VTI - Robert Rubin On The Debt Ceiling Debate

2023-05-09 16:18:02 ET

Summary

• The possibility that the United States will default on its debt is highly unlikely.
• Therefore, rather than focusing on all the child-like name-calling that is going on in Washington, D.C., those that are serious about the debt need to get to work.
• Robert Rubin is concerned about the long-term debt-to-GDP ratio and believes that this needs to be the primary focus of the government.
• Rubin believes that we work in a world of incomplete information and so must work with this uncertainty, but also keep our eyes on our longer-run concerns.
• Right now, Mr. Rubin does not think that the government is very focused.

Another one of my favorite decision-makers, Robert Rubin, has stepped up and entered the discussion about the debt ceiling and how it should be dealt with. I would highly recommend that people interested in this debate should take a look at his piece in the New York Times .

Robert Rubin is right up there at the top of my list of "best" decision-makers, right up there with Paul Volcker, whose ideas I just featured in another post .

Rubin emphasizes the fact that his approach uses "probabilistic thinking," the idea that "nothing is certain and everything is, therefore, a matter of probabilities".

In other words, decision-makers only work with incomplete information, so every decision that has to be made faces the dilemma that they never have the total amount of information that might be available to them in the making of a decision.

Thus, every decision is a risky one.

But, in making a decision, decision-makers must make some kind of judgment pertaining to how probable an outcome might be.

For example, Mr. Rubin states:

"Consider the standoff over the debt ceiling currently taking place in Washington. While many leaders are

"appropriately concerned about the risks, I fear that other leaders--and the markets--have grown complacent. The United States has always found a way to honor its debts in the past...."

"I myself view default as highly unlikely."

"To me, this probabilistic assessment of risk seems reason enough to eliminate the debt limit entirely. and to allow lawmakers to debate priorities during the budget process without reneging on the full faith and credit of the United States to meet commitments already made."

In other words, continuing to assume that there is a meaningful probability that the government will default on its debt because of the debt ceiling allows those involved in the discussion to act in a childish way .

That is, the debate over the debt ceiling can turn into name-calling and other immature ways of demeaning the other party involved in the discussions.

The focus is taken off of substance and placed upon trivia.

Focusing the debate on the irrelevant allows people to huddle into "opponents" and causes people to emphasize the wrong things.

Taking the approach that Mr. Rubin does allows one to be more pragmatic in reaching an agreement and coming to some kind of workable solution.

Mr. Rubin presents his own example of this. He writes:

"I remain deeply concerned about the long-term trajectory of our debt-to-GDP ratio. Yet during the Covid crisis, I publicly supported the $1.9 trillion rescue plan proposed by President Biden and backed by all but one congressional Democrat."

"Someone with a more absolutist mindset might see these two positions as mutually exclusive."

"But I examined the likely costs, did the same with the likely benefits, and then made a judgment that the latter outweighed the former."

"Performing that kind of analysis--one that doesn't shy away from nuance and complexity--is an essential element of sound decision-making."

Note...you will not always be right.

In fact, in a world of incomplete information, it is impossible to be correct in your decision-making 100 percent of the time.

At the beginning of the year 2022, what probability would you have given for the possibility that Russia would invade Ukraine?

In 2016, what was the probability given a month before the presidential election, that Donald Trump would be elected president?

In July of 2022, who would have placed any money on the Philadelphia Phillies getting into the World Series of baseball that year?

The point is, in a world of incomplete information, you must accept the fact that you do not know the future with any high degree of certainty.

In such a world, how do you make decisions?

Well, Mr. Rubin has given you a picture of how he makes decisions.

I believe that it is a very rational way to go about making decisions.

But, you will be wrong some of the time and you must accept that fact.

Still, you must not give up on making the best, most rational decisions you can.

Mr. Rubin has decided that default is highly unlikely.

So, he focuses on what is possible.

His concern is more with the long-term trajectory of the debt and its relationship with GDP. He believes in a disciplined approach to the substance surrounding the whole budget and the trajectory of the government's debt.

His concern is that we make the best decisions we can about the budget and the debt over time because we need the best possible decisions over time in this uncertain world so as to be able to look back and be satisfied with the path that was taken.

Unfortunately, the decision-making over the past few years, I believe, does not leave us with a very good taste in our mouths when we look back and examine what has been done.

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