CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press It’s Monday and Robert Samuelson Is Confused

It’s Monday and Robert Samuelson Is Confused

Print
Monday, 04 February 2013 14:43

The cause for complaint this morning is Japan where the new Prime Minister, Shinzo Abe, has plans for an ambitious new stimulus program. This makes Samuelson unhappy since he is much more fond of the sort of austerity that has given Greece a 26 percent unemployment rate or now threatens the United Kingdom with a triple dip recession.

Samuelson tells us that Abe’s plan won’t work because it doesn’t address the structural problems in Japan’s economy, especially in its service sector. Samuelson notes that Japan has had several stimulus programs over the last two decades. He tells readers:

“The lesson is that huge budget deficits and ultra-low interest rates — the basics of stimulus — have limits and can be self-defeating. To use a well-worn metaphor: Stimulus becomes a narcotic. People feel better for a while, but the effect wears off. The economy then needs a new fix. Too many fixes may spawn new problems (examples: excessive debt, asset “bubbles,” inflation). That’s already happened in Japan.”

Yes, this is where we can see that Samuelson is badly confused. Japan did have asset bubbles, but that was back in the 1980s. At the that time the country was not pursuing any stimulus at all. In fact, it had balanced budgets and a very low debt to GDP ratio.

As far as inflation, here again someone has to introduce Samuelson to the data. Japan’s problem is the opposite of inflation. Its consumer price level in 2012 was about 3 percent lower than it had been in 2000, implying an average annual rate of deflation of 0.3 percent.

In fact one of the most intriguing ways that Abe hopes to boost the economy is to have the central bank deliberately target a higher rate of inflation, committing itself to buy as many assets as necessary to raise the inflation rate to 2.0 percent. It is difficult to understand how Samuelson could think Japan has a problem with inflation.

Whether Japan’s debt is “excessive” can be debated, but it certainly does not have an excessive interest burden. Its interest burden is currently around 1.0 percent of GDP. It would be even lower if the interest paid to the central bank, and refunded to Japan’s treasury, were subtracted.

This low burden is possible because the interest rate on Japan’s debt is extremely low, with short-term debt getting near zero interest and long-term interest rates hovering near 1.0 percent. Samuelson wrongly imagines that the government would face a disaster if interest rates rose. In fact, it would be able to buy up its long-term debt at huge discounts and quickly reduce its debt to GDP ratio.

(Bond prices move inversely to interest rates, so if interest rates on 10-year treasury bonds rose to 3 percent, Japan’s central bank could buy them back for around half of their current price. There would be no real reason to do this, but it would placate the sort of ignorant people who tend to dominate economic policy debates and get obsessed about debt to GDP ratios.)

It is undoubtedly true that Japan, like all countries, has serious structural problems. The real issue is whether these would be more easily addressed in an economy that is growing at a healthy pace or whether structural reform is somehow advanced by stagnation and high unemployment. The latter view has been tested extensively in the last five years throughout the euro zone, the U.K., and perhaps now in the United States. Thus far it has been shown wrong everywhere.       

Comments (19)Add Comment
testing
written by David, February 04, 2013 3:52
It is undoubtedly true that Japan, like all countries, has serious structural problems. The real issue is whether these would be more easily addressed in an economy that is growing at a healthy pace or whether structural reform is somehow advanced by stagnation and high unemployment. The latter view has been tested extensively in the last five years throughout the euro zone, the U.K., and perhaps now in the United States. Thus far it has been shown wrong everywhere.


In particular, it was shown to be wrong in Japan itself. After 20 years of repeating the same failed policies (see definition of 'insanity') somebody finally has the good idea of trying something different. It won't be any worse and fans of arithmetic know that it will help Japan.
Legalize Stimulus
written by LSTB, February 04, 2013 4:45
...Or at least allow us to use it for "medicinal" purposes.

The lesson is that huge budget deficits and ultra-low interest rates — the basics of stimulus — have limits and can be self-defeating. To use a well-worn metaphor: Stimulus becomes a narcotic. People feel better for a while, but the effect wears off.


Forget if Samuelson has no factual basis for this. What's crazy is that he apparently believes that stimulus means government borrows money and when it's spent, it vanishes into the Twilight Zone:

When government spends money on a bridge, a bridge is in fact built, and real people's commutes are shortened. When government hires teachers, teachers are in fact hired; children are taught, and teachers spend real money on housing, food, fuel, etc. In Samuelson's world the moment the stimulus money stopped flowing, all those WPA projects and all those B27s that won WWII ceased to exist by operation of logic.

The only way stimulus doesn't work is if the government borrows a massive amount of money, prints it as currency, and then sets it on fire.
Samuelson should emulate Eisenhower
written by David, February 04, 2013 5:10
One major reason the Interstate system was built: way back in the day (1919), Eisenhower traveled across the country in a tank from Gettysburg to San Francisco along the Lincoln Highway. That experience ingrained deeply in his mind how bad the roads were in crossing the country. By the late 40's this was recognized as a defense issue, but Truman had bigger problems at the time.

Now, how in Samuelson's name he doesn't see that the overloaded, aging, inefficient power grid is a defense issue and not something to scrimp pennies on is beyond me. But I don't look to Samuelson for a vision for this country or (especially) any insight as to the economy. Neocons: bad for employment, bad for defense, bad for science, bad for peace. Why they have a say in policy is a testament to the power of "old money" (which isn't very old after all).
...
written by David, February 04, 2013 5:18
the point was, Samuelson should get out more, drive around the country, look at the powerlines and coal plants and get a damned clue.
...
written by liberal, February 04, 2013 6:56
LSTB wrote,
What's crazy is that he apparently believes that stimulus means government borrows money and when it's spent, it vanishes into the Twilight Zone...


If "Twilight Zone" is a euphemism for "landowners pockets", then that statement is somewhat true.
Stimulus scraping fat cats
written by jumpinjezebel, February 04, 2013 10:07
Any stimulus ideas should try to get the money down into the hands of the workers instead of being contracted to some big business who has a big staff and gigantic salaries and profit margins - they then sub some of the work to their buddies who have the same sucking sound - all this takes place before any actual work or labor gets paid. The percentage of the scrapped off bounty that gets spent is much lower than that of the actual people doing work that mostly live paycheck to paycheck. Don't know exactly how to solve this but some smart people must have some ideas. Limit profit percentages???
...
written by watermelonpunch, February 05, 2013 2:03
Thank you for the lay-out of the bond & interest rate relationship. This sort of thing is worth repeating, and repeating. It's a tad counter-intuitive & so the misunderstanding can trip one up into buying into ideas that make no sense.

RE: structural... I guess he may have a point in the sense that if the economy improves, the structural problems wont be fixed because people might go straight to bubble-mania again, and therefore think there's no need for structural change?
But while I totally see people wanting that to happen here in the U.S. & just have bubbles (because some people do make money in bubbles, after all), I don't know if that's likely in Japan.
My suspicion is that if the stimulus works, it probably won't be fast, and therefore they'll all be saying "look it's not working", until we're 10 years from now and they're at the top of the heap and the rest of us are underfoot.
Well that's my concern.

Japan plans investing in scientific research. That's going to be a step in the right direction no matter what happens.
If Americans should have any concerns regarding Japan, I should think it would be about us falling so far behind in science!

He says:
For years, Japanese governments have adopted stimulus plans

Dating back to the times of the Samurai!? ? ha ha
I thought they hadn't done a stimulus in the past decade?
When was the last stimulus in Japan?

Looks like everyone in finance in Southeast Asia is excited in a good way.
...
written by watermelonpunch, February 05, 2013 2:29
@ LSTB Your "Legalize Stimulus" comment is possibly one of the best comments ever!!

I don't know about Samuelson of course...
But the average person probably doesn't understand the concept of stimulus.

It is kind of counter-intuitive if you're looking at it from a very individual experience viewpoint... it does kind of sound like pissing it out the window.

The average person knows that when they spend their money - it's gone! It's no longer in their hand or in their bank account.
They don't stop to think about the fact that they're getting hours of cheap entertainment out of their TV they bought. Or that they're using their phone all month long.
They just know they themselves can't spend that money twice.

It takes at least a few moments of thought to consider that the money they spend, pays someone else, who then buys something from the company that they work for, that pays them... etc.

The reason they don't stop to think about these things is because they're literally too busy... they're harried & running between working 2 jobs. Etc.
It's not hard to see how some people in those kinds of situations think all sorts of things, and have all sorts of emotional resentments standing in the way of logic.

Again, I don't know what Samuelson's excuse is though.
inflation
written by bakho, February 05, 2013 5:59
Many people reverse inflation cause and effect. Inflation causes countries to print money. Printing money does not cause inflation. However, most US media people are confused about this.

Samuelson simply wants lower taxes on the wealthy by cutting back on contributions to Social Safety net programs. Samuelson wants the wealthy to be able to make money from the SSTF or at least not have to pay taxes to cover what is owed to the SSTF going forward. These are tules that favor the wealthy who externalize the social costs they create on the rest of us. The wealthy need to pay back the economy for the social costs they create.
Could be ...
written by dick c, February 05, 2013 8:28
Given the ridiculously large number of things Samuelson got wrong in this piece, isn't it possible he was actually writing about Thailand, Malaysia, or someplace else, and is only mistaken about the name of the country?
Stimulus is no panacea...
written by Jesse, February 05, 2013 10:57
Stimulus 'works' if it is coupled with a government policy of reform, and constructive uses of the stimulus.

If stimulus consists of providing more funds to a corrupt financial system so it can continue to do more of the same things that brought the financial crisis in the first place, then obviously this will not be effective.

Most Westerners miss that punch line with regard to Japan. The failure to reform the kereitsu crony capitalist structure of their economy effectively stifled any real recovery. It last as long as it did because they did not adopt austerity for their own people, given their cultural attitudes. In the US the same does not apply.

This is my major quibble with Paul Krugman, who is otherwise among the better commenters. He needs to sit down with Bill Black and have a meeting of the minds.

Printing money does not cause inflation, inflation causes printing money. MMT proved it. LOL.

That he doesn't know Japan has had a decade of deflation...
written by eddie-g, February 05, 2013 11:21
Is quite staggering. I guess the Post, has done a Newsweek and given up on fact-checking
Just sharing
written by Stefan, February 05, 2013 11:38
I lived in Japan--a country I dearly love--for several years, first as a GI from 1973-75, and then as a foreign student from 1981-83. Some observations:
1) During the two years I was a soldier there, the yen went from 360 yen to $1, to 280 yen to $1.
2) When I was a foreign student there (the yen was about 180 to $1), I remember being very impressed by the velocity with which money circulated within Japan's domestic economy (compared to America). People spent money. Is there any measure of the velocity of money in an economy?
3) By 1991, the number of luxury stores in Tokyo was amazing. The Japanese had gotten it into their heads that the value of the real estate of Tokyo was equal to the sum total of the value of all the property in the rest of the world. And, it was on that basis that they were lending each other money. I believe a lot of gangsters got involved in that kind of crazy money trade. (I think it was about 120 yen to the dollar then.)
4) My last point is "hysteria." The Japanese are a very homogenous people, which means they all tend to "share the same mood." When one of them rushes to one side of the boat, they all do, and so they have to contend with these dynamics of hysteria.

I don't know how my observations figure into Abenomics, more than 20 years after Japan's bubble burst, but I notice that a dollar is currently worth about 94 yen.
Deleveraging is painful
written by Painful Truth, February 05, 2013 11:48
Samuelson's main point is that deleveraging is painful. Europe is experiencing it. Japan has avoided most of it by increasing gov't debt. The U.S. also has avoided it by increasing gov't debt. We'll see the response in Japan if it even able to generate inflation.

If a gov't has a healthy debt (i.e., small with respect to GDP) it can reasonably offset recessions with temporary borrowing. When the debt is large, such as ours, offsetting a recession with increasing debt becomes a habit in which the gov't does not wish to face the pain. The hope is on increasing employment to raise GDP so more taxes can be collected. But, do we have the workforce and increased future demand to do that? We continue to hope, and doubts increase.
...
written by watermelonpunch, February 05, 2013 12:49
do we have the workforce and increased future demand to do that?


???
faux-economist hack
written by Betty Pawsheifer, February 05, 2013 2:00
Given the ridiculously large number of things Samuelson got wrong in this piece, isn't it possible he was actually writing about Thailand, Malaysia, or someplace else, and is only mistaken about the name of the country

Not at all. Samuelson is a shill who is paid to confuse the public and to introduce false talking points into the discussion.
Stimulus is like a narcotic: good medicine for a sick body
written by Chris Vaughan, February 05, 2013 3:06
Robert Samuelson writes: "To use a well-worn metaphor: Stimulus becomes a narcotic. People feel better for a while, but the effect wears off. "

But you know what? Sometimes when you are sick, you need a narcotic. It makes things better when you are really hurting and helps you heal, which is as it should be. When you get better, you stop taking it.

So calling the stimulus a narcotic really is not the indictment that Samuelson thinks it is. People should really think through their metaphors.
"Fed Risks Lossess From Bonds" sayeth WSJ 1/30/2013
written by TVeblen, February 05, 2013 9:33
I like Dean's point about bond buy-backs @ $0.50 on the $1.00 (e.g., if 30-year T-Bond rates hit 6-7%). However, a study by Fed economists points out that a rise in interest rates "will leave the highly profitable central bank with no extra income to hand over to the Treasury for several years." For example, last year the Fed earned a record $91 billion on its bond-buying program (not clear what part of that flow of income came from selling appreciated (older) bonds or from coupon payments on those older bonds. Accoring to the Fed study, a jump in short term Treasury rates from close to 0% to 4.8% could lead to $125 billlion in losses and no 6 years without paying profits to the Treasury beginning in 2016. Now Dean's point is that if the Fed bought back those presumably cheaper 30-year bonds, that would offset any of the losses on their purchases (I have no idea how this would actually net out in, say, 2016). Back in the late-1990s, the Fed started buying all those 30-year bonds issued around 1983 (at something around 13%). I'm sure there is some record, somewher, of how much was saved. I recall Barron's pointed out that investors were really mad because T-Bonds have no call feature (if they did, investors would have demanded 15% back in 1983) and if 1983 ever happened again, the Fed would have to pay a higher rate (once bitten, twice shy). So kudos to Dean for puncturing another canard.
...
written by watermelonpunch, February 06, 2013 2:50
Sometimes when you are sick, you need a narcotic. It makes things better when you are really hurting and helps you heal, which is as it should be. When you get better, you stop taking it.

So calling the stimulus a narcotic really is not the indictment that Samuelson thinks it is. People should really think through their metaphors.


Excellent point.
I wonder why he didn't think about the fact that narcotics are generally prescribed medicinally, and that's what they're made & sold for.
It's not like we're talking about a black market stimulus plan that Congress is going to score down in the red light district.

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.

busy
 

CEPR.net
Support this blog, donate
Combined Federal Campaign #79613

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.

Archives