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Tuesday, January 24, 2006

'We Must Change Policy Direction'

Former Treasury Secretary Robert E. Rubin says it's time for politicians to stop playing games and deal with our mounting economic challenges. He urges both sides to set aside differences and hammer out effective bi-partisan solutions. I will just note that one party is in power, the other isn't, and the party in power has shown few signs of a willingness to seek political solutions that will allow these problems to be addressed through negotiatied, compromise solutions:

'We Must Change Policy Direction', by Robert E. Rubin, Commentary, WSJ Online: ...[T]he leaders of Asia's emerging market economies... are making tough decisions ... The result is large numbers of well-educated workers in low-wage and increasingly market-based environments (especially in China and India)... This has created a competitive challenge of historic proportions which encompasses manufacturing and virtually all services electronically communicable. We can meet this challenge and enjoy a bright future. Our economy has great strengths ... However ... to avoid the real possibility of great economic difficulty, we must re-establish our own seriousness of purpose about economic policy, and we must change policy direction on many fronts.

Some would argue that our reasonably healthy GDP growth ... indicates that we can stick with the economic policy status quo. I believe this would be a serious mistake. Median real wages ... have been roughly stagnant for the past five years -- and many Americans have had falling real incomes. Private sector job growth has been the lowest of any recovery since the '30s. ...

Re-establishing seriousness of purpose regarding economic policy ... will require ... making choices that are very difficult politically, compromising among divergent views ..., and putting aside ideology in favor of facts and analysis. There is ... widespread agreement that our future economic well-being is threatened by large ... fiscal deficits, huge increases in entitlement costs ..., personal savings rates of approximately zero, public school system inadequacies, and high health care costs. But our political system is failing to mediate differing views on how to address these issues, and failing to make the difficult decisions required. ...

To move forward, serious policy advocates from all perspectives should start by agreeing on two basic bedrock principles: that there is no free lunch; and that a strong future requires incurring costs now for benefits later. We should then put everything on the table. Our strategy should have four components:

(1) We should re-establish sound fiscal conditions for the intermediate term ... and put in place a real plan to get entitlements on a sound footing ... (2) We need a strong public investment program -- paid for, not funded by increased public borrowing -- to promote productivity growth, to help those dislocated by technology and trade, and to equip all citizens to share in our economic well-being and growth. (3) We must pursue an international economic policy that continues global integration, ... (4) We should work toward a regulatory regime that meets our needs and sensibly weigh risks and rewards.

Our strategy should reaffirm market-based economics as the most effective organizing principle for economic activity, while recognizing the critical role of government in providing the many requisites for economic success that markets, by their very nature, will not provide.

Broad participation in economic well-being and growth is critical ... to realize our economic potential. ... Broad-based participation is also the best antidote to protectionism, and to pressures for undue restrictions on our economic flexibility and immigration. For these same reasons, measures to increase security for the growing number of people dislocated in our rapidly changing economy may well be wise economically. This can be done without creating the rigidities and excessive social benefits that have led to chronically slow growth and high unemployment in Continental Europe. ... Our economy is not working for too many of our people, and that is a problem for all of us...

The proponents of supply-side theory who assert that tax cuts will wholly -- or even significantly -- pay for themselves (through increased growth and federal tax revenues), appear to be no more accurate now than they were in the '90s. ... Virtually all mainstream economists take the view that sustained long-term deficits will crowd out private investment, increase interest rates, reduce productivity and reduce growth. ... The adverse impact on interest and currency rates has not yet occurred, partly because business has had relatively low levels of demand for capital -- but most importantly because of vast capital inflows from abroad ... This is not indefinitely sustainable; at some point, which could be near in time or still some years out, continued imbalances, increasing fiscal debt levels and ever-greater overweighting of dollar holdings abroad are highly likely to lead to loss of confidence, and trouble.

The fiscal and entitlement holes are now so deep that measures adequate to address them would be exceedingly difficult politically... And, even more importantly, the proposals themselves would likely be so sharply attacked as to become politically toxic. Thus, I believe that the most realistic way forward is for the president to bring together the leaders of both parties and both houses to make these decisions with joint political responsibility. Everything should be on the table... Finding the balance that best promotes economic growth in this context could well call for revenue increases as well as spending discipline... None of this is easy, but our economy could well be at a critical juncture... To realize our bright future and to minimize the risk of serious difficulty, we urgently need our own sense of mission to meet the challenges facing our economy.

    Posted by on Tuesday, January 24, 2006 at 12:17 AM in Budget Deficit, Economics, Policy, Politics | Permalink  TrackBack (0)  Comments (33)

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