September 22, 2008
Dr. Reich or: How I Learned to Stop Worrying and Love Deficit Spending
The current financial crisis has ended the chapter of Greenspanomics in American history with a resounding boom. With it go many assumptions about the benefits of deregulated financial trading, government inaction in markets, and an overall free trade mentality that has dominated economic policies on the left and the right since Ronald Reagan.
One democratic economic advisor who worked closely with Greenspan was Robert Rubin, who served as Treasury Secretary during both Clinton Administrations. Rubin was a proponent of the power of markets, and helped Greenspan engineer the deregulation of derivative markets in the 90s.
In fact, Rubin was the dominant voice in charting Clinton's economic policy when he was first elected to office in 1992. As the story goes, when Clinton sat down to map out an economic plan for his first term, there was a Robert on each end of the table giving counsel. On one side sat Robert Rubin, not yet Treasury Secretary but still a valued economic advisor and former Goldman Sachs executive, and on the other sat Secretary of Labor Robert Reich. These two Roberts offered fundamentally different ideas about how to create economic growth.
Reich's idea was to invest in infrastructure and job training to help the middle class and stimulate the economy. Rubin encouraged Clinton to reduce the deficit in order to calm bond markets, reduce interest rates and get the economy moving. It was the quintessential question of government investment versus a hands-off free market. Clinton went the route of Rubin, and with that ally in the White House, Greenspanomics continued to be the rule of the day.
For years Greenspan was a hero to American market economists who had once and for all proved the supremacy of the market in managing himself. But the current crisis has shown that many of Greenspan and Rubin's economic assumptions were askew, if not empty.
And now Reich has the upper hand. As he wrote in a recent New York Times op-ed, in a time when no one can spend, the Government can spend. In a time when no one can invest, the Government must invest. He writes:
All economic indicators are now pointing toward a deepening recession. Unemployment is already high, and the trend is not encouraging. Factory orders are down. Worried about their jobs and rising costs of fuel, food and health insurance, middle-class Americans are unable or unwilling to spend on much other than necessities.
Under these circumstances, deficit spending is not unwelcome. Indeed, as spender of last resort, the government will probably have to run deficits to keep the economy going anywhere near capacity, a lesson the nation learned when mobilization for World War II finally lifted us out of the Great Depression.
A historic moment could be in the making for large-scale public investment. It is becoming increasingly likely that Democrats will control the executive and legislative branches of government, and Barack Obama's economic plan includes two spending programs totaling 210 billion dollars in investment over ten years in energy and infrastructure. Deficit spending is obviously not ideal, but credit is frozen and the stock market is losing eight percent a day, and the federal government could create jobs and wealth in the middle class while embarking on national projects that could have decades of benefit for the American people.
However, these investments are far from guaranteed, even if Barack Obama is elected president in November. The Democratic caucus is rife with deficit hawks, who, while supporting government spending, might take issue with 21 billion dollars annually in new investment programs in a time of deficit and following on the heels of a trillion dollar financial bailout. If elected, in the early days of his Presidency, Barack Obama could find himself deciding between the Reich and Rubin models again. But these are different times, and the economic decisions made in 2009 could look vastly different than those made in 1993.
This post is dedicated to any Kubrick fans who read the BT blog--AZ