Robert Samuelson Has Not Heard About the Collapse of the Housing Bubble and the Recession

Friday, 12 July 2013 05:11

That is what readers of his column on the state of the world economy will conclude.  He told readers:

"Europe, the United States and Japan also face unsavory choices. All wrestle with what the IMF calls “fiscal consolidation” — reducing budget deficits. The underlying problem: costly welfare states with aging populations."

Actually this is completely wrong. The United States and most other wealthy countries had relatively modest deficits until the collapse of the housing bubbles threw their economies into recessions. It's amazing that Samuelson somehow missed the crisis.

In the United States, the pre-recession deficit was around 1.5 percent of GDP and projected to stay in this range for a decade. The collapse of the economy was what led to large deficits. Even now with the economy still badly depressed, debt-to-GDP ratios have nearly stabilized.

There is a similar story in most other wealthy countries. Contrary to what Samuelson asserts about "costly welfare states," the extent of budget difficulties is almost inversely related to the extent of their welfare state. Countries with expensive welfare states like Denmark, Sweden, Germany and the Netherlands have few fiscal concerns. The large budget deficits are in the European countries with the least developed welfare states, Ireland, Portugal, and Spain.

Samuelson also implies that there is some great harm in the trade deficits that India is running. India has had trade deficits in recent years of around 5 percent of GDP. This is quite sustainable for a country experiencing the sort of growth that India has been seeing and in fact exactly what standard economic theory would predict. By contrast, trade deficits of this size in a relatively slow growing country like the United States is a more serious issue.