Policy Memo: What Bob Rubin Won't Tell You

George W. Bush ^ | August 10, 2004

[RWR8189]

MEMORANDUM
FROM: BC'04 POLICY DEPARTMENT

This memorandum reviews two key issues for Bob Rubin's discussion on John Kerry's fiscal policies.  First, using Rubin's own words and Kerry's own numbers, the memorandum reviews a few examples of what's missing from Rubin's discussion of Kerry's agenda.  Second, using analysis from members of President Clinton's Council of Economic Advisers, the memorandum reviews the real causes for the economic growth and budget surplus in the late 1990s. 

What Bob Rubin Won't Tell You About A Kerry Presidency

Rubin advises Kerry not to reveal any more tax increases until elected -

Rich Miller of Business Week magazine: "Kerry has said he would roll back the tax cuts on the wealthy to pay for his spending programs. But if he wants to fix the deficit problem, won't he have to raise other taxes as well?"

Kerry adviser Rubert Rubin: "I don't think you can make proposals to try to dig out of this hole until you've gotten elected and until you've organized effectively across both parties and both houses. If you start to put out proposals now, they would be vigorously attacked, and they would in effect become tainted so they couldn't be used."  (Source: Rich Miller, "Robert Rubin: Embrace Kerry," Business Week Online, 8/2/04)

But John Kerry's claims on tax increases are already beginning to slip - Kerry's campaign now reveals that his tax increase for those earning $200,000 would include people earning as little as $147,000.  In another new attempt to add up his numbers last week, a document issued by Kerry's campaign revealed that he would "restore top two rates" for individual income taxes.  The second highest tax rate is applied to singles earning $147,000 and couples earning $179,000.  (Source: "The Kerry-Edwards Plan to Keep Spending in Check While Investing in Priorities and Cutting Wasteful Spending," 8/3/04)

Kerry does not pay for making $671 billion in middle class tax relief permanent - Though he claims to support it, the middle class tax relief is nowhere in his budget numbers.  Not paying for the tax relief violates his own proposal for PAYGO budget enforcements.  His numbers assume the tax relief will be made permanent this year and that he won't have to pay for it in his budget, yet Kerry attacked President Bush last month for not accepting a deal in Congress that only extended the tax relief for two years.  (Source: "The Kerry-Edwards Plan to Keep Spending in Check While Investing in Priorities and Cutting Wasteful Spending," 8/3/04)

Kerry now claims his $300 billion in veterans health spending is included in his health care insurance plan - Yet Kerry's health care plan doesn't cover veterans.  The estimate by Ken Thorpe (a former Clinton aide and now Kerry adviser) that Kerry uses for his health care plan never even mentions veterans.  (Source: "The Kerry-Edwards Plan To Keep Spending In Check While Investing In Priorities And Cutting Wasteful Spending," 8/3/04)

Kerry's numbers leave out several of his major proposals - They leave out an extension of extra unemployment benefits, and additional Head Start and global HIV/AIDs funding.  Also, defense and homeland security are funded separately from Kerry's latest budget plan.  (Source: "The Kerry-Edwards Plan to Keep Spending in Check While Investing in Priorities and Cutting Wasteful Spending," 8/3/04)

What Bob Rubin Won't Tell You About The 1990s

Former Clinton economist on the myth of deficit reduction as the cause of the economic recovery - "In explaining our success in the nineties to ourselves and the world we have largely drawn on a set of myths that desperately need debunking: that deficit reduction by itself led to the economic recovery of the 1990s."  (Source:  Joseph Stigliz, "The Roaring Nineties," Atlantic Monthly, 10/02)

Former Clinton economists Alan Blinder and Janet Yellen write in their book "The Fabulous Decade" about the rise and fall of "good fortune" in the 1990s. (Source: "The Fabulous Decade," 2003)

1.  "A large dose of good luck" fueled economic growth in the late 1990s - "The United States enjoyed a large dose of good luck during the second half of the 1990s: a productivity surge, slower growth in fringe benefits, a rising dollar, falling oil prices, and a series of measurement changes that lowered inflation… the U.S. economy was blessed by a series of favorable supply shocks that no one could have anticipated." (pg 67, 82)

2.  Temporary deceleration of benefit costs provided a one-time boost - "Substantial restructuring took place in the health care sector in the aftermath of the failed Clinton initiative, and employers shifted workers out of fee-for-service and into managed care plans.  Part of the decline reflected decreases in coverage, increase in co-payments and deductibles, and the like. … Forecasters had long feared that employer costs for health benefits would escalate again once the one-time gains from switching workers from a fee-for-service to managed care were exhausted. And they did.  By the end of 1999, benefits costs were increasing sharply." (pg 39,58)

3.  "Stroke of good fortune" in rising dollar and slower inflation - "A favorable - albeit transitory - influence on inflation between 1995 and 1999 came from import prices.  ...the sharp appreciation of the dollar from the spring of 1995 to the summer of 1998, coupled with a weak world economy, constituted a stroke of good fortune."  (pg 43-44)

4.  Good fortune had a profound impact and helped the Fed keep interest rates low - "Without those shocks, inflation would have risen to about 5% by the end of 1998, according to the models.  …Federal Reserve Governor Laurence Meyer began calling the period one of 'temporary bliss'.  It was during the good luck period (1996-1998) that Greenspan, the alleged hawk, revealed himself to be the committee's most ardent advocate of New Economy thinking…" (pg 51, 52)

5.  Technology had a favorable impact on productivity, including helping fuel the investment boom - "Technological improvements in the production of computers and semiconductors probably account for the lion's share (of productivity gains), both directly and indirectly." (pg 62)

6.  "Gravity-defying stock market" ensued - "The unexpected strength of demand during the 1996-1998 period arguably derived from the gravity-defying stock market, which stocked demand and drove down the personal savings rate down." (pg 53)

7.  Financial shocks kept inflation under wraps and the Fed added stimulus -- "The Fed recognized that the Asian shock would both reduce inflationary pressures and cut U.S. exports.  …The Russian default and the collapse of Long-Term Capital also prompted the Fed to ease.  ...Thus the Fed might well have tightened monetary policy both in 1997 and again in 1998 were it not for surprising, and somewhat ominous, events originating abroad." (pg 54-55)

8.  Favorable supply shocks were just temporary and began to reverse - "Given the inherently temporary nature of at least some of the favorable supply shocks, economists were hardly surprised when these factors began to ebb and reverse."  (pg 58)

9.  "Artificial high" of supply shocks and soaring stock prices would come to an end - "If soaring equity prices reflected 'irrational exuberance' as much as (or more than) any rational assessment of likely future earning streams, the economy was riding in part on an artificial high." (pg 70)

10.  Conclusion: "Good luck" factors, high income earners and financial bubble were responsible for the change in budget - "From a macro-economic perspective, however, the 1997 budget agreement did not amount to much.  In fact, with its small tax cuts and more generous cap on discretionary spending for 1998, the 1997 agreement actually increased the deficit by $21 billion in its first year.  …Roughly half of the budget surprise reflected improvements in the CBO's forecast for U.S. economic performance…In effect, many of the good luck factors that we discussed earlier were also responsible for the improved budget outlook.  …The remaining half of the budget surprise is attributable to 'technical changes'--mainly upward shifts in the functions relating tax collections to key economic variables.  …Taxable income rose faster than GDP because of strong capital gains, rising distributions from 401(k) plans, and the slow growth of untaxed benefits.  …The ratio of total taxes paid to Adjusted Gross Income (AGI) also rose substantially - because of bracket creep and disproportionately strong income growth among high-income taxpayers, particularly in the forms of bonuses, stock options and partnership income." (pg 74, 76, 77)

Bob Rubin did admit in his book - "Within a year, the tragedy of 9/11, the enormous drop in the stock market, and the generally deteriorating economic conditions showed how dramatically unexpected events can affect the country's fiscal condition…The remarkable economic conditions of the 1990s inevitably led to excesses and imbalances - including high levels of consumer and corporate debt, a large current account deficit, and a stock market that was high by any conventional standard - that pointed toward a more difficult period in both financial markets and the economy."  ("In An Uncertain World," 2003, pg 371)

[gilliam]

Is anyone concentrating on anything but the Swiftboats this week on the campaign?

[cd jones]

I'm saving this. Been looking for a detailed breakdown of the 90s since 2001.

I didn't see the word 'clinton' in here at all. (well, not so it matters)

[jonno]

econ bump

[Wphile]

BTTT! Just wrote a letter to the editor about Kerry's plans, or lack thereof.

[jonno]

(Source: "The Kerry-Edwards Plan To Keep Spending In Check While Investing In Priorities And Cutting Wasteful Spending," 8/3/04)

Just wondering - has this "document" been vetted - the date "don't look right".

regards,

[chaosagent]

PING