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Home Publications Blogs Beat the Press Economics 101 For Robert Samuelson: Recessions Are About Inadequate Demand

Economics 101 For Robert Samuelson: Recessions Are About Inadequate Demand

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Monday, 11 October 2010 04:21

Robert Samuelson insists that the bond markets are forcing countries to adopt austerity in the middle of a downturn. This is not true. Bad economic policy, by the same people who gave us the Great Recession (how badly do economists have to mess up to get fired?) is forcing countries to adopt austerity in the middle of a downturn.

In fact the bond markets are making money available to countries like Germany, Japan, and the United States at very low interest rates, the exact opposite of the scenario that Samuelson describes. (Samuelson notes these low rates in passing, but doesn't seem to understand their importance.) It is true that countries like Greece, Ireland, and Spain are paying much higher interest rates, but this has little to due with the generosity of their welfare states as Samuelson claims. It is due to the deliberate decision from the Great Recession makers at the European Central Bank (ECB) to squeeze these countries.

The situation of these countries is similar to that of individual states in the United States. They do not print their own currency and therefore are constrained in their ability to spend in a period of a downturn. The ECB does print money and could easily extend support to these countries during the downturn, but it has made a conscious choice to only do so insofar as they cut back on their welfare state benefits. Note this will not create inflation in the current situation; the economy's problem is inadequate demand, not too much demand.

It is not the downturn that is forcing cutbacks, it is the people controlling policy at the ECB. These policymakers do not like to be publicly associated with their policy decisions so they no doubt appreciate columns like Samuelson's that hide their role.

As a basic principle, there is no reason for general cutbacks in the welfare state. Societies are getting richer because of something called "productivity growth." The cutbacks in the welfare state are simply part of the upward redistribution that policymakers in the U.S. and elsewhere have been pushing for the last three decades.

Comments (7)Add Comment
intellectuals as apologists
written by frankenduf, October 11, 2010 9:08
"these policymakers do not like to be publicly associated with their policy decisions so they no doubt appreciate columns like samuelson's that hide their role"- this is the role of the integrated intellectual, as opposed to the ethical intellectual, whose function is to critique
Enthusiasm and Fear
written by diesel, October 11, 2010 12:04
They're eager to pump liquidity into the system when things look bright, commissions are to be made, prospective interest compounded into veritable Everests of wealth, but when the contraction begins, they want to lock in their gains, prevent the dilution of the money supply, squeeze the poor sucker who has no reserves to fall back on, crying now for "fiscal responsibility". If they could dampen their extremes (fueled by the vision of effortless gain), maybe the system wouldn't oscillate so wildly. Of course that would entail their recognizing that they are parts of a larger system to begin with, a perspective which is lacking in (as I posted earlier) a philosophical outlook that begins from the specious premise that we are all individual agents acting independently to optimize our selfish interests (a position that any respectable cognitive or developmental psychologist would find indefensible) and that any system "so conceived could long endure".
...
written by purple, October 11, 2010 1:06
The cutbacks in the welfare state are simply part of the upward redistribution that policymakers in the U.S. and elsewhere have been pushing for the last three decades.

And now there is the inevitable global AD crisis.
PIGs' balance of payments.
written by Ralph Musgrave, October 11, 2010 4:46
.
I agree that Samuelson is clueless. However I am not sure that Dean’s suggestion that the ECB dole out money to PIGS is a panacea. Part of the problem these countries face is a balance of payments problem. So cutting their welfare budgets makes their labour cheaper and helps their exports. Or have I missed something?
...
written by Ron Alley, October 11, 2010 5:35
Ralph,

My understanding is that "the welfare budget cuts" have little immediate effect. So I don't see much of an effect on any balance of payments issue. Balance of payments in the future could be affected by so many other factors that "welfare budget cuts" are unlikely to have any substantial and predictable effect.
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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.

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