overshooting problem. As a business economists that believed we were in both a stock market and economic bubble in the 1990s, I had viturally no sucess in convincing most clients of the case.
The few that agreeded said investing in the stock mkt in the late 1990s was a case of trying to deal rationally with an irrational world.

Posted by: spencer on December 21, 2003 08:23 AM

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SHOW ME HIS HAND!

Economic Policy? Robert Rubin? Billy (don't call me de Witt) Clinton?

Rubin's claim to fame (?) is his tenure at Goldman Sachs (and the fortune HE made -- although he missed out on the IPO), his theory of economics (Government borrowing raises the price of money [interest rates], and his dirty phone calls to try to prop up Enron when the dam was breaking.

So how is that we skated through Clinton's recession with plummeting interest rates despite a rising deficit and through-the-roof government borrowing?

As for Bubba, what exactly did he do besides raising MY taxes (I made a LOT of money in the early nineties)? The so-called government surpus looked good because of the (TEMPORARY) SS surplus -- which is off-budget! Clinton inherited an economy roaring out of recession and delivered an an economy mired in a recession. Clinton had NO policy except to kick the can down the road for his successors to deal with. SHOW ME HIS HAND.

The most significant piece of legislation that contributed to the corporate excess was signed by Clinton -- the limitation on direct compensation to $1M. This triggered the search for "performance based" compensatation, STOCK OPTIONS, that incented CEO's to pump up the price of their common stock.

Stop the bulls**t about their "results". Tell us exactly what either of these guys did to cause anything that happened on their watch -- other than the predictable rise in terrorism that occured nine months later.

I was on the 105th floor of WTC 1 in '93. Tell me what Big Bill did to make the world safer.

Posted by: Norman Rogers on December 21, 2003 08:49 AM

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Refresh my dim memory. Besides Moynihan, who were the Dems who failed to support Clinton. (Not a rhetorical question; I wasn't paying attention at the time.)

Moynihan had a lot of expeience and was smarter than anyone, but he was also extraordinarily vain and self-important.

Posted by: Zizka on December 21, 2003 09:02 AM

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Re: Healthcare systems.

I don't know much about the merits of any of them. However, I know several citizens of Canada and England.

They believe that their heathcare systems are MUCH better than ours!

Posted by: Mark-NC on December 21, 2003 09:03 AM

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Man, that was a long post. Brad, if you want to turn into Steven den Beste, all you have to do is 1) add 3000 words of unsupported babble and chest-pounding, and 2) remove all the content, and replace it with poorly-analysed history.

Posted by: Steve on December 21, 2003 09:21 AM

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Stephen J. Fromm:

Having looked at http://truthandpolitics.org/proposal.html and having seen the emphasis therein on access to information and self-education on issues, I take your objection to direct democracy more seriously than I would otherwise. I'll try to educate myself about what happened in California.

I do maintain that transition to direct democracy is possible and desirable through establishing a system of bureaucracy without the bureaucrats, both in public and private sector, through replacing the bureaucrats by (a) computers and (b) elected councils or stakeholder committees.

In fact, this has already been achieved somewhat in automotive sector, through automation that eliminated middle management (bulk of bureaucracy) along with labor.

The Founders had neither the technology nor the level of education of general public to allow direct democracy. (And they didn't have, for example, a Swiss tradition either. And they could not afford to wait for such a tradition to develop.) But I think today the situation is different.

As I said, I don't know what happened in California, but once I find out, I am likely to conclude that it was a glitch of trial and error in the course of progress -- such a prejudiced soul I am aren't I!? :)

Posted by: Bulent Sayin on December 21, 2003 09:45 AM

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Joe Stiglitz has a different take on the Rubin success in today's SF Chronicle: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2003/12/21/INGH63P9601.DTL

Posted by: paulo on December 21, 2003 09:53 AM

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Oh that, the California Tax Revolt! Yeah, I think that was a good exersize of citizens' democratic action.

Posted by: Bulent Sayin on December 21, 2003 10:20 AM

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In historical perspective, I believe that it will be concluded that Mr. Clinton, failing to understand the complexities of congressional politics, proposed a good agenda but in the wrong order.

The first priority (and I pleaded with my congressional delegation at the time) was to repair campaign finance so that corporate money could not become the distorting factor that it has become.

The second priority was to balance the budget, yet provide some tax relief, ideally in the form of a straight rebate. It was unwise to place heavy marginal tax rates onto the lower upper class, since they had the resources to strike back. Better to place a slightly heavier tax burden on the very wealthy. This might have been accomplished by taxing capital gains as ordinary income, perhaps indexed for inflation.

The third priority was to reform welfare in a humane manner. This would have reassured the middle class that Clinton was a "new Democrat" and helped to defuse some of the social tension. On the other hand, it could have also renewed the pledge that those who are unable to care for themselves will not be left in despair.

By the time that these things had been done, a well-prepared health care reform package could have been presented. It's understandable that Clinton wanted to pass this while people were feeling the effects of the recession, since it's much easier to get the funds to patch the roof while it's raining.

Only *after* reassuring the middle class in these ways should Clinton have passed NAFTA.

So, it was a good program, but the order it was addressed failed to deal with practical politics. The real failure of leadership, though, rests with congressional Democrats, who failed to understand how vital campaign finance reform was to the midterm elections.

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Regarding Jim Glass and Noumenon, I believe that one major error in the CBO forecasts is that they failed to capture the effects of declining interest rates on deficits. As has been pointed out, interest on the debt is a major portion of the deficit. Lower interest rates and the deficit falls. If one checks the record, under Alice Rivlin, the CBO projections were always conservative, and when she ran OMB, the same held for that office. Under the Republicans, CBO projections have been consistently and radically wrong.

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Mr. Fromm points out that rising revenues from "the bubble" (by which I assume he means principally capital gains revenues) helped to reduce the deficit. True but trivial. Had the Fed acted to rein in speculation, revenues would have arrived later, but they would have arrived. The growth of the 1990s was real, though perhaps overstated by 1-2% GDP.

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Steve and Norman, please leave off with the ad hominem. I don't know how Professor DeLong feels about it, but I find it juvenile.

Posted by: Charles on December 21, 2003 10:21 AM

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Steve and Norman are trollish trolls

Trolls are fool's fools and these are trollish trolls. Do not feed trollish trolls. Spit and pass on.

Posted by: jd on December 21, 2003 10:46 AM

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I didn't agree with Clinton on supporting the '96 welfare "reform," but he actually did have some significant anti-poverty impact. There were major expansions of the EIC (earned income tax credit) under Clinton, and that has become one of the biggest anti-poverty programs. AND it's a hard one for Republicans to attack, because it has been framed as a reward for hard work...

Posted by: Katie K on December 21, 2003 12:06 PM

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Both Clinton in the 1990s and Reagan in the 1980s
inherited economies emerging from recessions.
In the 1980s the econ has a burst of normal post recession recovery for a year or two. The rest of the Reagan era was one of normal to modestly sub-par economic performance. Under clinton the economy started out slow and gained strength as time passed.

To be honest, the policies followed by both admin probably did not make all that much difference.
Reagan could not have done better without an improvement in core productivity. But in the 1980s the econ was stuck in the low productivity era. The econ boomed in the 1990s because of
fundamental technological breakthroughs that grenerated a capital spending boom and a return to more historic 3% productivity growth.

But the most unusual developments in the 1990s was a capital spending boom not accompanied by rising rates that fedback to end the boom.
I believe the Fed surpluse in the 1990s played a major role in that development. Moreover, the stock market shift to historic high valuations was also justified by the fact that volatility in the system fell sharply in the 1990s. Prior to WWII investors expected a bear mkt almost 50% of the time. From 1960 to 1990 investors expected a bear mkt about 25% of the time. In the 1990s this was cut in half again to about 12.5% of the time.
This justified a much lower risk premium.

If you go back to the original Keynes analysis
the key breakthrough was looking at federal deficit in relationship to savings- investment.
He showed that if you have a savings surplus the correct policy was run a large structural deficit.
But the flip side of that analyst is that if the
core economic problem is a savings shortage the
worse thing you can do is run a structural federal deficit. I believe that is the basic
fundamental flaw to voodoo economics and why
it is doomed to failure. It just that the main stream missed the point because much of the
consequences of voodoo economics worked through the dollar and the trade deficit rather than interest rates where people were expecting the problem to emerge. Despite the massive change in the importance of the international side to the US economy the overwhelming majority of US economists still look at the US economy as if it were a closed system. We are seeing it now in the collapse of the dollar because foreigners are not willing to fiance the US savings-investment gap
(( that is massively enlarged by the fed deficit))
at current interest rate spreads.

Posted by: spencer on December 21, 2003 12:07 PM

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One way to talk about the points you are making is to talk about interest payments as a share of the federal budget. Before 1980 it was insignificant. From 1980 to the mid 1990s they rose to the point that interest payment were almost as large as the military budget. If we had not had the Clinton surpluses interest payments would have become larger than the military budget about the end of the 1990s. As we are going now interest payment interest payments on the federal deficit will be larger than the military budget before this decade is over.

Posted by: spencer on December 21, 2003 12:34 PM

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The capitalists are sayin:

"Look fella, I ain't payin taxes, OK? But I'll lend you money for the right price."

Strange.

The World Bank, run by the US, is trying to reduce share of interest on public debt in national budgets in developing countries (well, at least supposedly so), while the US is moving in that direction, i.e., towards having a big chunk of federal budget go to payment of interest on public debt.

Wonder what Joseph Stiglitz would think of that?

Posted by: Bulent Sayin on December 21, 2003 12:44 PM

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"Without it the Democrats couldn't now claim even to have put the deficit on a diminishing course, much less to have balanced the budget."

Yes, because we all know that doing something, even if it's not perfect, is worse than the alternative - doing nothing at all.

Seriously, Jim, what the hell? "The Democrats didn't plan to create huge surpluses" isn't incompatible with "The Democrats did try to make the budget situation better."

Posted by: Jason McCullough on December 21, 2003 01:03 PM

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Tangential question: Where does the use of the word "troll" to describe deliberately provocative or obnoxious posters come from? Did the verb "troll" -- as in trolling for comments -- get converted into the noun because the noun refers to a kind of monster?

Posted by: James Surowiecki on December 21, 2003 01:43 PM

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Charles wrote, "Mr. Fromm points out that rising revenues from 'the bubble' (by which I assume he means principally capital gains revenues) helped to reduce the deficit. True but trivial. Had the Fed acted to rein in speculation, revenues would have arrived later, but they would have arrived. The growth of the 1990s was real, though perhaps overstated by 1-2% GDP."

(1) I'd hardly call 1-2% GDP "trivial."
(2) It's not clear that revenues would have arrived eventually. If A sells B a stock that's artificially inflated, A pays cap gains, but then when the bubble bursts, B's ability to trade the loser off of a winner is probably limited. So the IRS ends up with revenue that it wouldn't have received if the stock had never
budged in the first place.

Posted by: Stephen J Fromm on December 21, 2003 01:52 PM

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"Higher debt interest came from the huge debts run up to finance Reagan's unfunded tax cuts."

Tax cuts need to be "funded," eh? That's interesting! Exactly how is a tax cut "funded?"

With more taxes? :-/

Oy, vey! The federal defense spending increases were what was "unfunded!" Not tax cuts!

Posted by: Mark Bahner on December 21, 2003 02:00 PM

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James S.,

I believe "troll" stems from the use of the word to describe a type of fishing,"to fish by trailing a baited line from behind a slowly moving boat." (American Heritage Dictionary)

Posted by: Bernard Yomtov on December 21, 2003 02:09 PM

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I'd never thought of this in quite this way, so I may be way off base, but if A owns a stock that rises X dollars which he then sells to B, who watches it fall X dollars (so at the end of the bubble the stock is exactly where it was at the beginning), don't B's capital losses (which are tax-deductible) have to equal A's capital gains? Obviously, there are some quirks to this, involving personal tax rates, length of holding, etc. But ultimately wouldn't the tax revenue gains and losses have to balance out?

Posted by: James Surowiecki on December 21, 2003 02:19 PM

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>>The '93-94 changes knocked the deficit for 1995 down from the $284 b (4.1% of GDP) expected in 1993 to $176 b (2.5% of GDP) expected as of early 1995. But they left the deficits growing perpetually after that.

And what's interesting is that this budget course with escalating deficits thereafter projected to larger deficits after 2001 than we've actually incurred even with a recession and the cost of a new war and rearmament (neither of which are considered in the projections, obviously) plus all the Republicans' spendthrift schemes too. Deficits then were projected for 2002 at $322 b (3.2% % of GDP) compared to the real $158 b (1.5%); and for 2003 at $351 b (3.3 of GDP%) compared to the real estimated $401 b (3.7% of GDP).

Those are an actually substantially larger-than-reality deficit for 2002, plus one for 2003 that when adjusted for recession and war costs is a good bit larger than our reality too. So the Democrats *believed* at the end of 1994 that their budgetary changes put us on course to be in an even worse budget situation today than we are actually in, with bigger deficits than we actually have, and an additional trillion dollars on the national debt.

The boom-and-bubble surprise is looking more fortuitous all the time ... for everybody!<<

Two points:

(1) The early 1995 budget projections were *much* *much* better than the start of 1993 ones.

(2) Yes, the Cliinton Treasury thought that 1993 was simply round 1 of deficit reduction, and that a just-as-big round 2 would be required to stabilize the debt-to-GDP ratio, and that a just-as-big round 3 would be required to balance the budget. We were really lucky...

Posted by: Brad DeLong on December 21, 2003 02:24 PM

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James S

I prefer to think of trolls as in "Peer Gynt." A thuggish ugly dense lot, they were and are. Ibsen knew trolls well. "Peer Gynt" is quite wonderful poetry. Being gratuitously mean to Brad, is sure Peer Gynt "trolldom."

Posted by: anne on December 21, 2003 03:14 PM

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James Surowiecki wrote, "...don't B's capital losses (which are tax-deductible) have to equal A's capital gains? Obviously, there are some quirks to this, involving personal tax rates, length of holding, etc. But ultimately wouldn't the tax revenue gains and losses have to balance out?"

Certainly. But that doesn't mean they balance out in terms of the effect on the IRS.

What I mean is that there's certainly no limit on the amount of capital gains you might have to pay taxes on, but _if I recall correctly_ there's a limit to how much you can claim losses, at least if those losses aren't balanced against winners.

I'm not going to make any strong claims since I don't know the tax code that well.

Posted by: Stephen J Fromm on December 21, 2003 04:03 PM

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You can use capital losses to offset capital gains, and there is no annual limit. There is also a bizarrely low annual limit of $3,000 in capital losses that can be used to offset ordinary income. But the important thing is that you can carry those losses on your books indefinitely, and use them to offset capital gains and ordinary income in future years, too. So I think the tax revenue from capital gains and tax losses from capital losses should balance each other (with the already-mentioned qualifications of tax rates, inflation, etc.)

Posted by: James Surowiecki on December 21, 2003 04:26 PM

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Am I the only one hear besides our illustrious host who has actually read the Rubin book?

My one complaint about the book is that he doesn't provide much in the way of evidence and/or argument to back up his claim that Treasury and the IMF generally did the right thing during the Asian crisis.

Stiglitz and others have been fairly sharp in their criticism, and I was expecting to see an equally robust defense.

Perhaps Rubin is too much of a nice guy to engage in academic warfare?

Posted by: praktike on December 21, 2003 04:31 PM

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I'm not sure you should reduce concerns about Rubin's impact on corporate behaviour to odd-days even-days. Was there not a real, and mistaken assumption that what Wall Street, what the investment banks think is good for them is good for US businesses and so is good for people? So much of the untrammelled, uncensured corporate, banking and securities industry behavior that was exposed in the Asian crash was repeated 3-4 years later in the US. On more than odd days I think Rubin and Larry Summers very chauvinistically presumed that their own finance and banking industry was cleaner and, indeed, more moral than those in other countries -- even though US financiers had a big hand in creating and feeding the Asian bubble. Was Rubin's bias or presumption against regulation of the finance industry an ideological thing, something out of self-interest, or just a blind spot?

Posted by: paulo on December 21, 2003 05:01 PM

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I'm not sure you should reduce concerns about Rubin's impact on corporate behaviour to odd-days even-days. Was there not a real, and mistaken assumption that what Wall Street, what the investment banks think is good for them is good for US businesses and so is good for people? So much of the untrammelled, uncensured corporate, banking and securities industry behavior that was exposed in the Asian crash was repeated 3-4 years later in the US. On more than odd days I think Rubin and Larry Summers very chauvinistically presumed that their own finance and banking industry was cleaner and, indeed, more moral than those in other countries -- even though US financiers had a big hand in creating and feeding the Asian bubble. Was Rubin's bias or presumption against regulation of the finance industry an ideological thing, something out of self-interest, or just a blind spot?

Oh yeah, trolling was also a male gay culture term for, well, trolling.

Posted by: paulo on December 21, 2003 05:02 PM

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re "probabilistic thinking"

this passage from a Paul Krugman essay:

". .. What's wrong with the kind of economics that Felix Rohatyn and many others practice is that they have failed to understand the principle. They think that you do economics the way a lawyer prepares a brief for a client-first you decide on your opinion, then you marshall as many plausible arguments as you can in support. And they imagine that the orthodoxies of economics-like the belief that the U. S. economy's potential growth rate is only 2.5 percent, or that free trade is a good thing-were arrived at in the same way.

But that's not how serious economics is done. A real economist starts not with a policy view but with a story about how the world works. That story almost always takes the form of a model-a simplified representation of the world, which helps you cut through the complexities Once you have a model, you can ask how well it fits the facts; if it fits them reasonably well, you can ask what sorts of magnitudes, what sort of tradeoffs, it implies. Your policy opinions then flow from the model, not the other way around. . ."

http://flash.lakeheadu.ca/~mshannon/KRUGMAN.htm

Posted by: roublen vesseau on December 21, 2003 05:09 PM

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also, this is a great sentence:

"Was there sufficient Democratic support in Congress for a Social Democracy--particularly given the fact that many Democratic Congressional leaders believed that Mr. 43% from Arkansas had no business asking for deference and were totally, utterly clueless about what the political consequences would be if they failed to enthusiastically support President Clinton?"

maybe you deserve the big bucks too;)

Posted by: roublen vesseau on December 21, 2003 05:34 PM

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"Where, if anywhere, did Rubin go wrong? Errors were remarkably few.".....

The fault is not Rubin's, but ours, for not realizing that the best and the brightest and the most educated squirrels, are still, after all, squirrels, and you should not expect more than the very best and honest squirrel duties from them.

Do squirrels, even the best and the brightest, ever become world leaders?

They can tell you how to gather the most acorns, where to store the acorns, how to best use the acorns, but they will never tell you how to get more acorns off the tree, because they can't.

Posted by: northernLights on December 21, 2003 08:19 PM

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On the origins of the term 'troll':

http://www.catb.org/~esr/jargon/html/T/troll.html

Posted by: Doctor Memory on December 21, 2003 10:50 PM

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I think that those here who are questioning Clinton's commitment to a social democratic agenda are perhaps forgetting what Washington was like in 1992. In that year, after a lot clever and otherwise successful politicians grappled with and failed to unmask and roll back The Big Lie, Clinton with Perot's help managed to get ownership of the problem. Bush I (voodoo economics), Mondale (where's the beef?), Dukakis, congressional Democrats, even deficit hawk Dole all were forced to either give up or give in and become part of the problem. The chronic deficits and the dishonesty that surrounded them was the single biggest problem that needed a fix. I'm not surprised that everything else took a back seat and given we're now back where we started it's clear even two terms was not enough time to undo the lie.

Regarding Brad's final question, I think it's a valid question for us today. If voters put Bush back in next November I think Democrats should seriously consider jumping on the runaway train and stoke the boiler til it blows. Then, sooner rather than later, the various pieces of the country going their separate ways can come to grips with responsibility separately.

Posted by: dennisS on December 22, 2003 08:30 AM

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Spencer says, "Both Clinton in the 1990s and Reagan in the 1980s
inherited economies emerging from recessions. In the 1980s the econ has a burst of normal post recession recovery for a year or two. The rest of the Reagan era was one of normal to modestly sub-par economic performance. Under clinton the economy started out slow and gained strength as time passed. To be honest, the policies followed by both admin probably did not make all that much difference."

You omit the fact that Reagan ran up a two trillion deficit achieving modestly subpar growth, a deficit that costs American taxpayers hundreds of billions every year.

Policies do make a difference.

While I think you do have a clear understanding of the the role of deficits, dismissing the role of policy implies that voting doesn't matter. That's simply wrong.

_____________________________

Stephen Fromm says, "(1) I'd hardly call 1-2% GDP "trivial.""

Not to my family budget, no, nor probably to yours.

Over a decade, however, 1-2% GDP is well within the errors of estimation. Revisions of the Reagan era are on that order.


Mr. Fromm adds, "(2) It's not clear that [capital gains] revenues would have arrived eventually. "

The example you give, of a stock falling and the owner selling at a loss, is certainly correct. But consider another example: the person who bought a stock when the Dow was at 7,000. While nothing is ever guaranteed in the market, valuation suggests that the purchaser is extremely likely to receive a 20% rise in value.

Mr. Surowiecki points out something else in favor of your position, namely that the seller receives a capital loss which can be applied against capital gains. However, the capital loss limit was $3,000 annually (see http://www.ncpa.org/iss/tax/2002/pd101602b.html). So, this effect is relatively small. (Ah, I see in a later post he is aware of this)

In terms of tax revenue, there is a rough balance. Assuming stable policy, revenue lost in one period is captured in another. While the real world is much more complex (for example, the Republican changes in cap. gains tax make it attractive to unearth very long-term capital gains in expectation that the law will be reversed in the future), the capital gains issue is a relatively small one in terms of long-term budgetary balance. Not small compared to my family budget, but certainly compared to the effect of the Bush tax cuts, it is.

Posted by: Charles on December 22, 2003 10:20 AM

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I was refering to an earlier post that claimed the Clinton record was good because it was a trough to peak record to just point out that both records were much more comparable than the earlier post implied. But we can not get away from the point that productivity sets the limit to how well the econ can do and because of that we ought to do better now than in the 1980s. But that begs the question of why aren't we now doing better under Bush than we did in the 1980s. One answer is that so far almost all of the gains from better productivity have gone to capital and none have gone to labor.

I agree completely that deficits do matter and that the large deficits are a drain on the economy. As I have pointed out in other post I believe that much of the bad consequences of the federal defictis are showing up in the international side of the ledger and consequently are being missed by most analysts that continue to look at the US as if it were a closed system.

It is like the claim earlier that capitalist are
lending the money to finance the deficit. Actually, it is foreign central banks that are lending the money to finance the fed defict much more than the capitalist. If the dollar were not the worlds reserve currency the US would not be able to get away with running the large deficits as long as it has.

Posted by: spencer on December 22, 2003 01:17 PM

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Spencer, I making the ten percent economist in me speak now:

Gettin away with large deficits depends on the economy's ability to pay back the debt: If your currency is not world's reserve currency, then you simply borrow in whichever currency happens to be that.

Capitalists do prefer to lend money to government rather than paying taxes to government. If the interest rate of lending to government exceeds their risk adjusted minimum attractive rate of return on investment, they prefer to lend money to government rather than invest in the economy. (And if they do invest in the economy, it won't necessarily be YOUR economy!)

At any rate, lending money to government is more or less like putting money in the bank. Anybody would prefer to put money in the bank rather than pay taxes to the government. In fact, capitalists lend money to government through banks.

If the capitalists are likely to invest in YOUR economy, then by all means give them the tax break and borrow to finance public deficit, because returns on investment would more than pay for interest on debt.

But what the Bush administration is doing, combined with unnecessary invasion of Iraq and the costs thereof and methods of financing those costs, is, I'm afraid not that. It is rather an ideological plan to delay social and political change towards reduction of privileges (spell? I could never get that one right!) and expansion of equal rights for all.

That's how things look to me.

Posted by: Bulent Sayin on December 23, 2003 05:52 AM

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Might laissez-emprunter be the phrase you're looking for?

Posted by: Chris in Boston on December 23, 2003 09:09 AM

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I don't know. I do sense a meaning but neither my French nor my knowledge of economics (if it is a French term in economics) is good enough to know or infer the exact meaning of laissez-emprunter.

Posted by: Bulent Sayin on December 23, 2003 09:44 AM

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I'm new to this forum and I've read all of the posts.

And after it all, all I can ask is


Why won't you all just leave us alone?


Thank you

Posted by: James Carroll on December 24, 2003 07:00 PM

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