Mr Rubin was interviewed by Jacob Weisberg, editor of Slate, and the co-author of Rubin’s best-selling memoir, In An Uncertain World: Tough Choices from Wall Street to Washington (Random House).

JW: In the 1996 and 2000 elections people thought we had a very strong economy. This time, you have a candidate arguing that it's quite strong and another candidate arguing that it's weaker in some ways. What do you think about both the health of the economy now, and the prospects for the American economy and the world economy going forward?

RR: It's been a complicated four years. On the one hand you've had enormous stimulus, and on the other hand you've had job loss. It's the first net job loss under any administration since 1932. You've had declining price-adjusted median incomes in the United States. A couple of months ago, I was out in the Midwest and I had dinner with the chief executive officer of one of America's largest companies. And he said the company was doing well but noted that people are being very cautious. Companies have an abundance of cash but they're not spending it on investment or hiring. The reason is that there is a real uncertainty due to an overhanging set of issues.

I've been involved with economic issues for a long time, and I think this may be the most critical juncture for our economy in my lifetime. And while the outlook is always complex and uncertain, I think this is the most complex and the most uncertain in some number of decades. That poses enormous difficulties and challenges for policy makers. But it also makes for a very difficult environment for investors. On the one hand, we have a country with an enormous comparative advantage in the global economy – our historical embrace of change, flexible labor markets, and willingness to take risk. On the other hand, we face hugely consequential and enormously complex challenges and risks. And if we're going to realize our potential, we have to deal with these challenges effectively. And if we don't deal with them effectively, and in my judgment we are for the most part on the wrong track right now, there is a real chance that we could have a lot of trouble ahead some place.

Three years ago we had enormous projected surpluses. We now have enormous projected deficits. We have very large current account and trade deficits. Consumer debt as a percentage of GDP is at historically high levels. We have an historic challenge, at least in my judgment, with respect to our competitive position from China and India, and the very large numbers of now well-educated workers in low-wage environments connected to us by real-time communications. These are challenges we can meet, but to do so we have to act in a whole host of ways that we are not now acting, with respect to policy.

JW: Let's start with the risk with which you are the most closely identified, and most focused on: the deficit. I thought in 1992 Bill Clinton successfully made a political issue out of the deficit. And it seems to me that this time around, John Kerry for some reason is not making an especially big deal out of it. Am I wrong?

RR: Well, just in terms of the numbers, in January 2001, the Congressional Budget Office projected a $5.6 trillion 10-year surplus. Goldman Sachs and most independent analysts are now projecting about a $5.5 trillion deficit. So that's actually a deterioration of about $11 trillion, or $9 trillion after methodological adjustments. Even President Clinton, with all of his enormous skills, had difficulty communicating about fiscal matters to the American people. It worked in the 1992 campaign because you had Paul Tsongas and Ross Perot talking about it. And the American people associated the tough economic times in some measure with the fiscal conditions of the 1980s that led to a roughly quadrupling of the public debt. In that context, the deficit had some traction politically.

But once President Clinton got elected, and he had to turn the concept into reality, we proposed a program that passed by two votes in the House. It was a tie in the Senate, which Vice President Gore broke. In 1998, we were beginning to see these large projected surpluses. President Clinton’s view was that they should go largely to paying down the debt. The political people in the White House said in a debate between paying down deficits versus tax cuts, tax cuts will win all the time because tax cuts are something tangible, and the public simply doesn’t understand the enormously dangerous long-term impacts that our deficits can have. The way Clinton framed it was in terms of protecting Social Security; that's something that resonates politically. I just don’t think in this campaign there’s a way to make this resonate in a public that is so underinformed on the issues that are so critical to their future.

JW: In 1993, after Clinton was elected, when he decided to focus on the deficit to the harm of some of the other things he had run on, including a middle class tax cut and a health care plan, it was a very good illustration of the way that you think probabilistically about problems. As head of the National Economic Council, your role really was to set up this decision for Clinton. Explain a little bit to us how that decision was made.

RR: One of the problems we have today is that we face these hugely complex issues, but they're not being approached with the recognition of that complexity. I know very little about Iraq. And I don't know whether we should have gone in or not. But I read a book prior to the invasion of Iraq, about Gertrude Bell, a British Arabist who is responsible for the current borders of Iraq. It talked about the Shiites, the Sunnis, the Kurds, the hundreds of years of friction amongst all these people. When I saw that we were going in, it seemed to me that there would be a plan that probabilistically took into account the issues that we might face. Instead you had this very, with all due respect, simplistic view that we would be welcomed. Well, I think the same approach is true for all these things, because the issues are conceptually the same, even though the circumstances are different. There is an effort in this book to focus on decision making. Larry Summers, who was my deputy at the time and is now President of Harvard, at one point said, “Look, everybody knows that issues are fundamentally about probabilities. But, the difference is, when we were there, we had an internalized sense of this. So when we got to actually making decisions, it informed all of our decisions.”

In the case of the deficit reduction, on January 7th, 1993, during the transition, we met with President-elect Clinton. We said if we don't make a dramatic change with respect to these deficits, in our judgment, the probability is very high that any time the economy begins to do well it will get choked off by higher interest rates. On the other hand, if we do make a dramatic change in fiscal policy, while we think the probability is high that that will create an interest rate regime low enough, it is also possible that the fiscal contraction will be the dominant effect, and there'll never be the confidence you need to have lower interest rates. There are no guarantees, but probabilistically we think this is the right way to go. And he related to that.

And you'll see this underlying phenomenon on all the policy decisions that we discussed in the book, but also investments. If you thought with discipline, probabilistically, about markets and about valuation in 1999, that was not an investment environment in which one would have participated.

JW: The International Monetary Fund has now issued two different reports suggesting that the deficit in particular could be a problem that plays into a global economic crisis of some kind, or at least an economic crisis in America. What kind of crisis are we talking about?

RR: Jacob always wanted me to use the word "crisis" in the book, and we never did. The two most important challenges are geopolitical issues and also these immense fiscal imbalances. I think it's impossible to predict when it will come. And I think one reason markets don't reflect that is simply because there's no way to quantify it, there's no way to fit it into models. It could be six months off, and it could be six years off. What I think at least is that the probability of serious economic difficulty is very high. If you have large fiscal deficits that absorb part of the savings pool, you have less savings available for private investment, and therefore low rates of productivity and low rates of growth. That is a long-run problem. But I actually think there's a much more serious risk. At some point, the markets will begin to look forward at the immense projected deficits, and the markets will begin to react by demanding sharply higher interest rates for providing long-term debt. On the other hand, none of this may happen. We may muddle through one way or the other. It's also possible that our political system may rise to the challenge.

JW: When I was watching the second presidential debate, the line that almost knocked me out of the chair was when President Bush said that "Bob Rubin says that Kerry's anti-outsourcing plan won't work." I was under the impression that you had been one of the people who had helped in some sense put that plan together. So what was the deal with that?

RR: What I said is that if you look at outsourcing, it is a part of a larger phenomenon of trade liberalization. I think trade liberalization contributed substantially to our well-being in the 1990s, and I think it's the right path going forward. But trade liberalization has to be intertwined with programs that will deal with those that are dislocated by trade. And we must have a much more effective program to promote competitiveness in our economy. We have got to have a world-class public education system. We've got to invest far more substantially and effectively in basic research.

Audience Questions:

Q: You mentioned the need for more investment in our schools and the need for more fiscal discipline. Is there a theoretical place at which taxation reaches a tipping point, where we have so much that we're taking care of in that regard that we collapse the economy from the other end?

RR: I think the answer is probably yes. But I don't think we're anywhere remotely near that today. My recollection is that federal revenues are something like 16 percent of GDP and that's the lowest percentage of GDP since the 1950s.

Q: When you look at the numbers you cited, they're astounding. And I wonder if you have an opinion on why you don't hear more from Federal Reserve Board Chairman Alan Greenspan or why some other prominent economic business leaders aren't out there talking about potential crises?

RR: Greenspan at various times has expressed great concern about fiscal matters, even when he was supporting the 2001 tax cut. Why business leaders don't speak out more is a very interesting question. Back in the mid 1990s, the Business Roundtable was taking the very strong position on deficits. John Snow, today’s Treasury Secretary, was at that time chairman of the Business Roundtable and in favor of fiscal discipline. I meet with a lot of business people, and almost always they talk about this as a very serious problem. But it's longer term, it's out there, it's intangible, it's not quantifiable, and it’s laden with politics.

Q: There's been a lot of talk and pressure about China and having them float their currency. And I know eventually that day is coming, and it could be soon. What do you think the net impact of that would be on our economy?

RR: I was in China three weeks ago, and met with Premier Wen, and he talked about the currency. I think China would benefit from being on a floating exchange rate system, and I think that's ultimately where they will wind up. But they have always had great concern about trying to minimize the risk of instability in a country of 1.3 billion people. My instinct is that they will continue to very heavily weight stability and until their financial system is in materially better shape than it is today, I suspect they're going to lag on moving ahead with such matters as exchange rate liberalization.