Fiscal disarray:
Outtakes from Robert Rubin
Oct. 1, 2004
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Wall $treet Week with FORTUNE co-anchor Geoff Colvin recently talked with Robert Rubin, the highly regarded Treasury Secretary of the Clinton administration. Portions of their conversation will be shown on our Oct. 1, 2004 program. Meanwhile, here are portions of their talk that didn't make it on the air:
GEOFF COLVIN: Mr. Secretary, the war in Iraq has become the central issue in the campaign, certainly a huge issue in the first debate. But the angle that doesn't get talked about is its effect on the economy and the markets. What effect do you see it having?
ROBERT RUBIN: Well, I think you're right, Geoff. I think there are actually some very much larger questions about the issues that affect our economy, and I at least think we're at something of a critical juncture with great opportunity over the longer run, but also very big challenges. And I think there are a lot of issues that we have to address differently than we're doing today.
But just to focus on the one that you mentioned, I think we will be affected for a long time to come, as we have been over the last few years, by geopolitical issues, and I think the question is how well have they been handled? That we're going to have to face them I think is an inevitable part of life today. But the question of how well we're handling them is another question. I think how it affects our economy and national security will be enormously impacted by whether we handle them well or badly. At least in my judgment there are a lot of questions about how we are handling a lot of this today.
COLVIN: The conventional view on the war back when it was sort of about to begin was that the markets couldn't go anyplace until the issue was resolved. There's still no feeling that it's resolved. Do you believe that somehow we have to come to some kind of closure on it before the markets can go further?
COLVIN: But if the tax cuts are so instrumental or so central to the huge deficits we now face, Senator Kerry has proposed not reversing the tax cuts, most of them, but has said that he will cut taxes for 98 percent of American citizens. Is this consistent with your advice to him?
RUBIN: What he has basically said, as you said, Geoff, is that he would rescind the tax cuts for people earning over $200,000, and he would use that for his education and his health care. And he has said that he is in favor of having middle class tax cuts, because middle income people have had a very difficult time over the last 3 1/2 years. They've had declining, inflation-adjusted incomes, actually over the last 30 years. Except for the extraordinary growth period in the 1990s, middle income families have not done well. And he does favor having middle class tax cuts.
But basically whoever is elected is going to have to face a very difficult fiscal situation and is going to have to provide leadership to both houses of Congress and the leaders of both houses to make some very difficult political judgments. I think there's no question that John Kerry has evidenced that he understands these issues and is committed to them, and I think the administration's policy speaks for themselves.
COLVIN: Another one of the issues you've mentioned and talked about is the deficit we have with our trading partners overseas, and as a result the amount of money we borrow currently from lenders overseas. I gather the U.S. is borrowing currently about a billion dollars a day from lenders overseas, so how they rate us is very important. When you are talking to world leaders behind closed doors, how do they rate the prospects of the U.S. economy?
RUBIN: I think that the global perspective with respect to our economy is pretty much that which has been expressed by the International Monetary Fund in their reports, which is that, and it's sort of what I said a moment ago, that we have tremendous natural advantages, which we do have, but that we also have very big issues and that we are currently not facing them. And if you look at the IMF report, one that they focus on very intensely are now very large projected fiscal imbalances and the imperative need to repair those.
COLVIN: There's a language of the markets and a language of economic policy. Now when you recently said that we are going through a period of fiscal disarray, what did you mean?
RUBIN: Well, I think what I said was actually a touch different. What I said was that we've had a set of fiscal policies in place over the last three years that have converted us from a country with very large projected surpluses to a country with very large projected deficits, and I believe that that is deeply threatening to our long term economic well being. And that's a broadly held view amongst a lot of mainstream economists.
The disarray, the use of the actual word disarray I used to say in the following context, which is that if the markets at some point, looking at those projected long-term deficits, begin to fear that we in fact are going to be in a period of long-term fiscal disarray, then there is the risk that the markets will begin to demand sharply higher interest rates for long-term credit. There's also the risk that the foreign creditors that you just referred to will also, taking a look at long-term fiscal conditions, become concerned not only about interest rates in this country, but also about the dollar, and for both reasons demand sharply higher interest rates for the very large amounts of money that they're lending us that we unfortunately need because of our fiscal deficits.
Fundamentally I think where we are, Geoff, is that 3 1/2 years ago the Congressional Budget Office projected a surplus of $5.6 trillion. Over the course of the past year, Goldman Sachs is projecting a deficit of -- a 10-year deficit, I'm talking about of federal government -- of about $5.5 trillion. Most independent analysts are between $5 and $5.5 trillion. That's a deterioration of $11 trillion, or if you make allowance for some methodological matters, it's a deterioration of about $9 trillion. That is an enormously threatening development with respect to our economy.
And one of the concerns that I have is that not only will we have the traditional crowding out, which is itself a big economic problem, but that at some point the markets may begin to fear that we are heading into fiscal disarray, and if that happens, then both the domestic providers of capital and also the foreign providers of capital, who may also then become concerned about our currency, will begin to demand sharply higher interest rates, and and all of that could have a very substantial adverse impact on our economy, on jobs, and on income.
We have got to change the basic thrust of our economic policy in this country. And if we do, I think we have a high probability, no certainties in life, but a high probability of having very good economic conditions over time. We can have a strong economy over time, but we have got to face our issues and face them soundly and sensibly, which we are not doing at the present time in my judgment.
COLVIN: You are an adviser to John Kerry. I gather you're not officially a part of the campaign. Is that right?
RUBIN: That is correct.
COLVIN: But the campaign obviously loves being associated with you because of your reputation and the terrific success the economy had while you were Treasury Secretary, and of course, you know, you sat next to Mrs. Kerry during the convention, during Sen. Kerry's acceptance speech. And this is all sort of suggestive, and I think a lot of people, and certainly a lot of people in the markets, would like to know would you in fact serve in a Kerry administration if asked?
RUBIN: Well, let me try to answer that in a few pieces.
I've known John Kerry for almost 20 years, actually ever since, pretty much ever since he was in the Senate. And I've always had enormous regard for John. He is very thoughtful, he is bright, he likes to weigh and balance, and yet he's willing to make decisions. So I think working with John would be a very good experience for whoever has that opportunity, and I do think, as I've said now several times, there are immensely important challenges that we have to work on. So in all those respects, I think it would be a very good thing to do. And I think there are a lot of people he can call upon who would be very good in any of the kinds of jobs that I could do.
When it comes to me personally, I was there 6 1/2 years, Geoff, and I would like to be helpful to John Kerry and useful in many ways, but my mind does not take me back to Washington. I think really there are a lot of other things that I'm sort of inclined to think I would like to do with my life at this point.
COLVIN: Security is obviously a huge issue in the campaign and in the first debate. Rahm Emmanuel, former Clinton adviser obviously, now a Congressman from Illinois, has made the point that the security issue he thinks could be turned by the Democrats into a larger issue, involving not just personal security in the sense of terror and so forth, but also personal security in the sense of jobs and protection against health care costs. Do you think that kind of personal security defined that way represents the largest economic issues we face?
RUBIN: Well, I think there are a lot of ways of thinking about framing the economic issue, but fundamentally the economic issue that we face, at least in my judgment, is what do we have to do in order to realize the enormous potential of this country for favorable economic conditions over the longer term? And also what do we have to do so that middle income and lower income people participate fully in that potential? And one way to think about it I suppose is security, but however you think about it, the challenges remain the same, and in my judgment at least, on virtually all of these fronts, we are not on the right track at the present time and I think we greatly need to make a change.
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