Good 'ol R Rubin

Discussion in 'Economics' started by EBenson, Jun 27, 2005.

  1. EBenson


    Here is an interview with former US Treasury Secretary ROBERT RUBIN,in the first part he is talking about the EU, the 2nd part is about the current US troubles&briefly China/India.


    The chief architect of America's boom years under Bill Clinton gives the German economy a check-up. He calls Finance Minister Hans Eichel a "sensible man" and says Germany needs to undertake reforms and create a more flexible labor market in order to face the challenges posed by emerging economies like India and China.

    Between 1995 and 1999, Robert Rubin, 66, was US Treasury Secretary under President Bill Clinton. Today, he is chairman of the executive committee of Citigroup, the world's largest bank. In an interview with SPIEGEL, Rubin discusses Continental Europe's stagnate economies and tells Germany what it needs to do in order to restore its role as Europe's economic powerhouse.

    SPIEGEL: Mr. Rubin, Germany was once the driving economy in Europe, but for a couple of years now, unemployment has been rising and the budget deficit is growing faster than ever. Would you fancy to take on Hans Eichel's job - and to overhaul the country?

    Mr. Rubin (laughs): Mr. Eichel strikes me as a sensible man...

    SPIEGEL:... who would love to save money but never gets around doing it.

    Rubin: Perhaps. But your problem in Germany isn't just the budget deficit. Faster growth would resolve this problem easily. You really have a conflict between the desire for a comfortable social system and the need for structural reforms which are needed in order to stimulate the economy. By the way, this is also true for France and more or less for most of Continental Europe.

    SPIEGEL: When you became Treasury Secretary under Mr. Clinton, you also had to deal with a huge budget deficit. Was this situation comparable to the issues Germany is facing today?

    Rubin: No, the situation was completely different. At the time, we only had a substantial budget deficit. But we were and are a society with flexible labour markets and we have a culture of embracing change. All this is part of our culture and our strength.

    SPIEGEL: So, what would the German government have to do?

    Mr. Rubin: I am not an expert on Germany, but I do know a little bit about the country. Your labour market laws are very restrictive and the social security benefits are very high. And you do have a demographic issue. These are the problems you need to address.

    SPIEGEL: When you were Treasury Secretary, you substantially reduced the budget deficit and even generated a surplus by imposing rigid savings measures and high taxes, if compared with today's levels. At the same time, you are considered the architect of the American economic miracle of the 90s. Are these two sides of the same coin? And if so, should Europe follow this path as well, i.e. start by straightening up their budgets?

    Mr. Rubin: It would solve at least some of the problems. The Maastricht Treaty was the right step. The trouble is that nobody cares about it any more.

    SPIEGEL: Germany will again be in breach of the stability pact this year. In addition, people increasingly call for lower taxes in order to stimulate the economy...

    Mr. Rubin: ... how high are your taxes?

    SPIEGEL: The highest income tax is 42%, the company taxes are at 38%.

    Mr. Rubin: And why should this be problematic? These rates are similar to those in the US. And our economy is a lot more dynamic and has a higher growth potential.

    SPIEGEL: But the US are one nation whereas there is a very unhealthy competition of tax systems in Europe - and this in a free-trade area allowing companies to easily shift their profits to the country with the lowest taxes.

    Mr. Rubin: I don't think that the taxes are the real problem. If Germany continues to cut taxes the budget deficit will increase further. Short-term, it is always possible to boost demand and consumption by reducing taxes. But what you really need to do is increase productivity, reduce unemployment and create sustainable growth. You won't be able to achieve this via tax cuts.

    SPIEGEL: But you ensure at least that the taxes continue to be paid in your country.

    Mr. Rubin: I don't even think that the taxes are responsible for this. Whenever I talk to business leaders, and which I do a lot of in my job, many tell me that they plan to invest in the new EU-countries in order to build a platform from there to deliver goods and services into Germany and Western Europe. But I never heard anyone refer to the taxes in these countries.

    SPIEGEL: So, what do your contacts build their investment decisions on?

    Mr. Rubin: Their main problem is that if you hire people, it is hard to let them go again if necessary. Or the difficulties they face when building or closing production plants. Investors appreciate the more flexible systems in Eastern Germany - and the resulting dynamics.

    SPIEGEL: Was the advent of the Euro, which effectively robbed Germany of its ability to make its own monetary policy, a disadvantage for Germany?

    Mr. Rubin: I think that both the Euro as such and the European Union are a good thing. But the common currency in some instances distracted people from the really important tasks - i.e. the structural reforms that create a climate in which companies invest, recruit and thus generate growth. So far, none of the large Continental European economies has undertaken reforms which create a robust investment climate.

    SPIEGEL: How do you, as an external observer, see the current political crisis in Europe?

    Mr. Rubin: The French would like to retain their labour laws and the current social coverage. At the same time, they are worried about the economic future of their country. Their "no" to the European Constitution was a vote against the system. But Brussels is not responsible for their problems. Therefore, the necessary political steps are further delayed.
  2. EBenson


    ...SPIEGEL: Whilst we all talk about globalisation, there is a global trend towards more protectionism.

    Mr. Rubin: These trends do exist, also in the US. The surveys show that people are anxious about the economy. And whenever that is the case, people traditionally call for the policymakers to step in and for increased protectionism. It is wrong, of course - the economic downturn is not caused by free trade or the globalisation. But everybody seems to think so.

    SPIEGEL: But protectionism can also be quite successful. Look at France where the government more or less creates national champions, i.e. market leaders in their specific sector, on the drawing board - and thus makes sure that they won't be taken over.

    Mr. Rubin: And you believe that this is a winning strategy?

    SPIEGEL: Only think of BNP Parisbas, Aventis and, more recently, Sanofi. The French make sure that their large corporations and thus the know-how remain in the country.

    Mr. Rubin: What is the French growth rate?

    SPIEGEL: It is very low, approximately around 1%.

    Mr. Rubin: So it is almost negligible. And unemployment?

    SPIEGEL: Approximately 10%, maybe a bit higher.

    Mr. Rubin: I really don't see much success here. You can of course build your national champions. But what do you win by doing so? You can protect your companies. But the price you pay is a pretty inflexible industrial structure which would likely not be very successful on the long run.

    SPIEGEL: Don't you think that similar trends, albeit less obvious, also exist in the US? Could a foreign company buy the market leader of a sector such as Microsoft, General Motors or Citigroup?

    Mr. Rubin: You can buy General Motors. You can also buy the market leaders in other sectors. I am not so sure if this is true for the banks. I believe that we have laws for this. But in principle, it is possible. Look at Deutsche Bank who bought Bankers Trust.

    SPIEGEL: At the moment, the US have huge budget deficit problems. What would you do if you were again responsible for the US budget?

    Mr. Rubin: I know what I would do. But nobody will be able to entice me to be responsible for the budget. At least not under the current circumstances.

    SPIEGEL: Then it should be even easier for you to answer the question.

    Mr. Rubin: (laughs) Yes, maybe. We have quite a number of issues we need to address. All independent research institutes forecast a ten year deficit of between 4.5 and 5 trillion USD - assuming that the most recent tax cuts are made permanent. In addition, we will see a huge number of baby-boomers enter retirement in the middle of the next decade - and this will create a whole set of problems, for example for the healthcare system. And we don't invest enough in education. I don't think that there is one single answer - you need to address the problems in a process.

    SPIEGEL: Which would be?

    Mr. Rubin: To arrange a process with the President and the leaders of the Senate and the House from both political parties. They would then have to bring themselves to collectively take responsibility for the situation. I think that the political challenge is so huge that not one single entity can cope with it on its own - it can only be done jointly.

    SPIEGEL: Do you see a big economic danger for the US - and thus for the rest of the world?

    Mr. Rubin: If anything dramatic happens in this country, it will of course have a large impact on the rest of the world. About ten years ago, we thought that Europe - or Japan - might do well if our growth decelerated. We thought that the world didn't move in one single cycle. But I believe that the large European nations, with the exception of the UK, will continue to see only modest growth - the same holds true for Japan, if only because of its demographic problems. If our economy softens, this will affect the entire world.

    SPIEGEL: How do you view the danger for the US - considering the large budget and trade deficit?

    Mr. Rubin: I think that the risks are indeed high. But the question is whether their impact will be visible short term or only many years from now.

    SPIEGEL: Do you think that the interest rate increase in the US might cause a deflation?

    Mr. Rubin: It is true that our private households are relatively highly indebted, and the savings rate is very low. In such an environment, interest rates could well bring housing price increases to a halt or even cause housing prices to go down.

    SPIEGEL: Are you rather optimistic or pessimistic?

    Mr. Rubin: We also have considerable strengths. Our society is able to very quickly face and cope with challenges - we are extremely flexible and dynamic. On the other hand, I don't see that large efforts are being taken in our political system to address our problems. And if we don't act, we can get into serious trouble.

    SPIEGEL: Would you ever have thought that the superpower USA would allow itself to depend on China - only because the Chinese hold trillions of dollars?

    Mr. Rubin: No, during my time as Treasury Secretary, I wouldn't have been able to imagine that we would have the budget situation that we have today, that we fall back from such a strong position to such a weak one.

    SPIEGEL: Are you worried that the Chinese might one day throw their US-Dollars on the market and thus cause the currency to crash?

    Mr. Rubin: I don't know. Of course, they have a strong interest to continue subsidising their exports. And other countries do the same thing, too. Korea, Japan, Thailand, Saudi Arabia. I don't think that this policy can continue forever - but it is impossible to say what will happen. China and the others have a strong interest to avoid any destructive development.

    SPIEGEL: Do you believe that the Western countries will still dominate the global economy 20 or 30 years from now? Or will China and India assume this role?

    Mr. Rubin: These countries will at least play a much larger role. Particularly if the US and Europe don't start to address their - individual - problems.
  3. EBenson


    LOL --->>> quote......"SPIEGEL: Would you ever have thought that the superpower USA would allow itself to depend on China - only because the Chinese hold trillions of dollars?

    Mr. Rubin: No, during my time as Treasury Secretary, I wouldn't have been able to imagine that we would have the budget situation that we have today, that we fall back from such a strong position to such a weak one.":( :( :(