Rubin at Treasury
Jude Wanniski
January 11, 1995


At 5:30 a.m., my biological clock awoke me to advise me it was time to watch the C-SPAN tape of the Senate Finance Committee’s confirmation hearings of Bob Rubin. A pot of coffee and three hours later I had these impressions of the man confirmed as Treasury Secretary last night by a 99-0 vote.

First, he is green. He thinks he understands the global capital markets but his knowledge is from the foxhole level of a trader. He knows the varied sounds of combat, can tell one incoming shell from another, but has only a superficial grasp of the forces engaged, why they are struggling, who is winning and who is losing. In his two years at the White House as chairman of the National Economic Council, he clearly has had a lot of Keynesian macro-baloney stuffed between his ears. It was also clear he was carefully coached by Leon Panetta & Co. to make certain he would not stray from the defensive political line the White House is laying down against “rich people.” Rubin, of course, is probably the wealthiest man in the administration, but I remain encouraged that he got it through smarts, not inheritance. If Alexander Hamilton were around watching C-SPAN, I’d say he would grade Rubin’s performance a “D.” Still, I came away with a positive feel for the man, who loosened up in the last half hour, departing from script long enough to admit he didn’t know as much about being Treasury Secretary as he should, that he intends to explore the questions the Republicans are putting to him, and that he intends to get along with Chairman Bob Packwood -- who got an “A” from me for his conduct of the hearing. Packwood cheerfully and gently asserted his own mastery over these topics of public finance in a way that let Rubin know he was going to learn supply-side economics and be the better for it. “I will be talking to you every day,” Packwood told Rubin, who had acknowledged, “You have been thinking about this a lot longer than I have.” 

A great deal of time was spent discussing “dynamic” scoring and a capital gains tax cut, as all the Republicans on the committee made sure Rubin knew they were going to be sending one to the President. Senate Majority Leader Bob Dole sent spirits soaring when he showed up to inform Rubin that he had recently asked 6,000 Kansas farmers what they wanted most, and they said a cut in the capital gains tax, so they could sell land now locked up because of inflated gains. This was the clearest sign yet that Dole sees the issue tied to real people, not in the abstract. Rubin’s worst answer of the day, which Packwood let pass, was in response to a question from Sen. Al D’Amato [R-NY], who wondered why the administration would cut out everyone who makes more than $200,000 if a lower capital gains tax has such beneficial economic effects. Rubin, who made the point several times that the administration would not go along with any tax cut that did not meet its “fairness” criterion, told D’Amato that the more benefit you give people at the top of the income scale, the greater will be the burden on the people at the bottom. Andrew Mellon, history’s best U.S. Treasury Secretary after Hamilton, would give Rubin an “F” for that answer (and so would John F. Kennedy) but I think Rubin was clearly coached into giving that answer. He also got tangled up on his insistence that the “saving rate” has to be increased, when asked what happens to the savings rate when the capital gains tax is cut. Well, er, yes, the savings rate increases because rich people have a higher propensity to save, he said, practically reciting from the textbook. Packwood essentially described and defended a Laffer Curve for Rubin, getting him to admit the government would get more revenue at an 80% rate than at a 90% rate, but Rubin begged not to be led down that path.

I was astonished by how little he knows about supply-side economics, which has been around now for 20 years. He certainly has had time to ask about it since November 8, even if, as chairman of the National Economic Council for two years, he had never bothered. When Packwood asked his view on the topic, Rubin could only cite the idea that tax cuts pay for themselves, which he promptly dismissed as trickle-down economics, going on to argue that the kind of supply-side economics he does agree with is that spending on education and worker training pays for itself. He also seems to genuinely believe that the 3 million jobs created since President Clinton’s inaugural would not have happened were it not for the President’s budget, which raised taxes on the rich. This political propaganda can only get in his way at Treasury, if he really does believe it. From his presentation, it seems the goal of deficit reduction is so critical to economic prosperity that he is willing to sacrifice every other policy on its altar. He came close, he said, to opposing the idea of asking Congress to waive the static revenue loss on GATT, even though every economist he knows believes GATT’s tariff cuts will pay for themselves! This was so it would not set a precedent for dynamic scoring. 

Packwood, bless his soul, led Rubin into a discussion of the bond market of the early 1980s, where Rubin lived and breathed at Goldman Sachs. How come, Packwood asked, the Jimmy Carter budget of 1980 projected budget surpluses as far as the eye could see, yet the bond market collapsed soon after it was presented, and when the budget deficits soared during the Reagan years, how come interest rates steadily declined? “That’s a good question,” said Rubin. His answer is that “something totally unexpected happened,” in that a huge amount of capital suddenly appeared, mainly from Japan, and they sent it to the United States, which bid up the bond market here! And the stock market too, he could have added. This is what I mean about his foxhole view from the trading desk at Goldman Sachs. To him, the Reagan tax cuts had nothing to do with capital flooding into the United States from the rest of the world, but that is almost the first thing that Bob Mundell told me would happen when the U.S. cut its inflation swollen income taxes. That was 1974. (Psst. Mr. Secretary, I’ll send you the citations.) 

What about the dollar/yen exchange rate? Here Rubin has learned from experience that as Treasury Secretary he can not even think about using exchange-rate policy to manage trade flows. When Lloyd Bentsen slipped up in early 1993 in a National Press Club speech, remember, the dollar crashed and bonds swooned. The bad news is that Rubin has been taught the idea that the dollar/yen rate is established by “the fundamentals,” and that the dollar will get stronger if the deficit declines. This is the floating currency argument that does not grasp the importance of the dollar as a unit of account and as non-interest-bearing debt of the federal government. Hamilton and Mellon and all Treasury Secretaries in between understood that their primary responsibility was to persuade the nation’s creditors to lend the government funds at the lowest possible interest rate, which they understood could not occur without protecting the dollar’s value. In a discussion about “real interest rates,” Rubin was asked if there was anything he thought could be done beyond deficit reduction to lower interest rates. Again, he suggested education and job training as a means of increasing national productivity. One of the more promising moments of the hearings came when Rubin revealed that Lawrence Summers, Treasury Undersecretary for International Affairs, advised him that because of the global competition for capital, real interest rates would rise by 1.5% by the end of the decade. This is the kind of sheer nonsense the Keynesians have concocted to explain what they don’t understand. Rubin, who instinctively knows from his trading-desk experience that Summers is wrong, volunteered that he did not agree with him. 

If Rubin is to get better grades from Alexander Hamilton on his future appearances before Senate Finance and House Ways & Means, he is going to have to get far beyond Summers and the Treasury technocrats in his understanding of the capital markets -- which means climbing out of the foxhole and soliciting a wider range of opinion, pushing into the monetary approach to the balance of payments, for example. He will not understand the Orange County crisis or the collapse of the Mexican financial markets unless he can connect these events to the Fed’s management of its portfolio of debt. The simplistic Keynesianism he parroted at the hearings -- we have to save more and consume less being just one silly old saw -- will only drag him down. 

I must repeat, if you did not notice it above, that Bob Packwood is just what Bob Rubin needs on a daily basis, weekends included. For two years, one of the smartest men on Wall Street has been trapped in an office of the West Wing of the White House, with no chance of learning on the run from people who know the way the world works. As Treasury Secretary, he will have to deal with the likes of Packwood, Gingrich, Armey & Co., and the questions they ask him will continue to embarrass him until he gets better answers. Actually his best answer of the day came when he was asked how he would like to be remembered by history. He said he would like to be remembered as a man who knows there are no easy answers, that what is most important is an understanding that at bottom what counts is good judgment on the available trade-offs. Agreed.