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Return to Rubinomics?

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By Sebastian Mallaby
Monday, November 13, 2006

During their long years in the wilderness, Democrats lashed out against trade and globalization, even though denying the economic case for trade is like pretending that tax cuts pay for themselves. Now that they have won Congress, the Democrats must prove that they are more than the mirror image of their opponents. This means reviving the pro-market centrism of the Clinton era -- a spirit that lives on in the form of the Hamilton Project.

The Hamilton Project is the brainchild of Robert Rubin, Treasury secretary under Bill Clinton. Rubin's great virtue was to be as free of ideology as is possible in politics and to recruit a team of clever pragmatists to work for him. Not every Cabinet secretary would choose an intellectual bulldozer as deputy -- particularly one with a talent for political incorrectness. But Larry Summers could get to the right answer faster than most people could get out of bed, and that's what Rubin cared about.

Two years ago, Rubin teamed up with Peter Orszag, a laser-brained economist at the Brookings Institution. He no longer controlled the Treasury, but he persuaded a number of fellow Democratic grandees to finance a center for Rubinomics in exile; and Orszag served as policy director, commissioning a series of creative pragmatists to grapple with the nation's economic challenges. Anyone who laments the watery generalizations of the House Democrats' election platform should check out http://www.hamiltonproject.org/ . It is proof that Democrats do have sophisticated ideas. They just need congressional leaders to adopt them.

During the recent congressional campaign, Democratic candidates mostly had the right diagnosis and the wrong prescriptions. They saw that middle-class and poor Americans have not experienced wage gains during the past five years of growth, and they saw that families are one health crisis away from financial hardship. But the Democrats' remedies -- bashing Wal-Mart, railing against globalization -- offered little more than symbolism for the poor and middle class while promising damage to the economy.

The Hamilton people are just as ready to acknowledge that Americans are hurting. They note that the probability of an average family experiencing an income drop of half or more has jumped from 7 percent to 17 percent since the early 1970s; and that the average spell of unemployment has gone from 12 weeks to 16 weeks since the 1960s. But the Hamilton people have a better solution than protectionism.

Their first prescription is to encourage workers to save for themselves. A simple reform -- requiring companies to make enrollment in a retirement plan the default option -- would greatly boost savings, since many workers currently don't enroll not because they don't want to but because they don't get around to it: One series of experiments found that making participation the default boosted coverage for newly recruited low-income workers from 13 percent to 80 percent. A recent law facilitated automatic enrollment in 401(k) accounts but did not require it; and the law did nothing for the more than 70 million workers at companies that don't offer pension plans but that could nonetheless enroll workers in IRAs.

The Hamiltonians also advocate reform of government savings incentives. The current system of tax deductions favors the rich, because deductions are worth most to people in the highest tax brackets. A janitor who saves a dollar gets no help from the government, whereas a chief executive who saves a dollar gets a 35-cent tax subsidy. The Hamiltonians would replace this upside-down system with tax credits that are worth the same to everyone, irrespective of their tax bracket.

The Hamiltonians also have ideas on unemployment insurance. The existing system is designed to protect workers who lose jobs, though in practice eligibility restrictions ensure that only one in three gets covered. It is not designed to help workers who find new work at a much lower wage -- even though the resulting hardship lasts longer. So why not create a new borrowing mechanism to help workers get through temporary layoffs, and use the savings to provide government insurance to workers who suffer acute wage losses?

In keeping with the Rubin pragmatism, some Hamiltonian ideas violate Democratic shibboleths. One paper demonstrates that teacher quality has nothing to do with whether a teacher is certified and argues that school principals should have the freedom to fire ineffective junior teachers -- which would not thrill the teachers unions. But nearly all the Hamilton proposals have three things in common. They would reduce the inequality that Democrats emphasized on the campaign trail. They would not bust the budget. And they would promote economic growth. If the political system can't make use of ideas that tick all these boxes, there is something desperately wrong with it.

smallaby@washpost.com


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