Wall Street Journal
Wednesday, February 16, 2001
REVIEW & OUTLOOK (Lead Editorial):
Mr. Rubin's Discipline
The Wall Street Journal Europe via Dow Jones
In the interest of economic science, we've been trying to understand what, exactly, the antitax-cut people in the U.S. mean when they argue that the money taxpayers have sent to Washington must be used to pay off the national debt. So we were happy to read the explanation offered by Robert Rubin, the former U.S. Treasury Secretary, in a recent New York Times op-ed piece.
Mr. Rubin was very intent on attributing America's economic good times to something he called "fiscal discipline," which, he argued, had reduced the deficit and brought interest rates down. Indeed, he invoked "fiscal discipline" seven times in his explanation. Indeed, we were tempted to think Fiscal Discipline must be a cross between Mistress of the Whip and a broad-beamed nanny with meaty arms and a horrid scowl. But after a while we realized that Fiscal Discipline was a coy reference to the high taxes that have resulted in the U.S. budget surplus. Here's Mr. Rubin's reasoning: Fiscal Discipline has created a pool of capital that has pushed down interest rates, thus enabling consumers and business people to borrow more, thus spurring economic growth.
Well, we beg to differ. There are several problems with Mr. Rubin's argument:
-- Levels of deficits and national debt have nothing to do with levels of interest rates. There is no theoretical or empirical evidence to support Mr. Rubin's claim. At its most basic, interest rates are determined by the global supply of capital and the global demand for it. The global supply of capital is huge -- tens of trillions of dollars -- so the demand for credit from any single government (even in the form of budget deficits) has only a modest impact on interest rates.
In practice, empirical evidence from the past 20 years in the U.S. especially demonstrates that there is no relationship between interest rates and the budget deficit.
-- Budget deficits or surpluses have nothing to do with economic growth. During the high-deficit years of the Reagan administration, economic growth averaged an annual rate of growth of 4.5% -- higher than the 3.7% annual average achieved during the lower deficit years of 1993-99.
Simply put, economic growth does not depend on budget deficits or surpluses, but on economic fundamentals such as an attractive investment climate -- low inflation, stable prices, a skilled and mobile labor force, seductive new technologies, higher productivity growth and citizens with a lucky penchant for innovation.
-- There are no compelling reasons to reduce U.S. debt beyond its current level. Right now, the U.S. debt-to-GDP ratio is around 35%; about equal to Ireland's, and half of the average of other industrial economies. European nations with debt-to-GDP ratios at or above 100% might do well to bring their debt ratios down into the 50% range, but there are in fact drawbacks to trying to eliminate government debt altogether.
Indeed, there are good arguments to aim for a debt-to-GDP ratio about where it is now in the U.S. and Ireland. As a bond trader like Mr. Rubin should know, no debt means no government debt securities. That would be a shame since Treasury securities are deeply cool financial instruments.
-- There is absolutely no reason to believe that the budget surplus will be used to pay down the debt. Where was Mr. Rubin's friend, Fiscal Discipline, during the past three years when U.S. government spending was headed in the up direction? As the record clearly demonstrates, once taxpayers' money is sent to the national treasury, the government spends it.
One thing is for sure, healthy economic growth is not the result of Fiscal Discipline taking Americans' money, shoving it into the capital markets and then letting them borrow it back. To the contrary, healthy growth in the U.S. during the past 20 years (including the Clinton administration) was the result of the hard work done by Americans despite Mr. Rubin's theory of Fiscal Discipline.
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Copyright (c) 2001 Dow Jones and Company, Inc.
Received by NewsEDGE/LAN: 02/22/2001 1:11 AM