Ex-Treasury Rubin cautious on near-term

By SONIA KOLESNIKOV, UPI Business Correspondent  |  July 25, 2002 at 4:19 AM
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SINGAPORE, July 25 (UPI) -- Former U.S. Treasury Secretary Robert Rubin issued strong words of cautious Thursday about the near-term outlook for the U.S. economy but was positive for the long-term.

"The (economic) imbalances that developed over the last 8 years are far from having fully unwound," said Rubin, who is now the chairman of the executive committee of Citigroup Inc.

He warned that the uncertainties "could produce more difficult conditions."

"So far, increasing housing prices have maintained consumer net worth, and with mortgage refinancing have helped maintain consumption, but will that dynamic continue?" he asked.

Speaking at a luncheon sponsored by the Monetary Authority of Singapore, he said the current forecast may prove too optimistic given the high level of consumer and corporate debt, the widening current account deficit, and the ballooning fiscal deficit.

"The projected long-term fiscal position of the government has deteriorate enormously over the past year, with significant likely adverse effects on interest rates, confidence and the ability to attract capital from abroad over the long run," he said.

He added that though there was noting wrong with tax cuts (as implemented by the Bush administration) as a stimulus for the economy, "it is imperative we repair our long-term fiscal position."

Throughout the 1990s, the United States benefited from remarkable economic conditions, through a combination of fiscal discipline, the availability of new technologies, a flexible labor market and a culture of embracing changes. But unfortunately, some economically important issues were also not effectively addressed during those years, Rubin said, such as the troubled public school system, inadequate programs to equip the poor to enter the economic mainstream, and an excessive litigation regime.

Imbalances developed throughout the late '90s with rising corporate and consumer debt, a low personal saving rate, a stock market that was high by any conventional standard, a widening current account deficit and excess capacity.

These imbalances have been greatly underweight in forecasters' works, which are also ignoring the importance of terrorism and the geopolitical concerns on the economy, he noted.

Rubin also warned that though many analysts view the current stock prices as undervalued, after the recent market slump, "a thoughtful case can be made that valuation is unclear and remains a question."

Rubin strongly backed current Treasury Secretary Paul O'Neill's decision to pursue the so-called strong dollar policy that his own administration had followed during his tenure under President Bill Clinton.

He said the strong dollar policy was more than ever important in the wake of the currency's recent decline in global markets.

"At a time when our asset markets are under some pressure, it seems to me confidence in our dollar is exceedingly important," he said, adding a strong dollar policy would not only keeps inflation down, but provide the United States with favorable terms of exchange and capital inflows.

Rubin also noted that the dollar should not be used as a policy tool to tackle trade imbalances. "I think that would be dangerous folly," he said. "We should deal with the current account deficit through increasing our savings rate, and of course repairing our fiscal situation, and also through increased productivity and increased exports."

Rubin was confident the U.S. economy could sustain a current account deficit for "a very long period," but added that the gap would eventually have to be addressed.

Talking about corporate governance issues, he said despite the recent setbacks, the U.S. corporate model had served the country "exceedingly well for a very long time" by allowing for rapid change, agility, experimentation and risk-taking.

"There are systemic issues that need to be addressed," he said, but in a balanced and sensible way.

Citigroup itself is under investigation for its role in helping Enron Corp. hide debt that led to its eventual collapse. The bank is also facing a lawsuit over allegations it did not properly disclose its dealings with the bankrupt energy trader.

Looking at the long-term, Rubin remained optimistic about the prospects of the U.S. and the global economies. But he also cautioned that the current global economic uncertainty could lead to "counterproductive policy." For example, protectionist trade decisions, "such as the steel tariff restriction imposed by the U.S.," more restrictive labor measures, or other movement away from the growth maximizing regime of embracing change, he said.

He noted that in Europe and Japan, little if any progress had been made in recent years on the structural reforms needed for strong growth on a sustained basis.

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