Big Deficit, Bob Rubin, and the Strong Dollar
Robert Rubin's reputation has taken a serious hit in the last couple of years. After getting glowing reviews for his stint as treasury secretary in the Clinton administration, the world has now seen the fallout from the financial deregulation that he engineered and personally profited from to the tune of $110 million for his work at Citigroup. He now ranks only slightly ahead of Reverend Wright and Bill Ayers on the potential guest list at the White House.
In spite of his plunge, Robert Rubin is still overrated. In addition to his other pearls of what passed for wisdom, Robert Rubin was also the chief architect of the "strong dollar" policy. Lloyd Bentsen, Rubin's predecessor as treasury secretary, was quite happy to see the dollar fall.
The logic was straightforward: A lower dollar would improve the US trade deficit. If the dollar falls relative to the euro, yen and other currencies, then it is more expensive for people in the United States to buy imported goods. Therefore, they buy domestically produced goods instead.
Similarly, if the dollar falls in price relative to other currencies, then it is cheaper for people living in other countries to buy US exports. This will increase US exports, thereby further reducing the trade deficit.
A lower valued dollar was in fact supposed to be one of the main dividends of the deficit reduction policy that President Clinton pursued from the start of his presidency. The argument was that lower deficits would lead to lower interest rates in the United States. If interest rates in the United States fell, then foreign investors would buy up fewer US government bonds and other financial assets. This gave us the lower dollar and improved trade deficit.
That was more or less the picture until Rubin succeeded Bentsen as treasury secretary in 1995. Rubin began touting the strong dollar. He was able to put some muscle behind this policy two years later as a result of the East Asian financial crisis. Rubin got the IMF to impose a policy on the countries of the region that essentially called for them to repay their debts by exporting like crazy to the United States. This meant taking advantage of currencies that were grossly undervalued relative to the dollar.
The financial crisis kicked off the era of exploding trade deficits. At its peak in 2006, the trade deficit was equal to 6.0 percent of GDP, approximately $900 billion in the current economy.
The big trade deficit was not the whole story. For those who know accounting, a large trade deficit implies a large budget deficit. In other words, even if they yelp endlessly about budget deficits being too high, proponents of a high dollar policy in fact support large budget deficits.
To see this, imagine an economy with full employment and no trade deficit. Now, suppose that we just started buying 6 percent of our goods from abroad, instead of domestically produced goods. In this case, we would suddenly be in a situation in which the economy was well below full employment. Demand would have fallen by 6 percent, leaving roughly 9 million people out of work.
If the trade deficit remains in place, then there are two ways to replace the demand lost to imports. We can either have a big burst of spending from the private sector, which means less private sector savings, or we can have a big burst of spending from the public sector, which means less public sector saving.
In fact, we actually got some of both in the last decade. We did run fairly large budget deficits in the Bush years. However, a more important factor in boosting the economy was the extraordinary boost to consumption that resulted from the $8 trillion in artificial wealth generated by the housing bubble. As a result of the bubble driven consumption, which pushed the household saving rate to zero, the economy was able to maintain reasonably high levels of employment, in spite of a trade deficit equal to 6 percent of GDP.
Of course, the bubble has now burst and the consumption driven by bubble wealth has also largely disappeared. This means that if the economy is going to sustain high levels of employment in spite of a large trade deficit, then it will need to run very large budget deficits.
In short, because a high dollar leads to high trade deficits, it means that the country must run large budget deficits to sustain high levels of employment. In other words, a high dollar means a high budget deficit.
Does Robert Rubin know that his strong dollar policy directly contradicts his fixation with low budget deficits? Who knows and who cares? Either he is ignorant of the fundamentals of economics or he is dishonest. Either way, he is not the sort of person who should be taken seriously in economic policy debates. He belongs well below either Reverend Wright or Bill Ayers on the White House invitation list.
Robert L. Borosage: Building A New Economy: What Obama's Next Big Speech Should Be
Just as in his health care speech tonight, Obama must soon address the fundamental threat to our security that can no longer be ignored.
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he helped sponsor bank deregulation and cashed in to the tune of 110 million ---banks deregulation resulted in the crash of the financial system-----thats all one needs to know.
he is a failure , as is greenspan
Exactly...
Also please refer to Long Term Capital Management,,,all the current Bank CEOs were around for that and then they learned the lesson that GREED is good.....
Taxes 91% like they were under IKE.....
Yeah, we dodged a bullet there, but Obama has appointed every other conspirator in the deregulation scam that worked for Clinton in those days--
"Many on the economic team worked for former Treasury Secretaries Robert Rubin and Lawrence Summers. During the Clinton administration, both pushed for deregulatory policies that many say contributed to the current economic crisis. They now advise Obama on economic issues.
Clinton Treasury officials now working on the Obama team include Munoz, chief financial officer; Gary Gensler, former under secretary of domestic finance; James Johnson, undersecretary for enforcement; and Burwell, who also worked as chief of staff for Rubin."
"At the top is Lawrence Summers, the director of Obama's National Economic Council. As Bill Clinton's Treasury secretary in the late 1990s, Summers worked with his deputy, Tim Geithner (now Obama's Treasury secretary), and Clinton aide Rahm Emanuel (now Obama's chief of staff) to champion job-killing trade deals and deregulation that Obama Commerce Secretary Judd Gregg helped shepherd through Congress as a Republican senator.
Now, this pinstriped band of brothers is proposing a “cash for trash” scheme that would force the public to guarantee the financial industry's bad loans. It's another ploy “to hand taxpayer dollars to the banks through a variety of complex mechanisms,” says economist Dean Baker — and noticeably absent is anything even resembling a "rival" voice inside the White House."
Weaker dollar equals weaker nation. The argument that a weaker dollar helps our exports is nonsense. What do we make? Super expensive weapons systems? Plus also the fact that has been pointed out that more than half the components in a Caterpillar Tractor comes from abroad, and now so the case with Boeing airliners.
the weaker dollar imports inflation --it costs more US dollars to buy goods --see gold price
To further point out the problem with this single assumption which assumes we actually make stuff and we dont and that what we make has significant foreign inputs which cost more as the dollar goes down offsetting the pricing advantage of the lower dollar....
The CEO of Catapillar was asked 2 years ago when the US dollar was way down if that helped CAT exports. His answer was NO, because most of their expensive components were not made in the U.S. ( made in Germany, #1 exporter, all unionized, single payer helathcare, stronger currency) and imported into the U.S. as inputs into what CAT assembles here!
Regards
Thats the most upsided down piece of economics I ever heard based on just one factual observation and ignoring the rest of the environmen
1) Yes a cheaper dollar allows what we make here to be more competative and helps with exports. Of course if you make almost nothing that fact becomes almost irrelevent. It means the cost of what we import goes up also and much of what we import including energy is input into what me make largely offsetting such export gains/pricing advantages. not counting that it lowers the std of living when people pay 4 bucks for a gallon of gas becuase of a cheaper dollar. Also pls note that the devalued dollars does not make up for $2 a day wages in China or even the competative advantage of single payer healthcare of those who import to us or the fact that China and most Asia economies peg their currency to the dollar such that as our currency drops so does theirs.
2) Clinton raised taxes because the dollar was being devalued because of our growing deficits just as now.. and strengthed the dollar by balancing the budget and ending with a surplus. We did well because of that. MFG jobs increased under Clinton strong dollar.
3) Under BUSH the dollar was very much devalaued and we still lost 7 million MFG jobs as again huge deficits were run up.
Regards
lowering the dollar is a great way to bring in investment, would be good for the underemployed joes. But if you're trying to export those zero percent interest rate dollars out of your Goldman Sachs account and into, say international metals and agriculture, you need the dollar to be overvalued. This is why we (ok just me) hate the Fed. The Fed distorts our economic policy to hell... unless you are at the receiving end.
Many do not buy this at all. Whatever Rubin’s public rhetoric during the 90’s, we had a strong dollar in fact and it helped lead to a surplus. The weak dollar is exactly what is problematic for our deficits and our grandchildren. Sapping the buying power and lowering the standard of living of Americans and mortgaging the future are the downsides of a weaker dollar. What is the worse of course, is lack of confidence in the dollar.
If there was an article on how to put the US economy away once and for all, it would this one. Innovation on the other hand is exactly what does lead to increased standard of living and more sustainable jobs. The lack of innovation, among other things is what brought down our auto companies. What did ended up wanting was as an easy “out” as opposed to doing the right thing (innovating). A lower dollar. That did not end well.
When you feel that, the only differentiation as for a country is price, which is exactly how a lower dollar solution corners a country, then you are on a race to the bottom. Look at what Apple does for example. That is what Innovation can do.
You cant innovate when all the jobs and technology have gone over seas. H1B visas have been used to do both. Innovation from now on will cone from those actually working on the technology.
H1B Visas are for people to work here. We do innovate in the US and the biggest opportunity is innovation on our infrastructure, health care and energy, all of which must happen here.
"Either he is ignorant of the fundamentals of economics or he is dishonest.
I vote for both.
Given that there's such a close correlation between a massive trade and budget deficits, and the relationship of these with a strong dollar, the question is why was this ignored? Just screwed up Ideology?
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