Diary

A Farewell to Rubinomics

RubinomicsRiddle me this. One argument you hear tossed around these days is that Bush’s tax cuts somehow had something to do with the currently poor state of the economy. The argument is almost never backed by any serious attempt to explain how this is, simply that because the Bush critics don’t like his tax policy it must be to blame.

More to the point, the case for blaming low taxes for the economic downturn is diametrically opposed to the “Rubinomics” line that liberals everywhere spent the first seven years of Bush’s Administration pushing. The argument, at the time, was that low taxes would lead to big deficits, and big deficits would push up interest rates by “crowding out” private access to credit as safe federal borrowing sopped up all the available credit. In fact, the conventional economic wisdom today is that precisely the opposite happened.

Specifically, the accepted wisdom today is that we had a credit bubble, and in particular a housing credit bubble, because interest rates were artificially low and private access to credit got too cheap, resulting in too many loans being made at rates that were not sufficient to cover the credit risks, especially systemic risks, being taken. When credit finally did get expensive, after the bubble burst and a lot of the lenders got essentially wiped out, the problem was less a market-wide lack of capital than a lack of faith in the ability to identify credit-worthy borrowers – interest rates didn’t shoot up uniformly so much as they rose in comparison to the rates for sovereign borrowers like Uncle Sam (in the parlance of the markets, spreads widened). And even that only happened after years of overexpansion of private credit side by side with low taxes and high deficits.

In other words, the Rubinomics crowd, who claimed so much credit for the tech boom of the 1990s on the theory that eliminating the deficit had created prosperity by lowering interest rates, turned out to have their diagnosis completely wrong, or at any rate so oversimplified given the many other variables involved as to be meaningless. Which was pretty much what the supply-siders had been saying all along: not that deficits are a good thing, but that in the grand scheme of things, the economic effects of deficits on access to cheap private credit is not one of the major drivers of economic prosperity, nor of economic downturns.

Of course, Rubinomics won’t have much if any influence in the Obama Administration, which is turning its back on the economic theory and practice of the post-1940 period and heading for old-fashioned Keynesian ‘pump priming’ and trillion-dollar deficits as far as the eye can see. And the onetime disciples of Rubin will simply declare that this is what they have always believed in, and that it still means low taxes are bad. Change, after all, means never having to say you’re sorry.