Rubinomics

Question: how do deficits affect interest rates and inflation in the long run? You’d care too if you were the Secretary of the Treasury. Check that job description again.

Robert Rubin, Secretary of the Treasury under Bill Clinton, founded “Rubinomics,” focusing on that very question. Rubin believed we should be reducing the deficit rather than playing with fed funds rates. A balanced budget theoretically would keep interest rates and inflation at healthy levels.

In the 1990s, long-term interest rates were high, despite what the Fed did to lower them. Usually, when the Fed (the Federal Reserve, a.k.a. the U.S.’s central bank) lowers the fed funds rate (the rate at which banks lend money to each other overnight), this causes a drop in interest rates. But in the '90s, that’s not what happened.

While over at the Fed they were trying to figure out what was going on, Rubin suggested everyone focus more on a balanced budget (where the government only spends what it makes), rather than tinker with fed funds rates to lower interest rates.

Cue: nasty looks shot at Rubin from fed funds fans.