Thursday, April 29, 2004

The Next Generation: Bob Samuelson has an important article in TNR this week on the economic "lessons of the 90s" and their applications for the next decade or so. Here's a rundown of half of it, if you aren't a subscriber (though I encourage you to spend the $3.95 on this issue instead of the usual venti today). It's not easy to read, since it isn't full of particularly good cheer. His major theme, not a new one for Samuelson, is that Rubinomics's focus on budgetary policy, specifically deficits, was a classic case of arranging the deck furniture on the Titanic. Budget deficits matter little, Samuelson says, when so much of the budget goes to entitlements:
Spending, not deficits, dominates the budget's economic and social impact. To understand why, consider two hypothetical (and extreme) budgets. One equals 5 percent of GDP and has a deficit of 2 percent of GDP. The other equals 50 percent of GDP and is balanced. In the first, the role of government is small, despite the deficit. Public services are skimpy, and a modest tax increase could easily cover the deficit. In the second, government plays a huge role. Government services and transfers are huge. Taxes are already steep. Any unanticipated spending or loss of tax revenues might create economic or social strain. In both cases, spending sets government benefits and determines the required level of financing, whether by taxes or by borrowing. If taxes or deficits get too high, they could harm the economy or cause a political backlash.
The structure of the budget, therefore, is more important than how close it is to balance. He continues:
Indeed, Clinton's budget policy failed in one critical respect: it did not address the long-term problems of the baby-boomers' retirement. Not only did the administration refuse to face the issue, it opposed anyone who tried. As a member of the party that created Social Security and Medicare, Clinton might have made a historic break with the past, much as Richard Nixon broke with Republican dogma when he went to China. Clinton might have argued that longer life expectancies and more retirees justified slowly increasing the eligibility age--with ample advance warning--and tying benefits more directly to income. It is almost impossible for one party to propose changes alone without facing withering partisan attacks. But there were many opportunities for a bipartisan approach. In 1993, Senator Bob Kerrey of Nebraska provided the decisive vote to pass Clinton's budget plan; his single condition was that the president appoint a presidential commission on entitlement spending. Clinton did, and then he ignored it. In his second term, he undermined a commission on Medicare reform. Less conspicuous opportunities were similarly discarded.
Entitlements are politically popular, and thus hard to trim. Moreover, the demographics clearly indicate disaster -- delusionally partisan cries of social security's trust fund solvency notwithstanding. Samuelson essentially blames Rubin:
And what was Rubin doing all this time? Not much. There is no evidence that he ever pushed for major spending curbs on government retirement programs. What we have is the paradox of a man who has built his reputation as a paragon of budgetary rectitude but essentially ignored the major budgetary problem of his time. It may be an uncertain world, as he says, but some things are fairly certain. One is that baby boomers will age and clamor for their federal benefits. That is the central engine driving spending, taxes, and the deficit. While he was a member of the administration, Rubin's silence might have been rationalized as pragmatic. If the president wasn't interested, why fight a futile fight? But Rubin still ignores the issue. In this book of roughly four hundred pages, he never discusses it in any detail. He focuses singlemindedly on budget deficits as if they were freestanding evils and little else mattered.
In the other half, Samuelson gives Rubin a lot more credit for keeping the Asian 'flu from hitting America hard. But as Samuelson notes, "the Asian financial crisis was not just a dress rehearsal for others like it. So much else has changed." Trouble innovates. Globalization will be keep the job of Treasury secretary interesting for the foreseeable future, but its specific effects (and crises) will remain relatively unpredictable. Razor is undoubtedly more expert in this area, being one of the few who understands why Korea and Vietnam weathered it all much better (speaking relatively) than Japan, so I'll leave this subject to him.

Meanwhile, the domestic problems are more obvious, more predictable, but just as troublesome.

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