In an Uncertain World

by Robert Rubin

  I found that Treasury was different from the White House in all sorts of ways. At one level, my role, while broad, was more defined. I was the head of an immense enterprise that, while obviously answerable to the President, also functioned in many respects as a freestanding subsidiary, with established statutory responsibilities. These included supervision of (though with varying degrees of authority over) large agencies, including the Internal Revenue Service, the Customs Service, the Bureau of Engraving and Printing, the Secret Service, and the Bureau of Alcohol, Tobacco and Firearms. Much more central to the life of the Secretary, Treasury also has several big policy shops. International Affairs deals with international economic policy and with representing the United States at the IMF, World Bank, and other multilateral institutions. Domestic Finance handles debt management, oversight of bank and regulatory functions, and much else. Tax Policy is central to any administration’s economic strategy. The Economic Policy Group provides analysis on a broad range of issues. All told, I was now in charge of 160,000 employees.

  In another sense, though, my position as head of a cabinet department was much more exposed and precarious. At the NEC, I had been one member of a group of people who helped to formulate and advocate the administration’s economic policies. Now I was publicly and politically accountable in a way I hadn’t been at the NEC. Because of his extensive knowledge and deep involvement, Bill Clinton remained the real leader of his own economic team—as well as being the decision maker with the ultimate responsibility. That notwithstanding, I was now also in some measure the personification of the administration’s economic policies. That meant that if the performance of the U.S. economy deteriorated in any way in terms of inflation, unemployment, productivity, trade, or the strength of the dollar, I would be viewed as in some sense responsible—certainly for the policy response and probably to some extent for the problem as well. It also meant that those who objected to the administration’s economic policies now saw me as the personal expression of them, not just as a part of a White House process that devised them. In short, I was now in the line of political fire in a way I hadn’t previously been and hadn’t really recognized as part of the Treasury Secretary’s job until it became mine. And just when I took that job, the fire became a good deal more intense, thanks to the Mexican crisis.

  The experience of serving as Treasury Secretary brought me closer to two related concepts that had already become central to my Washington experience: confidence and credibility. At the NEC, I focused on confidence and credibility as they related to the President and his policies. My first job at the NEC had been to assist in designing an economic plan that would lead to the kind of business, consumer, and financial market confidence that were necessary for Bill Clinton to succeed in his economic goals. I also helped advise him on ways to increase—and avoid diminishing—his public credibility as an economic policy maker and leader. An administration’s policies are by far the most important determinant of its economic credibility. But how an administration speaks about economic issues, both in tone and in substance, affects its reputation with businesses, consumers, and markets as well. And that reputation is important. If an administration is viewed as generally sensible on economic matters, that contributes to confidence. If, on the other hand, an administration is viewed as not sensible economically, that diminishes confidence.

  At Treasury, I retained those same responsibilities as part of the President’s economic team. But I had a new role as well. The most important factor in an administration’s economic credibility is what the President does and says. But how the Treasury Secretary handles himself in office is also meaningful. As the administration’s lead economic spokesman—a role long enshrined in practice—I had direct, as well as indirect, responsibility for furthering confidence in the U.S. economy. That meant that my credibility now mattered for more than personal reasons. And, as I quickly discovered, my credibility was at constant risk from substantive mistakes or careless words—or even from carefully crafted words that people didn’t relate to in the way I had anticipated. I also faced the new hazard of what were sometimes harsh personal attacks as an inherent part of my new job.

  There was a critically important paradox at the heart of my new role, one that unfortunately is not always well understood. At one level, confidence and credibility are issues of perception—perceptions about how strong economic conditions are, how well an administration is handling economic policy, how successful the President is in his job, and how effective the Treasury Secretary is in his. But to say they are perceptions does not mean that they’re based on illusions or that they can be manipulated for any length of time. While economic confidence and an administration’s economic credibility might at times and in certain ways diverge from reality, they are ultimately grounded in reality. For that reason, pursuing confidence and credibility as goals in themselves is largely futile. Trying to create an impression of economic strength will almost surely backfire. Public relations efforts or attempts to “jawbone” the economy or markets don’t change the underlying realities. They only diminish the credibility of anyone who tries—whether a President or a Treasury Secretary—and erode his ability to instill confidence.

  In other words, while confidence and credibility were constant concerns, they weren’t objectives that someone in my position could pursue explicitly. Ultimately, confidence would come from the policies we pursued. And managing the politics well would be critical to what we could accomplish in an era of Republican control of the legislature.

  THE STRUGGLES THAT PLAYED OUT in the course of 1995 and early 1996 between President Clinton and the new majority in Congress were about issues of great and fundamental importance: What functions should government perform? How large a role should government play in society? How much should the government help the poor? In retrospect, what was happening in those days is much clearer. Bill Clinton was in the midst of turning back a powerful antigovernment effort by the victors in 1994 congressional elections. At the time, however, it just felt like bitter fighting over everything.

  Internally, the Clinton administration continued to face a conflict over how to respond to the Republicans. On one side was the argument that we needed to be more populist, to energize the Democratic Party’s base. That view was best exemplified by Secretary of Labor Robert Reich, who was now speaking publicly about the need to cut what he termed “corporate welfare.” I shared the view that public subsidies for profit-making enterprises, many of which were embedded in the tax code, were often wasteful and unjustified. But I also thought that using the term “corporate welfare” was inflammatory and could adversely affect how the President was seen and, as a consequence, the economy itself. In addition, I had sat in on enough discussions about swing voters to feel that this crucial section of the electorate reacted badly to anything that sounded like class warfare. President Clinton had gone a long way toward countering the old stereotype of Democrats as being antibusiness. To a surprising degree, he had gained the confidence of the business community and financial markets. Using language that sounded hostile to business could undermine that confidence, harming both the economy and the administration.

  On top of these substantive and political disagreements, there was a process issue. Throughout the first two years of Clinton’s first term, Reich had been an especially good team player inside the administration. As someone who had a close personal relationship with Clinton going back to their days together at Oxford, he could easily have gone around the NEC process. As far as I could see, he never did that. But now he was venturing into new rhetorical and substantive territory on his own, without any internal debate. To me, that seemed inconsistent with our understanding. Our agreed-upon process was that if people on the economic team differed and couldn’t work out their dispute on their own, they should take the issue to the President, through an NEC process, for him to decide. Then we could all publicly support whatever the decision was. What Bob was now doing left me, as someone who strongly disagree
d with him, in a troubling position. If he alone spoke about these issues, he would appear to represent the administration’s position. But if I spoke on the other side, it would look as though the administration were divided. Process can be a fragile thing; I couldn’t do what Bob was doing without creating a mess. After some discussion, Bob—who, like the rest of us, was very supportive of our all working as an economic team—agreed not to use that kind of language. We agreed to conduct a public conference on the related issue of corporate best practices.

  Around the time this was going on, debates inside the White House began to be affected by the invisible hand of Dick Morris. In the spring of 1995, people at the White House were stunned to discover that the President had created an entirely separate advisory team led by Morris, a pollster and political consultant who had worked for him in Arkansas. Though I didn’t have much interaction with him, I thought some of Morris’s perspectives, such as his focus on swing voters, made sense politically. But the problem once again was the need for a regular process. It made sense for the President to solicit views from whomever he found helpful. But there should have been a way to do that without circumventing the regular structure of the White House, which created all sorts of problems.

  In April 1995, an act of domestic terrorism in Oklahoma City killed 168 people, including 18 Treasury Department employees and members of Treasury Department employees’ families. I flew to Oklahoma City with the President and others in the administration to meet with the families of victims and attend a memorial service. President Clinton’s words at that service movingly expressed the feelings of people throughout the country. I had groped for words when meeting with victims’ families, so I not only appreciated but greatly respected the President’s ability to comfort these families and the country at a time of shock and tragedy. Political analysts said that these terrible events—and President Clinton’s response to them—did much to revive public respect for government in our society and were something of a turning point in the President’s standing with the American people.

  Clinton’s political turnaround unfolded through the budget battle that culminated in two government shutdowns. I remember that at the outset of that conflict, George Stephanopoulos told me, as we were leaving a meeting in the Cabinet Room, that we were going to attack the Republicans over their proposed Medicare cuts. George said that Gingrich had made a big mistake by proposing drastic reductions in Medicare, and we were going to ride that mistake through to the 1996 election. Gene Sperling had described George as a political genius, but it seemed to me that George was just being ridiculous. That Medicare cuts could become the organizing principle of a presidential campaign seemed almost inconceivable. I remember laughing with Larry Summers about how small and insufficient that approach seemed.

  I was, of course, wrong. Government spending in the abstract might not be popular, but specific programs resonated with people. The attempt to cut Medicare by $270 billion and reduce taxes by a similar amount, in a way that primarily favored the affluent, was an issue with special political force. The Clinton administration had learned a few things since 1993, when the Republicans had been so successful at casting deficit reduction as what it was not, a tax increase on middle-income people. This time, my colleagues weren’t going to stand by while our opponents created the prism through which our policies were viewed. The President told me that in 1993 we had “left the field.” In 1995, we stayed and played hard. Of course, there was much more at stake in the budget conflict than just Medicare, and the President cared passionately about many of these issues. “Medicare is the thing that matters politically,” he said at one of our Cabinet Room meetings, alluding to the powerful lobbies that protected this health care program for the elderly. “But I’m not going to let them gut Medicaid just because no one cares about a program for poor people.”

  The President’s defense of Medicare and his opposition to tax cuts aimed primarily at the affluent was only part of the reason he bounced back and won reelection in 1996. Another important aspect of his political recovery was that he was at last coming to be seen as a centrist. The prevailing view in the media was that this represented a change from his first two years in office. My view was that Clinton remained the centrist that he’d been all along, as evidenced by our original deficit reduction plan, his support for NAFTA, and a host of other issues. Although his health care reform was often touted as a big-government program, Clinton had proposed a private-sector solution—albeit with a significant government role—as opposed to government provision of health care. In 1995 and 1996, however, the President communicated this orientation more deliberately and effectively. The change in perception makes an important point that goes well beyond Washington politics. The President’s policy choices remained on a largely consistent track, but it was only after the first two years that the perception of what he was doing began to accord with that reality.

  In 1995, we put out a budget that continued deficit reduction as a proportion of GDP, but with a stable actual deficit number. Our congressional opponents kept hammering away at our budget’s failure to balance. I remember that when I testified before the Senate Finance Committee, several of the Republicans on the committee wanted me to acknowledge that our proposed budget would mean $200 billion deficits “as far as the eye can see.” I wouldn’t describe the ongoing deficit in dollar terms because that could be used to argue—incorrectly—that we were not committed to deficit reduction. Instead, I responded by pointing out that our proposal would continue to reduce the deficit as a share of GDP. But the reality was that I was in a holding pattern I couldn’t acknowledge. Our strategy was to put out a budget while at the same time we were working on additional spending cuts that would lead to much lower deficit numbers. In this detailed and painstaking work, we were lucky to have the help of one of the unsung heroes of the federal government, Alan Cohen, an indefatigable, disheveled Treasury staffer who had perhaps the greatest knowledge of and passion for the federal budget process of anyone in government. But we had not wanted to put in the cuts Alan helped us find in our original budget submission for fear that the Republicans would “pocket” them and then seek additional cuts that we objected to in negotiating a final budget. And so, for some time, we continued to work on developing what would be our real budget, but without any decision at that point on whether it had to go to absolute balance. In May, the congressional Republicans introduced their proposal to cut taxes, paid for with Medicare and Medicaid reductions, in a budget that went to balance.

  From early on, President Clinton sensed that the persistence of a deficit, even a small one, created a major political problem for him. In our regular meetings in the Roosevelt Room and the Cabinet Room on the 1996 budget, he kept asking, “Shouldn’t I come up with a balanced budget?” All of his economic advisers, myself included, responded that he shouldn’t, because there wasn’t any real economic difference between small deficits that continued to decline as a share of GDP and actual balance. We had successfully addressed the deficit problem in 1993 and intended to continue reducing the deficit. Going all the way to a truly balanced budget would require additional program reductions that would serve little economic purpose.

  It was in a meeting in the Cabinet Room sometime in May that Clinton finally said to us, “If I’m going to get heard on anything else, I first have to show a balanced budget. Once I do that, I can talk about progressive programs. But if I don’t show a balanced budget, they’ll never listen to me about progressive programs.” Basically, I knew what he was saying was right. We advisers were all sitting there telling him there was no economic difference between a few billion dollars and zero, which is true as an analytical point. But there was a much bigger point, the one Clinton was making: if we wanted to talk about spending money on education and programs for the inner city, people weren’t going to listen to us unless we talked about those programs in the context of a balanced budget. The President realized that while fiscal responsibility was not itself political
ly resonant, balancing the federal government’s books did resonate and was a goal that voters could relate to and rally around. In that meeting, the President was pretty much alone in what really was an extraordinarily perceptive insight about what was needed to make his agenda work with the public. And I later realized that without the politically resonant goal of a balanced budget, fiscal responsibility itself becomes much harder to establish and maintain.

  Clinton’s point was an extension of the one I remembered him making in early 1993 at that initial Little Rock meeting about the economic plan. At the time, deficit reduction had been what he called a “threshold issue” to get the economy moving—a precondition for everything else he hoped to do. Now, a balanced budget had become a threshold issue, because it was a precondition for getting people to listen to us and hence for doing almost everything else the administration cared about. Proposing to balance the budget may also have been the only feasible way to defeat the pernicious idea of adding a balanced-budget amendment to the Constitution. Such an amendment would violate all known wisdom about economic policy. It could compel the federal government to cut spending or raise taxes in a recession, substituting “procyclical” policies (which would cause the economy to contract even more) for the “countercyclical” ones that a recession ordinarily calls for. Even after our decision to support a balanced budget, the amendment failed by only a single vote in the Senate in 1995, and it might well have passed if we hadn’t persuaded people that Social Security benefits could be endangered by the spending cuts the amendment might at times require.