Rubinomics in the FT

A week or two ago, Robert Rubin took to the Op-Ed pages of the WSJ to pitch the economic model of the establishment Left. Today Rubinomics gets a airing on the FT's page 15. (For those not in the know, the FT is a pink newspaper put out by foreigners.) The purveyor is not Rubin himself, but a mini-me of sorts, Jacob Weisberg. The article is quite fair. Weisberg admits that, budget deficits notwithstanding, the Bush economy has been performing quite well, and he even recognizes the dovish argument that globalized capital markets may represent a paradigm shift for the role of deficits. Still, he warns us that it is just temporary and that deficits, like people, haven't changed their nature - they're still terribly bad.

Here is the nub according to Weisberg: "The basic problem is quite obvious: we are making ourselves poorer. Borrowing to consume, which is what the US is doing, as opposed to borrowing to invest, is a lousy long term strategy..."

I will get to the nub of my criticism shortly, but I have to point out the dishonesty in this statement. He rests the legitimacy of borrowing on the distinction between consumption and investment, but that distinction is totally ignored by any devotee of Rubinomics if the source of funding is taxation rather than borrowing. You can be sure that if taxes were rising to match the outlays, Weisberg and his ilk would not be splitting expenditures into good and bad buckets. The true goal of Rubinomics is to always raise taxes to the level of expenditures, not to make distinctions and judgements on the merits of the expenditures.

But on the real issue. I will be the first guy to agree with Weisberg that deficit spending to subsidize our farmers or hand out pills to old people is reckless, but by lumping all deficit spending as consumption, Weisberg makes the same mistake that most make in simply dismissing wartime defense spending as consumption and not investment. Spending on a transformative foreign policy, of the type that the current administration is pursuing, is an investment in the conditions for expanded global trade. Transforming profoundly illiberal and backward regimes, by force or otherwise, into liberal, capitalist governments and removing security threats creates new participants in the global economy and empowers new producers and new consumers. As any mayor can tell you, business flees when law and order break down, and conversely when you make your town attractive to hardworking people, they move to your town and work hard. On a global scale it is no different. If you don't have conditions conducive to economic prosperity, spending on it is an investment not a cost. Then there is simply the cold calculus of preventing another 9/11. If 9/11 caused $1 trillion worth of damages and something like 9/11 could happen again, you would be wise to spend money to avoid such a similar cost in the future. Investment in cost avoidance makes us richer, not poorer. But that is just the numbers. Obviously the human toll should factor as well. Not just the lives lost, but the damage to our spirits. No less than the patron saint of liberal economics himself, Keynes, saw the importance of our 'animal spirits' to the vitality of the economy. Avoiding another crushing blow to our animal spirits, that which drives us to get up each morning and work, invent, and improve, is not a cost, but probably one of the best investments going.