Rubin Reality Check Is What the Democrats Need

Sept. 12 (Bloomberg) — The Democrats are on the march, the tax march that is.

Charles Rangel, the New York congressman and chairman of the House Ways and Means Committee, is talking about "the mother of all reforms," a plan that is said to include raising the capital-gains tax rate for many investors. Back in July, presidential candidate John Edwards proposed a return to the 28 percent rate that the country hasn't seen in more than a decade.

Other Democrats are making similar points by arguing that the 20 percentage-point spread between the capital-gains rate at 15 percent, and the income tax, at 35 percent, represents a problem. Ron Wyden, Democratic senator from Oregon, and Rahm Emanuel, a Democratic congressman from Illinois, have been trying out the idea of a 35 percent tax on capital gains, on the theory that this income is no different from regular wages.

This leap to action is no surprise. Democrats instinctually veer left at the end of a recovery and at the beginning of primary season, and right now we are in one of those situations, if not both. In the name of recovery or reform they back projects that are unrealistic and that hurt the economy.

To which one can only reply with a three-word broadcast: Calling Bob Rubin.

Only the former Treasury secretary has the authority to reset the Democrats' course. He got that authority through the bitter experience of doing the resetting for the Democratic Party back in the 1990s.

Recall the chronology. Bill Clinton came into the presidency with vague plans for reform that portended tax increases. That tax increase came within a year — the new top income-tax rate became 39.6 percent, up from 31 percent.

Team Clinton

The Clinton team also set to work on broader projects. Labor Secretary Bob Reich sought creation of an Economic Security Council and billions in spending on labor and education. Adviser Paul Begala was encouraging Clinton to speak about the evils of "the rich." First Lady Hillary Clinton, for her part, had the health-care task force, which would add heaven knows how many points to health care's share of gross domestic product.

Everyone knew that these projects would be expensive. And everyone was in the kind of good mood you see Rangel displaying these days. The extent of the ambition could have been measured by the breadth of Reich's grin.

Enter Rubin, at first a mere assistant to the president. Updating the Roosevelt view of Wall Street as a New Yorker cartoon, Rubin reminded Clinton that the rich create jobs. As Bob Woodward reported in "The Agenda," Rubin at one point provided what could be termed the Great Reality Check of the 1990s, saying, "Look, they're running the economy and they make the decisions about the economy. And so if you attack them you wind up hurting the economy and wind up hurting the president."

Changed Direction

Aided by Republicans who gained control of the House and Senate in 1994, and egged on by Federal Reserve Chairman Alan Greenspan, Rubin proceeded to redirect the administration. He turned Clinton, who was, after all, a governor from Arkansas, into a bond-market expert who nattered on about basis points. By 1997, James Carville was uttering his famous quote about being reincarnated as the bond market, because then "you can intimidate everyone."

As for Reich, he left office and wrote a hilarious account of his frustrations while being marginalized by Clinton the cynic, "Locked in the Cabinet." Clinton gave up on health care. Rubin even pushed him into cutting the capital-gains rate to 20 percent, a level below that of the second half of the 1980s during the Reagan years.

Reality Check

The Rubin Reality Check was so powerful it affected both parties long after Clinton left the White House. Through Rubin, Democrats learned that expansive experimentation has a downside because of the fear it can generate. Through Rubin, Republicans were reminded that capital-gains-rate cuts can generate extra revenue.

The economic-growth rate of the late 1990s, 4.1 percent on average, was something to brag about — and still is. Protecting the economy from uncertainty was Rubin's hallmark. He even titled his 2004 memoir "In an Uncertain World."

Democrats today are back where they were when Begala, Carville and Reich were leading the transition team: bouncing with ambition to do something grand. But much more talk — never mind laws — about a big capital-gains increase will sock equities in the face, just like the mortgage crisis socked subprime and commercial paper in recent months.

Nanny State

There is a proposal out there by a Harvard professor, Elizabeth Warren, to create a Financial Products Safety Commission, which would do for mortgages and other financial products what the Consumer Products Safety Commission does for child car seats. This sounds like the old Economic Security Council idea.

There is another choice: to follow the old Rubin line, which in today's terms amounts to a simple acknowledgement that markets are mostly a force for good, that governments don't need to be nannies, and that capital-gains-rate cuts, not increases, are what a nervous market needs.

Investment in the stock market tends to increase at the news of a coming rate cut. As Rubin noted, "decades of experience with investors and markets support this." Where is the Democrat who is saying that? Once again, it is up to Bob to make an uncertain world less uncertain.

(Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.

© Copyright 2007 Bloomberg

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