Rubinomics

Key Takeaways

• Rubinomics was a fiscal policy focused on balancing the federal budget.
• The policy aimed to reduce inflation expectations and lower long-term interest rates.
• Rubinomics was associated with economic prosperity and budget surpluses in the 1990s.
• The effectiveness of Rubinomics is debated among economists.
• Other factors, like monetary policy and global trade, also influenced 1990s economic growth.
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What is Rubinomics?

Rubinomics is a fiscal policy that aims to balance the federal budget to influence long-term interest rates and drive economic growth. It was introduced during the Bill Clinton administration, under the guidance of Robert Rubin. Rubin served as Assistant to the President for Economic Policy and as the first director of the National Economic Council from 1993 to 1995. He served as Secretary of the Treasury from 1995 to 1999.1

Rubinomics focuses on reducing the federal budget deficit to manage inflation and spur private sector investment. It was part of a larger neoliberal consensus in the 1990s that included free-market and global trade initiatives.

The Principles Behind Rubinomics

Rubinomics gained traction during the 1990s as long-term interest rates remained high despite the actions of the Federal Reserve to lower the Federal Funds Rate. The Federal Funds Rate is the rate at which banks will lend each other money overnight. When the Fed increases the money supply through open market operations, it puts downward pressure on short-term interest rates, using the Fed Funds Rate as its target to gauge the immediate impact of monetary policy.2 However, this effect may not always carry over to long-term rates (or may take an unpredictably long time to do so).

Federal Reserve Chair Alan Greenspan and other experts believed the lack of responsiveness of long-term rates to overnight lending rates was due to an inflation premium that was built into long-term bond prices. Rubin proposed the government concentrate on reducing the federal budget deficit instead of spending money on infrastructure, technology, and education. This displeased liberal economic advisers who favored higher government spending, as well as supply-side economists who predicted the tax increases needed to balance the budget would negatively impact the economy. However, Rubin argued that lower long-term rates would spur greater private sector investment in key industries and the development of high-value, long-term projects that would grow jobs regardless of tax increases.

Thus, Rubinomics essentially argues for balancing the federal budget as an economic growth strategy, an idea that also found some support among more conservative and free-market economists. This was a key component of the neoliberal consensus that emerged in the post-Cold War era of the Clinton administration. Through the 1990s, this consensus united economists and policy makers of the moderate Left and Right behind fiscal conservatism, low interest rates, and the globalization of trade.

Evaluating the Success of Rubinomics

Proponents argue that Rubinomics contributed greatly to the long and pronounced period of economic growth and eventual government budget surpluses that developed over the course of the 1990s. Long-term interest rates trended lower during the Clinton administration—as intended by the policy of Rubinomics—with 10-year U.S. Treasury rates falling from 6.60% in January 1993 to 5.16% in January 2001.3 Long-term corporate bond rates followed suit, falling from 7.91% to 7.15% over the same period.4

At the same time, GDP growth averaged around 4%,5 inflation maintained a low, stable rate around 2.5%,6 and the U.S. economy experienced its longest period of continuous expansion in history up to that point.7

So at first glance, the immediate and long-term goals of Rubinomics appear to have been achieved. However, factors other than just Rubinomics were certainly in play, including the ongoing easy monetary policy led by Greenspan, the "Peace Dividend" resulting from military drawdowns, and the opening of global international trade in the form of NAFTA and other multilateral agreements.

Whether Rubinomics or other factors were more important to the prosperity of the 1990s is an ongoing matter of debate among economists still today. It is also worth noting that the U.S. suffered a recession with the bursting of the dotcom bubble immediately following this period, and some economists trace the roots of the Great Recession to financial liberalization that occurred under Rubin’s watch.