This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
The problem is that's led us two years and years of borrowing too much. We now have a debt that's about to be at record levels, interest payments that are the fastest growing part of the budget about to be larger than defense.
That was Miyamaguinnis of the Committee for a Responsible Federal Budget talking about the great and growing US federal debt and deficit. This is a special Wall Street Week podcast, and we sat down with former Treasury Secretary Bob Rubin to take us through not just where we are now, but about how he helped President Clinton engineer a way out of a similar situation some thirty years ago when
he ran the White House Economic Council. To fix the problem, we first have to figure out how we got here. Some like presidential candidate Nikki Haley say that the problem is that we're spending too much.
Do you have to start cutting what you spend? Why is it everybody in this room balance as a budget. I balanced budget is Governor of South Carolina? Why is Congress the only group that refuses to balance a budget.
Others like Willet Advisors Steve Ratner point to the Trump tax cuts.
There are a lot of people who basically on Wall Street, who you and I would know, who voted for Trump once or even twice. Basically, look, I don't like the guy, but I like the policies, and they got what they wanted, the tax of the TCGA, the Tax Cut and Jobs Act being the most prominent.
And the answer likely is both. That was why, according to Larry Summers, President Clinton both raised taxes and cut spending in his nineteen ninety three Omnibus Budget Reconciliation Act. That was the last time that the federal government really got serious about addressing the debt.
I think he laid out the case, he brought people together, He was willing to do things that were painful for the people who were his friend. He was able to explain the case to the American people, and that's the kind of leadership we're going to need, and he reaped a benefit.
And to explain to us where we are in the Debton deficit and where we were back in nineteen ninety three, were welcome.
Now.
One of the architects of that plan that President Clinton pursued. He is Bob rowin former Treasury Secretary. So, Bob, thank you so much for being on Wall Street.
Rig David happy to be with you.
So at the time, you actually were Director of National Economic Council and you helped put together a plan with Lloyd Benson the Treasury, but President Clinton really pushed it through. Give us a sense of how bad the problems were you were facing. Then what caused you to do what you did in ninety three Act.
David, we met with the president elect Governor of Arkansas in Little Rock after the election, the economic team, the income economic Team, and we talked to him about what kind of an strategy he should have, and he said, listening to all this, our deficit is a threshold issue.
And who want everything else?
We've got to do that because we have to get our fiscal house in order, and that was really the our focus. Now we did it in the same time we did public investment. But the pressures, I think were very substantial. There was a lot of concern in the business community, there was a lot of concern in the markets, and there was a real public political environment, which unfortunate we don't have today. He not only had the substance of it, which is President Clinton, the few that this
was the rest of the issue at threshold issue. We also have a political environment in which it was doable.
If we can try to tease those two things out. How much of it was the market reaction what you were seeing? Basically we have the famous incidents supposedly where Jim Carvell said, I want to come back to the bond market.
Well that was James said that he wanted to come well, because what happened there was we were having a debate within the administration should we focus on fiscal matters or should we focus on public investment.
We end up doing both, but with a program, the ninety.
Three Deaths Production program that was very heavily focused on death production. And that's when James said he wantause. We argued, and I think rightly argument and it turned out to be correct that markets would react very favorably if we were serious, and also the better reserve would react very favorably. So James and responses all that said he would I to come back in his next life is the bond market.
So that is a somewhat market oriented approach. I mean, you'd come out of Goldman Sachs, you knew the markets terribly well you took that sort of approach. The whole question how much that that drove what it was? Was it really just almost dollars and cents in what was going on in the markets.
It was more than just the markets, and I think this is something unfortunate that it hasn't been focused on, But it was the market's David. And when we got serious about deficit reduction, it was very favorable for the markets. And also green Spend reacted very well in terms of maintaining a relatively livable with a practical speaking, a FED funds rate that was consistent with growth, but it went way beyond that.
We wanted to have the resilience after.
If you're going to have if you have an economic or a noir security emergency of some sort, you want to be able to deal with it without creating fiscal havoc. And another thing, when I was at Goldman Sacks and Steve Freeman and I were the co CEOs of Coleman Sacks in ninety one and in ninety two, one thing that I had the impression was that business was very concerned about our fiscal position, not only because the fiscal position, per say, but also because it gave him the feeling
government was incapable of dealing with our problems. So business confidence, I think was a very important factor. And once we acted, I think it had a really positive effect on business confidence.
Giving me a sense of what that means as a pracuamatory, does that translate into investment or lack of investment?
Exactly?
Exactly what well investment plans in terms of expansion. John Maynor Kaine famously referred to animal spirits in his letter, his famous letter to President Roosevelt, and animal spirits make a confidence makes a very big difference. And yeah, it does in terms of hiring plans, expansion plans, investment, And that absolutely is what happened.
Talk about the politics of it.
You said that, then governor about to be President Clinton came in and said, that's a threshold issue of the deficit. It's hard to imagine right now an incoming president saying the same thing. But give me a sense of what was going on politically in the country that obviously President Clinton was reflecting to some extent what he thought the people felt.
I think there was a feeling there was a broad public concern about our fiscal position. And then Songus ran for Paul Songus ran for president on a fiscal the unfortunately died as you know, in that process, but on a fiscal discipline plank if you want to call it that, or program, let's say, and that attracted a lot of favorable attention.
Then Ross Bureau came along and he ran.
Also on a fiscal discipline theory, and he got about nineteen percent of the vote if I remember correctly.
President Clinton believed it to begin with.
But then you had the politics I guess you call converge around this point of view as you saw songis and then as I said, Perro and President Clinton made that central to his economic program. But you know, David,
he always combined it with vigorous public investment. Now, once we got there, what we found was that the prospects that the outgoing Bush omb was providing had gotten much worse, and so it forced us to cut back on what we would have done in public investment and to increase what we did on definit reduction.
So when you decided to address this, I should say the president decided, The President.
Absolute decided he was terrific. David.
He really was steeped in this. So while all of us gathered together. We really were gathering with somebody who were ready was really very highly heavily.
Informed on this.
I mean by this, I mean on economic policy ramifications of various measures one might take.
When one goes back and looks at the package, it looks like there was both tax increases as well as spending cuts.
Correct.
Was that the theory from the beginning, we have to do it both ways at the same time.
The theory, well, the theory was we would do fifty to fifty, and we did do fifty to fifty. We're discussing then and not now. But if you looked at now, I think, unfortunately we face a very different empirical situation. But in those days, that exactly was our theory, and that's what we did.
We're going to come back and talk about now, but before that, give us a sense of the effects once you got this through. By the way, it was a near run thing politically, as I recall the Towers we won.
We had by one vote if I remember correctly, in the House of Representative and it was a tie I guess in the Senate and Gork cast inciting vote in our favor obviously, but it was a very close thing and I remember being in the Oval Office the night of the vote. You know, there's that little room that is adjacent to the Oval Office is the President's room, and we were all sitting there watching a television as people voted, and it was a very near thing, in a really nailbier.
How did the results of it through the rest of the Clinton term.
We're going to take it through there.
Compare with what you expected when you first got it through. If you'd written down and said this is what I expect, it's good to compare with what happened. I gotta compare, you know, David.
I think one thing that I saw and I think was right, was that our fiscal situation, for the reasons I already discussed, was having a real adverse effect on business confidence. And I thought if we did this, there was a reasonable chance that could affect that. But I think the effect of it was much greater than I thought it would be. President Clint went through eight years in which the business community felt that he related to
the issues that they faced. They didn't always agree with them, or he didn't always agree with them, but I think they really felt that he related to their issues, and I think this played a major role in that. I thought something like that would happen, at least that would have been my expectation, But I think it happened to a greater degree than I thought. The market reacted very well, as you may or remember in terms of interest rates.
One big difference between that now is we were very concerned at the time. I remember this personally with Japan. The rise of Japan is that I can have power that they basically had a better mouse.
Trap than we did and they take us over.
How important was that in helping drive this through to say we've got to actually catch up with Japan.
As you correctly say, David, Japan reviewed as a goliath. And I can remember this so well when I was at Golden Sacks, because we were very much focused on where should our business go, where should we focus? And we very much focused on Japan for the very reason you just said, And I think that was part of it. I think there was a feeling of a real competitive urgency, if you will, imperative, real competitive imperative with respect of Japan.
But it was more than that, David.
I think there was just a general recognition, which we don't have today in the country that unsound, fiscal conditions were very dangerous, which I think they are very dangerous economically, and people sort of connected the dots and there was broad based support for fiscal discipline. It was a political reality within the context of which President Clinton acted and then eventually and Congress came along with it, as you said, by a very very narrow margin.
You mentioned Chairman Greenspan, Alan green spent at the time. What role did he play and the FED play throughout this entire process.
Well, I will tell you what it was.
It's not been written this way sometimes, but Alan green Spin came down to a little rock. He conferred with the advice or President elect Clinton, and I think his advice was very sound. On the other hand, there was never although it was legs in some places that there was never a deal, and I've asked both President Clinton and Alan Greenspan about this. There was a never deal between the two of them pursuing to which, if you President Clinton will reduce the efic it, I'll keep interest rate flow.
That never occurred.
But what did occur was the advice that Alan green Spin gave to President Clinton and all of us, because we had a very good relationship about what at least he thought, and then we would deal with it as we saw fit.
One of the key elements, as I understand it, economists tell us economic growth is productivity. Was there an effect, in your opinion, on productivity? What was the effect? How large was it?
There was a substantial effect on productivity. And it's sort of interesting, at least in my opinion, David, because this was also, as you may remember, the nineties at the time the technology technology development took off, but even more important, maybe the application of technology took off. But it happened here and it didn't happen in Europe to merely the same degree. So the question is why, And I'll tell
you what I think. I think the administration made enormous and President Clinton made enormous difference in this respect because I think what happened was what you were getting out before. I think there was an atmosphere of confidence. And it doesn't mean, as I said before, I'm repeating myself, it didn't mean the business agree with everything we did, because they didn't. But fundamentally they believed that this was a sound administration. And I think that had an enormous impact
on investment and therefore on productivity. So we had a productivity boost from both the technology development and application, which Europe which had a different sort of political environment and a different sense of confidence in their case lack thereof.
Than we did.
So, Bob, we've been talking about what happened in ninety three when you were there in the White House. Now let's bring it forward to today, because there's a lot of talk about the debt and deficit, which is frankly a lot larger both and nominal now and in comparative dollars than it was back then.
Let's talk about.
What you learned in ninety three, what you did in ninety three, they could continuably be applied to twenty twenty four.
It's also a lot bigger, David, And this is the really important thing as a percentage of GDP and the preenet of our economy, and that I think is the critical point. I think that the risks that we identified then, the multiple risks, the same as they are today. I think that the risks are even greater today because our debt GDP ratio is a proximal sumbio estimated about one hundred percent right now.
It's the highest in the history of the country.
Except for nineteen forty six and forty seven we were coming back out of World War Two. I think the risks are enormous, and some of them are materializing already, like higher interest rates and effect on inflation in part not full, and others haven't materialized yet, but I think they're out there and sooner related will materialize if we don't correct our our physical trajectory.
You talked about some of the market indicators and even forces that you saw in ninety three that sort of pointed you in a direction quite at present, Clinton, in the direction of really making the depth set.
Of special issue.
Are we seeing those indicators of their forces today in the markets.
I think that we are seeing the effects, but it's unfortunately from a political point of view, David, I don't think they're getting connected in a meaningful way with deficit reduction sure interest. I mean, the long the tenure was about I think one and a half percent, say two years ago, and now it's about four and a half percent.
Now.
That's a lot of factors that go into that, but I think.
Part of it is our fiscal situation and the effect that's had on inflation. I think it's been an aggravator of he if you will an effect on inflation. And I think there's a general concern about the imbalance between supplying demand for savings and the excess demand that's created by our deficits, but it's not Unfortunately, from political point of view, I don't think the dots are being connected the way they were back in ninety two to three
when we acted. Ninety three we acted, but ninety two when preddent Clinton was putting his plans together.
There's a lot of talk these days when we talk about the feed about the neutral rate and debate about whether it is the neutral rate higher. And I guess my question is does the deficit and the debt normally, all the things being equal, drive the neutroid higher?
I think over time, but I think you can also have a long period of time. And we had a long period of time, David, actually a long long period of time during which all this was having little effect, and then all of a sudden that the tenure went, as I said, a moment ago, from roughly one and
a half to roughly four and a half. And I've been around markets, and these policies were for five decades now, and there's certainly our periods when you can have a long time when reality is out of or what's happening is out of sync with reality. But that doesn't go on forever, and when it corrects, it can correct savagely. A good example was the Eurozone, the sovereign Eurozone crisis.
For years, a Greek bondstrated roughly speaking parody with ghivlie take with German buns, and then all of a sudden it exploded. And I think it's a good example of how what isn't sensible ultimately doesn't continue.
There's the politics of it, which I want to talk about. Before that, Let's talk about the approach taken to it. Let's talk about, for example, the Biden administration. We can talk about the Trumpet search if you walk, but the Biden is when you were there back in the nineties, you came from Golden Sachs, you had other people there who knew the markets pretty well. There was a healthy dose of how are the markets reacting this? What does
that do for us? Do we still have that or is it more ideologically driven because some people think we've sort of shifted the orientation, particularly the Democratic Party, more toward protectionism, more toward populism.
Well, you've asked multiple questions, so I'll give you. I'll give you my view.
I've given a lot of thought this, and I know the people there pretty well. If you look at the proposals, the major policy proposals that President Biden made, they were all paid for in the proposals. Now, ultimately they had to go through Congress, and when they went through Congress, they came out, some of them paid forwards and some of them not. I think he's actually pretty good on this.
I think there are other issues were I might have a different view than he does, or maybe I would have it so say it an altered view rather than a different view. But I think on fiscal stuff, actually
he's got a pretty good sense of it. I think on the proposals that they had three major bills I were chips and infrastructure, and in the original proposal and then of course for that build back better and all of those if you look at them, and this is correct because I looked at them, all of those the proposals were fully paid for that to go through Congress, and in Congress they in some cases they lost the pay for us. You know you mentioned I forgot how
you put it now before? But did you say populism or progressive? Yeah, populism. If you look at what has been referred to as industrial policy, and they referred to as industrial policy, it's their label, but it's not picking winners and losers. Now it may be in the minds of some of those people, but if you look at those proposals, and I've talked to their people about this a lot, I think they actually make a lot of
sense on a purely economic basis. Their externalities they basically dealt with, short for, with insecurities in our system, excuse me, in our economic system with respect to our economic security or economic function are geopolitical or national security functioning that markets were not going to meet and had to be met by government. So that I think is not industrial policy in the traditional sense. And let's pick winners and losers.
It was let's fill holes that the private sector simply isn't filling, and those are holes of economic and incial security.
So from your perspect the overall approach, you don't take much issue with. No do we end up with where we are, where we have increasing deficits in increasing debts.
Oh weud a minute, what I talked about with the proposals. No, I think we're in a terrible place because unfortunately, once you get to legislating, there isn't the will. There's a lot of talk, but the talk is always divided politically between the Republicans who refused to raise taxes and the
Democrats who won't deal with entitlements. Now, I think there was a reality to this, and that is I do think when we eventually get to doing this, or if we're going to do it after the next election, which the Good Lord would hope we will, but I.
Wouldn't bet on it.
About sixty percent or something of the increase in the debt from two thousand to twenty twenty two was because of the tax cuts, So if it hadn't been for that, the debt, instead of being one hundred percent CDP would about sixty percent. Another way to look at it is exactly what I just said, which is what percent would the debt be of GDP we had the two tax cuts is about the same number, around sixty three percent
or something like that. So I think in very large measure what happened is we had two very big tax cuts, neither what we paid for, so we decided not to pay for what we were spending, and that's how we got where we are. But looking forward, we're gonna have to deal with both spending and taxes, though I think for the reasons I just said, when you get realistic about it, I think you're going to have to be largely on the tax side.
On the tax cuts, the theory of that was to increase productivity, increase growth. Can we grow our way out of the problem. No, no, But let's go back one step.
When the Trump tax cuts were enacted, one of the major investment banks put out a piece saying that on a ten year basis, they thought that the tax cuts had zero effect on investment and productivity and growth. Now that's the tax cuts in terms of their impact. On the other hand, what it did do is contribute greatly to our fist, to our deficits when it comes to really garnering support.
Can we grow our way out?
Look, if we could put in place a serious inclusive growth strategy and increase our rate of growth, that would certainly help. Because of those debt over GDP, so that would help. But I still think we're going to have to deal with our expending. But even mostly with our taxes.
If we could put together a plan. As you look at the two likely candidates right now, Donald Trump Joe Biden, is either one putting forward a comprehensive growth plan.
No, but I think natured I think is no. But I do think if you look at what President Biden has done, as I said a few moments ago, I actually think he's sort of pretty much in the right track. I think if you look at the major programs these, I believe our externalities they were dealing with, that is to say, areas where the economy needed the indrection of government to deal with what the markets were not. But I would say that neither one is at the present
time put forward they program. But if you extrapolate what President Biden has done looking forward conceptually at least be pretty comfortable with subjects A caveat that we need to focus on our on the issues that we have unable to politically. But that of course gets you back to the politics.
Trump is a different matter.
I mean, Trump is talking about huge tax cuts and that will just exacerbate our problem. I don't think it's gonna have any effect at all and growth, just like an other trap tax cuts did I think a lot of other problems by the way around the Trump president that we could have run into the rule of law is fundamental to our economy. He's talking about weaponizing the Dust Department and the FBI. He's look, the fundamental of any democracy is the peaceful transfer of power. He's denying
their legitimate in the twenty twenty elections. Still so, I think there are a lot of problems economically if he gets elected.
When we talked about nineteen eighty three, we talked about Japan and the perceived threat of Japan, challenge of Japan and the business community more broadly, Can China play that role today? Where is China? Is it something that we need to focus on. Is it something that might cause the American people say, you know, we better address this or else we're going to be in trouble with China.
I think people do say that to some extent, So that may be, but not it's not in the same way, David. I mean, Japan was a palpable in a lot of people's minds, a palpable and ever present risk at the time. I don't think China plays quite that role. Also, China China, and I wouldn't profess expertise as back to China, but a little bit about it. I think they've got some really serious problems. I think they're much more. Is not just a question of the way they reacted to COVID
or something. I think there's some really systemic problems. It was a terrific article Foreign Affairs by Adam Posen a few months ago. I guess about what I would call the systemic issues that they faced, and I think they're very serious.
That was former Treasury Secretary Bob Rubin. And this has been a special Bloomberg Wall Street Week podcast.
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