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Rubinites Trading Off a Mid-90s Happy Accident

Paul Krugman is a bit too polite with this comment, methinks:

I’m saddened but not really surprised by Robert Rubin’s declaration that we don’t need more stimulus. It has seemed to me from early on in this crisis that Rubin and his disciples wanted to believe that this world crisis was something like the 1997-98 Asian crisis, and amenable to similar solutions.

For what the Committee to Save The World did in the Asian crisis was … not much. Some emergency loans to ease liquidity problems, some declarations that they were highly confident, a bit of interest-rate cutting; and once the panic was over, things recovered pretty much on their own.

Hence the view that fiscal stimulus was just an insurance policy, that the big thing was to stop the economy’s headlong descent, and then unemployment would come down mostly of its own accord.

If he took this a step further, he would add that Rubin and company happened to be around when technology advanced to the point that the Internet boom could take flight. The circumstances around that – heck, the establishment of the Internet – have something to do with good government, but human curiosity and the usual trajectory of communications tools and networking did a lot of the heavy lifting. A Dole Administration may have allowed the telecoms to take control of the Internet from the outset, but they also might have been as blissfully unaware of the VC money pouring into the pockets of anyone with a clever name for a dot-com as everyone else, and as happy to see that create jobs as the Clinton economic team was.

I’m not saying the Internet was fated to turn out the way it did, or that it necessarily would have led to economic growth. And I’m not saying the Clinton economic team had nothing to do with the creation of 23 million jobs during its tenure (while also setting the stage for the eventual financial crisis, it must be told). But surely they faced a far less daunting time than we did at the end of 2008. I remember hearing Bill Clinton say that the new Administration “can’t do things the way we did it,” and that’s right. But that hasn’t seemed to hit home with the neoliberals who are, as we now know, basically in charge of the Obama economic team.

So we get too-small stimulus packages, even before Congress gets their hands on them. And we get this rhetorical emphasis on deficit reduction, which started at the end of 2009, actually, in leaked trial balloons about the State of the Union, and which has fueled all the deficit talk from that point forward, to the extent that even no-brainer actions like extending unemployment during a time of crisis becomes agonizing. This stems completely from a worldview that says, essentially, protect the banks, and let nature take its course. Now we have banks making record profits, but nature has been cruel to everyone without a Wall Street address. And the Robert Rubins of the world don’t have the imagination, or the desire, to think of what to do in that situation.

Nelson Schwartz actually addressed this over the weekend.

Americans have almost always taken growth for granted. Recessions kick in, financial crises erupt, yet these events have generally been thought of as the exception, a temporary departure from an otherwise steady upward progression […]

The “new normal,” as it has come to be called on Wall Street, academia and CNBC, envisions an economy in which growth is too slow to bring down the unemployment rate, while the government is forced to intervene ever more forcefully in a struggling private sector. Stocks and bonds yield paltry returns, with better opportunities available for investors overseas.

If that sounds like the last three years, it should. Bill Gross and Mohamed El-Erian, who run the world’s largest bond fund, Pimco, and coined the phrase in this context, think the new normal has already begun and will last at least another three to five years.

The new normal challenges the optimism that’s been at the root of American success for decades, if not centuries. And if it is here, the new normal could force Democrats and Republicans to rethink their traditional approach to unemployment and other social problems.

But I don’t see any rethinking going on yet. Robert Rubin, the intellectual godfather of mainstream Democratic Party economics, values “market confidence” over stimulus. This is magical thinking. But hey, Goldman Sachs had a good year, so I guess everything’s as if 1999 never left.

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David Dayen

David Dayen