A Conversation With Gary Becker, David Rubenstein and Robert Rubin

U.S. Economic Outlook and Growth Potential

• Current Growth Trajectory: The U.S. economy has grown at a rate below its long-run potential for four consecutive years; real GDP growth is currently estimated near 2% rather than the sustainable 3% benchmark observed from 1880 to 2010.
• Long-Run Aspirations: A 3% annual real GDP growth rate is deemed attainable and achievable as a long-term goal, contrasting with 4% or 5% targets which Gary Becker considers unrealistic.
• Structural Strengths: Bob Rubin identifies significant long-term advantages for U.S. investment, including a dynamic entrepreneurial culture, strong demographics relative to China and Europe, rule of law, vast natural resources (specifically shale gas and tight oil), and stable political institutions.
• Key Growth Engines: Three specific drivers are expected to propel the economy forward over the next 3–6 years: the energy revolution (shale), the recovery of the real estate market (rising home prices and construction), and U.S. manufacturing growth expanding at double the rate of the overall economy.
• Fiscal Deficit Risks: Publicly held federal debt is approximately $10 trillion (73% of GDP), excluding trust fund debt; the government adds roughly $1 trillion to the deficit annually, though the deficit is slightly declining in the current year.

Fiscal Policy and Deficit Reduction Proposals

• Proposed Solution Strategy: Bob Rubin recommends a bipartisan fiscal program that stabilizes the debt-to-GDP ratio over 10 years with a slight decline, deferring implementation by 1.5 years to allow for economic growth.
• Funding Mechanism: The deficit reduction plan would rely on a combination of spending constraints (specifically entitlement reform) and revenue enhancements, rather than solely on tax rate increases.
• Entitlement Reform Specifics: Proposed reforms include altering the Consumer Price Index (CPI) calculation for Social Security and implementing $400 billion in Medicare cost constraints, similar to President Obama's budget proposals.
• Tax Reform Focus: Gary Becker and Bob Rubin suggest reducing "tax expenditures" (loopholes and deductions) rather than raising marginal tax rates on the top bracket; specific targets include municipal bonds, state/local income taxes, mortgages, and charitable deductions.
• Simpson-Bowles Critique: While acknowledging the program's role in raising awareness, Rubin argues the Simpson-Bowles proposal is impractical because it requires revenue increases triple the maximum feasible reduction in tax expenditures estimated by the Congressional Research Service ($1.5 trillion over 10 years).
• Inflation Strategy: Both panelists express skepticism that inflation can be used to reduce the debt burden; raising inflation would necessitate higher interest rates on rolling short-term federal debt, potentially negating any debt reduction benefits.
• Fed Policy Risks: The Federal Reserve faces a high-risk environment navigating excess reserves created by quantitative easing (QE); tightening monetary policy too quickly risks recession, while delaying it risks triggering uncontrollable inflation that could spiral.

Political Dysfunction and Structural Reforms

• Primary Cause of Stagnation: Panelists identify political gridlock, ideological partisanship, and a lack of compromise in Congress as the single biggest threat to U.S. economic recovery and future growth.
• Immigration Reform Outlook: Gary Becker advocates for a radical market-based immigration system where individuals can purchase the right to immigrate, potentially financed via student-loan-style programs to attract skilled talent.
• Legislative Probability: David Rubenstein predicts that meaningful immigration legislation will likely pass before Congress adjourns, driven by Republican pressure to address the issue after failing to pass gun control measures.
• Electoral Reform Suggestions:
  • Open Primaries: Suggested to draw candidates toward the political center rather than the extremes, potentially reducing polarization.
  • Term Limits: Gary Becker argues against term limits, noting they create an "end-point" problem where officials focus on post-office careers rather than public service, with no evidence they improve governance.
  • Information Campaigns: Rubin calls for a massive investment in nonpartisan civic education to create an informed electorate capable of holding officials accountable.
• One-Party Control Risks: The panelists express concern that unified government (one party controlling the Presidency and Congress) historically leads to reckless spending increases and lacks the checks and balances provided by divided government.

Emerging Markets and Global Investment

• Investment Criterion: The primary factor for investing in emerging markets is the effectiveness of the political system and the historical ability to implement sound policy decisions over time.
• Case Studies: Singapore and China are cited as examples of successful growth driven by effective political systems, despite differing political structures, contrasting with countries where political dysfunction hampers progress.
• Currency Recommendation: Panelists favor the U.S. dollar as the primary long-term currency holding, contingent on the U.S. political system functioning effectively; the Euro is criticized for lacking the devaluation option necessary for non-competitive member states like Spain and Greece.

Personal Perspectives and Historical Context

• Nobel Prize Reaction: Gary Becker received the call while sick with the flu; he regrets not selling the Nobel Prize money in Swedish Krona immediately, as the currency was devalued two weeks later, causing a 25% loss in value.
• Impact of Nobel Prize: Becker notes the prize provided professional validation for unconventional economic research (e.g., discrimination, human capital) rather than personal wealth.
• Government Service: Both Rubin and Becker express no regrets regarding their time in government (Rubin at Goldman Sachs and Treasury; Becker in academic life), though they note the political process has become significantly more hostile and difficult under modern media scrutiny.
• QE Evaluation: Rubin views QE1 as a good idea but expresses doubts regarding the necessity and efficacy of QE2 and QE3.
• Macro Model Skepticism: Gary Becker criticizes macroeconomic models for their failure to predict the 2008 financial crisis, urging reliance on empirical data rather than theoretical forecasting in unprecedented economic conditions.