Rubinomics 2.0: Getting the Bugs Out

Robert Rubin, architect of what has come to be known as Rubinomics, defined below as a policy of balanced budgets and trade liberalization, has changed his view of the success of these policies many of which were promoted and implemented during the Clinton administration. He is concerned that rising inequality will undermine the global trading system if it is not reversed. In response, he has created the Hamilton Project to find policies to address inequality without abandoning the push to open global markets. This is from The Nation:

Born-Again Rubinomics, by William Greider, The Nation, July 31, 2006 issue: ..Robert Rubin ..., former Treasury Secretary, now executive co-chair of Citigroup, captured the party's allegiance in the 1990s as principal architect of Bill Clinton's ... conservative approach known as "Rubinomics" (or less often "Clintonomics"). Balancing the budget and aggressively pushing trade liberalization went hard against liberal intentions and the party's working-class base. But when Clinton's second term ended in booming prosperity, full employment and rising wages, most Democrats told themselves, Listen to Bob Rubin and good things happen.

So it's a big deal when Robert Rubin changes the subject and begins to talk about income inequality as "a deeply troubling fact of American economic life" that threatens the trading system, even the stability of "capitalist, democratic society." More startling, Rubin now freely acknowledges what the American establishment for many years denied or dismissed as inconsequential--globalization's role in generating the thirty-year stagnation of US wages, squeezing middle-class families and below, while directing income growth mainly to the upper brackets. A lot of Americans already knew this. Critics of "free trade" have been saying as much for years. But when Bob Rubin says it, his words can move politicians, if not financial markets.

Rubin has launched the Hamilton Project, a policy group ... developing ameliorative measures to aid the threatened workforce and, he hopes, to create a broader political constituency that will defend the trading system against popular backlash. ...

A storm is coming, Rubin fears. He ... explains ...: "Where there's a great deal of insecurity, where median real wages are, roughly speaking, stagnant...where a recent Pew poll showed 55 percent of the American people think their kids will be worse off than they are, I think there is a real danger of heightened difficulty around issues that are already difficult, like trade.... Look at the difficulty around immigration."

Princeton economist Alan Blinder, a Hamilton participant and Federal Reserve vice chair in the Clinton years, describes the "difficulty" in more ominous terms: "I think the prospects for the liberal trade order are not great," he says. "There's a whole class of people who are smart, well educated and articulate, and politically involved who will not just sit there and take it" when their jobs are moved offshore. He thinks CNN commentator Lou Dobbs, who has built a populist following by attacking globalization and immigration, "is just the beginning--nothing compared to what's going to happen in the future." ...

Many view the Hamilton Project as just more talk-talk. I regard it as an important event--a "course correction" in elite thinking that, given Rubin's influence, may reshape the familiar trade debate, at least among Democrats. Rubin's central objective, however, is to control the terms of debate ... without disturbing anything fundamental in the global system itself.

His program consists mostly of familiar ideas that might soften the pain for displaced workers. But I doubt the Hamilton proposals will do much, if anything, to reduce the global forces that are depressing incomes for half or more of the American workforce. Even Rubin is uncertain. When I ask if his agenda will have any effect at all on the global convergence of wages--the top falling gradually toward the rising bottom--he says: "Well, I think that's a question to which nobody knows the answer. I think the proposals and approach we are proposing are the way to get the best possible outcome for the United States in a complicated world.... But whether that's going to stop the global convergence of wages, I don't know the answer to that. I would guess the answer is no."

Despite my skepticism about his policy ideas, I think Rubin is providing a significant opening for the opposition--a new chance for labor-liberal reformers to make themselves heard with a more fundamental critique of globalization. Up to now, the standard trade debate has been utterly simple-minded--"free trade good, no trade bad"--and anyone who opposes trade agreements or WTO rules is dismissed as a backward "protectionist." The enlightened position, as major media always explain, is to support the "win-win" promise of globalization.

Only Rubin is departing a bit from that script, effectively accepting the opposition's central complaint that "win-win" is a cruel distortion of what's happening. If so many Americans are actually losing ground, Rubin asks, shouldn't government do something about that? ... Several times, I was taken aback when his comments made tentative concessions to the opposition's argument. He even endorsed, though only in broad principle, some objectives for reforming global trade that his critics have long advocated. ...

 

The Hamilton Project's early policy output, I concede, doesn't encourage a belief that reasoned dialogue with dissenters is what Rubin has in mind. Advisory board members see themselves as progressive-minded, but they do not stray from the mainstream's conventional wisdom--lots of Harvard, Princeton and Berkeley, no one from the ranks of "free trade" skeptics. ...

The "soft" ideas in the Hamilton Project playbook are mostly old ideas--improve education and retraining, provide "wage insurance" payments to dislocated workers, increase public investment in industrial development and infrastructure. All are worthy things to do, but they seem like tinkering around the edges. Ron Blackwell, chief economist of the AFL-CIO, observes, "What they've got going are these little ideas that sound like they are forward-looking and respond to the problem of living standards, but they don't speak to power."

The right-of-center tilt of Rubin's group is reflected in some secondary proposals that are sure to rattle Democratic constituencies: Reform education by weakening teacher tenure, linking it to student performance; reform the system for tort litigation to eliminate what Rubin describes as "vast excess today" ...

The "hard" economic propositions in Rubin's agenda are essentially the same ones he pushed successfully in the Clinton Administration: Balance the budget to boost national savings and thereby (Rubin assumes) reduce the country's horrendous trade deficits and enormous capital borrowing from abroad, where the creditors are led by China and Japan; advance more trade agreements if possible, but don't tamper with the trading rules or international institutions that currently govern the system.

In other words, born-again Rubinomics. Peter Orszag, the young economist who is Hamilton's director, doesn't quarrel with the label, saying, "This is almost like Clintonomics 2.0." ... But will it work? That's the question I would like to hear debated among Dems before they sign up for more Rubin magic. Clinton's second-term boom did temporarily reverse the downward wage trends, though economists still argue over the cause and effect. But ... Rubinomics in the 1990s did not reverse the long-term trend of rising trade deficits in goods and services or the deepening current-account deficits in capital borrowing from abroad...

Rubin is sticking to his convictions, though respected conservative economists no longer believe in the "twin deficit" relationship. Studies by the Federal Reserve and the IMF found the relationship too weak to matter much. ... Rubin defends his thesis by blaming the rising trade deficit on inflexible currency exchange with China and other Asian nations. Correct that and everything will be fine, he says. Further, he explains that the capital deficits in the Clinton years were actually a good thing because the high-tech investment boom was drawing in more foreign investors. ...

In any case, Rubin sees nothing in the trading system itself that needs fixing. "Maybe I'm missing something," he says, "but I don't think there's anything in the design of the system we would have done differently."

Another debatable tenet in Rubin's thinking is the familiar mantra that more education will save us in the long run... Rubin's tone is sympathetic to workers, but some acolytes pushing this logic sound like they are "blaming the victim." US educational attainment levels, after all, rose robustly during the last generation with no effect on job losses or wage stagnation. "I actually think education is key," Rubin insists. ... The more productive we are, the better we can compete..."

There's one large and looming problem with that logic: The number of "losers" whose jobs are outsourced to foreign labor markets is getting much larger than the establishment had envisioned, and the job losses are creeping up the income ladder to undermine people in well-educated, highly paid occupations. ... These are people who presumably did the "right thing" by getting advanced educations. How, I ask Blinder, does educational improvement help them, since they are already well educated? "I wish I knew the answer to that," Blinder replies. "On balance, more education is better than less education, but it's not a panacea." He talks vaguely of changing the style of American schooling. ...

Free-trade advocates like Blinder are complacent about the loss of manufacturing jobs, comparing it to the technological changes that wiped out agricultural employment a century ago. "It's pretty inevitable," he says. They seem more worried now that white-collar jobs are being wiped out. But they think it would be a big mistake to interfere...

When I asked Rubin to consider labor's critique and its argument for global labor standards, I was pleasantly surprised that he did not brush off the question. Instead, we had an engaging back and forth. ...

To my surprise, Rubin ... recalls the work of John Kenneth Galbraith and his famous concept of "countervailing powers." Market-based capitalism, Rubin explains, is kept stable, broadly prosperous and equitable because its excesses are checked by labor unions, government and other institutions with countervailing power. "If you have a big company negotiate with its workers and the workers aren't organized, it isn't real negotiations," he says, adding, "If one side has no negotiating power, that isn't really a market-based system. It's an imposition of one on the other." This is a startling statement: The man from Citigroup has articulated the essential reasoning that makes the case for including labor rights in the global trading system.

That conversation has convinced me that outgunned reformers ought to make use of Rubin's musings. Knock on his door and try to initiate a dialogue. ...

In some ways, Robert Rubin reminds me of the original Progressives of the early twentieth century, reformers drawn from the emerging middle class of managerial and professional people. They tried in various ways to reconcile the tumultuous conflicts between capital and labor but without getting blood on their hands. They were horrified by the greed and inhumanity of industrial capitalism but also wished to keep their distance from Socialists and the struggling labor movement. ...

My hunch is that Rubin won't succeed any more than the original Progressives in reconciling the competing forces (the New Deal eventually did). The tumult most likely will grow louder and possibly violent before reformers gain the political power to accomplish their serious goals. ...

Comments

[anne]

Superb, superb, superb. There too are a smiling Benjamin Friedman and David Swensen and from what I heard on tape Warren Buffett.

[johnchx]

This is a very exciting development.

The project website is here:
http://www1.hamiltonproject.org/es/hamilton/hamilton_hp.htm

[dd]

I discern little substantive difference from republicans other than Rubin is a nice guy who is more articulate; but the goals are the same: "The Hamilton Project is a sophisticated example of what I call "deep lobbying"--developing well in advance of the 2008 presidential election an agenda that safely avoids critical challenges to the global system and defines the terms of debate in very limiting ways." The Rove strategy with velvet gloves.

[dd]

No criticism intended; just an observation.

[dryfly]

But whether that's going to stop the global convergence of wages, I don't know the answer to that. I would guess the answer is no.

[...]

Another debatable tenet in Rubin's thinking is the familiar mantra that more education will save us in the long run... There's one large and looming problem with that logic: The number of "losers" whose jobs are outsourced to foreign labor markets is getting much larger than the establishment had envisioned, and the job losses are creeping up the income ladder to undermine people in well-educated, highly paid occupations. ... These are people who presumably did the "right thing" by getting advanced educations.

The problem these guys face is that if you dilute the wealthy populations of the developed world into the undeveloped world... the 'convergence point' of where the wages will be after 'equilibrium' is FAR closer to the bottom (undeveloped world) than the top (developed world). It has to be this way - at least for a long time, probably generations - due to the numbers.

I did a quick google on population

330 MM US & Canadians
460 MM EU
130 MM Japanese
920 MM

Throw in Aussies & Kiwis & a few other wealthy countries and maybe we have 1B.

Diluted into a world population of 6B... My guess (and only a guess) is that half are in abject poverty... average household incomes equivalent to $1,000 per year or less.

I see no way you throw them all together and have a 'convergence point' greater than say... real average household income equivalent to $8000. Just a WAG

I can only imagine the political turmoil if real US average income fell to $8000.

BTW - my WAG wasn't just a zero sum average... if that were to happen my guess the convergence would be something like $4000-$5000. I'd expect aggregate growth to occur with all that trade... but the downward pressure on western workers incomes would continue EVEN with that global growth - most of it in the developed world.

And there will be way more winners than losers - worldwide - but the losers (us) are going to lose a lot. Convergence - that really explains it well.

The vast majority of developed world families are going to experience a dramatic fall in real income... actual dollar values might not fall but in terms of what those dollars can buy - PPP - it will be very significant.

And education won't save us - not completely. The well educated will converge to a higher asymptote than say regular toilers... but if your from the west the fall will still be severe... maybe on a percentage basis even worse than the toilers since the educated in the west start from such a high point relative to everyone else in the world.

I do NOT see how gov't in developed countries can 'protect the worker' at anywhere close to our current standards of living if this large of a population experiences this big of a fall - I don't see where the resources come from to do it. We'd have to quite literally eat the rich... and then divy up all their stuff... a la the October Revolution. Not pretty & not really all that successful.

[save_the_rustbelt]

Rubin helped start the shift of income and wealth from Main Street to Wall Street, now that the blitz is well under way he has regrets.

Thanks.

[Tymbrimi]

Look, first of all, generally Democrats never were, and never wil be, free traders. Free trade is good economic policy, which generally means Democrats will oppose it. Basically, Democrats are "French". :)

Free trade has, and will continue, to cause dislocations. I believ we are more near the end of that process than we are to its beginning. Many of our corporations are quite profitable. The percentage increase in our exports is significantly larger than the increase in our imports, impressive considering how the cost of our imports has risen sharply due to the increase in the price of oil. Our businesses have, and will continue, to take steps to remain competitive.
All that is needed now is to coninue Republican dominance so as to curtail protectionism, and let America complete its global competitive restructuring through the free market. :)

[K. Marx, III]

RE: That nice Mr. Greider's nice report on that nice Mr. Rubin.

Mr. Rubin probably has nervously observed that progressive public intellectuals are beginning to badmouth Mr. & Ms. Clinton's DLC. So he wants to recover control of the game by renaming and regrouping what is still the same sort of Democratic Party power financial elite that owned ol' frisky Bill from the start of his elevation to national prominence--and apparently already has bought that impressive and super smooth young Barak Obama.

Unless the Democratic Party returns to an even more progressive program than FDR's, and uses its economic/military power to lead the northern tier developed nations in a reconstitution of world-wide social democracy, then the US will continue its present direction -- flowing rapidly into the domestic and international political economy sewer, dragging much of the world economy down with us.

In fact however, it is probably now too late for a change in direction. With 95 percent of the world's capital swishing around in speculative ventures under control of the top one percent, the whole edifice administered by a huge bureaucracy of poorly educated descendants of the original Cowles priesthood, the probability of a change in directions is miniscule.

(Not to mention the recent absolutely disastrous destabilization of the Middle East at $6 billion per month.)

Rubin and his nice friends didn't invent class warfare, but they lacked the brains to overcome their ambition, greed and lust for power, and foresee where the neoclassic synthesis would take them.

And if that nice Mr. Greider wants to help his Princeton friends try to save a sinking ship, then before he writes another column he and his staff should first read all of William H. McNeill's corpus, and then begin reading people like Tariq Ali and Amartya Sen -- the which to discover the real world state of nature.

[reason]

Tymbrimi = faith based economics. (i.e. Trust me I know what I'm doing - Republican policies haven't worked for 25 years (as measured by median income) but they will - just wait).

(P.S. Re growth in exports vs imports
a. Over what time period
b. Measured in what?
c. But of course the BOT is still getting worse.
d. Ever thought what might happen if Microsoft or Hollywood were to lose their pre-eminent positions?

P.S. I'm surprised at you - normally you avoid all reference to facts. Getting tired of arrogant prognostication?)

[save_the_rustbelt]

"...I believ we are more near the end of that process than we are to its beginning...."

The citizens of the Rustbelt who went bankrupt and lost their homes are really pleased.

But we are just at the beginning. As soon as the Chinese finish destroying our textile industry, they are going to destroy our auto parts industry. At the same time they are stealing patents to destroy our machine tool industry.

The fun has just begun.

[save_the_rustbelt]

Lou Dobbs has been reviled and beaten like a rented mule.

I wonder when the Ivy League / Wall Street crowd will apologize to him.

Not in my lifetime.

[wimpie]

"All that is needed now is to coninue Republican dominance so as to curtail protectionism, and let America complete its global competitive restructuring through the free market."

Tym, "free market" or debt enslavement market?

[camille roy]

I thought the interview was fascinating, partly because it exposed the blind spots of Rubin, a nice guy surely, but also a member of the financial and political elite.

But whether [his proposals are] going to stop the global convergence of wages, I don't know the answer to that. I would guess that the answer to that question is no.... This stuff is really interesting. Unfortunately, almost nobody in the press asks this stuff--no, I'm serious--or tries to do it in a thoughtful way. So there's almost no public understanding of any of this stuff.

He is a Democrat who lives in a bubble. He thinks nobody asks questions about this? What planet does he live on? I wonder what Lou Dobbs would say to that assertion.

(question) Labor would say: If you are not going to stop the process of convergence, you are at least going to moderate it. Because you've forced rising wages at the bottom, you have some chance of not completely decimating high-wage, blue-collar labor in America or elsewhere.

(Rubin) Well, I guess there are two pieces to that. If you are saying what you want to do is improve the distribution of income in low-income trading countries and that will have advantage to everybody concerned, low-income countries and to us, I think that is in everybody's interest. On the other hand, I've had exposure to people who make that argument and I think make it as a way to prevent trade liberalization.... But it is a complicated question. The one hope that some of these countries have to take people out of abject poverty is that their labor-cost advantage will result in a shift of production to their countries from the place that it's now taking place and, if you require them not to take advantage of their labor-cost advantage, then you really have condemned them to poverty. It's not so simple, I think.

(question) What we have now in many parts of the world is manufacturers, multinational and domestic, moving their production to the next country. You go from Thailand to Shri Lanka or Cambodia because the textile workers in Thailand are organized and demanding higher wages. Our side would say that way is the "race to the bottom" for everybody, both for the workers in Thailand and for workers in advanced countries.

(Rubin) Well, yeah, but what makes it complicated is that it may be the only way for the people in Sri Lanka to get out of abject poverty. Now, having said that, you do want to wind up with a system where the benefits of economic activity are being divided up in some reasonable fashion. If you look at the situation in some developing countries today, that's not the case.

(question)But you do see the dynamic in the mobility of capital? They keep putting labor at new disadvantages.

(Rubin) Yeah, I think that's right. But then the question is, would you say the people of Sri Lanka have to stay in abject poverty to keep that from happening? Or would you say: This a very legitimate issue that should be addressed in one fashion or another and, when Sri Lanka comes to benefit from this, the benefits should be divided up in some reasonable fashion between the employers and the employees?

I quoted this because I want to show how the topic of advocacy for American workers gets dropped. It becomes a question of what is good for the workers of Sri Lanka.

Now I'm not against the poor folks of Sri Lanka, but you see over and over again amongst the liberal globalists of the Democratic party, a tendency to advocate for free trade as a way to raise living standards in China or Sri Lanka.

Meanwhile for decades now our living standards have barely tread water, or have fallen.

I personally have had enough of this nonsense. I think that when Americans yell in protest at changing globalization in order to protect American workers because then the poor in Sri Lanka would not benefit [which is debatable, btw] then they are doing it for one real reason: they are part of a global elite that shoves dollars into their bank account everytime a global corporation lays off an American worker and hires a Sri Lankan.

[Blissex]

«I discern little substantive difference from republicans other than Rubin is a nice guy who is more articulate;»

Ahhhh, but there is a world of difference, a very, very large difference, because Rubin does not believe that the poor and wage earners are thieving parasites whose exploitation of the rich has to be kept under control. The key difference is this:

«To my surprise, Rubin ... recalls the work of John Kenneth Galbraith and his famous concept of "countervailing powers." Market-based capitalism, Rubin explains, is kept stable, broadly prosperous and equitable because its excesses are checked by labor unions, government and other institutions with countervailing power. "If you have a big company negotiate with its workers and the workers aren't organized, it isn't real negotiations," he says, adding, "If one side has no negotiating power, that isn't really a market-based system. It's an imposition of one on the other."»

This is, politically and economically, a whole world of difference, because it explicitly acknowledges the obvious, that the division of the fruits of trade depends on leverage and bargaining power, and that currently it is the top 1% who have got the leverage and get more than 100% of the fruits of free trade.

Indeed his words please me because they are equivalent to my usual suggestion that collective action and ''sponsoring'' politicians (via the vote or contributions) is the way for the poor and wage earners to regain leverage.

Disclosure: I have read a lot of Galbraith, and in particular I liked his (and the neo-ricardian school) emphasis on the role of power in economics (thus political economy, not ''economics'').

If the republicans were not fired by moral outrage for the exploitation of the rich by the parasitical poor they might opportunistically concede that tolerating a bit of ''parasitism'' might be a good bargain for them too as it has been in 1940-1990.

But given the alleged availability of an endless supply of 3rd world headcount that is begging for work and does not have the power to exploit the rich, they think they do not need to tolerate any abuse by USA based parasites. I suspect that they are wrong.

[Brian]

Maybe it's me, but I don't know of many Democrats who favored liberalized trade that are against unions. What they appear to be against is trade that isn't liberalized, which apparently is supported by people who also support unions.

"Meanwhile for decades now our living standards have barely tread water, or have fallen."

The understanding I have of free trade and rising living standards is that the richer another country is, the better we are, because they can buy more stuff from us. Look at what's happening to Ford. Its business is booming in China because the economy there is doing well, but here, it's not doing nearly as well.

says...

"Rubin does not believe that the poor and wage earners are thieving parasites whose exploitation of the rich has to be kept under control."
I am not so certain about rhetoric versus beliefs and whether the end game is any different.

[dd]

that was me
dd