A TALK WITH ROBERT RUBIN
Treasury Secretary Robert E. Rubin is ready to talk. How do we know? He has folded his slender frame into a chair and has kicked off penny loafers--a Rubin trademark. In a wide-ranging interview with Business Week Washington Bureau Chief Lee Walczak and other editors on Feb. 25, the Treasury chief sounded off on the balanced budget, taxes, and the economy.
Here is an expanded, online-only version of the interview that appears in the Mar. 10 issue of Business Week.
A: The President is committed to finding common ground consistent with his principles, and we have set up a number of meetings with the congressional leadership on both the Republican and Democratic side. For all kinds of reasons, these people are committed to reaching a successful conclusion. Then the question is, what process is most likely to achieve that? Two weeks ago we had [Presidential] meetings on Capitol Hill and set up all these task forces. Whether that's ultimately going to be fruitful or not, I don't know. But in the final analysis, no matter what the process may be, an agreement will be reached on balanced-budget legislation.
Q: Republicans have some bones to pick with your fiscal 1998 budget. They feel the entitlement reforms are too timid, there's too much new spending, and the big cuts concentrated in the plan's final two years are unrealistic. Your response?
A: My general comment is, they're wrong...
Q: ... Does that go for the independent analysts at your old firm, Goldman Sachs, who reached much the same conclusion in a new report?
A: I haven't read the Goldman report, but if that's a summary of it, yeah. It's very much like '93. We put in place an economic plan, and people said it wasn't going to work, it would produce a recession, it would explode the deficit. We said we felt it would work. And it did work. We've taken exactly the same approach to the '98 budget. If you have people who produced budgets four years in a row when the deficit came down as projected, there's a certain presumption of credibility.
Q: But is it realistic to expect $200 billion in domestic spending cuts in the plan's last two years?
A: I wouldn't look at that way. You have roughly $350 billion in savings, and $100 billion in tax cuts. How are the savings phased in? We run a tax cut through there and absorb some of the savings. About 60%-70% of the savings are in the last two years. The Congressional Budget Office put out an illustrative budget track some weeks ago, and under their acceptable track, some 65% of the cuts would be in the last two years. That's an achievable objective if you're willing to make tough decisions and continue our Reinventing Government efforts.
Q: You've said that there's nothing magical about mandating budget balance by a date certain...
A: ... I don't think I said that. No, I actually think there's a lot to be said for a balanced budget, and a goal that's worth making sacrifices to get to.
Q: Do you say that for economic reasons--or because the markets expect you to make good on your pledge?
A: Those become the same thing. Balance has taken on enormous symbolic importance, both in terms of political will and market reaction. Remember, for this whole strategy to work, you have to have markets respect what you're doing on the fiscal side and provide you with appropriately lower interest rates.
Q: Are you disappointed by Wall Street criticism of your budget?
A: When we sat down and did the budget, we said, "What are people going to say," and they're saying pretty much what we expected.
Q: Is that because market analysts overlook the fact that this budget may merely be an opening bid in negotiations with Republicans?
A: I don't think it's a negotiating document. It's very valid. If we put this in place tomorrow, we would be very happy. If conditions turn out as we projected, then, based on our numbers, we'd have balance. If they don't, then we have a trigger mechanism for spending and taxes that will adjust the budget and still bring us to balance.
Q: Republicans feel you're one of the strongest voices urging the President to resist calls for a broad-based capital-gains cut. What's your problem with this approach?
A: The ultimate decision on the budget and tax pieces will ultimately be the President's. The view we've all reached is that we have scarce resources to use for tax cuts, and the targeted, moderate program we have is the most sensible use of those resources. A capital-gains tax cut, except for home sales, is not a top priority. If you look at academic literature, the predominant view is that savings tends to be relatively indifferent to the aftertax rate of return. You'll also find that the view of most economists is that the capital-gains cut is likely to have relatively little effect on savings, and therefore little effect on growth.
Q: Democrats tend to attack the capital-gains cut as a giveaway for the rich. But with the middle class rushing to invest in stocks, is this class-based argument still valid?
A: There are those who are concerned about the distributional effects. I never get to that piece of the debate in my own thinking. The way I look at it is, [a broad capital-gains cut] costs the government money to do it, and are you getting an economic effect that is worth the cost? My answer is no.
Q: Republicans clearly resent your views on capital gains, and they hold you accountable for stiffening the President's opposition to the balanced-budget amendment. Could this be a reason why Trent Lott said recently the odds on a budget deal would improve if only Clinton and Hill leaders could get alone in a room?
A: I didn't see the comment. Look, the President knows his own mind on the economic issues. He's learned a lot, but his fundamental view he had before he got to Washington. With [my role in fanning opposition to] the balanced-budget amendment, that's not what happened. The President did a press conference and got asked about the balanced budget. There were those who interpreted what he said as having some give. We went in to him an hour later and said, "This is being interpreted as representing change," and he said "Absolutely not." So I went out and said we want to be clear in opposing the amendment. His position never changed.
Q: But didn't Lott accuse you of whipping up "hysteria" over the amendment?
A: We have addressed the substance of the amendment, which is a monumentally important issue, in a very serious way. My testimony on the issue was substantive analysis. All of us are committed to putting in place balanced-budget legislation this year, none more strongly than the President.
Q: Some of your opponents consider you an obstacle to tax reform. Since a majority of Americans seem to think something is seriously amiss with the tax code, why stand in the way of fundamental overhaul?
A: Obstacle to tax reform? Right now, our priority is to balance the budget. Structural tax reform is enormously complicated. It has ramifications for every taxpayer, and it needs to be thought through with enormous care. Most people who advocate reform haven't gone through that process. The only people who are advocating major reform and have really done work commensurate with the reform they're advocating are Senators Pete Domenici [R-N.M.] and Sam Nunn [D-Ga.], with their USA Tax. They spent years developing the idea. I'm not saying it's right or wrong, but that gives you a sense of how complicated these issues are.
Q: Isn't your fondness for targeted tax credits the antithesis of reform--it clunks up the code, has a hidden cost, is seems an inefficient way of altering behavior...
A: That [last point] is the question we've faced on each of our tax decisions. Does the proposal make sense, is it better to do it through an expenditure or a tax deduction? The tax code has always been used to influence behavior.
Q: Assume that the balanced-budget deal is made. Does the Administration want to spend its last two years wrestling with tax reform, or the equally monumental task of addressing long-term Medicare and Social Security funding problems?
A: It's the right question. I don't know the answer. We're obviously going to have to work through this with the President and ask what we want to do to preserve energy, because you can't do everything. It takes an enormous amount of effort to get the big things done in our system. Right now our priorities are to do the tax items that are in the President's budget, and clearly to focus on the IRS and get it back in good shape.
Q: If fiscal and monetary policy are going so well, why are real interest rates so high?
A: I think there's room for... Oh look, who knows? One of the reasons it's good to go to a balanced budget is that it all does go to how the markets react. Clearly, you've had an enormous change in confidence in the markets over the last five years, and that is why nominal rates have come down substantially. One would hope that if you go to a balanced budget, that interest rates would reflect that.
Q: Was Fed Chairman Alan Greenspan right when he worried publicly about an overheated stock market?
A: I think the general economic outlook is favorable for continued growth and low inflation. As for the stock market, that is a question of how you think your valuation relates to the outlook for additional growth. That is a subject I have assiduously avoided comment on. I interpret Greenspan's comment as basically a suggestion that people who look at the markets take into account the full range of possible outcomes and properly weigh the rewards and risks.
Q: Have structural changes--the end of the Cold War, globalization, and the shift to an information economy--lessened the risk of U.S. recessions?
A: We don't see any signs of serious slowdown as you look at the future. But I don't think anybody's repealed the business cycle. There has been a set of [positive] changes, from globalization, to technology, to businesses learning to use technology better. The American private sector has gotten itself into much better competitive shape. And there's been a sea change in fiscal policy that started with our deficit-reduction program in 1993.
Q: You have long maintained that it was pointless to try to artificially influence currency values, since they reflect economic fundamentals. So why did you try to talk the dollar down against the yen and the mark a few weeks back?
A: That's not what I said.
Q: World financial markets seemed to think otherwise...
A: It's important for a Secretary of the Treasury to state the nation's policy with respect to the dollar. Beyond that, it's best to say nothing.
Q: But you didn't say nothing...
A: What I've said was, I believe a strong dollar is in our nation's interest, and it's been strong for quite some time now. We spent a lot of time [on that wording]. That foreshadowed what we said at the G-7 meeting, which was that two years ago there were significant asymmetries in exchange rates. Now we're saying that the movement that has taken place over the last couple of years has been good.
Q: So, this means, perhaps, that currency intervention by governments is appropriate...
A: ... When it's appropriate. When you think on it, that actually has some content to it.
Q: Were market mavens wrong when they concluded that part of your comments reflected concern about ongoing woes in the Japanese financial system?
A: It's very much in the interest of Japan to have strong, domestic, demand-led growth. Japan's overall macroeconomic position has been to take measures to further that position. It's obviously also very important to look after the soundness of your banking system.
Q: During the President's first campaign, Clintonites criticized George Bush's China policy as overly mercantilist and insensitive to human-rights concerns. Is your current policy any different?
A: That was the criticism. I think the criticism was wrong. There has been a consistent and continuous policy.
Q: A disturbing aspect of the unfolding Donorgate scandal is the coziness between big campaign donors and Clinton policymakers. Does this concern you, as a top policymaker and former fund-raiser?
A: We're talking about one coffee that I was at...
Q: But Comptroller of the Currency Eugene Ludwig also attended an event with bankers, many of whom gave money...
A: ... As the President and Gene have said, a regulator shouldn't have been at that meeting.
Q: Do new steps need to be taken to prevent a blurring of the lines between normal public outreach and fund-raising activities?
A: You have a political system in which virtually everybody who participates meets with people in a fund-raising context. Every member of Congress, pretty much every member of the Administration. You're asking me should the whole system change? That is a mega-question that I don't care to comment on. I don't accept your point about "coziness." I'll tell you, in my meetings with people at fund-raisers, the only thing I do is to get input. I see labor people, inner-city people, business people. The key is to make your decisions based on the merits. I did raise money once. And it never seemed to me that this system was fundamentally affected by the fund-raising process. I also think that campaign-finance reform makes sense.
Updated June 15, 1997 by bwwebmaster
Copyright 1997, Bloomberg L.P.