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Home Publications Blogs Beat the Press It's Monday Morning and Robert Samuelson is Confused About the Economy

It's Monday Morning and Robert Samuelson is Confused About the Economy

Monday, 14 October 2013 07:48

Today's topic is how we are stuck in a slow growth path and therefore will have to take the ax to programs like Social Security and Medicare. Of course Samuelson always wants to take an ax to programs like Social Security and Medicare; this is just a new reason for cutting back programs that working people depend upon.

Most of his problem stems from the fact that he seems to have forgotten that we are still in a downturn, with the economy operating at a level of output that is more than $1 trillion below its potential according to the Congressional Budget Office. This means that when he complains about the impossibility of finding a political path to closing the structural deficit due to the growth of social spending ("welfare" to Samuelson), he is complaining about a problem that does not exist.

The most recent projections from the Congressional Budget Office show a baseline deficit projection for fiscal 2014 of around $600 billion. If the economy were operating at potential GDP, this would reduce this figure by around $300 billion. (An additional dollar of output will lead to roughly 30 cents in savings to the government due to higher tax collections and lower payments for programs like unemployment benefits and other transfers.)

This leaves a deficit of around $300 billion or roughly 1.8 percent of GDP. With a deficit of this size the debt-to-GDP ratio would be falling, which means that the government can run a deficit of this size in perpetuity.

It is true that in the longer term the deficit is projected to rise due to the rising cost of health care. The United States pays more than twice as much per person for its health care as other countries with nothing to show for this spending in terms of outcomes. Unfortunately, political debate in Washington is dominated by hard-core protectionists like Samuelson and the Washington Post editorial board who refuse to even consider plans to open up U.S. health care in ways that would reduce the income of doctors, drug companies, and insurers.

The high price of health care in the United States imposes an enormous burden on the economy and the budget. If the U.S. paid the same per person costs of health care as people in other countries we would be looking at enormous surpluses for the rest of the century, not deficits. Rather than reducing the extent to which the rich benefit from waste in the health care system, Samuelson and others want working people to get by with less care.

CBO-health care 17343 image001

                         Source: CBO, OECD, and author's calculations.

Samuelson is also wrong on other parts of his pessimism, most obviously he can't seem to find his way over the Bureau of Labor Statistics website. He told readers:

"Take women’s labor-force participation. From 1950 to 2000, it surged from 30.9 percent to 59.9 percent; but in 2012, it was 57.7 percent, with the falloff starting before the recession."

This is wrong. Our friends at the Bureau of Labor Statistics tell us that the labor force participation rate for women over age 20 went from 60.5 percent in 2006 to 60.6 percent in 2007. It dropped after the recession started at the end of 2007.

The basic story is that we are certainly seeing slow growth now, but this is because Congress is working hard to roll back sources of demand, most importantly government spending. For reasons that no one can explain we are not supposed to even talk about raising demand through reducing the value of the dollar and thereby increasing net exports.

As Keynes taught us almost 80 years ago, with weak demand the economy will grow slowly. We know how to fix this -- spend money -- but that is not in fashion right now. Instead, high unemployment and slow growth is the rage, but this is by design, not a fact of nature. 

Comments (23)Add Comment
accounting identities
written by joe, October 14, 2013 10:29
Sorry Dean, but that chart is total bs. If the govt has a budget surplus, then the non-govt sector has a budget deficit. It's simply part of the national income accounting identity. Your income is someone else's spending. The non-govt, as users of the currency, simply can't sustain deficits for very long. The govt, as issuer of the currency, can and must run deficits to accommodate the net savings desire of the non-govt sectors.

I see your point about health care costs, but you're placing it into an entirely unrealistic context. The more important issue is to get the public to understand that govt deficits are their surpluses.
Is there some reason that the U.S. can't run a trade surplus with fast growing countries?
written by Dean, October 14, 2013 10:43
That one is a question for Joe -- I'm a big fan of accounting identities, as we all should be. Is there some problem with the government running a budget surplus, associated with a trade surplus being run with countries growing much faster than us (e.g. China and India).
btw, I was not advocating a budget surplus, just laying out what baseline projections would show adjusting for differences in health care costs.
US trade surpluse
written by joe, October 14, 2013 11:03
True, if we have a trade surplus then the govt and domestic private could both run surpluses.

We do our trade in US dollars. There's a finite amount of US dollars held abroad. If we ran a trade surplus for too long, there'd eventually be no more foreign held dollars. Then either we'd have to be willing to accept foreign currency, or foreigners would have to go to the fx market to obtain the dollars to buy our goods. Which would entail someone holding US dollars being willing to trade them for whatever foreign currency. And wouldn't this raise the value of the dollar????

Presently, foreigners wish to earn more dollars than they spend. The domestic private sector wishes to earn more dollars than it spends. So the govt has to run a deficit to accommodate that.

Personally I prefer the national incoming acct identity in this form
Domestic private balance + foreign balance + govt balance = 0. (in this form, a US trade surplus would be a foreign deficit, form the pov of the foreigners)
and in real terms
written by joe, October 14, 2013 11:12
in real terms, a trade surplus would mean that US workers are laboring to produce goods that the don't get to consume. So we should labor and not consume, just so we can collect pieces of paper that we ourselves can make in unlimited quantities? To me, a trade surplus is bad.
Grand Bargain Disorder: The New Economic Normal
written by Last Mover, October 14, 2013 11:51

Patient: Doctor, I've been feeling morose and lethargic since 2008. I need more energy in order to live up to my potential. What should I do?

Doctor: That's a mistaken diagnosis. The tests show you have been living beyond your means. You have plenty of energy on the supply side, you just need to use less of it on the demand side financed by debt instead of current available energy.

Patient: What's the cure?

Doctor: Here, take these austerity pills for economic bipolar disorder. The highs of full employment potential and lows of severe unemployment will disappear in about a month as you stabilize into a chronic state of living below your means as the debt is paid down with cuts made to your debt driven expectations of unearned entitlements.

Patient: Why is living below my means a cure for living beyond my means? Why can't I live a fully employed life at my means rather than below it?

Doctor: We call it the Grand Bargain of New Normal, manipulating your expectations down to a lower potential than you really have. Once you arrive at this level, your energy will pick up in no time as the moroseness and lethargy disappears, because you will consider it a normal state of full employment potential once the austerity pills kick in.

Read Robert Samuelson. He knows. He's a patient of mine with severe economic bipolar disorder.
Welfare state?
written by Jennifer, October 14, 2013 11:52
"Careful historians will, I think, cast it as a symbolic turning point for post-World War II institutions — mainly the welfare state"
I can't take anybody seriously who refers to the programs we have in place that barely keep people alive as the "welfare state".
written by Bart, October 14, 2013 12:21

Remember that Samuelson thinks roofers, tree surgeons, dental hygienists and others with physically demanding jobs should work well into their 70s before getting "welfare."

Foreign investment
written by Dean, October 14, 2013 12:36

that's just the story of foreign investment. Rich countries lend poor countries money to buy their stuff and develop. I fail to see the problem with it.
written by skeptonomist, October 14, 2013 12:45
International trade is more complex than the accounting identity that Pete gives. The current US deficit is a symptom of the flight of manufacturing (and other things), which tends to reduce wages of US workers but adds to profits of US corporations. US workers want to protect their standard of living and this is not always accomplished by buying cheap stuff made in other places.
Play up the accounting identities more
written by Sustainable Gains, October 14, 2013 12:46
Joe, you are really on to something. Dean, thank you for noticing.

Unlike most other economic relationships, the accounting identities seem to be pretty hard to argue about.

Right now the corporate profits are grossly elevated (70% above historical norms). This surplus can exist because of the government's deficit and the trade deficit. That the domestic private balance is turned into corporate profits and not household savings reflects, IMHO, a systematic failing of the current U.S. economic structure.

In the absence of reform of the systemic failings, one can make the seemingly paradoxical point that arguing for a larger deficit is tantamount to supporting outrageous corporate profits!
Off topic but..
written by Michiganmitch, October 14, 2013 12:53
Dean, Avik Roy could use a firm slapdown.
... and the other paradox is interesting too...
written by Sustainable Gains, October 14, 2013 1:01
If we want to continue to have a growing dollar-based global economy with stable dollar value, the U.S. trade deficit has to exist (on average, over time). With stable dollar value and growth, other nations will continue to demand more dollars. The overseas dollars will be used either internally (several nations have dollar economies or shadow economies), as savings (private hedging against domestic currency problems) or as foreign currency reserves to support discrete foreign currencies.

So the paradox is that here, arguing for a smaller trade deficit entails also arguing for a reduced role for the dollar as a multinational currency and global reserve currency.
written by skeptonomist, October 14, 2013 1:06
I meant Joe.
written by joe, October 14, 2013 1:42
So Dean, your idea is for the US govt to run a surplus then lend that money to foreigners to buy our goods that we labored to produce? Yes, that's basically what the marshal plan was, but in real terms, it's a horrible deal for American workers. And even then, the US govt ran a deficit. And it's what Germany was/is doing, but again, in real terms it's a raw deal for the german worker.

But now it wouldn't really work for the US, because foreigners desire to net save in US dollars. The only place to get those is from a US trade deficit. So until foreigners desire to net spend in US dollars, there will be no govt surplus & domestic private sector surplus simultaneously.

Sustainable gains - Yes, accounting identities are irrefutable. For you to earn a dollar, someone else must spend a dollar. One account goes up a dollar, someone else's account goes down a dollar. And I think you're probably right about corporate profits. The govt deficit ends up as corporate profits. But that's an in sector distributional issue, workers wages need to be a bigger portion.
Foreigners didn't use to like to save in dollars
written by Dean, October 14, 2013 3:44

you seem to have a few things off here. I never said anything about the U.S. government running a surplus and lending the money to anyone. That one came from you. The private sector could run a surplus, as it often has and likely would now at full employment, and lend the money. I'm not quite sure what the problem is.
You don't need a Marshall Plan story here, it is accomplished with a lower valued dollar. FWIW, workers fared great with rapidly rising real wages in the Marshall Plan years.

I really don't understand your logic. If we increase net exports to get to full employment, this improves workers bargaining power and pushes up wages. That is the way it has worked in the past -- is there some reason it will be different in the future.

In terms of how foreigners "like" to save, you just telling me how they do save. You're welcome to use the term "like," but they "liked" to save much less in dollars prior to the East Asian financial crisis and they "liked" to save much more in dollars in 2006 than they do today. In other words, their likes seem to change quite a bit.
Furthermore, we are talking about foreign governments, not private actors. The big increase in "liking" came from central banks. They can be persuaded to change their likes and dislikes.
while Dean, & Joe from the popsicle stand argue...
written by watermelonpunch, October 14, 2013 4:12

That nice little graph is a good exercise in critical thinking.

Is too hard to notice the salient point here?

Regardless of whatever else is going on, does anyone have a good argument for justifying paying too much for overpriced and underperforming health care?

Just askin'.
written by urban legend, October 14, 2013 4:12
Samuelson isn't "wrong" about the employment-to-population ratio and you shouldn't say that. He's using the 16 and over figure that is the first one reported by BLS, a choice that is a perfectly valid one. There's plenty of other Samuelson B.S. to keep us occupied.
your graph
written by joe, October 14, 2013 4:33
My main beef was with the govt surplus in your graph, it goes on and on for decades. I pointed out that for the govt to be in surplus the non-govt (foreign + domestic private) will be in deficit. And you brought up trade. And in order for both the govt and domestic private to be in surplus, the foreign sector must net spend. We've had a trade deficit for most of the last 30 years (http://neweconomicperspectives...led-32.png). Unless that magically turns around and in a big way, there will be no simultaneous govt surplus and domestic private surplus.

My logic is simple. Why should we labor to produce stuff we don't get to consume? Just to collect pieces of paper only we ourselves can create?

Yes I suppose the private sector's net savings desire could be satisfied with net exports(foreign net spending), but in real terms, it's a loser. And at some point, due to the finite amount of foreign held dollars, we would either have to accept foreign currency, or park our net savings in foreign currency denominated assets. Why not just consume what we produce (balanced trade) and have a govt deficit to satisfy pvt sector net savings desire?

The bigger point is: the US govt is the only source of US dollars. It can't run out. The non-govt desires to net save (presently in any case) so the govt must net spend. There is no public debt crisis, there never will be. The govt's debt is literally the non-govt's net financial savings. It's an accounting identity, deficits must equal surpluses.

And our healthcare system sucks!
What's wrong with foreign investment
written by Dean, October 14, 2013 5:25

yes, this would mean buying assets land, businesses, foreign government debt etc, that are typically (but not always) sold in foreign currencies. So what? Is there a reason you think that workers should get a lower return on their savings to avoid having the money go abroad? This is in a context of full employment in the U.S. What's the problem.
Foreign investment is fine within reason
written by joe, October 14, 2013 6:24
So our workers should labor to produce cars and send them to india for them to drive (or wherever) and then purchase indian govt bonds to store their net savings in?
Our workers labor to produce cars that we ourselves get to drive and then have our net savings put into US treasuries? Which sounds better to you? Sure it's over-simplified but the point remains, laboring to produce goods you don't get to consume isn't a very good long term first world strategy. Really Germany's dumb for doing it, and you can't all be germany, global trade is balanced afterall.

It's normal for the US govt to have a deficit. It's had a deficit most years since it's founding. In any case, even with a slight trade surplus it's unlikely that would be big enough to cover the private sectors net saving desires. If you look the sectoral balances, even during the 60's when we had a slight trade surplus, the govt still had a deficit, which ended up as private sector net savings.

There doesn't seem to be a single year in the last 60 years where both the domestic private and the govt were in surplus. If there was, the surpluses were very small. http://multiplier-effect.org/f...Berlin.png
It sounds good to me to get a higher return rather than a lower return
written by Dean, October 14, 2013 7:00
I'm still confused as to what your objection is to foreign investment. Workers would get a higher return investing in foreign countries than the U.S.. Why is that bad?
The investment can and does take the form of U.S workers investing in U.S. companies investing overseas for greater profit. Not sure why this is supposed to be problem -- those economies are growing much more rapidly and allow for higher rates of return.
Can that go on forever? of course not, they will eventually catch up and have growth and productivity levels comparable to us, or at least I hope they do. At that time you wouldn't have capital flowing to developing countries because they would no longer be developing. But we don't have to lock in a pattern of growth for all eternity.

btw, until Reagan deficits were quite small in the post-WW II era. But I'm not actually arguing for surpluses, just saying that there is no logical problem with them if they go along with trade surpluses.
it's not a problem, but domestic investment is better
written by joe, October 14, 2013 8:52
OK, so what. So I get higher rate of return in rupees. Then I have to go find someone willing to trade me rupees for dollars before I can realize that gain and spend it here. Where will those dollars come from? You've just shifted the issue one step back.

It should be obvious that a big trade surplus would be a bad thing in real terms, over the long run. How about you come labor for me, I'll consume all you produce and give you my shiny IOU's, with a high interest rate to boot, then you can exchange them for brand new iou's when you want..

We have our own currency and we should use it to our advantage. We could have full employment and a trade deficit, if the govt sector would have a large enough deficit to accommodate domestic private savings desire. (your act of net saving is lessening someone else's income, who then must lessen their spending, which lessens someone else's income. not big enough govt deficit to cover net savings, then someone gets left unemployed. Kinda like musical chairs)

In any case, I bet there's not 2 people in congress that understand the sectoral balances thing we've been discussing. I would bet they all think that everybody in the economy should be 'fiscally responsible' and earn more money than they spend. But, as we know, that's mathematically impossible. One person's surplus is another deficit.
capitalists get very rich giving people money in exchange for IOUs
written by Dean, October 15, 2013 4:20

Does Warren Buffett suffer because he invests in exchange for shiny IOUs (i.e. stocks and bonds)? I'm failing to understand what you're objecting to. If you can invest in China and get a 15 percent real return, why is that worse than investing in U.S. bonds for a 1-3 percent real return. (I don't know which asset is shinier.)

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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.