Why Robert Rubin is (Utterly) Mistaken

in a recent WSJ op/ed copied below, Robert Rubin says: 

“Within that context, we must create budgetary room for vigorous public investment in education, basic research, infrastructure and other areas that are critical for competitiveness and broad increases in standards of living.”

Such a claim is total nonsense.  While it is true we need investment in education, basic research and infrastructure in order to facilitate an economic system capable of delivering broad increases in societal standard of living over time.  HOWEVER, we do NOT need PUBLIC investment in education, research, infrastructure, etc. 

These are all areas that have enjoyed massive public funding for decades and counting and the results have been nothing short of disastrous.   Why throw good money after bad.  Look at public education, look at infrastructure, look at public supported green energy endeavors (Solyndra and ethanol come to mind), and look at our financial system which continues to be pumped up with liquidity supplied by friend the Federal Reserve. 

Why do we keep pumping national resources down a rabbit hole controlled by political elites (on both sides of the aisle) who are the ones who benefit most directly from special interest / money politics, while everyone else suffers (at least relative to what the situation would be if government elites were not beholden to powerful special interests and vice versa).

(and by the way, campaign finance reform is not a fundamental solution to money politics and special interest politics.  the answer is to get government out of the game of picking winners and losers.  campaign finance will merely entrench incumbants in power.)

Forget it.  Let’s have a radical re-think of the role government plays in society.  We ALL know that government investment is less efficient than private investment.   

Why do we want to put the public sector in charge of the most critical investment decisions in our society?

Let parents choose where they want their children to go to schools – and let funds flow to where schools perform and attract students.  Why should government have monopoly power to raise public funds and deploy them as “they” see fit.  Why shouldn’t parents be given responsibility to choose where their children will be educated.  Why should we support a public monopoly that holds especially disadvantaged households hostage to a failing public system? 

And, whatever we do, let us NOT invest in high speed rail and other feel good "green" infrastructure that is fiscally unaffordable – and impractical as China is painfully finding out and Japan has found out already with their high speed rail system losing money hand over fist, and China’s doing the same.   Let us also forget about public investment in "green energy" which inevitably turn into rent seeking boondoggles for special interests.

Let basic research be driven by private sector demand!!!  Basic research is a waste unless it adds to human welfare.  How do we know basic research is useful until we know it addresses (or potentially) addresses a problem we are trying to solve in the REAL world?  Forget about public funding for R&D. 

Successful R&D is the dynamic CAUSE and EFFECT of a flexible private enterprise system. 

Basic R&D occurs naturally and spontaneously as companies see problems they need solved before they can commercialize some technology aimed at enhancing human lifestyle and productivity (the success of which is measured in profits).  Using public funds to fund esoteric R&D not connected to a real world practical problem is a waste of scarce social resources. 

Let the market solve problems organically and dynamically by private enterprises aiming to provide customers with solutions to make their lives better.  In a recent speech, Obama credits government R&D expenditures with paving the way for the success of internet companies such as facebook and Google.   

I agree with Tony Katz who argues in his recent Townhall.com article that government intervention RETARDS innovation and value creation rather than drives it as claimed by President Obama in a recent speech.   

see http://townhall.com/columnists/tonykatz/2012/04/18/google_at_odds_with_president_obama/page/full/

Rubin talks like a typical power elite.  He speaks as if he has the answers and that if only we all thought about things rationally we can and will get to the promised land together. 

Forget it. 

Robert Rubin is for Robert Rubin.  He enjoys his status as a power broker in the status quo and he fears what might happen if the current power elites cannot maintain their monopoly stranglehold on public rent seeking opportunities.  Rubin wants us all to sing halleluiah when we continually bail out banks with Federal Reserve money printing, thus screwing Joe Six pack tax payer.  Why should tax payers be on the hook for Wall Street bailouts?    Why should we agree to pay off the debts incurred by wreckless bankers and Wall Street executives who were encouraged to take excessive risk thanks to easy money supplied by the Federal Reserve.

Why should we "compromise" and raise taxes for the specific goal of creating room for more public investment?  I don’t want more public investment!  If Rubin wants comprehensive tax reform so that we can create room for public investment that is a terrible, wasteful, self destructive idea.

I want the public sector to take a serious look in the mirror and stop promising the moon and delivering failing schools, failing infrastructure and failing markets.  jUst once, I’d like a power elite such as Robert Rubin to admit that the public sector is not where the answers to America’s greatness lies.  Once I’d like to hear someone like Rubin admit that government is a best a transfer agent in society NOT a value or productivity creator.  Value and productivity are created by the risk taking and creativity and entrepreneurial activity pursued by PRIVATE sector actors.    Can the government create value by creating a favorable environment for private enterprise to flourish?  the government can limit its destruction of value by maximizing efficiency.  But it cannot produce value or productivity or social gains because it does not produce anything on its own.  The only resources the government has at its disposal are public resources.  It is fantasy land thinking to believe the government creates value or can make sure society invests appropriately in education, infrastructure, etc such that we enjoy rising standards of living.  

The iron law of eocnomics is this:  the more government involved itself in allocating scare national resources (land, labor, capital) in public designed investment schemes, the more it destroys value and reduces the potential rate of growth in the economy and gradually impoverishes society.  it is pie in the sky fantasy land thinking to assume the government can engineer good outcomes in society.  where is the evidence government can do this?  if government was so efficient, why not continue to keep adding important investment decisions to the list of government responsibilities.  We already have massive government subsidies aimed at promoting investment in health care, housing, banking, green energy, infrastructure, etc etc etc.  Government retards efficiency, it does not promote it. 

We do not want government to collect ever more national resources in the form of higher taxes in order to allocate it for the benefit of society.  National resources collected and allocated by the government and used to “invest” in education, healthcare, energy, infrastructure, active fiscal and monetary policy is money deployed less efficiently than if it were deployed by private entities and firms and households going about their day to day business.

Am i advocating a world of might makes right?  the big win and the little guy gets screwed because government is sitting on the sidelines?  no, it is precisely the opposite.  when government gets in the game of choosing winners and losers, that is when "might makes right" because the governmetn is the mightiest on the block and anything it decides is "right."  This sort of dynamic leads to an ends justifies the means ethic that is a cancer in society.  "free markets" DOES NOT mean anything goes.  Free markets are only free if the golden rule is applied evenly and universally by a non partisan neutral government, which applies "justice" with a blind eye toward race or social status.   Free markets require that individuals are prosecuted for encroaching on private property rights.  Free markets are the opposite of might makes right.  Free markets require peace and cooperation.  I can't force you to buy anything or do anything that you don't want to do because you are free to make decisions you feel are best for you and your family.  when government gets in the act, it must use coersion and force that is rationalized as for the good of society as a whole.  such logic is precisely the sort of canerous "might makes right" ethic that people erroneously claim is the core feature of markets. 

government investment in education, infrastructure and R&D requires some central authority deciding what is best for society.  This is "might makes right."  the market requires mutual reciprocity and peaceful exchange and cooperation and mutual agreement between parties.  the market results in win/win outcomes where "might DOES NOT make right."  might makes right when Government makes unilateral decisions for society that are supposed to benefit all equally.  that is a contradiction in terms.   when government allocates resources it must allocate according to a perverse logic that erroneously asserts the ends justify the means.  

Such evils as War are justified by the logic of the ends justifying the means.  what virtues are promoted by "ends justify the means" logic.  what such a logic entails is that we must live with certain evils in order to promote a man made conception of a better world.

Rubin presents a false choice between higher taxes and more public investment OR social disaster as if this is the only choice.  Either we cooperate and raise taxes in order for the government to be able to invest such that we enjoy “global competitiveness and increases in standards of living” or we face inevitable social decline. 

In fact, I argue just the opposite. We face disaster if we listen to the self anointed power elite who assume they know best and should be empowered with greater authority to allocate a greater percentage of national resources.   When things go wrong elites argue that is proof why they should be given even a greater percetage of national resources.  Why should such failure be accepted let alone rewarded.  Why should the government bailout machine stay in operation as it commands a greater and greater share of national wealth and resources -- thus retarding the ablity of society to generate rising living standards. 

Adam Smith recognized 200 years ago that big business is NOT for free markets.  Big business is for government regulation because big business is able to control big government through money politics.  These so called wise-men we have like Soros, Rubin, Buffet, Gates … they are all about gaming government regulations and power for their own selfish interests, of course hidden behind gracious and high sounding rhetoric and good intentions.  If we want to truly level the so called playing field, we would get the government out of picking winners and losers so Big Business truly was vulnerable to market competition.    Big doesn't mean better in a competitive market.  Might makes right only when it comes to government "might" because only the government wields the ultimate power of deciding life and death --rationalized as it is all for our own good.

Ben Franklin said it best.... those willing to trade liberty for temporary safety deserve neither. That is the perverse tradeoff we make when we believe politicians promising solutions to market failure.  there is no such thing as market failure only human failure to adapt to market features some of which are destructive, just like we have natural disasters.  should we put the government in charge of solving earth quakes and tornadoes or should we learn ways to live despite natural disasters?  i say we should not pretend we can use government to solve natural disasters in nature any more than society, which is not a machine invented by man, but rather is a natural sub system of the larger earth system we all live in.

May 28, 2012, 6:58 p.m. ET

A Budget Grand Bargain Will Follow the Election

Early 2013 will offer the best political environment for critical fiscal reform.

By ROBERT RUBIN

Congress's failure to reach a fiscal "grand bargain" last summer manifested the deep economic-policy divide separating Democrats and Republicans. Fortunately, the so-called fiscal cliff will soon create an extraordinary second opportunity for a breakthrough compromise.

Washington's continued failure to get our fiscal house in order poses five basic risks. One, government borrowing risks crowding out private investment. Two, our unsustainable fiscal outlook undermines business confidence by creating uncertainty about future policy, economic conditions and our ability to govern, which in turn dampens investment and hiring.

Three, deficits constrain our capacity to make the public investment critical to competitiveness, growth and widespread income gains. Four, deficits hamper our financial ability to cope with economic weakness or geopolitical events. And five, our fiscal position creates a strong potential for some form of severe macroeconomic distress at an unpredictable time: high inflation, high interest rates and low confidence in the future that produce an extended period of slow or negative growth, or a harsh financial crisis.

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President Obama, right, and House Speaker John Boehner in a meeting on the debt limit on July 7.

Soon after November's election several events will put serious pressure on both parties, possibly providing the impetus for a serious fiscal program. The critical decision-making period will be Congress's lame-duck session after the election, and the first two or three months of the new Congress.

These events are already understood: The 2001 and 2003 tax cuts for middle-class and upper-income taxpayers, and the payroll tax holiday, will expire at the end of 2012. The dramatic mandatory reduction in spending ("sequestration") required by last year's debt-ceiling deal will take place in January 2013. And the debt ceiling will need to be raised again in late 2012 or early 2013.

Each of these events is unacceptable for one or both political parties. Sequestration includes deep cuts to nondefense spending that Democrats oppose, and similarly deep cuts to military spending that make Republicans (and many Democrats) recoil. Republicans oppose the expiration of tax cuts on upper-income Americans, Democrats oppose the expiration of the payroll tax holiday, and members of both parties oppose the expiration of middle-class tax cuts.

As for the debt ceiling, the party in the White House will insist that it be raised (because there is no other responsible choice), while the other party may seek to use it as leverage to achieve other policy goals, as we have seen before.

Since some form of divided government after the election is likely, the parties will need to make an accommodation with each other to avoid chaos. Even if one party controls the White House and Congress, it might still seek meaningful bipartisan participation to avoid sole responsibility for difficult decisions. The multitrillion-dollar question is what kind of accommodation it will be.

There is widespread concern about our elected officials' willingness to find common ground on tough issues. When the right choice is the tough choice, it can be all too easy to make the wrong one. Many experienced people think that will happen, with the parties agreeing to kick the hardest choices down the road by extending the tax cuts, canceling the sequester, raising the debt limit and resolving to "study" the problem.

But this time could possibly be different, thanks to five factors combining to create the best political environment for real fiscal action in a long time. The risks of inaction are apparent and will put pressure on all policy makers: Sequestration and expiring tax cuts will have severe consequences and could cost the country 3.5%-4% of gross domestic product in 2013. A political punt would be a striking manifestation of our inability to govern ourselves and could heighten uncertainty and lack of confidence about future economic policy. That could have serious adverse impact on our economy and on markets. And the months right after a presidential election are—since they're the furthest from the next federal elections—the lowest-pressure time in our political system.

Most important, there is no choice available to Congress that does not involve significant changes to taxes and spending that members of each party will oppose. Unlike any situation I remember, Congress cannot simply maintain the status quo by failing to act.

Doing nothing means tax increases and massive cuts in defense and nondefense spending. Kicking the can down the road requires compromising with the other party on taxes and spending. And biting the bullet on the hard choices will necessitate compromises and action as well. The compromises required for constructive action are substantially harder than the compromises necessary to punt, but taking the easy way out requires actions that come with their own set of political costs. And, the longer you avoid tough choices, the deeper the hole gets, the greater the resulting crisis is and the harsher the necessary measures necessary to reestablish confidence and recover.

What's more, most policy analysts agree on the basic framework for establishing sound fiscal conditions, though the specifics would require intense negotiation.

The overarching goal should be a 10-to-12 year track of deficit reduction that stabilizes the ratio of debt to GDP and then begins to bring it down. Within that context, we must create budgetary room for vigorous public investment in education, basic research infrastructure and other areas that are critical for competitiveness and broad increases in standards of living.

Reducing the deficit, increasing public investment, and preserving government's ability to conduct critical activities will require constraints on spending in all areas, including serious entitlement reform, substantial additional revenues, and difficult judgments on priorities and trade-offs. Because the recovery is still relatively fragile, implementation of the deficit-reduction package should be deferred for a time certain—say, two years—to give the recovery additional time to take hold. But that implementation must be made difficult to cancel or delay, so that it is understood as credible.

There will be vigorous debate about how to raise revenues. I believe the three principal criteria should be economic impact, fiscal effect and progressivity. We should increase the top rate, reform the alternative minimum tax to create greater fairness without penalizing the middle class, and increase capital gains and dividend taxes to levels that best satisfy those criteria. There are also opportunities presented by revising tax credits and deductions, but the impacts are complicated and the potential may be limited.

Whatever the outcome of the elections in November, our political leaders will encounter an extraordinary set of circumstances that we are unlikely to see again. Those circumstances will create a historic opportunity to reshape America's long-term economic outlook for the better. Let's hope they take it.

Mr. Rubin, a former U.S. Treasury secretary, is co-chairman of the Council on Foreign Relations.

A version of this article appeared May 29, 2012, on page A13 in the U.S. edition of The Wall Street Journal, with the headline: A Budget Grand Bargain Will Follow the Election.