Understanding Rubinomics

If you were around in the 80s, the term Reaganomics is familiar to you. Rubinomics is another financial approach named for an individual – specifically Robert Rubin, the Secretary of the Treasury during the Clinton years. This is an approach that displays concern about deficits and the effects they have on inflation when maintained over the long term.

During the 1990s Rubinomics became well established as long term interest rates stayed high regardless of the Federal Reserve’s attempt to bring them down. Rubin suggested that rather than spending money on infrastructure around the country, money should be used to reduce the deficit in order to achieve the desired goal of lower interest rates.

The Federal Reserve was accustomed to causing interest rates to drop by lowering the Federal Funds rate. This time that strategy was unsuccessful. Part of the problem was attributed to an “inflation premium” bond traders were demanding as a portion of every transaction.

The goal of reducing interest rates was increased investment and consumption by the private sector. This would lead to stronger growth which dovetailed with President Clinton’s campaign goals of investing in the people first.

While not directly rejecting Keynesian economic principles which expect the government to run in a deficit during recessions, Rubinomics worries about the long term effects of deficits on the economy in general. The policy places a strong emphasis on balanced government budgets: that taxes taken in should match spending and that tax cuts financed by creating deficits are a poor way to manage growth.

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Read more on Interest Rates, Robert Rubin, Inflation at Wikinvest

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