“Robert Rubin’s absurd economic recommendations”

I should not be surprised to see that Robert Rubin, having been one of the single most destructive forces over the last two decades (Greenspan gets more heat because he was more visible, but Rubin has long had enormous sway) continues to have influence, not simply through his large network of well placed proteges (Larry Summers and Timothy Geithner as the most visible examples), but his ability to command attention (an article by him in Newsweek as the latest example).

Marshall Auerback, an investment manager and strategist and longstanding Rubin watcher/critic, below takes on the latest bit of Rubin self congratulation masquerading as wisdom (cross posted from Ed Harrison’s blog). Marshall has tastefully omitted some of his spurious arguments to focus on the central flaw of the piece, but let me give you one example:

The question of which economic model works best was recently subjected to rigorous analysis by a task force called the Commission on Growth and Development, established by the World Bank and other sponsors in April 2006….While the specifics differed from country to country, the commission concluded that these highly successful economies shared a set of common characteristics: sustained movement toward market-based economics; governments that effectively provided sound fiscal and monetary policy, substantial public investment, and increasing integration with the global economy; high savings and investment rates; political stability and the rule of law; and considerable focus on widening the distribution of income. The commission also found that no economy anywhere in the world had been successful with largely state-directed activities and high walls against global integration.

Yves here. First, China is on the list. So is Japan. China liberalized its markets, but retained substantial state direction. Anyone attempt to indicate otherwise is a gross distortion. Ditto Japan. I’d need to read the report, but this smacks of a hugely biased reading of the data. Both countries pursued openly mercantialist policies, with substantial barriers against imports, which raises serious questions about the practical meaning of “global integration.” When the Plaza Accord nearly doubled the price of the yen in dollar terms, Japanese imports of US goods barely budget. Japan was found to have “structural” barriers, a combination of consumer attitudes but also very cleverly designed trade impediments (trust me, the Japanese are masters of this, I can bore you with details). And China has has a substantially undervalued currency for the last, what, at least six years? An undervalued currency is tantamount to a massive export subsidy. To suggest these countries are operating with a neoliberal, largely open market model is utter bunk.

Now to Auerback:

As we all know, during his tenure as Treasury Secretary, Robert Rubin laid the groundwork for today’s crisis through his aggressive championing of financial deregulation. Had he at least acknowledged some remorse or recognition of error, he would be more appropriately suited for an advisory role on how to fix the global economy, much as a reformed criminal often has useful insights on penal. No such luck here. This neo-liberal zealot reiterates the usual self-serving nonsense how ‘NOBODY’ could have possibly foreseen the magnitude of the problem. Being one of the worst Treasury Secretary’s of the 20th century was clearly not enough.

Post the Clinton Administration, Rubin was a senior advisor of Citigroup after he quit the Treasury. He left just before its near collapse amidst criticism of his performance. In 2001, he got hold of Peter Fisher in the US Treasury Department to try to put pressure on the bond-rating agencies to avoid downgrading Enron’s debt which was a debtor of Citigroup.

In January 2009, he was named by MarketWatch as one of the “10 most unethical people in business”.

Letting him publicly expound on getting the global economy back on track is akin to providing Kim Il Jong-il a public platform on human rights. Unlike Greenspan, who at least has had the decency to admit mistakes, Rubin still expects to be taken seriously as a policy maker. This is truly disgusting considering the millions of Americans who are without work now and heading south into poverty, not to mention the millions of workers around the world that have lost their jobs and savings and more largely thanks to the policies championed by this misguided deficit warrior.

And the article clearly establishes that the man is a deficit terrorist who understands nothing about reserve accounting and bonds. This is a classic illustration of the idiocy:

The United States faces projected 10-year federal budget deficits that seriously threaten its bond market, exchange rate, economy, and the economic future of every American worker and family. Those risks are exacerbated by the context of those deficits: a low household-savings rate, even after recent increases; large funding requirements for federal debt maturities every year; heavy overweighting of dollar-denominated assets in foreign portfolios; worsened fiscal prospects in the decades after the current 10-year budget period; and competing claims for capital to fund deficits in other countries.

Bonds don’t “fund” anything and certainly don’t create competition for “funding requirements” on the basis of a silly “crowding out” theory.

Here Rubin assumes that government deficits increase the claim on saving and reduce the “loanable funds” available for investors. Does the competition for saving push up the interest rates?

Yves here. The “loanable funds” theory was discredited back in the thirties, which is why Auerback slips in the reference. Back to him:

No, for two reasons: First, budget deficits build productive infrastructure which exerts a positive influence on economic growth.

Second, budget deficits typically help stimulate investment because they keep aggregate demand from plummeting.

Bond sales do play an important role in managing aggregate bank reserves and in the administration of overnight interbank interest rates, but Rubin clearly does not understand this, despite years on Wall Street. When government spends, recipients of Treasury checks deposit them into banks, which adds reserves to the banking system. In effect, government spending actually lowers interest rates.

By contrast, budget surpluses are not even remotely like private saving. They actually destroy liquidity in the non-government sector (by destroying net financial assets held by that sector). They squeeze the capacity of the non-government sector to spend and save. If there are no other behavioural changes in the economy to accompany the pursuit of budget surpluses, then the private sector is forced to increase its private debt levels to sustain demand and then when this option is exhausted, aggregate demand falls and consequently wipes out non-government saving.

Pro-active fiscal policy will allow the private sector to have healthier finances by providing spending stimulus over time to generate income growth (and private saving) when it is targeted toward creating full employment, not bank bailouts. Bad fiscal policy, by contrast, simply reflects a collapse in private spending and correspondingly lower tax revenues, and the concomitant failure of governments to act so as to prevent increased social welfare payments (such as unemployment insurance or food stamps) from coming into play as a result of this declining economic activity.

It is clear that if resources are fully utilised then choices have to be made on appropriate use. These choices will be political in nature. That is the only constraint which exists. Rubin clearly doesn’t understand this, so he is in no way suited to offer any kind of advice (other than how to blow up an economy via reckless banking practices).

These people are never shamed by their actions. Fortunately, society was spared their advice for several months – but now they are back, akin to the bad aftertaste of greasy pizza that one belches out after a particularly gruesome serving. I’m just waiting for the day when Bernie Madoff will be writing an article for Newsweek, expounding on how we can improve financial regulation.

Also see my related post at New Deal 2.0 “Deficit Hawking: A New Year Opens with the Same Bad Old Ideas.

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  1. Advocatus Diaboli

    This country gives con-men and sociopaths many “second” chances, so don’t be surprised.

    “I’m just waiting for the day when Bernie Madoff will be writing an article for Newsweek, expounding on how we can improve financial regulation.”

    1. soulmatic09

      that’s the thing, most in the country wants these guys’ head on a very long stick.

      the problems is that the power to do so has been stripped from us.

  2. soulmatic09

    “In effect, government spending actually lowers interest rates.”


    “By contrast, budget surpluses are not even remotely like private saving…They squeeze the capacity of the non-government sector to spend and save.”

    Huh?!? X2

    I’m sorry, but this is incredibly oversimplified, yet completely tortured logic. It’s just as bad as the “Tax cuts create growth” meme.

    The non-gov’t sector had *no* problems spending & speculating despite surpluses in the 90’s. The deficit today isn’t having the opposite effect, either.

    And I don’t even know where to begin w/the first quote.

  3. roger steinhauer

    Why does “widening distribution of income” make me uncomfortable,especially considering the rising number of food stamp recipients?

  4. Marshall Auerback


    Governments spend (introduce net financial assets into the economy) by crediting bank accounts in addition to issuing cheques or tendering cash. This has the effect of lowering short term rates. The orthodox conception is that taxation provides revenue to the government which it requires in order to spend. In fact, the reverse is the truth. Government spending provides revenue to the non-government sector which then allows them to extinguish their taxation liabilities. So the funds necessary to pay the tax liabilities are provided to the non-government sector by government spending. It follows that the imposition of the taxation liability creates a demand for the government currency in the non-government sector which allows the government to pursue its economic and social policy program.
    This insight allows us to see another dimension of taxation which is lost in mainstream analysis. Given that the non-government sector requires fiat currency to pay its taxation liabilities, in the first instance, the imposition of taxes (without a concomitant injection of spending) by design creates unemployment (people seeking paid work) in the non-government sector. The unemployed or idle non-government resources can then be utilised through demand injections via government spending which amounts to a transfer of real goods and services from the non-government to the government sector. In turn, this transfer facilitates the government’s socio-economics program. While real resources are transferred from the non-government sector in the form of goods and services that are purchased by government, the motivation to supply these resources is sourced back to the need to acquire fiat currency to extinguish the tax liabilities.
    If you are genuinely interested in finding out more about this, I suggest you read Bill Mitchell’s work on deficit spending: (http://bilbo.economicoutlook.net/blog/?p=332 )

    1. soulmatic09


      Your explanation, as well as Bill’s, is very elegant.

      There was a lot of talk about taxation, however, I didn’t see an explanation as to:

      1) Why interest rates would fall as gov’t spending increases

      2) Why gov’t saving cripples private company development

      Yes, presumably gov’t expenditures are private sector revenues, but outside of defense, education, and a few other sectors, that spending would be a fraction of total GDP. There are numerous examples where spending would have no impact at all, and in some cases cause problems (corn subsidies, tax credits for HELOCs, etc.)

      I find this view incredibly simplistic, b/c it seems to equate spending on war with infrastructure spending (I doubt that you are, though), or for that matter tax cuts, which can be another form of spending.

      So by this logic, deficit financed tax cuts lowers interest rates?

      “the motivation to supply these resources is sourced back to the need to acquire fiat currency to extinguish the tax liabilities.”

      By extension, reducing tax liabilities would cause output to fall b/c people would need to pay less in taxes, and therefore will work & produce less? You sure about all this?

      There are so many broad based assumptions in the argument that it is very hard to take it credibly. Whenever someone aggregates all spending into “G” or “K”, I get very disappointed. That being said, I doubt the comments section of a blog is the proper place to explain this fully.

      1. Marshall Auerback


        I’ll try to make this clearer: Increases in the federal deficit tend to decrease, rather than increase, interest rates. This is because deficit spending leads to a net injection of reserves into the banking system. (And big deficits imply big injections of reserves.) When the banking system is flush with reserves, the price of those reserves – in the U.S. the federal funds rate – is driven to zero (yes, zero!). Unless a zero-bid is consistent with Fed policy, the central bank will begin selling bonds in order to drain excess reserves. The bond sales continue until the fed funds rate falls within the Fed’s target band. The Federal Reserve sets the key interest rate in the U.S., and it can always hit any nominal interest rate it chooses, regardless of the size of the budget deficit (or debt). And this isn’t just true of the Fed. Just look at the Japanese experience:

        1. jake chase

          Somehow, I do not think we need intellectual justification for limitless government spending. Remember, these are the same idiots who allowed the financial sector to cripple the real economy under the thrall of a bogus ideology. What do you suppose Reid, Pelosi, Frank, Waters and their ilk have in mind to fix things now? Remember, Hayek told you why the worst people always end up in charge.

    2. JasonRines

      Well put and thank you for the link Marshall. What I advised President Bush in 2008 was to declare a national energy emergency and use those powers to direct $2 T into energy independence. This was actually not a new plan, it was enacted in the 1930’s in the building of Hoover Dam and thousands of other electricity producing dams most of which are still used today.

      The second part of the plan was to utilize the SBA for early stage and start-ups. The SBA has a wonderful mentoring program where retired executives review the entrepenuar plans for merit and funding to support energy independence.

  5. Ivan

    Mr Rubin titled his book on the Clinton years “In an uncertain world.” In such a world, all he did was to introduce even more uncertainty.

    1. JasonRines

      Government creates chaos and has the people pay for it. Today we see more intense fear based politics than Rubin’s time as Treasury Secretary.

      The fear-based scams like global warming have gotten more than bold and quite obvious to the general population. Individuals like Rubin think of the world as their playground and that backlash can’t exist with a bankrupt population. I would call such people neurotic, having passed the encapsulation phase long ago.

      Between the first WTC attacks in 1993, the second and very deadly attacks on 2001, no profiling but preying on civilian fears, government has forgotten its one true useful role of providing for the common defense of the people. Instead, the USA went on a huge gamble of empire building. CFR types don’t stop and think of what would happen if a Russia/China or both double crossed them. Such types forget nations still compete. It seems both Russia and China want a bigger piece of the crime syndication pie.

      In the end, all governments start to believe they are bigger than the people and this is even more visible in a global society. The one and only time government will be temporarily bigger than the people is when someday, all people on earth RUN toward a new supply chain using carrots without having to use the stick. Based on the broken trust this last decade, you can be sure whatever emerges as the global empire will not last long.

  6. K Ackermann

    The Commission on Growth and Development’s conclusions were stuffed down its collective throat. It’s the same conclusions that caused the IMF and the other cabals to ransack and loot whatever they can in the name of the free market.

    Don’t let the state provide malaria medicine… make them get it through the free market. If they can’t afford it, then the problem solves itself, doesn’t it? That’s been the attitude of maestros like Rubin for a long time. I call them phone whisperers. They speak softly into a phone, and people die, and they smile.

    Of course they are never shamed by their actions. They have a whole different concept of what it means to be a human being.

  7. George Washington

    This is a perfect example of a blog post which is both very angry and very wrong.

    “When government spends, recipients of Treasury checks deposit them into banks, which adds reserves to the banking system. In effect, government spending actually lowers interest rates.”

    “Government spending” does not create reserves. Stepwise:
    – Government issues bonds. Investors write check and get bond.
    – Government spends money. Vendors provide services and get check.

    Cash just moves around, from investors to vendors. On the way back, cash moves from taxpayers to bondholders. Federal Reserve monetary policy is different but that is not what this guy is talking about.

    “Bonds don’t “fund” anything and certainly don’t create competition for “funding requirements” on the basis of a silly “crowding out” theory.”

    – Bonds provide funds to the government. Not. Too. Complicated.
    – Crowding out was and is a basic fundamental theory of economics. More borrowing = higher real rates. People need to be paid to eat tomorrow instead of today, and the more demand there is to borrow, the higher the cost of borrowing.

    “By contrast, budget surpluses are not even remotely like private saving. They actually destroy liquidity in the non-government sector (by destroying net financial assets held by that sector).”

    – “Destroy liquidity” ??? Does this guy know what “liquidity” means?

    – Budget surpluses destroy net assets? How is that exactly? When a bond is paid off the holder gets cash…cash is an asset.

    Really, this stuff is so idiotic that it shouldn’t be posted…

    1. Yves Smith Post author


      With all due respect, you have just shown you are out of your depth. You put your foot in mouth and started chewing at Step 1.

      Marshall is correct here and has written on it at length. People constantly make the mistake of making an analogy between the government sector and a personal budget, and it’s all wrong.

      Some have argued that there are limits on this process of the government sector, but they are political, not operational (see Michal Kalecki).

      In other words, if you never heard of Kalecki, you do not know this terrain.

    2. Matt Franko

      George, Your line:
      1. Government issues bonds. Investors write check and get bond.
      2. Government spends money. Vendors provide services and get check.”

      After step 1, yes there is no change in financial assets of the non-govt sector, ie someone in non-govt sector exchanged reserve balance (bank account) for say a 10-year govt bond…agree no change.

      In step 2, the govt sends reserve balances to the non-govt entity that provided the goods or services. the non-govt sector now has an increase in financial assets (bank account of non-govt entity has higher balance at end of day).

      so after Step 1 and 2, the non-govt sector has MORE financial assets than before (step 1 was a breakeven and step 2 was a gain for non-govt sector).

      I have found it useful here to think of things in a strict 2-sided way, with “Government” on one side and “non-Government” (that’s us!) on the other side. Then evaluate all fiscal and monetary actions in the context of reserve balances moving from one side to the other, back and forth, to and fro, etc…(really just accounting paradigm). You can then see if govt runs a surplus as fiscal policy, govt is extracting financial assets from the non-govt sector (again, that’s us!) making the non-govt sector “poorer”.

      In this context dont think “you” are the govt (even though you are a citizen and in this way may have a citizens ‘claim’ on govt assets), or that the govt assets are “yours”, you are not the govt sector, you are the non-govt sector. Rubin often brags about how he ran surpluses for “us”…WRONG! He depleted the assets of “us”. No one in govt should ever brag about surpluses or even balanced budgets.

      Fiscal 101:
      Reserve flow to non-govt sector-> good!
      Reserve flow to govt sector-> bad!

      George I enjoy many of your posts here. Take a break from chopping on that cherry tree for a few hours and visit moslereconomics and/or billyblog…I cannot tell a lie, it will increase your understanding of the terrible effects of misguided fiscal and monetary policies such as those advocated by the likes of Rubin.

      1. jdmckay

        Then evaluate all fiscal and monetary actions in the context of reserve balances moving from one side to the other, back and forth, to and fro, etc…(really just accounting paradigm).


        Q: what happens when that “accounting” paradigm gets muddled w/bs?

        You can then see if govt runs a surplus as fiscal policy, govt is extracting financial assets from the non-govt sector (again, that’s us!) making the non-govt sector “poorer”.

        W/Q above in mind, deconstruct cash flows from Enron for example… from, say, ’96 >> ’01. Where did “assets” come from, and go to? What happened w/all that hoard of Enron value?

        And in this one example alone, assets transferred were a lot more than just dollars.

        Enron lobbyists essentially wrote Ca’s deregulation scheme, rubber stamped by then gov Wilson. Among other things, that “free market” experiment required dissolution of public utility (PGE/Edison etc.) physical assets: power generation plants, whole lot of land (public parks in central ca. sierras, for example, by long standing agreements maintained by prior custodians for public use, now gone)… all in the name of “free market” magic.

        Dissoluted power plants then resold by various investors, while under siege by Enron’s fake Ca. pwr shortage, sold at inflated prices… on and on it went (Enron, incredibly to me, is still in court trying to enforce power supply contracts signed from this era).

        And all this, aided and abetted by Bush’s cabinet level “gatekeepers”, FERC etc. (Spencer Abraham’s’s comment: “They (ca.) need to put shovels in the ground” comes immediately to mind. Cheney & Rice, many similar comments).

        Beyond that, until that time… for decades, those utilities provided:

        * AAA gold standard investments which funded retirements of millions, eg. what used to be called “Blue Chip.
        * Provided large volume, solid income to hundreds of thousand blue collar workers which, again for decades, gave back very high quality services in infrastructure maintenance, service etc. Now, vastly… vastly deprecated.

        And all this… the Enron experiment, a company built on smoke and mirrors and operating as such for +/- 4 yrs as they put this sting in place… built on utterly, convoluted accounting statements that not only accounted for nothing, but more or less just made stuff up.

        And WS, institutional investors etc. entirely oblivious to it all until every last penny sucked out of their coiffures.

        The intertwining of public/private in housing bond scam similar, if more sophisticated. And much, much larger.

        And how ’bout the little trick of moving all those toxic assets from public to private in flick-of-a-hand… that’s a lot of terabytes for your accounting paradigm to move across you equation in one, fell swoop.

        So ‘ya, I like your “accounting paradigm”… good luck divining that stuff. :)

      2. jdmckay

        I have found it useful here to think of things in a strict 2-sided way, with “Government” on one side and “non-Government” (that’s us!) on the other side. Then evaluate all fiscal and monetary actions in the context of reserve balances moving from one side to the other, back and forth, to and fro, etc…(really just accounting paradigm). You can then see if govt runs a surplus as fiscal policy, govt is extracting financial assets from the non-govt sector (again, that’s us!) making the non-govt sector “poorer”.

        How does FED’s assumption of toxic assets (underwater mortgage bonds) fit into this paradigm?

        Seems to me it’s inverse of what you suggest: eg. “non-govt sector” injecting junk into govt sector. Watching similar events over last decade, seems to me this becoming a strategic paradigm in and of itself.

  8. stf

    George W


    The govt deficit creates net financial assets for the non-govt sector. The bond sale is an asset swap. Accounting 101 . . it’s not. too. complicated.

    To settle your tax liability or your Tsy purchase in the primary market, your bank uses reserve balances. Where did the reserve balances come from? Open market operations? With Tsy’s? Where do Tsy’s come from? Deficits? So, the reserve balances were supplied to buy the bond or pay the taxes by the previous deficit spending. Again . . . Accounting 101 is. not. too. complicated.

  9. Doug Terpstra

    Wow “…rigorous analysis by a task force established by the World Bank and other sponsors in April 2006”

    I wouldn’t trust the World Bank anyway, but its President at that time was Paul Wolfowitz, Neocon chickenhawk forced to resign in ’07. Here’s Wolfowitz’s “rigorous analysis” on the economics of the Iraq war for Israel in 2003:

    “There’s a lot of money to pay for this that doesn’t have to be U.S. taxpayer money … the oil revenues of that country could bring between $50 and $100 billion over the course of the next two or three years … We’re dealing with a country that can really finance its own reconstruction, and relatively soon.”

    1. aet

      Getting their predicted numbers (as to costs, oil prices, etc.) proved wrong on the ground in Iraq after their invasion of that country has very much to do with the US economic crisis, methinks.

      One thing’s apparent. Whatever it is that the American Government is trying to achieve, the politicians don’t seem to care about the happiness of the most productive portion of the citizenry:


  10. michael

    On a side note, I just read the article on MarketWatch about the “10 most unethical people in business”. While his list and the order of it is debatable by iself, the mention of Ethisphere’s list of the 100 most ethical people in business (in 2008) plus some detail surely make my hair stand on edge.

    It seems Ethisphere put in 3rd place Heinrich Kieber, “a former computer technician for LGT bank who blew the whistle on corruption”. That is truly Orwellian!
    A shady guy who stole data and tried to sell it to the highest bidder, including the IRS, and in the end was paid €4.2 million by the German Federal Ministry of Finance for his dealings.

    The most ethical person I know so far -and the only one I would approve as a role model for me- is William K. Black, and he is neither mentioned on the 2008 nor 2009 list.

  11. Peter T

    When Auerback writes of Government he seems to mean a government that issues fiat money, like the US federal government or the UK. US states and cities on the other hand are “money limited” like a personal household, as is Greece. Maybe Aurback should use a more specific expression for Government.

    1. pebird

      Yes, this is true. By Government, I believe this is supposed to mean a sovereign issuer of fiat currency.

  12. Francois T

    The so-called deficit hawks never have a problem spending for military, national security and business tax cuts.

    Yet, when it comes to spending on any social priorities, they become apoplectic.

    This is the only clue needed to dismiss these people as shills, brown-nosers for the powerful and wealthy and enemies of the people.

    They love America, yet, hate Americans.

    Who needs these intellectual criminals anyway?

    1. Vinny G.


      I agree with what you wrote, except with your use of the word “intellectuals” in your last sentence. There are several more colorful epithets that come to mind as possible replacements… :)


  13. Hugh

    Newsweek is, of course, owned by the Washington Post parent company. It revamped its format not too long ago to get out of the news digest/summary business. It essentially conceded that market to the web. Similarly, the WaPo is outsourcing its own news operations and has closed its non-Washington bureaus. The feature sharing deal with Pete Peterson is just part of this. This is all just a way of saying that the Post company really doesn’t do or want to do news anymore (of course it still does commit the random act of journalism but these are increasingly rare and aberrational). The Post is a Village rag where Beltway gossip replaces news. Newsweek is just a platform for lengthier pieces for the Conventional Wisdom (CW).

    That’s why a destructive quack like Rubin will show up in it. Rubin still visits and advises the White House. Unlike Marshall, I think it is beside the point whether Rubin actually believes the tripe he is peddling (I really don’t think he does). That really isn’t the purpose of the exercise. Rubin validates a view that allows for the ongoing corporate looting of government. In the eyes of Jon Meacham, Newsweek, and the Village that confers legitimacy on him. In other words, the Newsweek interview is an example of economic hack meets media hack for the masturbatory delight of other Beltway hacks.

    What the rest of us should take away from this is that Obama’s economic policy is not naïve or mistaken but (as Rubin’s ongoing participation in its formation, and the recognition of this by Newsweek) clear-eyed and deeply criminal in nature. Obama, Rubin, Summers, and Geithner are not trying to improve the situation of the country. They are trying to improve the situation of its corporations, and at our expense. This is not a subtle point. Team Obama is not trying its best but just wrong or out of its depth. They are pushing an agenda of state corporatism that is antithetical to the foundational values of our republic. There is no mistake, no misunderstanding. They mean it. They would not let a disgrace like Rubin within a hundred miles of the place if it were otherwise.

    1. rickstersherpa

      While I believe a lot of what you say Hugh, I don’t think it is a criminal conspiracy. You simply underestimate the power of Groupthink, self-deception, and unconscious class bias. Rubin, Summers, and Geithner have not seen much of the rest of the United States outside of New York, Harvard, D.C., L.A., and Aspen. It is an abstraction to them, perhaps a bigger one than China. They enrich themselves, and think they are enriching the country.

      From John Cole’s Balloon Juice:

      “It is going to be really, really depressing watching the Democrats blow this in the next couple of months. Unlike Jane Hamsher, I don’t think there are rampant anti-corporate sentiments on both sides of the aisle, but I do sense that there is rampant anti-Wall Street sentiments on both sides of the aisle. No one is happy about the bailout (except the Bankstas). No one is happy about the culture of greed and unaccountability on Wall Street and among our larger financial institutions. On that, I am in complete agreement with the the Jane Hamshers of the left.

      There is a growing sentiment among even people like me, who are generally favorable towards capitalism, that Wall Street is no longer about the efficient allocation and movement of capital, but of maintaining a level of wealth and prestige for a select few. Have the right family name, go to the right school, spend a couple years at Goldman or one of the other major players, and have your ticket punched for life. Like, for example:

      “Chelsea Clinton, the 29-year old daughter of former President Bill Clinton and Secretary of State Hillary Rodham Clinton, has become engaged to her longtime boyfriend, investment banker Marc Mezvinsky.

      Mezvinsky is a son of former Pennsylvania Rep. Marjorie Margolies-Mezvinsky and former Iowa Rep. Ed Mezvinsky, longtime friends of the Clintons. Ed Mezvinsky was released from federal prison last year after pleading guilty in 2002 to charges of bank and wire fraud.

      The couple became friends as teenagers in Washington and both attended Stanford University. They now live in New York, where Mezvinsky works at Goldman Sachs and Clinton is attending graduate school at Columbia University’s School of Public Health.”

      This is also why I am not as disillusioned as Yves and so many on this blog apparently are. One has to have illusions to begin with. Obama was simply the least worst of a very compromised group. A whole generation thinks that by enriching themselves, they are doing, in Lloyd Blankenfein’s words “God’s Work.” All of the financial/political/educational elite, whether Republican or Democrat, has been infected with memes Ayn Rand planted in our culture 50 years. And the contrary tradition of patrician service to the Republic and noblesse oblige to all in society, a tradition dating before the Revolution ’76 and exemplified by the service of people like Robert Shaw and Oliver Wendell Holmes in the Civil War and the children of both Roosevelts in WWI and WWII respectively, that died in the jungles of Vietnam and with the student deferment to stay out of those jungles.

      1. Gentlemutt

        You hit it right on the head at the end!

        The patrician class has no skin in the game in terms of real risk to their families or their wealth. They skim off the top and use house organs to convince themselves and others of the righteousness of their self-serving politics.

        Charlie Rangel is now a rascal like all the rest, but even old rascals can seek good things for their country once in a while: bring back the universal draft.

      2. Hugh

        What conspiracy? This is being done out in the open on a daily basis. It has been going on for something like 30 years. This is what the essence of capture means. Capture implies intent. It is one thing if these were people who just happen to be doing a bad job. It is another if they are doing a bad job because it achieves a private purpose but is against the public interest, i.e. capture.

        Just because politicians and those who buy them have succeeded in getting called what they do something other than bribery, fraud, and theft of public services doesn’t transmute the criminality of their acts.

        We have been witnesses to some of the largest cons and swindles in human history yet we remain curiously hesitant to characterize those who perpetrated them as criminals. It is amazing how even at this late date they so control the discourse that almost no one can bring themselves to call a criminal a criminal. And it is good to remember the extent of the harm involved. Because of the financial criminals we call banksters and the politicians they own, millions have lost their jobs, millions will lose their homes, millions will lose their retirements, and millions will have their lives shortened and impoverished. Just because they so own the system that they can avoid any accountability should not stop the rest of us from calling them what they are.

      3. DownSouth


        With all due respect, I don’t think you know much about criminals. Criminals, or associations of criminals, always construct some moral or intellectual framework that justifies their criminal activity. For a penetrating case study, I recommend Dostoevsky’s Crime and Punishment.

        Another great discussion is Kevin Phillips’ chapter in Wealth and Democracy called “Wealth, Money-Culture Ethics and Corruption”:

        The result by 2000 was a Washington in which liberals found themselves muttering about “corruption” that was largely legal behavior—decision-making lubricated by so-called “soft money political coantributions, and resulting in flagrant tax favoritisms, bank bailouts, gutted regulations, and see-no-evil administration of the federal election laws.

        Morality is both genetic/biological and cultural. Stray too far from the dominant morality of a society, and you might get to hear the swish of the guillotine up close. As far as I’m concerned, that would be entirely too lenient of a fate for someone like Rubin.

      4. DownSouth

        • Hugh said: “Rubin validates a view that allows for the ongoing corporate looting of government.”

        • John Cole said (quote from rickstersherpa): “I don’t think there are rampant anti-corporate sentiments on both sides of the aisle…”

        I was reviewing Taleb’s lauding of Hayek in his book The Black Swan a couple of days ago, because I find it unfathomable that anyone in their right mind, after what’s happened over the last couple of years, could think highly of some sociopathic, mediocre intellect like Hayek.

        Taleb was lionizing Hayek because he was “one of the rare celebrated members of his ‘profession’ to focus on true uncertainty, on the limitations of knowledge.” Oh well, I suppose in the land of the blind, the one-eyed man is king. Theologians, writers and philosophers had been pointing out the same thing at least as far back as Jonathan Swift (1647-1745).

        Hayek expressed great fear about the ordinary man and democracy, but had a blind spot when it came to the evil of corporations. Taleb, much to his credit, is not so ideologically blinded as Hayek, stating that “I fear governments and large corporations.” (emphasis mine)

        Taleb would have been much better off if he would have left it there. But he greatly discredits himself when he goes on to write:

        But corporations can go bust as often as they like, thus subsidizing us consumers by transferring their wealth into our pockets—the more bankruptcies, the better it is for us. Government is a more serious business and we need to make sure we do not pay the price for its folly. As individuals we should love free markets because operators in them can be as incompetent as they wish.

        Ah, the “paradise of innocence” (Niebuhr) that these libertarians live in.

        1. Gentlemutt

          Ok, Down South, now I [i]really[/i] must read Niebuhr. And we are fully agreed on the damage wrought by Rubin, fwiw.

        2. Skippy

          DS said…Ah, the “paradise of innocence” (Niebuhr) that these libertarians live in.

          I personally blame it on the garden of eden tripe, they wish to de-evolve, too the blissful state of purity in gods un-judging grace, free of all sin and dissonance.

          PS DS your comment on another post with regards to Mexico and Colombia was spot on BTW and I know why, but lets live that for another time eh.

  14. dave

    A post about Robert Rubin veers off into a tirade about how we need to deficit spend.

    1) No, for two reasons: First, budget deficits build productive infrastructure which exerts a positive influence on economic growth.
    That is a mighty fine assumptions. I’ve looked out the stimulus and bailout programs and I don’t see a whole lot of “productive infrastructure”. I see a lot of politically connected people looting the treasury. That doesn’t provide a positive influence for economic growth. Then again, you Keynesians think burying bottles full of money and digging them back up is economic growth, so I guess I have no hope getting through here.

    Government spending is only helpful if its wise spending. If its politically motivated pork and looting it does nothing for growth (it even hurts it).

    2) Second, budget deficits typically help stimulate investment because they keep aggregate demand from plummeting.

    And what’s the ideal level of AD again. Time and time again I find you guys pulling definition out your ass. What’s full employment again? 5.5%? (in Japan apparently that’s a lost decade). 7%? (apparently that’s full employment in Europe). You guys don’t have a clue, your just guessing, and the tools you have to guess with are ridiculous. Did it ever occur to you that GDP at the height of the bubble was too high? That is was the result of capital consumption and sectoral imbalance? That the only way to get back into balance is to have a higher savings rate, a reasonable trade balance, and some people actually producing real things instead of trading paper. Of course we are never going to get there if you morons keep shoving money into incompetent auto companies and insolvent banks in a fools errand to increase AD.

    1. Anonymous Jones

      I am not saying you are wrong (because I haven’t really looked at the current infrastructure investments), but many projects that were outrageous, seemingly ill-timed and full of good old fashioned graft actually turned out to have overwhelmingly positive ROI for the country as a whole. Western water projects in the 1930s seemed like outrageous boondoggles at the time; yet there is good evidence that the cheap hydroelectric power in the Northwest was one of the greatest advantages we had in WWII.

      I guess this is just a reminder that actions with ill intentions and poor execution can still yield good consequences. The world is far more complex, and the future far more uncertain, than we know. Of course, let me say that this is most assuredly not a prescription from me for diving into projects with ill intentions and poor execution, but at the same time, don’t let the perfect be the enemy of the good; sometimes you just have to try a lot of public projects until you find the one that really pays off in ways no one ever imagined (i.e., it is not crazy that the public sector have lots of pilot, startup projects that either succeed or fail just like the private sector does).

      (Also, not a big deal but future hint: burying bottles full of money example = straw man)

      1. dave

        How about the settling for the good being the enemy of the idiotic.

        Its one thing to argue that paving a new road or building a new bridge has a higher ROI when resources are less utilized by the private sector (such as when there is high unemployment). It is another to say that building a bridge to nowhere has a positive ROI under any circumstances. Ditto for giving trillions to bankers that produce no wealth or car companies that haven’t been run well in decades.

        Japan is an abject lesson in what happens when the government spends a lot of money on wasteful projects, it produces no lasting growth. The Keynesian answer is that instead of just building bridges to connect a 40 person fishing village to the mainland we should build a bridge that literally disgorges motorists into the middle of the sea. Anything to get up AD, no project too idiotic.

      2. JasonRines

        Great! Where is the energy independence movement? Dead to provide funding for ‘insurance’ to all. By the time government collects all the taxes from it, unemployment will be at 30%. It looks like more graft, looting and taxation on an already beaten down people. I am not so sure how the American people are going to respond, I doubt it will be so forgiving.

    2. Marshall Auerback


      Full employment means what it implies – something approaching zero (excluding those who genuinely do not want to work). I’m interested in eliminating INVOLUNTARY unemployment. Leaving aside frictional unemployment (people moving from one job to another) there is no reason why we should not have unemployment close to 0%. I hope that clarifies for you. Like the Mad Hatter, I mean what I say and say what I mean, nothing more and nothing less.

      1. Fed Up

        What if there are about 6 billion people, 4 billion want jobs, and 3 billion people can produce enough goods and services for the 6 billion? What should be done?

        1. Jeff65

          If 6 billion can afford to buy goods and services, at some stage they would have had to have been working. The reduction to 3 billion needed to supply the 6 billion must result from increased productivity or reduced demand. Surely we can come up with a better answer to those problems than starving to death.

    3. Adam


      You and almost everyone else misses the point, including the government. You can’t treat the government’s budget and books the way you do a business or a household. It’s simple accounting really…

      All Savings MUST Equal All Investment Spending (usually done via a loan).

      Said another way: Private Savings + Taxes Collected + Current Account (all that money coming from China) = Government Spending + Private Investment (this is plan and equipment not stocks) + Capital Account

      Let’s make this simple now… S+T+CA = G+I+KA

      The current account and capital account are our Balance Of Payments from international trade. Right now we have a huge imbalance between the two mostly due to Chinese Mercantilism.

      OK, now for the dilemma… I agree with you that the US has a problem where people need to save more because we borrowed way beyond our means. That means that as S rises government deficit MUST rise (reduced taxes or increased spending or both) unless you can change the Balance of Payments (BOP) components which I will probably require a currency crisis or a trade war (unfortunately); or you increase investment – but as you said GDP has been too high hence we’ve already overinvested so Investment wont grow on its own.

      None of this is theory, its basic macro accounting.

      On top of this you also need to realize that the government is the only entity listed that can PRINT its own money. The government’s only constraint is inflation (so long as debts are in US dollars that is). It doesn’t even have to go to the bond market (other than because of technical hurdles we’ve build into operation) to fulfill its needs.

      So said another way, if the private sector is going to boost its saving the only way it can do this is if the government increases its spending (with or without bonds) beyond the taxes it collects.

      1. dave

        “Savings” occurs when current production is set aside to invest in productive assets that support higher levels of future production. “Accounting savings” does not equal real “savings”. If the government gives you a bond you think you’ve saved. You’ve got an asset which pays interest and sits on your books are “riskless”. However, that bond must be serviced. The legal contract is to be paid back in dollars, but the implied contract is to be paid back in future goods consumption. If the government invests the real resources it receives from bond issuance to build useful income producing assets then it can service the interest on the bond in dollars with real purchasing power (just like a private company). However, if it wastes the real resources it receives then it will not have real income producing assets with which to pay interest. Thus, it will have to pay interest in fiat dollars that don’t buy the same amount of real goods.

        Simply put: Inflation is the result of wasteful government spending. That’s why times of war tend to be associated with high inflation, because war spending is 100% waste.

        If an entity issues a bond but doesn’t invest it in productive assets then it can’t service the debt and defaults. In this case the investor hasn’t “saved” anything, and when the bond defaults he has to recognize this. Inflation is the governments version of default, and it happens for the same reason that private entities default, poor investment of resources.

        What’s so dangerous about government debt is that it convinces people they have “saved”, but that’s only true if it was used to build productive assets. Otherwise you’ve got a bunch of “investors” making claims on the public that the public can’t service without turning to inflation because there are no productive assets to service it with.

        1. Adam


          I can’t say I disagree with you from a philisophical perspective at all, but I think you’re missing the point. If American’s are to SAVE, then that savings (the actual flow of dollars) has to go somewhere. Given the world economic condition it wont go to Investment (plant and equipment) because we already have too much of it. And given how “un-free” world trade is don’t expect a export boom to truely off set the change in the flow of funds. That means either the Government must run large deficits or we will eventually have a currency crisis because all of those dollars have to go somewhere and if it’s not in domestic investment or government bonds then it must go overseas which means selling dollars and a lot of them.

          While I’m not opposed to a falling dollar (for export reasons), comiting the government right now to a balanced budget or even a reduced deficit is risking a crash of the dollar. On a larger perspective I too am not very fond of all of the deficit spending because the real elephant in the room is all the debt that can’t be service (as you noted). The whole OECD has a credit bubble problem and the worlds largest default (or forgiveness) is in the offing. Where government spending (and printing presses) will be key is when we realize how big the default must be and how big of a GDP whole we need to fill really is. Deficit spending that doesn’t co-incide with fixing the debt problem is just a waste of time and resources.

          1. dave

            I would love for the government to run a deficit to fund useful projects. It certainly would be a nice way to help the situation. The problem is whether the government can do this, and under current circumstances (kleptocracy) it can’t.

            I fear that the government will run a deficit without investing in productive assets, which only increases the debt burden on the public. Now all of a sudden the taxpayer is on the hook to make “savers” who purchased government bonds whole on their “investment” even though it wasn’t an investment at all.

            Debt jubilee is the only way out of this mess. Wipe away outstanding debt that was based on the speculative bubble so it doesn’t drag down the productive economy.

        2. john c. halasz

          Nope. Fundamentalist nonsense. Investment occurs primarily through the extention of credit and not through a prior pool of “savings”, else investment in future production capacity would reduce current production and deflate the economy through deficient demand. And investment in improved future productivity and innovative products produces “savings” by increasing actually and potentially the real distributable surplus-product through lowering real costs-of-production, rather than savings producing investment. Government spending, in turn, not only serves to support current levels of demand and thus incentives for further private investments, but performs numerous functions that directly or indirectly support private investment and the business environment, as well as public investment in long-term public goods providing a “ratchet effect”, which encourages further longer-term private investment to piggy-back on, which otherwise would appear too long-run, uncertain, high-cost and/or risky for private investors to undertake.

          1. dave

            Of course investment in the future reduces current consumption. You can’t build a factory without inputs such as labor. If labor is used to build a new factory it can’t be used to produce additional goods for consumption in the present.

            When someone chooses not to consume everything they produce savings, and instead set aside some of their resources to build future productive capacity, that’s savings and investment.

            However, if someone defers consumption in order to purchase a government bond in the hope of consuming in the future, but the government takes that money and blows it on a consumptive purpose (example: war) then nobody has saved or invested. The government gave someone a bond representing a claim on future production when no asset exists which can make that consumption possible.

          2. john c. halasz

            All future production capacity is built out of current production; that much is true. But that always an ongoing part of the current capital goods production sector. However it doesn’t require a withdrawal from current consumption expenditures and a lowering of current aggregate demand. as if there were a fixed supply of “hard” money corresponding to a finite set of resources; that’s the point of credit financing. If there were a fixed amount of money requiring withdrawal from consumption in order to pay for building of future improved capacity, then, since the workers producing that capacity would still have to be paid in the present, current consumption demand would fall and either wages would have to go down or consumption prices rise; either way that could be called “deflation”. You might wish to save some of your current income for future consumption, so you deposit it in the bank. But then the banking system lends it back out and more, for which you might get some modest return in interest. But you shouldn’t confuse individual behavior with systemic aggregate effects: your money hasn’t been withdrawn from circulation and hoarded from current demand. Official capacity utilization figures avaerage ~81% and peak around 85%: modern industrial economies are simply not sharply supply constrained. And, of course, during upswing boom phases of business cycles, it’s perfectly logical that profits, wages, consumption and savings/investment all go up “at the same time”, though not without asymmetries and lags.

            One shouldn’t confuse modern monetary and credit driven industrial production economies with as-if barter economies. That fallacy is called “Say’s law”, which Austrians fall for in the extreme and neoclassical or “new classical” theories to a lesser extent. And one shouldn’t replace self-righteous moralizing for clear understanding of functional relationships, I’m amazed how many commenters don’t have the most basic grasp of the principle of real effective aggregate demand and simply mistake their confusion for superior virtue.

            Not all government spending is wasteful consumption; indeed, concerns about cost-effectiveness or improved efficiency aside, most of it is likely not. Some of it is necessary to support economic and social reproduction; other spending is effectively productive capital investment. And transfer payments are just rearrangements of private consumption spending. In fact, insofar as public debt is domestically held, payments on public debt simply amount to a kind of transfer payment. And public debt is certainly sustainable, insofar as it accords with and contributes to overall growth of the economy. I’m no fan of the industrial-military complex and U.S. imperialism. But even such public spending does have spill-over and multiplier effects, and contributed to high growth during the hay-days of the U.S. industrial economy. The absurdity nowadays is the extention of U.S. military commitments abroad and continued increases in “defense” spending, when the U.S. industrial base has been outsourced and undermined.

            Much of what Auerback is saying here is not really new. It goes back to Abba Lerner’s “functional finance” in the 1940’s.

  15. Glen

    Greenspan at least had the balls to admit he was wrong, but Rubin, Greenspan, Summers, et al have done more damage to their country than every terrorist attack combined. Listening to these guys for more advice is like inviting Osama Bin Laden to America to blow shit up.

  16. Don

    While I am no fan of Robert Rubin, there is a serious argument on both sides about the impact of deficit spending. Especially regarding just what is the ‘multiplier effect’ of deficit spending.

    Richard Koo maintains it has ‘saved’ the Japanese economy, but at what cost? Are the hedge funds who are now beginning to bet against Japanese low interest rates completely wrong? -or must a price eventually be paid for uncontrolled/ineffective deficit spending [as Greece & selected others are now discovering]?

    For me, nothing in this discussion convinces me to sell my gold stocks, which have been very profitable to own over the last few years, as monetary policy, fiscal policy, and regulation remains basically irresponsible.

    1. Doug Terpstra

      Rubin is following the maxim of Rahm Emanuel: “You never want a serious crisis to go to waste.” Who knew they meant to engineer a bankster coup.

  17. doctoRx

    Federal deficit spending is inherently good or bad. It’s how the money is spent that matters. If it’s spent as it has been lately, with massive Govt borrowing and Fed money creation in order to pay Goldman Sachs’ employees very large incomes etc., in which much of the money ends up in gold in full-to-the-gills Swiss vaults, then the deficit spending was bad. If the spending is for socially good things such as a safety net for the poor, that’s good but if the spending is chronic but unfunded, then the hidden tax of inflation or withdrawal of the spending may follow. If it’s for a productive effort such as aiding development of the West after the Civil War, great, then deficits are good things.

    IMO too much Federal spending these days is wasted in East Asia and to support the rentier class. Until true populists reign in Washington (don’t hold your breath), I’m afraid that those such as Marshall Auerbach who have only the best goals for America will be disappointed in the real-world results of deficit spending, which will help destroy the possibility of the good things it can do. More green tech and biomed research is needed, less killing of Muslims, for example would be a good and obvious start to returning to the policies of the New Deal.

  18. LeeAnne

    A tailor recommended his Washington economist think tank type clients to a colleague thusly: They’re loaded. They don’t care how they spend their money and they’re easy to fit. Well, first of all they have no balls.Then their brains are so fried with power they don’t even look at the tab.

  19. Siggy

    I am puzzeled. Is it not true that what the government spends it must fund by either taxation, or the debasement/devaluation of the currency.

    If that is true; then, deficit spending leads to some ultimate combination of an increase in collected taxes and the devaluation of the currency. Taken together, singularly each of the foregoing ultimately operates as a constraint on economy activity.

    I’ve read Mr. Auerback’s explanation several times and what I get is that in order for his model to work it is absolutely necessary for the sovereign currency to be fiat. No backing only the authority to tax and the acceptance of the fiat currency in payment of taxes.

    Nothing is said about purchasing power and the negative forces that are unleashed by the persistent erosion of purchasing power.

    The fact of small but persistent loss of purchasing is a critcal factor in the creation of our current distress.

    This leads me to conclude that the resolution our distress is the repair of our currency. A part of that repair would include the ensuring of the currency’s purchasing power.

    Another part of the cure would be the recognition of losses on bad loans and speculations. In that regard, it will be necessary to recognize that much government expenditure has been made in support of financial entities that are insolvent. That implies that balance sheet amounts are inflated to the extent that purchasing power has been lost.

    As to Rubin, my ad hominem view is I never did like him.

    1. Adam

      “I am puzzeled. Is it not true that what the government spends it must fund by either taxation, or the debasement/devaluation of the currency.”
      That would be true if we lived in a commodity based economic world. We really don’t even live in a fiat currency world anymore. Our economy runs on basically a pure credit money model.
      “Nothing is said about purchasing power and the negative forces that are unleashed by the persistent erosion of purchasing power.”
      You should be very careful what you wish for. Deflation of the magnitude we’re facing in the next few years is potentially far more crippling than the Great Depression’s. While it would “restore” the purchasing power of the dollar, it’s likely none of us would have any dollars.
      As a side note, the dollar isn’t worth anything now, not because we’ve debased it but because we really don’t produce anything of any value anymore. We’ve off-shored nearly our entire manufacturing base and about 50% of all profits are earned in the financial sector. Those profits are from transactions, not any real output.
      “The fact of small but persistent loss of purchasing is a critcal factor in the creation of our current distress.”
      I disagree. The fact that US households and businesses have taken on debt levels approaching 300% of GDP and so much of this debt has been to finance non-income producing assets and consumption we can no longer service the debt. Since we live in a credit based economy, paying off that debt (which is normally a good thing) is destroying the money supply far faster than uncle same can debase it. One estimate I read was that the FED would need to increase the monetary base 30 times. People are screaming after doubling it.

  20. Marshall Auerback

    Agree largely with your sentiments. We’ve completely misallocated fiscal resources, which is why I (and several others, notably Randy Wray, Warren Mosler, Bill Mitchell, Jamie Galbraith) have called for a Job Guarantee program to promote full employment. I was recently in Sydney, Australia and there the goverment spent a lot of money upgrading the parks, the beaches, the hiking trails, in other words, public goods enjoyed by the vast majority of the population. What do we do here? We spend money bailing out banks, which not only is tremendous inefficient, but also discredits any kind of fiscal activism. And it is particularly galling to see the main beneficiaries of those bailouts (people like Bob Rubin), now becoming the leading exponents for deficit reduction. (Yes, that’s why I’m angry, Dave and George W. You should be as well). The ability of the financial markets to cause havoc would be lessened dramatically if:

    banks were only be permitted to lend directly to borrowers and all loans would have to be shown and kept on their balance sheets. All third-party commission deals which involve banks acting as “brokers” and on-selling loans or other financial assets for profit would be banned.
    banks were prevented from accepting any financial asset as collateral to support loans. Credit risk would be assessed more accurately as a result.
    banks were prevented from having “off-balance sheet” assets, such as finance company arms which can evade regulation.
    banks were not allowed to trade in credit default insurance.
    banks were restricted to the facilitation of loans and not engage in any other commercial activity.
    banks were prevented from contracting in foreign interest rates.
    If you supplement these restrictions with the central bank and treasury reforms which I’ve outlined in other posts then substantial benefits would be forthcoming.

  21. craazyman

    I don’t see how Robert Rubin failed to make our Thanksgiving list of the “Top 10 Turkeys of 2009”. That was a severe analytical lapse on our part, probably due to inebriation. But at least we own up to it.

    There are a lot of normative judgments being made on this thread. But, based on our extensive research, if you take all normative judgments out of economic thought, there’s not much left to be positive about. Wink wink.

    -Professor Delerious T. Tremens, PhD, MA Divinity and Logic
    Institute for Contemporary Analysis
    University of Magonia

  22. Eric L. Prentis

    We can “thank” Bill Clinton for Robert Rubin, Larry Summers, retaining Alan Greenspan, the Gramm-Leach-Bliley Financial Services Modernization Act (1999) and the Commodity Futures Modernization Act of 2000. Clinton seems to have set up the economy to crater as soon as he left office.

  23. JTFaraday

    “By contrast, budget surpluses are not even remotely like private saving. They actually destroy liquidity in the non-government sector (by destroying net financial assets held by that sector). They squeeze the capacity of the non-government sector to spend and save. If there are no other behavioural changes in the economy to accompany the pursuit of budget surpluses, then *the private sector is forced to increase its private debt levels*

    …Rubin clearly doesn’t understand this”

    In that case, isn’t it more accurate to say that Rubin DOES understand this, and it’s BECAUSE such policy promotes debt, ie business for banks, that he actively PROMOTES those policies?

    Good for banks, provided people/businesses can pay those debts. Failing that, go to the government for it. This is exactly what Rubin’whole government career has been about.

    These people have particular partial, or FACTIONAL, interests. They do not belong in government, and certainly not in the executive branch where they can hang out right in the Oval Office and sweet talk the president.

  24. Ishmael

    I was recently in Sydney, Australia and there the goverment spent a lot of money upgrading the parks, the beaches, the hiking trails, in other words, public goods enjoyed by the vast majority of the population.

    I am sorry, I really do not see this getting the country back on track! This seems to reek of digging holes and filling them in.

    Productive expenditures for the govt would be building an efficient rail system that worked versus continuting to subsidize airports. This would move freight and people at a lower cost.

    The problem with government spending is if something really had a decent ROI then private industry would do it because they would like the financial return. Accordingly, most if not all government spending is unproductive and results in the problem being worse than where we started.

    I have a hard time putting my head around this whole deficit spending idea as being good. If that was so wouldn’t Argentina and Zimbabwe be booming countries right now instead of walking dead (even though I have heard that Argentina has rose from the dead for the third time).

    In addition, it is difficult to compare Australia to the US. I have lived and worked there. Australia is a country rich with natural resources. In addition it has a small population. The government has a high level of taxes. Due to the trade surplus and low population, Australia is able to support a large number of people on the dole. Go up to the 100 mile beach around Broome and you will find a large number of young people doing nothing and just hanging out collecting their dole. When demand for commodities drops off, Australia starts being squeezed.

    The US has a large population, a declining level of natural resources and a trade deficit. People need to be put to work in a productive basis or the hole just gets deeper.

    1. Yves Smith Post author


      While I agree that our current bought and paid for government is highly unlikely to make decisions that are good for the populace as a whole, I have to differ with you on the idea that the government cannot make good investments. Some very successful projects (from an economic standpoint) could simply never have been made by the private sector, due to scope, timeframes, complexity: the interstate highway system, the Hoover Dam, the Tennessee Valley authority. Felix Rohatyn has an excellent book on precisely this issue.

      And your assumption re “the private sector would do it” is no longer true either. Companies have become so short term oriented that they no longer invest (at least not the big public companies). In our last upturn, companies were net savers for at least two years running. That is simply without precedent in a non-recession. Similarly, my buddies at McKinsey tell me often of projects with VERY HIGH ROI that are turned down because they don’t like the immediate income statement consequences. For instance (and this was BEFORE the crisis) one of the telecoms was advised to promote a second line service (I assume McKinsey found second line use was low measured by some magic McKinsey process). Second lines are THE most profitable service in telecom land. The investment had a 11 month payback. They turned it down.

      1. Ishmael

        Yves — I am there with you on everything that you said about current government and that is what I am referring to and yes, our government in the past did perform some great public works that were productive uses of money. I just do not see that happening with our current government. We have experienced a major change in our society.

        Let’s face it, some investment is just too large for private business with out govt assistance; however, most of the so called shovel ready programs just look like a wsste of money to me. I know driving through New Mexico a few months ago I saw a bunch of those road signs that said this project was paid for with stimulus money. Besides the signs being a waste of money, the area being worked on was the same area being worked on the year before.

        One other thing, because the govt is involved, the project is required to pay prevailing union wages when the real wage is far below. This once again results in enormous waste for any project funded by the govt. Is the goal to pay a few people a lot of money and line Union management’s pocket or to pay people a fair wage and put as many to work as possible.

        1. dave

          Whether or not the abstract concept of “government” can make good decisions is rather irrelevant. Any actor private, public, or otherwise can make good decisions. The question at hand is whether our current government is capable of making good decisions, and as your sentiment indicates you feel the answer to this is no. As such, deficit spending will accomplish little more then further indebting the public with little benefit.

    2. john c. halasz

      I don’t know the most recent stats, but a few years back AUS was running a CA deficit of 6% of GDP, same as U.S.A. The big difference is that their trade deficit was just 1.5% of GDP. AUS has a huge external debt of 100+% of GDP and basically always has, having been developed by capital investment from the mother country, which has to be balanced by a primary export surplus, (as the country is primarily a raw materials exporter, having de-industrialized a la the U.S. from a much lesser industrial base). On the other hand, pre-crisis AUS had next to no real government debt. The parameters of the political economy of AUS, as a small highly open economy, are just vastly different than those of the U.S.A.

  25. Chris

    I freely admit that I don’t know much about this subject, but the argument in the article is quite misleading in that it reads like an argument that deficits are good and the bigger they are the better. This is clearly wrong as a simple reductio ad absurdum argument demonstrates (we could increase the deficit by several orders of magnitude simply by giving away a million dollars to every taxpayer, but I doubt many would argue this was a good thing).

    On reviewing the comments I can see that Marshall wasn’t actually trying to say that and I can even get a sense of what the real picture is (from DoctorRx’s comment for example) but I have to dig fairly deep into the comments to understand. For an article decrying fuzzy thinking on economic matters, this is unfortunate, and I think a more considered discussion of the pros and cons of deficit spending might have forestalled some of the reactions we’ve seen.

    1. Ishmael

      Chris — An excellent summary. Some deficit spending is good if well guided and well managed. Unlimited or poorly guided and managed projects are bad.

      One thing I have seen pointed out preciously and maybe on this site is the whole avoidance of the other side of Keynesian thinking which is when times are good the deficit spending should be recouped. Something that never occurres. Accordingly, we just need to keep increasing the juice to get the same pop until we reach the point where we get no reaction.

  26. RebelEconomist

    Another sloppy post that gets cheap applause by beating a popular scapegoat. The more eminent proponents of “modern monetary theory” concede that monetary financing will generate inflation if over-used, and that bond issuance can be used to control this. So, they simply arrive at conventional wisdom – ie some money and some bonds – by a different route. And I suspect that, if you target the same rate of inflation, you end up with about the same stocks of money and bonds, unless you restrict the ability of private sector banks to compete with the state in providing money (ie transaction deposits must be matched by loans to the government). So what is left is a plea to trade employment for inflation, and we know from the 1970s where that leads. But you don’t need to understand the economics to be sceptical about the arguments made in this post – the gratuitous insults give it away.

    1. Mark

      Not to mention. The distinction between the term “deficit spending” and “government spending” is never made.

      So, you are led to the conclusion.

      More government spending via deficit spending in a recession is good.

      How about less government spending and more deficit spending in a recession as well as in economic boom times?

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