Should Democrats Dump Wall Street?

The battle for the heart and soul of the Democratic Party. Here's the issue, in a nutshell:

[In 1992] Clinton famously exploded that his whole economic vision and political future were being held hostage by "a bunch of fucking bond traders." At another planning session ..., Clinton declared with sarcastic disgust: "Where are all the Democrats? We're all Eisenhower Republicans … . We stand for lower deficits and free trade and the bond market. Isn't that great?"

And here's part of a much longer essay by Robert Kuttner on the role of Robert Rubin and Wall Street in the Democratic Party:

Friendly Takeover, by Robert Kuttner, American Prospect: In April 2004, AFL-CIO president John Sweeney grew concerned that John Kerry was getting too much of his economic advice from the Wall Street wing of the Democratic Party. ... In the general election, he would need the unions. Sweeney proposed a private meeting to discuss living standards as a campaign issue, and the candidate invited the labor leader to his Beacon Hill home. Sweeney arrived ..., bringing his policy director, Chris Owens, and Jeff Faux of the Economic Policy Institute. There, seated in the elegant living room, were Robert Rubin and two longtime lieutenants: investment banker and former Rubin deputy Roger Altman, and fellow Clinton alum Gene Sperling -- Kerry's key economic advisers.

In a three-hour conversation, the group discussed the deficit, taxes, trade, health care, unions, and living standards. The labor people urged the candidate to go after Wal-Mart's low wages. Rubin countered that a lot of people like Wal-Mart's low prices. Kerry eventually announced that the meeting needed to wrap up... Sweeney and his colleagues were ushered out the door; Rubin, Altman, and Sperling remained. "Wall Street was in the room before we arrived," says Faux, "and they were there after we left."

Now, more than two years after Kerry lost a winnable election, the Democrats have taken back both chambers of Congress, running on an economic platform far more populist than Kerry's. With the strongest field in decades, they could win the presidency in 2008. Though Hillary Clinton is running as an economic centrist, a ticket led by John Edwards, Barack Obama, or Al Gore (if he gets in) would probably run a robust campaign on pocketbook issues. But if the Democrats do take back the White House, they are likely, once again, to find Bob Rubin in their living room. ...

Rubin enjoys unparalleled reach into the overlapping worlds of corporate and Wall Street boardrooms, nonprofits, party organs, and senior Democratic politicians. ... The Hamilton Project, founded by Rubin and based at the Brookings Institution, promotes free capital movements, fiscal balance, and small gestures toward greater equality. ... Though widely regarded as a Wall Street liberal, Rubin has played the same fiscally conservative ideological role for more than two decades...

As Clinton's top economic adviser, Rubin's dubious counsel included making the North American Free Trade Agreement (NAFTA) a priority over health reform (Hillary Clinton's objections notwithstanding), and pushing the budget all the way to surplus, protected from a Republican treasury raid only by a fictitious Social Security "lockbox." He did support expansion of the earned income tax credit and minor social-spending increases, but fiscal discipline was paramount. These views are ... exactly what you would expect of a leading banker.

Rubin's position as the Democrats' economic seer is unfortunate in several related respects. First, the vision Rubin is selling ... is that budget balance, free capital markets, and low interest rates are both necessary and mostly sufficient for broad prosperity. We might like new social spending, but alas, the fiscal imperatives tie our hands. Rubin was a big supporter of pay-as-you-go-budget rules, now adopted by the Democratic congressional majority. These rules limit further Republican tax cutting, but they also hobble Democrats' ability to spend more than token sums on new initiatives.

Rubin contends that surpluses are required to prepay the coming costs of Social Security (which are in fact manageable) and of Medicare (which are not). But ... Rubin's fiscal design precludes bolder strategies, such as increasing efficiencies and containing costs by making health insurance universal. Despite soothing rhetoric, the Rubin program offers nothing to fundamentally alter the economic risk and stagnation afflicting the broad working middle class. If the Rubin doctrine again dominates the Democrats' pocketbook program, it will once again blunt the Democrats' (now resurgent) appeal as the party of the common American. ...

Rubin's stewardship of the economy in the middle and late 1990s is credited with producing the holy grail of Democratic economic policy: full employment, with rising living standards and greater income equality. But for the most part, that credit is misplaced.

Supposedly, the gradual progress to budget balance that began in 1993 produced lower interest rates. Investment, higher growth, and full employment duly followed. The Clinton administration's embrace of this strategy began at a private meeting in the Arkansas governor's mansion in December 1992. There, Greenspan indicated that if deficits were reduced, the money markets would likely approve, and the Federal Reserve could deliver a somewhat looser money policy. A prime advocate for the Greenspan view was Rubin. In a key strategy meeting, Clinton famously exploded that his whole economic vision and political future were being held hostage by "a bunch of fucking bond traders." At another planning session recounted by Bob Woodward, Clinton declared with sarcastic disgust: "Where are all the Democrats? We're all Eisenhower Republicans … . We stand for lower deficits and free trade and the bond market. Isn't that great?"

Clinton did succeed in producing a budget surplus. To his and Rubin's credit, the budget included tax increases on the rich as well as cuts in spending. Interest rates did fall, and the economy did briefly reach full employment. But Clinton's initial skepticism was correct. The cause and effect did not follow the Greenspan-Rubin script.

The '90s saw declining inflation, looser money, and rising productivity growth, for reasons unrelated to Clinton's slaying of the deficit. The economy's previous investment in computers was belatedly raising productivity growth rates. With higher productivity growth, the Fed didn't have to "take away the punch bowl,"..., for fear of letting growth trigger price pressures. Greenspan let the recovery rip because he saw few signs of inflation, not because of reduced deficits. The weakness of unions and the globalization of the economy also damped down wage pressures, while foreign competition disciplined producer prices.

Supposedly, deficits raise interest rates because government borrowing "crowds out" private investment. But with the globalization of capital markets, there was no crowding out. Having foreigners supply most of the U.S. economy's capital is not sustainable in the long run, but in the 1990s it worked. ... With credit cheap, and cooked corporate books exaggerating the good news, investors kept inflating the stock bubble. ...

So it was higher productivity, a compliant Fed, and consumption financed by a stock bubble that generated the bout of full employment. Budget balance deserves only minor credit... In fairness, the deficits inherited from Presidents Reagan and Bush Senior did need to be reduced -- but not to zero. Rubin also gets credit for helping the Democratic Party escape its "tax and spend" reputation. ...

Rubin's economic views are much as Clinton described: Eisenhower Republican. Rubin has personally pitched President Bush on his proposed grand fiscal bargain: The Democrats agree to cap Medicare and Social Security, the Republicans agree to raise some taxes, and a glorious future of budget balance ensues. Only Bush's resistance to tax increases has saved the Democrats from this ideological and political neutering. But Rubin continues to promote his recipe through his Hamilton Project. ...

[T]he Hamilton Project's actual program does not advocate serious new social outlay, nor does it have a kind word for unions, wage regulation, or social norms for trade. With the exception of one early paper by Jacob Hacker on "Universal Insurance," Hamilton proposals are basically budget-neutral. I asked Rubin what level of net new social outlay the project envisioned. He declined to say.

Last July, at a Hamilton Project public program, The Washington Post's Steve Pearlstein mischievously asked panelists Rubin, Altman, and Summers why not take a "time out" on further trade deals until Congress passes some of the social buffers that the project keeps endorsing in principle. "To a man, they recoiled at the idea," Pearlstein reported.

Calling this posture "a perfect example of how the Democrats have lost the instinct for the political jugular and the ability to use policy disputes to political advantage," Pearlstein added, "The idea here isn't to kill free trade. It's to take it hostage." Lately, many Democrats in Congress have indeed been trying harder to hold the next trade deal hostage to more social protections. If they fail, Rubin's counsel will have played a key role. ...

The small-bore programs advocated by Rubin and Hamilton ... will not rouse voters, because the policy will do next to nothing for the average American. ...

So how are Bob Rubin and Rubinomics positioned for 2008? All too powerfully, one suspects. The Hamilton Project will continue to turn out centrist policy papers trying to signal boldness with scant resources. Rubin will continue promoting his grand bargain to cap social insurance, raise taxes, offer token benefits, and further liberate global private capital. He will continue to have unparalleled influence with Democrats, and to receive an adoring press.

In presidential politics, Rubin is personally close to Hillary Clinton, but this trader covers his bets. His son, Jamie Rubin, is a major Wall Street fund-raiser for Barack Obama. His former deputy chief of staff, Karen Kornbluh, is Obama's chief domestic policy adviser, and Rubin is also close to Obama's chief of staff, Steve Hildebrand, who used to hold the same position for former Senate Democratic Leader Tom Daschle, another Rubin ally.

One candidate who might well reject Rubinomics is John Edwards, who is unlikely to raise large sums on Wall Street. And even Edwards is talking more about our duty to the poor, and less about the need to reregulate capitalism. However, should the populist Edwards be nominated, he will need a calming figure to reassure Wall Street that he is not an economic madman. Someone like Bob Rubin.