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The build-up
to the State of the Union speech should be especially amusing this election year,
with overly rosy previews by David Brooks et
al (see his column today opposite this one claiming that a neocon
cabal in Washington is an urban myth), while those who don’t have free passes
to the White House cafeteria point to sobering indicators that contradict the
White House’s official Happy Days are Hear
Again chorus. As the Center
for American Progress wrote yesterday, tongue in cheek to color-coded security
alerts, we have “Rhetoric Alert” in full force ahead of the beloved leader’s
anticipated pronouncements about a new “ownership society”. See links to both
of these, below. - KWC Rubin Gets Shrill OpEd by Paul Krugman, January 6, 2004 @ http://www.nytimes.com/2004/01/06/opinion/06KRUG.html
Argentina retained the confidence of international investors
almost to the end of the 1990's. Analysts shrugged off its large budget and
trade deficits; business-friendly, free-market policies would, they insisted,
allow the country to grow out of all that. But when confidence collapsed, that
optimism proved foolish. Argentina, once a showpiece for the new world order,
quickly became a byword for economic catastrophe. So what? Those of us who have suggested that the
irresponsibility of recent American policy may produce a similar disaster have
been dismissed as shrill, even hysterical. (Hey, the market's up, isn't it?)
But few would describe Robert Rubin, the legendary former Treasury secretary,
as hysterical: his ability to stay calm in the face of crises, and reassure the
markets, was his greatest asset. And Mr. Rubin has formally joined the
coalition of the shrill. In a paper presented over the weekend at the meeting of the
American Economic Association, Mr. Rubin and his co-authors — Peter Orszag of
the Brookings Institution and Allan Sinai of Decision Economics — argue along
lines that will be familiar to regular readers of this column. The United
States, they point out, is currently running very large budget and trade
deficits. Official projections that this deficit will decline over time aren't
based on "credible assumptions." Realistic projections show a huge
buildup of debt over the next decade, which will accelerate once the baby
boomers retire in large numbers. All of this is conventional stuff, if anathema to
administration apologists, who insist, in flat defiance of the facts, that they
have a "plan" to cut the deficit in half. What's new is what Mr.
Rubin and his co-authors say about the consequences. Rather than focusing on
the gradual harm inflicted by deficits, they highlight the potential for
catastrophe. "Substantial ongoing deficits," they warn,
"may severely and adversely affect expectations and confidence, which in
turn can generate a self-reinforcing negative cycle among the underlying fiscal
deficit, financial markets, and the real economy. . . . The potential costs and
fallout from such fiscal and financial disarray provide perhaps the strongest
motivation for avoiding substantial, ongoing budget deficits." In other
words, do cry for us, Argentina: we may be heading down the same road. Lest readers think that the most celebrated Treasury
secretary since Alexander Hamilton has flipped his lid, the paper rather mischievously
quotes at length from an earlier paper by Laurence Ball and N. Gregory Mankiw,
who make a similar point. Mr. Mankiw is now the chairman of the president's
Council of Economic Advisers, a job that requires him to support his boss's
policies, and reassure the public that the budget deficit produced by those
policies is manageable and not really a problem. But here's what he wrote back in 1995, at a time when the
federal deficit was much smaller than it is today, and headed down, not up: the
risk of a crisis of confidence "may be the most important reason for
seeking to reduce budget deficits. . . . As countries increase their debt, they
wander into unfamiliar territory in which hard landings may lurk. If
policymakers are prudent, they will not take the chance of learning what hard
landings in [advanced] countries are really like." The point made by Mr. Rubin now, and by Mr. Mankiw when he
was a free agent, is that the traditional immunity of advanced countries like
America to third-world-style financial crises isn't a birthright. Financial
markets give us the benefit of the doubt only because they believe in our
political maturity — in the willingness of our leaders to do what is necessary
to rein in deficits, paying a political cost if necessary. And in the past that
belief has been justified. Even Ronald Reagan raised taxes when the budget
deficit soared. But do we still have that kind of maturity? Here's the
opening sentence of a recent New York Times article on the administration's
budget plans: "Facing a record budget deficit, Bush administration
officials say they have drafted an election-year budget that will rein in the
growth of domestic spending without alienating politically influential
constituencies." Needless to say, the proposed spending cuts — focused
only on the powerless — are both cruel and trivial. If this kind of fecklessness goes on, investors will
eventually conclude that America has turned into a third world country, and
start to treat it like one. And the results for the U.S. economy won't be
pretty. Brooks: The Era of Distortion @ http://www.nytimes.com/2004/01/06/opinion/06BROO.html CAP Progress Report/Economy: Not Trickling Down @ http://www.americanprogress.org/site/pp.asp?c=biJRJ8OVF&b=6228 |
Rubin gets Shrill 010604.doc
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