In an Uncertain World

by Robert Rubin

  Gore can be awkward in interpersonal interactions—an unusual and unfortunate characteristic for someone in political life. But that awkwardness can be misleading. Gore is very bright, vigorous in his thinking, and possessed of a sharp and often self-deprecating wit that I very much enjoy. I remember when the Prime Minister of Poland was visiting Washington and had the usual meeting in the Oval Office with the President, the Vice President, and a few senior officials from each side. It was a busy time at the White House, with electoral politics very much on people’s minds, and I thought the meeting was probably a less than optimal use of the President’s time—though, in fairness, Poland was the poster child for economic reform in Eastern Europe. At the end of the meeting, the Prime Minister noted that there were many people of Polish extraction living in the United States. The Vice President looked at him with mock astonishment and said, “We had heard something about that.” I told the Vice President afterward that I had practically broken up, because in his own ironic way, Gore was making the point to the earnest Prime Minister that this was exactly why the meeting was taking place.

  I tended to agree with Gore on most of his policy positions. He strongly opposed George W. Bush’s campaign proposals for a massive tax cut and for the partial privatization of Social Security. Gore had been a strong force for deficit reduction from the beginning of the administration, had worked hard on the Hill to pass the Mexican support program, and had very publicly supported trade liberalization, especially during the struggle to pass NAFTA—even though that had been politically difficult at times within the Democratic Party. He also had a strong focus on inner-city problems.

  Gore’s greatest passion, of course, was the environment. I had entered the administration with great skepticism about what seemed to me absolutism on the part of at least some environmentalists. But Gore persuaded me that the threats to the environment were a serious danger and that environmental protection and economic growth were not necessarily a trade-off; that, indeed, long-term economic growth would depend on sensible environmental policy. I came to believe that measures of the gross domestic product would more accurately reflect economic output if environmental costs and benefits could be included—though that is not yet feasible, either politically or technically. I remember a long conversation we had in the Vice President’s West Wing office about global warming. Gore said that even if science didn’t provide certainty, the evidence was considerable that global warming was occurring, and measures to repair it would take a long time to have substantial effect. If we waited too long and the evidence turned out to be correct, the result could be an unpreventable catastrophe. And with risk of catastrophe, you cannot afford to be wrong. This was in a way analogous to the problem a trader faces when he has a position that is almost certain to produce a positive return but is so large that failure could put him out of business. That is a chance he can’t afford to take. And of course, with global warming, most experts believe that the risk of a catastrophe is real. Any sensible analysis of global warming seems to me to lead to the conclusion that putting effective preventive measures in place is imperative—though that still leaves questions about which ones make the most sense.

  Unfortunately, rather than running primarily on the economic record of the Clinton-Gore administration, the Gore campaign took something of a populist tone. Income distribution is a critically important economic issue for any society; the question is the language you choose and the sense you convey with your words. At any time, but especially at a moment when people were broadly benefiting economically, language tinged with class resentment seemed to me politically and substantively counterproductive. If Gore were to win, his populist rhetoric in the campaign could hurt business confidence and investment, which was not the way to start a new administration.

  All of this, of course, is a long-standing debate within the Democratic Party, which has its philosophical schisms just as the Republican Party does. I am not a political analyst, but I’ve been around this debate for many years, listening to the vigorous policy and political arguments on both sides. My view remained what I remember Hillary Clinton telling Bob Reich after the 1994 midterm election debacle: that the key in the general election is the 20 percent of swing voters in the middle of the electorate, and that class conflict is not an effective approach with those people. In response to this kind of criticism, Gore’s campaign strategists are quick to point out that Gore got more popular votes than Bush. But whatever one’s view of the outcome, I think the Gore campaign should have done better, given that he was running as an incumbent Vice President amid the best economic conditions in many decades.

  AFTER BEING SOMEWHAT involved in the 2000 election, I didn’t give much thought to what role, if any, I would have in the policy debate going forward. But three events quickly got me reinvolved: the new administration’s tax cut proposals in early 2001, which I considered fiscally unsound; the Democrats’ need for economic policy advice from people they were comfortable working with; and the September 11 attacks. All of these factors pulled me back into the policy-making process. It’s useful to separate the history of the Great Fiscal Debate from current arguments around the question of whether deficits matter. After analyzing the issue, I’ll relate the story of how I reengaged with the debate.

  The Great Fiscal Debate: More than anything else, it was my deeply troubled reaction to the administration’s tax cut proposals that led me to reengage. The tax bill, debated and passed in the first half of 2001, began a period in which tax cut advocates dismissed mainstream views about the direct and indirect effects of large tax cuts on the government’s fiscal position, the value of sound fiscal policy, and the harm caused by large, long-term structural deficits.

  Conservatives often framed the debate over Bush’s proposals as a question of lower taxes versus more spending. (Here and throughout the chapter, my reference to conservatives is to those who, through the 1980s and 1990s, coalesced around fervent advocacy of the tax cuts as an overriding priority, rather than more traditional conservatives, who, whatever their social and other views, were strong advocates of sound fiscal policy.) The Concord Coalition, an organization dedicated to fiscal discipline, and led successively by two Republicans, former Commerce Secretary Pete Peterson and former Senator Warren Rudman, was advocating policies that once were at the core of the conservative movement and the Republican Party (and eschewed by most Democrats). One of the ironies of this period is that today those policies are opposed by many leading conservatives and supported by many Democrats.

  If government didn’t give back the surpluses to the public in the form of a tax cut, leading conservatives argued, “Washington” would find a way to spend the money. Another version was that the surpluses were the people’s money and should be returned to them. These formulations are as politically shrewd as they are simplistic and in many ways misleading. Nobody likes what government does when it’s described as “spending.” Yet the major programs that make up the vast preponderance of government spending—from Social Security and Medicare to defense, law enforcement, education, and environmental protection—command widespread public support. In practice, even conservative supporters of tax cuts are reluctant to scale back these popular programs, and they even vote for increases at the same time as they inveigh against “spending.” These programs are the people’s programs, just as tax dollars are the people’s money. If tax cuts are not matched by spending reductions, they increase the size of the federal debt—a debt that is the people’s debt.

  The Bush administration’s approach to tax cuts framed a new stage in the Great Fiscal Debate, an ongoing clash about the effects of fiscal discipline and of tax cuts on economic growth. This argument first affected policy in a significant way during the 1980 presidential campaign, when a group of conservative “supply-siders” attained prominence. The core of the supply-side theory was that lower marginal tax rates would cause people to “supply” more labor, working more and harder, which would increase growth—and the p
ositive effect on growth would be so large that government tax revenue would actually increase rather than decrease in response to the tax cut.

  George H. W. Bush, Ronald Reagan’s opponent for the Republican nomination in the 1980 election, referred to this as “voodoo economics.” And not all of Reagan’s advisers believed this theory. Some committed conservatives understood that reducing the size of government is difficult because of the popularity of most spending programs of significant size. Tax cuts seemed to offer a way around this political problem. If government’s revenues were squeezed, this line of reasoning went, spending could no longer grow and might even be forced to shrink. Despite that theory, spending throughout the 1980s, agreed to by both the Reagan administration and Congress, consistently and significantly exceeded levels necessary to offset the tax cuts. The result was the large deficits of the 1980s, deficits that kept increasing during the early 1990s and were projected by the outgoing administration in 1992 to grow even more in the years ahead.

  For a government to run a cyclical deficit—a short-term and temporary deficit in conjunction with a recession or an economic slowdown—isn’t necessarily bad and at times may be entirely sensible. Keynesian economics explicitly advocates cyclical deficits produced by temporarily higher spending or temporarily lower taxes as a way of dealing with recessions. In the 1960s and ’70s, some liberal Democrats who accepted that theory also found in Keynesian economics a convenient argument for advocating permanent increases in programs. But the Reagan tax cuts, combined with the Reagan-era defense spending increases, created something different: large and intractable long-term structural deficits, which persisted even when economic conditions were good. The Walter Mondale campaign of 1984 and the Michael Dukakis campaign of 1988 both argued that the existence of this structural deficit was a significant, long-term threat to the American economy. Essentially, they didn’t get any response, because so few people understood the problem. Mondale told me some years later about his frustration at not being able to talk about the deficit in a way people could relate to.

  By 1989, the deficit had begun to seriously affect the economy. People began to understand that deficits were contributing in some way to the difficult economic conditions of the very late 1980s and early 1990s, which changed the political dynamics of the issue. By 1992, the deficit was 4.7 percent of GDP—nearly $300 billion. Dealing with the deficit was a centerpiece of Clinton’s 1992 campaign. One of the reasons Clinton focused so intently on the deficit is that it not only was causing harm to the economy but was also undermining confidence in government, limiting its ability to deal with problems and issues that people cared about. Though he supported reductions in many areas, Clinton wanted government to be more active in others.

  After Clinton took office, the Great Fiscal Debate mutated. In 1993, the debate was between supporters of Clinton’s economic plan—which included revenue increases, principally an income tax increase on the top 1.2 percent of taxpayers and a small gas tax—and opponents who argued that tax increases of any kind would harm the economy. Loyal supply-siders such as Jack Kemp and Paul Gigot of The Wall Street Journal argued that our economic program would harm the economy and lead to higher unemployment. Some were even more specific in their predictions. “I believe this will lead to a recession next year,” Newt Gingrich said at the time. “This is the Democrat machine’s recession and each one of them will be held personally accountable.”

  The 1993 deficit reduction program was a test case for supply-side theory. Instead of the job losses, increased deficits, and recession the supply-siders predicted, the economy had a remarkable eight years—the longest period of continuous economic expansion yet recorded. Unemployment fell from more than 7 percent to 4 percent, accompanied by the creation of more than 20 million new private-sector jobs. Inflation remained low while GDP growth averaged 3.5 percent per annum. Productivity growth averaged 2.5 percent a year between 1995 and 2000, a level not seen since the early 1970s. Poverty rates went down significantly, including among Blacks and Hispanics, and incomes rose for both higher and lower earners. For the first time in nearly thirty years, the budget balanced in 1998.

  President Clinton’s economic plan contributed greatly to these conditions. That success created an immense anger on the part of some conservatives, who saw a policy they decried lead to conditions they said wouldn’t occur. Ever since, they’ve been trying to find other ways to explain what happened to the economy and to denigrate Clinton’s accomplishment. During the 1990s, some moved to the position that the economy was booming for reasons they said had nothing to do with declining deficits and balanced budgets, and pointed instead to technological progress and trade liberalization (both of which were, indeed, also important, and promoted strongly by President Clinton). A number of supply-siders advanced the theory that the boom of the 1990s was a delayed reaction to Reagan’s 1981 tax cut.

  My response was that you might as well give the credit to Herbert Hoover, though I do think in other respects, such as trade and some aspects of deregulation, the Reagan administration made meaningful contributions. George H. W. Bush’s administration also had important, constructive initiatives, in trade and—though not often cited by supply-side conservatives—the tax increases and new budget rules he put in place in 1990. These measures were a useful step toward reestablishing fiscal discipline, although far short of what was needed to stem the tide, with the result that actual and projected deficits were at very high levels—and growing—by the end of his administration.

  By 2002, conservatives had a different argument: the collapse in stock prices that had followed the eighteen-year bull market showed that the 1990s hadn’t really been that healthy an economic period after all. In fact, the 1990s were years of extraordinarily favorable and sound economic conditions, but extended good times almost always produce imbalances that lead to a period of adjustment. Of course, the view that some adjustment was probably inevitable still left an important debate about what policies would best serve to minimize the duration and severity of that adjustment and best position us for the long term. I felt that our policy choices during this difficult period of adjustment did neither.

  In 1994, the Democrats lost control of Congress. After the election, conservatives took the political offensive, pushing for big new tax cuts to be paid for with deep reductions in Medicare and other programs. These proposed spending cuts, which were highly unpopular, faded away after the government shutdowns in 1995. However, the tax cut proposals remained—which showed how unwilling the proponents of tax cuts usually are to take the political heat for actually cutting specific programs in a way commensurate with the reduction in tax revenues. Because specific proposals to cut the budget step on toes, conservatives often advocated ameliorating the effects of their tax cuts through “dynamic scoring”—revising the projected cost of a tax cut downward on the basis of the supply-side theory that tax cuts would create enough additional growth to pay for themselves, partially or entirely.

  In the 1996 campaign, Bob Dole argued for an across-the-board reduction in rates that would have cost $548 billion over six years; President Clinton responded with the position that any tax cut should be much more modest. In earlier decades, demands for balanced budgets tended to come from Republicans, while Democratic Keynesians argued that deficits should be disregarded. The Reagan administration began to change this traditional alignment, with its supply-side approach to tax cuts. And during the Clinton presidency these roles were reversed: it was Democrats who wanted to hew to the path of fiscal responsibility and many Republicans who seemed relatively indifferent to fiscal effects, so long as the money went to reducing taxes.

  As the deficits diminished and a surplus emerged during Clinton’s second term, the debate evolved again. Conservatives now argued for “giving back” the large projected surpluses to taxpayers in the form of a tax cut. It seemed that other uses of the surplus better reflected the preferences of the American people and we felt that continued fiscal discipline
—in this case, beginning to pay down the debt of the federal government—would best promote economic growth. What’s more, Social Security and Medicare were facing huge deficits once the baby-boom generation began to retire in significant numbers. We couldn’t literally prepay these future obligations out of general revenues, but if the government had paid off its debt and was in a sound fiscal condition when those enormous bills began coming due, the country would be much better positioned to deal with them.

  All of this argued against massive tax cuts. But dealing with the surplus left the Democrats in a tricky situation politically. Most voters don’t even understand the difference between the government’s annual deficit and its accumulated debt. So it was almost impossible to explain, in a way that people would relate to, why entitlement obligations we faced decades down the road meant that a government that was running a surplus should use the money to pay down its long-term debt instead of refunding it to taxpayers. Preserving the surplus as savings and using that to pay down debt would contribute to lower interest rates, greater job creation, and higher standards of living. But the reasons this was true were complicated. To better bring home to people the advantages of saving the surplus, the administration in 1998 reframed the issue as “Saving Social Security First.” The idea was to offset the political appeal of giving back the surplus in the form of a tax cut and remind the public that if the surplus was their money, the debt was their debt as well, and to connect saving the surplus with a purpose that was easy to explain. That argument worked to hold the line against massive tax cuts for a couple of years more.

  In January 2001, the nonpartisan Congressional Budget Office projected a ten-year federal government surplus of $5.6 trillion. Because of certain long-established methodological practices that are widely viewed as unrealistic—for example, assuming that expiring tax credits, such as the research and development tax credit, won’t be renewed—that number was probably overstated. By September 2003, after two rounds of tax cuts, Goldman Sachs, using more realistic assumptions, estimated a ten-year deficit of $5.5 trillion. That’s a swing of $11.1 trillion, but adjusting for certain methodological inconsistencies, the better number to use is a $9 trillion deterioration from surplus to deficit. (Obviously, ten-year projections are extremely unreliable, but the risk of actual results being worse than these projections seems, if anything, to be greater than the chance of them being better—these projections all assume healthy growth rates, which might be undermined by these very deficits.)