Last spring, I received an invitation to debate Robert Rubin, the distinguished former treasury secretary and now vice-chairman of Citigroup, at a forum sponsored by The New Republic. Rubin is the leading light of an initiative called The Hamilton Project, founded on the principles "that broad-based economic growth is stronger and more sustainable, that economic security and economic growth can be mutually reinforcing, and that effective government can enhance economic growth". I was quite excited by this, and went so far as to draft my remarks during a spare moment a month in advance, fearing in part that I might otherwise forget the pun in the introduction. But then the panel was cancelled. I present here the speech I would have given, but never will.
It's a pleasure to join this discussion of the work of the Hamilton Project, even though my designated role today is to play thorn-in-the-side - or, perhaps, Burr-under-the-saddle.
I look forward to the sidebar in The New Republic on my remarks, with the inevitable headline: Errin' Burr. All I ask is a footnote, conceding that I thought of it first.
I had not met Robert Rubin before today, though I was graceless enough to review his book, and to suggest that while as three-word philosophy "Life is Uncertain" wasn't bad, it wasn't as rich as that of the great Austin ice cream parlour known as Amy's: "Life is Uncertain. Eat Dessert First."
A few days after that review appeared, I was passing through National Airport and spotted a friend - it was the former Air Force Secretary Hans Mark - and went over to say hello. Hans introduced me to the man he was speaking with: "Karl, do you know Jamie Galbraith? Jamie, this is Karl Rove."
Rove looked at me. "The James K Galbraith?" "The same," I replied. "The only man," he said, "ever to get a mention of Amy's Ice Cream into the Washington Post?"
The Hamilton Project has been praised by Bill Greider for opening a bridge to the left on questions of inequality, wages, and the Chinese Challenge. It has been criticised by Steven Pearlstein for lacking sincerity on these points. What is the meaning, Pearlstein asks, of expressing concern about issues if you wouldn't change your policies in any important way to deal with them? Pearlstein's analysis quickly became the Left Critique of the Hamilton Project, which is an odd bit of political gender-bending, considering that no one previously suspected Steve Pearlstein of being to the left of Bill Greider.
My take is different, so much so that I fear it will leave some of you shaking your heads and saying, "he's doesn't live around here". Here's my view in three brief points:
1) On the new points of convergence, the Hamilton Project has converged to positions that the left should not have held in the first place, because they are wrong, or at least highly misleading, on the merits.
2) On at least two major issues where the Hamiltonians make no concessions, their positions are wrong on the merits, so as to obstruct any good the project might otherwise do. These are the budget deficit and the so-called "entitlements problem", code for Social Security.
3) All the sound and fury about trade agreements signifies very little. For the future of the world system, the issue of how to regulate capital flow is far more important.
The first point of misbegotten convergence concerns inequality. I am a professional student of inequality and you might think I share the political fervour about it often found on the left. But life is not so simple. One must first distinguish between incomes and pay. In the late 1990s, income inequality in the United States rose. Why? Mainly, it was the technology boom, creating huge income flows to a handful of firms and their bankers. If you isolate the between-county component of inequality, you find that the rise is almost entirely due to income registered in four places: King County, Washington, and three counties in Silicon Valley, California. That's it.
Was this a bad thing? Does Secretary Rubin now repudiate the internet boom that President Clinton did so much to foster? I hope not. Once at a conference I was asked directly whether I'd give up the stock boom in order to avoid the rising inequality it caused. When I said no, exactly one person clapped. It was Robert Summers, father of Larry.
The other issue is pay inequality-the reward for work. And that form of inequality declined in the U.S. as we approached full employment from 1994 to 2000. I published a book in 1998 called Created Unequal: The Crisis in American Pay on this topic; it might have been a best-seller except that the crisis was receding as I revised, and I said so. Full employment is a powerful force for greater equality in pay. If I were Robert Rubin, I'd be taking credit for it. I'd be drawing the appropriate lesson, which is that full employment ought to be our policy objective. But the Hamilton Project doesn't mention full employment.
On wages, Mr. Rubin and the Project accept a favourite left-factoid, that average productivity growth more rapid than median wage growth is a terrible problem. Well it does sound pretty bad-as though profits have been soaring at the expense of wages. But this isn't so. The share of wages in total income is barely lower than thirty years back. And while the profit share did rise sharply between 1998 and 2005, the wage share did not decline. What happened? Profits rose at the expense of personal interest income, which fell as interest rates fell. I cannot see why this is a bad thing.
Median wages lag average productivity in part by arithmetic, given an expanding labour force relative to population. As women and minorities and the young found work, as they have done over the past thirty years, an increase in the share of jobs earning less than the average was inevitable. And so the median must lag behind. But since the new workers weren't previously working at all, they may be better off than before-at least, they aren't necessarily worse off. There could be much more to this, but until this effect is adjusted for, we cannot know.
Therefore, pending further evidence, this factoid-quoted and deplored prominently in the Hamilton strategy document-could be a victimless crime. I'm an equal opportunity scold on the point: I've scolded my friends about it; now I scold you for agreeing with them. If we are not careful about our facts, those of us who are truly concerned about inequality end up handing ammunition to those who are not, like David Brooks.
Then there is the China Challenge. According to Bill Greider, Secretary Rubin now agrees that we face a grave threat to jobs and living standards from Chinese competition, but he believes it could all be taken care of by a revaluation of the RMB.
As a consumer of Chinese shirts, exactly what harm Americans suffer when jobs migrate from Saipan sweatshops to Chinese export zones isn't clear to me. But anyway it's obvious that even doubling the RMB's value wouldn't save or return a single American job. It would, at most, displace a few jobs from China to the Dominican Republic or Thailand. It would also not increase Chinese imports, which are limited by the capacity of Chinese ports, and not by their purchasing power on the world market. Not affecting either exports or imports, a Chinese revaluation would have no significant effect on the U.S. current account.
Some think an all-round devaluation of the dollar would be a different matter. But as my father wrote to President Kennedy in a less politically-correct age, for some economists this remedy is like alcohol to the Iroquois - they can't leave it alone. Gratuitously doubling the price of all imports, and halving the international market value of all American assets - including banking assets - would not in my judgment be very sensible things to do, if they can be avoided.
Let's turn to the bedrock issues on which the Hamilton Project is founded, and on which the Project has not budged. These are the budget deficit in general, and the so-called "entitlement problem" in particular, by which is meant Social Security as well as Medicare and Medicaid.
On the budget deficit, the Hamiltonians echo the unshakeable Brookings Line: deficits must be cut before anything else can happen. We've been around this track so many times that we might for once consider the politics before the merits. The fact that the Republicans do not share this attitude inevitably means that they get what they want and we never get what we want. Even if budget deficits had important economic costs I'd be prepared to pay them, in order to meet some social and environmental objectives in this country.
But in fact running moderate budget deficits has no discernible economic costs. In a paper last year, I reported on the work of two leading Hamiltonians and respected economists, Bill Gale and Peter Orszag, who did their best to find that deficits lead to higher interest rates. I read their econometrics carefully, and though they claimed otherwise they simply could not find a serious effect. Gale and Orszag never replied to my comments on their work.
Alexander Hamilton proposed to build America with public works. Today we face vast challenges, of which the largest, as Al Gore warns us, is to transform our patterns of energy use and defend against global warming. If we don't meet this challenge, then in a century or so this country of coastal cities will cease to exist. The correct social discount rate on the required investment is practically zero. The required scale is enormous. It makes sense to borrow heavily to make these investments. If you insist on paying from current revenue it will never happen.
Deficit-fetishism also underscores and bolsters a longstanding insider campaign to cut and partially privatize the Social Security System. The Hamilton Project strategy document doesn't mention Social Security by name. But it is riddled with codewords about the "long-term entitlement problem" which, it avers, can only be solved by a "bipartisan commission" acting on well-known options, behind closed doors.
In fact, Social Security is our most successful social insurance program. It is in better financial shape than ever. No economic or budget imperative requires that it be cut, now or in the reasonably foreseeable future. There is no Social Security crisis, and no real "long-term problem" involving the program. Medicare and Medicaid are also not the worst parts of our health care system; the problem of health care insurance could best be dealt with by expanding, not cutting those programs. The Hamilton Project's promise to deal with these issues by "bi-partisan consensus" behind closed doors is a promise to exclude the voices of labour, the elderly, the poor, and loudmouths like me. I will resist. The correct policy toward Social Security is, and remains, what the late Robert Eisner always recommended: leave it alone.
Finally, a word on globalisation and trade agreements. Here I speak as someone who supported Nafta, because I felt (and wrote, in 1993) that it would oblige us to bring financial support to Mexico in a crisis sooner than we did in 1982. In 1995, thanks to Rubin, this proved correct. But Cafta and similar agreements have no similar advantages. (They also have nothing to do with industrial trade, and will have no effect of any kind on American wages.) Their main effect will be to force small corn-and-bean farmers off the land, reducing food security and increasing economic migration-both to the urban slums and to the United States. And, they oblige small and vulnerable countries to agree to pay extortionate prices for medicines over long periods of time, under the guise of protecting intellectual property rights. I'm not for this. To dress such agreements in the holy shroud of free trade seems to me to be, well, sacrilegious.
These agreements generate a lot of sound and motion but their importance to us or anyone else (apart from the specific clientele among the corn traders and drug firms) is greatly overstated. Thomas Friedman is so far as I know not part of the Hamilton Project, but he recently revealed himself unaware that the CA in Cafta stood for "Central America" and not "Caribbean." That is indicative. Things that do not matter very much, should not be taking so much of our time.
What should be taking our time and thought, is to devise some new means of coping with the instability of the world financial system. The Asian crisis in 1997 and the Russian crisis in 1998 can now be seen as the last days of an unfettered global credit market. Since then Russia has largely retreated into itself, Asia is developing a sophisticated substitute for the Monetary Fund we should have let them create in 1997, and Latin America has moved decisively at the polls to reject neoliberal globalization. Meanwhile the effort to implant this supposed ideal in Iraq has consequences we can all see plainly.
I do not think that a collapse of the dollar reserve system is necessarily imminent, but it is likely to happen eventually. We should be thinking, creatively and pragmatically, about what happens afterward. And, in particular, about how to foster a more balanced and stable path of development for the poor countries of the world, recognising that this is not a job that private banks - not even Citigroup - can finance on commercial terms.
Thank you for your (in)attention.