OPINION
Updated November 23, 2012, 6:09 p.m. ET
Andy Kessler: Obama Needs to 'Pull a Rubin' on the U.S. Dollar
What revived the 1990s' economy wasn't higher taxes, but a strong greenback and credible Treasury secretary.
By ANDY KESSLER
Facing stubbornly high unemployment and slow growth, swelling deficits and a divided Congress, President Obama is surely scrambling for an economic elixir. He has often cited the economy of the 1990s during the administration of his Democratic predecessor, Bill Clinton, as his ideal. President Clinton managed to keep the economy moving ahead briskly despite repeated foreign currency crises—and despite raising taxes, which should have been an economic drag.
That seems to be Mr. Obama's plan. As he has said repeatedly, he wants to increase tax rates on "millionaires and billionaires" to "the same rate we had when Bill Clinton was president"—39.6%—"the same rate we had when our economy created nearly 23 million new jobs."
Dream on. Given increases in state, local, payroll and other taxes since the 1990s, the effective rate is considerably higher. In California—the home of venture capital and of many job creators—the top marginal income-tax rate would exceed 50% thanks to the state's new 13.3% rate. The top capital gains rate in the Golden State, if Mr. Obama gets his way, would rise past 37%—the scheduled increase on Jan. 1 to 20% plus 3.8% in ObamaCare plus the 13.3%, since the state taxes capital gains as ordinary income.
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AFP/Getty Images
Here's a better idea. If Mr. Obama wants the economy to get some of that Clinton mojo, he needs to pull a Rubin.
Robert Rubin, who took over as Treasury Secretary in January 1995 after 26 years at Goldman Sachs, GS +2.22% understood a thing or two about markets. In particular, he knew that during the inflationary 1970s, weak dollars flowed into commodities instead of stocks and ventures that were vulnerable to shifts in the value of the currency. During the Reagan era, Mr. Rubin and Goldman Sachs thrived by learning that a strong dollar attracts productive investment that drives a growing economy.
Under President Clinton, Treasury Secretary Rubin told everyone who asked that "the U.S. supports a strong dollar." And he put the country's money where his mouth was, pushing a strong-dollar policy that included working with central banks to keep the dollar's value up by buying and selling currencies and advocating free trade. During Mr. Rubin's nearly five-year tenure at Treasury, the dollar price of oil and gold dropped; the unemployment rate declined to 4.3% from 5.6%; and the stock market more than doubled. The Clinton economic legacy exists primarily because Robert Rubin acted on what he learned during the 1980s.
But somewhere in the dozen years since the end of the Rubin era, the country has lost its way. As low-end manufacturing jobs began to be outsourced to Japan, then Taiwan and now China, support for a strong dollar dissipated as the mistaken view took hold that a weak dollar would boost exports and return U.S. manufacturing to its glory days.
And we've had a bad run of Treasury secretaries. Alcoa AA +0.97% executive Paul O'Neill didn't last long under President George W. Bush, and in 2008 he admitted to Bloomberg TV: "When I was secretary of the Treasury I was not supposed to say anything but 'strong dollar, strong dollar.' I argued then and would argue now that the idea of a strong-dollar policy is a vacuous notion.'' His replacement, railroad executive John Snow, was for a "sound dollar," not a strong dollar, saying in 2003: "You want people to have confidence in your currency." He watched as the dollar dropped 46% against gold.
When the dollar is devalued, it flows into fixed assets and out of financial instruments and productive endeavors—into gold instead of Google, GOOG +0.32% oil instead of risky startups. And as the world saw in the 2000s, far too much into housing.
Henry Paulson, Mr. Rubin's partner at Goldman Sachs, tried to change the tone. He started at Treasury in July 2006, and after just four months had the dollar up 20%—although he would spend most of his tenure battling the housing and banking crises caused by a loose, dollar-debasing Federal Reserve.
Then came former New York Federal Reserve President Timothy Geithner. This Treasury secretary understands that "the U.S. supports a strong dollar," even telling the Senate Finance Committee in February 2010: "That particular phrase and commitment of policy was first written in my office at the Treasury Department in 1995"—for his boss, Robert Rubin.
But Mr. Geithner didn't back it up. On April 26, 2011, he told the Council on Foreign Relations: "Our policy has been and always will be, as long as at least I'm in this job, that a strong dollar is in our interest as a country. We will never embrace a strategy of trying to weaken our currency to try to gain economic advantage."
Yet a week later, at a meeting of the U.S.-China Business Council, he said: "It would be better for the world, more fair to us, and we think in China's interests, to let the exchange rate appreciate more rapidly." In other words, forget the strong dollar.
It is no wonder that dollars have fled to fixed assets like gold, bidding the price up to $1700 an ounce from $900 during the Obama administration. Meanwhile, investible cash sits on the sidelines or offshore, waiting for better dollar-based returns.
Mr. Obama doesn't need Congress to kick-start investment in the U.S. It takes a strong dollar and a new Treasury secretary with credibility as a start. That person will need to persuade Federal Reserve Chairman Ben Bernanke or his eventual replacement to end what has come to be called "QE Infinity"—investors' belief that the Fed will just keep printing dollars and debasing their value by quantitative easing.
This is a key moment. High tech from Apple to Cisco to Google will benefit from a strong dollar as memory and storage and displays get cheaper and foreigners have to pony up more yuan and euros for an iPad Mini. Pharma and retail and many other industries will benefit as well.
But the real kicker in 2013 will be fracking-induced lower energy costs in the U.S. This is not about heating homes or cheaper driving, though that will help. It is about bringing back aluminum and chemical factories that, seeking lower natural-gas costs, were driven to build factories in Saudi Arabia and other oil-producing countries. A rising dollar—versus other currencies but especially against the price of oil and natural gas—will make a decision to build in the U.S. an easy one.
Without support for the dollar, foreign capital will stay offshore until investing in the U.S. feels safe.
A strong dollar has already proven under Presidents Reagan and Clinton to increase investment and then jobs and then profits and then more investment. A weak dollar will delay an investment boom and continue the country's current plodding path. Inquiring minds and investors wonder which it will be.
Mr. Kessler, a former hedge-fund manager, is the author most recently of "Eat People: And Other Unapologetic Rules for Game-Changing Entrepreneurs" (Portfolio, 2011).
That seems to be Mr. Obama's plan. As he has said repeatedly, he wants to increase tax rates on "millionaires and billionaires" to "the same rate we had when Bill Clinton was president"—39.6%—"the same rate we had when our economy created nearly 23 million new jobs."
Dream on. Given increases in state, local, payroll and other taxes since the 1990s, the effective rate is considerably higher. In California—the home of venture capital and of many job creators—the top marginal income-tax rate would exceed 50% thanks to the state's new 13.3% rate. The top capital gains rate in the Golden State, if Mr. Obama gets his way, would rise past 37%—the scheduled increase on Jan. 1 to 20% plus 3.8% in ObamaCare plus the 13.3%, since the state taxes capital gains as ordinary income.
.
President Obama and U.S. Treasury Secretary Timothy Geithner in February 2011
Here's a better idea. If Mr. Obama wants the economy to get some of that Clinton mojo, he needs to pull a Rubin.
Robert Rubin, who took over as Treasury Secretary in January 1995 after 26 years at Goldman Sachs, GS +2.22% understood a thing or two about markets. In particular, he knew that during the inflationary 1970s, weak dollars flowed into commodities instead of stocks and ventures that were vulnerable to shifts in the value of the currency. During the Reagan era, Mr. Rubin and Goldman Sachs thrived by learning that a strong dollar attracts productive investment that drives a growing economy.
Under President Clinton, Treasury Secretary Rubin told everyone who asked that "the U.S. supports a strong dollar." And he put the country's money where his mouth was, pushing a strong-dollar policy that included working with central banks to keep the dollar's value up by buying and selling currencies and advocating free trade. During Mr. Rubin's nearly five-year tenure at Treasury, the dollar price of oil and gold dropped; the unemployment rate declined to 4.3% from 5.6%; and the stock market more than doubled. The Clinton economic legacy exists primarily because Robert Rubin acted on what he learned during the 1980s.
But somewhere in the dozen years since the end of the Rubin era, the country has lost its way. As low-end manufacturing jobs began to be outsourced to Japan, then Taiwan and now China, support for a strong dollar dissipated as the mistaken view took hold that a weak dollar would boost exports and return U.S. manufacturing to its glory days.
And we've had a bad run of Treasury secretaries. Alcoa AA +0.97% executive Paul O'Neill didn't last long under President George W. Bush, and in 2008 he admitted to Bloomberg TV: "When I was secretary of the Treasury I was not supposed to say anything but 'strong dollar, strong dollar.' I argued then and would argue now that the idea of a strong-dollar policy is a vacuous notion.'' His replacement, railroad executive John Snow, was for a "sound dollar," not a strong dollar, saying in 2003: "You want people to have confidence in your currency." He watched as the dollar dropped 46% against gold.
When the dollar is devalued, it flows into fixed assets and out of financial instruments and productive endeavors—into gold instead of Google, GOOG +0.32% oil instead of risky startups. And as the world saw in the 2000s, far too much into housing.
Henry Paulson, Mr. Rubin's partner at Goldman Sachs, tried to change the tone. He started at Treasury in July 2006, and after just four months had the dollar up 20%—although he would spend most of his tenure battling the housing and banking crises caused by a loose, dollar-debasing Federal Reserve.
Then came former New York Federal Reserve President Timothy Geithner. This Treasury secretary understands that "the U.S. supports a strong dollar," even telling the Senate Finance Committee in February 2010: "That particular phrase and commitment of policy was first written in my office at the Treasury Department in 1995"—for his boss, Robert Rubin.
But Mr. Geithner didn't back it up. On April 26, 2011, he told the Council on Foreign Relations: "Our policy has been and always will be, as long as at least I'm in this job, that a strong dollar is in our interest as a country. We will never embrace a strategy of trying to weaken our currency to try to gain economic advantage."
Yet a week later, at a meeting of the U.S.-China Business Council, he said: "It would be better for the world, more fair to us, and we think in China's interests, to let the exchange rate appreciate more rapidly." In other words, forget the strong dollar.
It is no wonder that dollars have fled to fixed assets like gold, bidding the price up to $1700 an ounce from $900 during the Obama administration. Meanwhile, investible cash sits on the sidelines or offshore, waiting for better dollar-based returns.
Mr. Obama doesn't need Congress to kick-start investment in the U.S. It takes a strong dollar and a new Treasury secretary with credibility as a start. That person will need to persuade Federal Reserve Chairman Ben Bernanke or his eventual replacement to end what has come to be called "QE Infinity"—investors' belief that the Fed will just keep printing dollars and debasing their value by quantitative easing.
This is a key moment. High tech from Apple to Cisco to Google will benefit from a strong dollar as memory and storage and displays get cheaper and foreigners have to pony up more yuan and euros for an iPad Mini. Pharma and retail and many other industries will benefit as well.
But the real kicker in 2013 will be fracking-induced lower energy costs in the U.S. This is not about heating homes or cheaper driving, though that will help. It is about bringing back aluminum and chemical factories that, seeking lower natural-gas costs, were driven to build factories in Saudi Arabia and other oil-producing countries. A rising dollar—versus other currencies but especially against the price of oil and natural gas—will make a decision to build in the U.S. an easy one.
Without support for the dollar, foreign capital will stay offshore until investing in the U.S. feels safe.
A strong dollar has already proven under Presidents Reagan and Clinton to increase investment and then jobs and then profits and then more investment. A weak dollar will delay an investment boom and continue the country's current plodding path. Inquiring minds and investors wonder which it will be.
Mr. Kessler, a former hedge-fund manager, is the author most recently of "Eat People: And Other Unapologetic Rules for Game-Changing Entrepreneurs" (Portfolio, 2011).
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