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Home Publications Blogs Beat the Press Robert Samuelson: Economics Is Hard

Robert Samuelson: Economics Is Hard

Monday, 28 June 2010 04:51

That seems to be the main point of Robert Samuelson's column today. It might be a bit easier with a bit more careful thought.

For example, Samuelson tells readers that the debt burdens of major countries are rapidly approaching "financial and psychological limits" that prevent further fiscal stimulus. He then cites the 92 percent debt to GDP ratio for France, 82 percent for Germany, and 83 percent for the UK as countries that are reaching these limits.

If he was looking for financial and psychological limits, he might have considered the case of Japan. Its debt to GDP ratio is close to 220 percent. Its interest payment take up a bit more than 1.0 percent of GDP each year and it can borrow at long-term interest rates of around 1.5 percent. This is possible because its central bank has bought up much of the government's debt over the last 15 years. Since the economy remains well below its capacity, the central bank's actions have not to led to inflation. In fact, Japan continues to be troubled by deflation.

The European Central Bank could similarly adopt a policy of buying and holding large amounts of the debt of euro member governments. The interest on debt held by the central bank does not impose a burden on governments, since it is rebated to them.

The column also touts some recent research which purports to show the benefits of deficit reduction as stimulus. It is worth noting that nearly all the examples of deficit reduction as stimulus involve countries that faced very high interest rates and in which trade comprised a very large share of the economy.

In these circumstances, a reduction in the deficit could produce a substantial stimulus through two channels. First, it would lower interest rates, which would provide a direct boost to domestic investment and consumption. Second, lower interest rates would lower the value of the currency, which in turn would make its goods more competitive internationally, thereby increasing net exports.

These conditions do not apply for most countries at present and certainly not to the United States. It is very doubtful that even the strongest deficit reduction measures will have a noticeable effect on lowering already low interest rates. It is also not clear that there would be any substantial investment response to lower interest rates by businesses that already are sitting on huge amounts of retained earnings. Heavily indebted consumers are also not likely to substantially boost consumption.

The trade route also does not look especially promising. If interest rates fell in the United States it is unlikely that it will lead to much of a decline in the dollar in a context where it has been pushed up by a flight to safety in uncertain times. Furthermore, it is not clear that the United States will be able to increase its net exports by much at a time when every other country is trying to go the same route and is also constricting demand through fiscal contraction.

See, economics really isn't hard.

Comments (9)Add Comment
Who Got the Hundred Dollar Bills on the Sidewalk?
written by izzatzo, June 28, 2010 7:14
Samuelson writes in the article,

We may be reaching the limits of economics. As Keynes noted, political leaders are hostage to the ideas of economists -- living and dead -- and economists increasingly disagree about what to do.

To the contrary, the limits being reached are not in economics per se, but reflected in revisionist history of events like the Great Depression of 1929 or Japan today, as Baker notes.

There has been no major paradigm shift in mainstream economics since Keynes introduced essentially what was macro economics into the neoclassical framework. The dominance of mathmatical economics and modelling, and theories like the Efficient Market Hypothesis were not paradigm shifts, but instead ultra refinements within the existing paradigm.

Where Samuelson really trips over his own logic and history lies in the claim that "political leaders are hostage to the claims of economists", which was more true in Keyne's time than now. In the US today, political leaders are bought and paid for outright by powerful corporate and special interests, while economists are kept on the sidelines for appropriate appeals to credibility to justify whatever decisions have already been made.

Look around on the sidewalks. There's no hundred dollar bills. They've all been picked up because self interest is still alive and well withing a neoclassical supply-demand framework of market capitalism. It didn't "reach its limit" and stop working because of a deep recession or massive income equality and corporate dominance over markets.

Baker reminds Samuelson et al of this every day. It's not the economics that's hard. It's the evidence under the nose, the elephant in the room that's conveniently ignored. Of course there's no hundred dollar bills laying around on sidewalks. That's not the question. The question is who got them and how, and why others aren't getting them.
G20 applauds fiscal austerity
written by Scott ffolliott, June 28, 2010 7:30
G20 applauds fiscal austerity

We need a next big thing, not new cell phones or video games or bad movies.
written by fuller schmidt, June 28, 2010 11:17
I knew Izzatzo's head and heart were in the right place.
written by Min, June 28, 2010 12:20
"It is very doubtful that even the strongest deficit reduction measures will have a noticeable effect on lowering already low interest rates."

It could have the opposite effect, at least on consumer rates, by making it harder for them to avoid defaulting on their debts.
written by Queen of Sheba, June 28, 2010 3:34
I read Samuelson's column while eating breakfast this morning. I won't make that mistake again (nearly lost my breakfast). His entire column sounded like he was just throwing up his hands at the whole problem, even though he managed to bring up the subject of "cutting deficits expanded the economies of other countries" with no explanation of how that worked. He just sounded tired and whiny.

Apparently Newsweek's being put on the block is affecting him. I wonder if supply-side economists change their tune when they themselves become part of the unemployed or underemployed masses.
economics is hard
written by tal, June 28, 2010 3:48
hey dean,

have you had a chance to address Kartik Athreya's paper "Economics is Hard. Don’t Let Bloggers Tell You Otherwise"?

You can find it here - https://docs.google.com/fileview? id=0B6yuUpUNGf0pZGQ0YmQ5MjctM2ZiNS00NGIxLTg3OWItYWIxOTc

And a blogpost about it here - http://www.salon.com/news/econ...s_bloggers
written by bailey, June 28, 2010 8:26
I suggest THE question for Economists is: when will they base arguments in terms that correlate to population samplings? Let's start with "inflation"!
written by Osman Aziz, June 30, 2010 9:26
It seems awfully difficult for the likes of Dean Baker to wrap his head around the simple fact that debt issuance in excess of the underlying countries ability to service it is percisely the problem we are currently suffering from.

The use of Japan as a benchmark to indicate how much more we can borrow to finance our deficits is not only farcical in economic terms, but also from a common sense standpoint. Japan, unlike the US, has the highest personal savings rate relative to GDP. Per any growth model, this explains why Japan has been able to focus on Capital investment, unlike the US that squanders its money in commercial and residential real estate.

Baker, along with the rest of these mindless academics need to abide by what Tolstoy said most sanguinely. "Freethinkers are those who are willing to use their minds without prejudice and without fearing to understand things that clash with their own customs, privileges, or beliefs. This state of mind is not common, but it is essential for right thinking..." Unfortunately, Baker's obedience to Keyenes prevents him from realizing this...
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.