Has America's hero got out at the top?
Friday 14 May 1999
Well, not really, because the present long expansion of the American economy had already been running for nearly four years when Robert Rubin took office as Treasury Secretary in 1995 and had its origins in the Bush tax cuts rather than in any policies of the Clinton Administration. But Robert Rubin deserves credit for both his stewardship of the boom and the turn of the US fiscal position from deficit to surplus.
Naturally the two are related, for without the surge in revenues generated by the boom the deficit would have remained. Naturally, Mr Rubin should share some of the credit with Alan Greenspan, chairman of the Federal Reserve Board.
In any case, ultimately, the credit for the strong performance of the US economy goes not to the policy-makers but to American business, large and small, for those are guys and gals who have really pulled the US clear of the rest of the developed world through the 1990s.
The contribution of small business is particularly important, for firms with fewer than 20 employees have created about three-quarters of the new jobs in America over the past decade. Still, the Administration fostered the environment in which these small businesses could spring up and flourish, so it too should take a bow.
The ability of the US economy to generate jobs has been quite astounding. JP Morgan has done some fascinating research on the extent to which the European economic model has failed to lift employment and living standards in Continental Europe since 1980. You can see the employment picture in the left-hand graph (with, as usual, the UK occupying a middling place between Europe and North America). In the euro area there has been no rise in employment over two decades. In Britain employment has risen by 8 per cent. And in the US it has risen by 32 per cent.
This job-creation machine (plus the way it sucks people into the labour force to fill those jobs) distinguishes the US from other developed countries and is a prime reason why the place has managed to keep growing so strongly through the 1990s without any serious resurgence of inflation.
There is a further facet to this: the way in which US households have benefited from the increased wealth the economy has generated. As the other graph shows, household disposable income in the US (and the UK) has risen as a proportion of GNP by 2 or 3 percentage points over the past two decades. By contrast, the proportion of income available to ordinary people in Germany, France and Italy has fallen by a similar amount. It is hardly surprising that consumers in the United States are confident and have been able to sustain their spending, for they have been enjoying the full fruits of economic growth. Living standards in the US (and the UK) have risen by about 65 per cent between 1980 and 1998. Living standards in the "big three" continental economies have also climbed, but by only 40 per cent.
But as you can also see, the out-performance of the US economy really has its origins in the 1980s, not in the 1990s. What then should we really attribute to good 1990s macro-management and, more specifically, to Bob Rubin?
My guess would be that when the economic history books of this period are written, the judgement will be somewhat more mixed than the present lavish praise being heaped upon Mr Rubin would suggest. He will get much of the credit for the return to surplus of the Federal budget. He will be recognised as a safe pair of hands with regard to domestic economic policy, an anchor within the Clinton Administration. And he will be praised for the confidence that he (with Alan Greenspan) managed to imbue in the international markets through the potentially catastrophic emerging market crises of the past two years.
But if, on his watch, one of the twin US deficits of the 1980s was eliminated, the other was not. The current account deficit of the States is now running at about 3.5 per cent of GDP. Does it matter?
It is surprisingly hard to answer that question. At some level of course it must matter, for the US cannot continue to accumulate claims against itself from other countries indefinitely. But the country was able to grow its way out of the budget deficit, so that it now is in a healthier fiscal position than France or Germany and vastly healthier than Italy or Japan. Can it grow its way out of the external deficit too?
More than anything else, Mr Rubin's reputation will turn on this. If the US economy continues to out-perform the rest of the world, then it is quite rational for other countries to want to invest in it, and the inward flow of investment can comfortably finance a reasonable current account deficit. (Remember, balances of payments have to balance: if you have a capital account surplus from a flow of inward investment you have to run a current account deficit.)
But if the exceptional performance falters, the European economies make a come-back, the euro flourishes, the dollar's strength fades and inflation in America returns, then the verdict will be more circumspect. Mr Rubin may even come to be remembered for the timing of his resignation: the market genius who knew when to get out.
Let's hope for all our sakes that that is wrong. Let's hope his successor, Larry Summers, will be seen to be carrying on the calm and competent stewardship of Mr Rubin. The markets seem relaxed, which is a sensible response.
It is always wrong to attribute too much power to any one person, albeit someone doing the top job in fiscal policy in the world. The US economy goes cantering on and the rest of the world economy appears a bit less fragile than it did even a couple of months ago. So everything is all right, isn't it?
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