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Thursday, July 13, 2006

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. ...

    Posted by on Thursday, July 13, 2006 at 03:06 PM in Economics, Income Distribution, International Trade, Policy, Politics | Permalink  TrackBack (0)  Comments (17)

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