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Home Publications Blogs Beat the Press Robert Samuelson Is Tired of Stimulus

Robert Samuelson Is Tired of Stimulus

Monday, 17 September 2012 03:59

That's the gist of his column today. After all, it really gets exhausting watching folks like Ben Bernanke try to create jobs for people who are unemployed because folks like Alan Greenspan and Ben Bernanke were too incompetent to recognize an $8 trillion housing bubble.

I'm not kidding. Here's the opening line:

"We are reaching — or may already have passed — the practical limits of 'economic stimulus.'"

Samuelson concludes the paragraph by telling us:

"The average response of 47 economists surveyed by The Wall Street Journal was that a similar program might cut the jobless rate 0.1 percentage point over a year."

Wow, that sure sounds like the end!

Okay, this is getting beyond silly. Limited stimulus has limited impact. Bernanke proposed (in my view) a very limited measure. I answered a different poll the same way, its impact on employment would be limited. (I still wouldn't dismiss the possibility of creating 200,000-300,000 jobs at no cost.) Only in Washington Post land would this imply that stronger stimulus would not have more impact.

Suppose Bernanke had said that he would buy enough bonds and mortgage backed securities to lower the 30-year mortgage rate to 2.5 percent as advocated by former Fed economist Joe Gagnon? Suppose Bernanke had pledged to buy enough bonds to raise the inflation rate to 3-4 percent, a policy he advocated for Japan's central bank in 1999.

The score that I and many other economists would put on these policies would be much more than a drop of 0.1 percentage point in the unemployment rate. If you invest $300 a year in a retirement fund then you probably cannot expect a very comfortable retirement. In Washington Post land this is a conclusive argument that saving is not a route to retirement security, but most other folks can figure out that the problem was that you had to save more money.

Samuelson's brief tour of various stimulus efforts gives examples of limited stimulus that produced the limited result that was predicted, starting with President Obama's original stimulus package. By almost all accounts, this package produced the 2-3 million jobs that had been predicted at the time. (The paper predicts 3-4 million, but it assumes more spending than Congress approved.) Of course we needed on the order of 10-12 million jobs, as fans of arithmetic said at the time

But Samuelson is somehow baffled:

"Whatever the benefits, massive stimulus clearly hasn’t triggered a monster recovery."

Just to recap the arithmetic we lost $1.2-$1.5 trillion in annual (as in every year, as in recurring) demand when the housing bubble collapsed. Residential construction fell by roughly 4 percentage points of GDP (@$600 billion a year) as the bubble driven boom went bust.

We also lost close to $500 billion in bubble driven consumption. This is not a debt story. We had $8 trillion in ephemeral housing wealth that disappeared when the bubble burst. People spent based on this wealth. The wealth ain't there any more, therefore the spending stopped.

Throw in another $100-$200 billion from the collapse of a bubble in non-residential real estate and state and local government cutbacks in response to lost tax revenue and you get the total amount of demand that we need to replace.

Samuelson and most of his ilk don't even have a clue as to where they expect this demand to come from. Do we expect consumption to go back to its bubble-inflated levels even when the wealth that supported this consumption is gone? Why? How? Consumption is still unusually high relative to disposable income, not low. What on earth is Samuelson thinking?


                                Source: Bureau of Economic Analysis.

Do we expect that investment will soar through the roof to replace this lost demand? If we focus on equipment and software investment (sorry the overbuilding from the bubble will prevent a surge in construction any time soon), this component of expenditures is almost back to its pre-recession level of GDP. How high does Samuelson think it will go?

(Samuelson gives an often-repeated silly argument on investment, telling readers:

"Low rates don’t matter if tougher credit standards prevent potential homebuyers from qualifying for loans. Or banks curb lending to restore capital."

Companies that make up close to half of the economy have direct access to credit markets by issuing bonds. These companies don't need bank loans. If the problem is that lack of access to bank loans is preventing smaller firms from growing, then we should see the big firms, that can borrow at record low interest rates, expanding like crazy to seize market share.

We don't. Firms like Wal-Mart and Starbucks have scaled back their expansion plans in the downturn. This means that either we don't think these companies want profits or the problem is a lack of demand, not a lack of access to credit.)

If we don't expect consumption or investment to produce the demand necessary to replace the demand lost when the bubble burst then we have the government sector and net exports. If don't expect consumption or investment to produce the demand necessary to replace the demand lost when the bubble burst then we have the government sector and net exports. (Sorry, the repetition was just in case someone from the WAPO was reading.)

The former means big budget deficits. I know how painful this is for deficit hawks, but that is what the arithmetic tells us. Fortunately the financial markets also tell us that big deficits are fine (near record low interest rates) and interest payments as a share of GDP are near a post-war low.


                                Source: Economic Report of the President.

In the longer term we need to replace the lost demand with increased net exports, getting our trade deficit closer to balance. That means a lower-valued dollar. Politicians are scared to say this because it isn't macho like losing jobs with a "strong" dollar. Anyhow, until we bring the dollar down to restore trade balance (sorry, the trade agreements are a joke in this respect -- I have some Internet stocks to sell to anyone who takes them seriously as tools for reducing our deficit), we need large government deficits to sustain demand. That is arithmetic, not ideology. There is no way around this story.



Comments (20)Add Comment
written by foosion, September 17, 2012 5:32
"Demand" is likely too abstract a term. Consider writing about buying goods and services, or using some other image that would be more comprehensible to those without an economics background, such as WAPO writers.
Who's Pushing On a String Anyway? When Diminishing Returns Go Negative
written by Last Mover, September 17, 2012 6:37
It's certaintly not Baker. If anyone it's Samuelson and the austerian crowd.

Pushing on a string reflects the failure of tax reductions or monetary policy as an effective stimulus due to a liquidity trap, thus the need for direct fiscal stimulus to bypass both. (BTW all three are classic versions of Keynesian stimulus, contrary to sanctimonious ownership claims of tax reductions by austerians.)

So Samuelson believes the practical limits of stimulus have been reached or surpassed and further efforts are like pushing on a string? What a nice example of diminishing returns by Samuelson.

Speaking of diminishing returns, not only are Samuelson and the austerians pushing on a string with their useless supply side policies, they're actually going backwards into the realm of negative returns by choking off growth that could reduce future debt.
written by skeptonomist, September 17, 2012 8:41
There are two kinds of stimulus, and Samuelson is right about one and wrong about the other. The 47 economists Samuelson cited were referring mostly to monetary policy. The response of the Fed has not been limited, it has been far more extensive than at any previous time in history and Bernanke has promised to continue with QE. In case no one has noticed, this did not prevent the recession, nor has it noticeably speeded up the recovery. Most economists recognize that monetary policy has essentially reached its limits. The idea that the Fed could conjure up inflation by policy declaration would be wonderful but there is no evidence that it would work.

If the Fed could set mortgage rates at 2.5% (the historical minimum is over 4%), who would lend the money? Banks have to have a profit margin, based on the difference between short and long-term rates. At 2.5% banks probably would not make enough to lend even if short term rates are held at zero, but is the Fed really going to hold short-term rates low for 30 years? If I were a mortgage banker I would not believe it. Dean and others who advocate extremely low long-term rates (including Bernanke) have not thought through the consequences.

Fiscal stimulus is another matter - so far it has been limited and probably inadequate, according to economists' consensus. It directly addresses demand, while monetary policy operates only on the supply side. Fiscal stimulus worked in WW II and some other occasions and did not have the adverse consequences predicted by classical economists. Was there monetary stimulus during the recovery from the Depression (growth rate was very high after 1933) and through WW II and during the post-war? You could say so, since the Fed held rates low and did not respond to inflation spikes in 1942, 1947 and 1951 (which subsided by themselves). But the real stimulus was the war spending.
we'll see
written by Peter K., September 17, 2012 10:34
Commenters at various blogs have been echoing conservative Samuelson about monetary policy for years now. Do they have some relatively prominent blogger who shares their views or no? Naked Capitalism?

Bernanke has said unconventional monetary policy has helped create (or save?) 2 million jobs. That's not nothing. It's better than tax cuts for the rich. Where is Samuelson's evidence that this is wrong?

Recently Bernanke has made a qualitative change in policy in response to the weakness of the labor market. We'll see if it works. I'd like to think he changed his mind in part due to the tireless efforts of the community of bloggers and economists - like Mr. Baker! - who discuss the issues day in and day out. No thanks to the naysayers like Robert Samuelson or various commenters who believe fiscal stimulus is somehow going to arrive one day flying on the back of a unicorn all rainbows and sunshine.
what? who?
written by David, September 17, 2012 10:41
@skeptonomist: of course QEs didn't prevent the recession nor speed up the recovery noticeably. As Dean has pointed out, they've been obsessed with stability. If you want the details on what the purpose of QEs 1 and 2 were, go to Perry Mehrling's blog and backsearch for his entries on that error. Now that the Fed is somewhat convinced stability has been achieved (to a decent degree), they can take this next step.

So why would banks lend? Because there is a customer and bank profit margins historically have been low anyway; and profit margins are due for a major correcting factor (it's here!). So banks are gonna grab this opportunity, if they have customers. But who will be the customers? Not mortgage seekers, so much, but investors: if they can leverage at a super low rate, they will invest as long as their investment has a somewhat higher rate (the risk is reduced to nearly nothing). This is an overlooked, but still significant, way that Fed money gets into the economy. So expect a stock market rally for a little while. Which helps Obama by the way.
Interest/GDP graph seems inappropriate
written by Andrew Burday, September 17, 2012 11:35

You keep writing that "interest payments as a share of GDP are near a post-war low", and you keep using the chart from the Economic Report of the President to illustrate it. But what that chart appears to show is that interest as a share of GDP is at or near a record high since 1980. I'm willing to take your word for it that this is also a near-record low since 1945; but why do you keep using this chart? It doesn't show what you're claiming, and to a careless reader who didn't look at the years, it would appear to show the opposite.
Unicorns, Rainbows and Sunshine @ Peter K.
written by ellen1910, September 17, 2012 12:33
Except that the dominant, scholastic discussions of monetary policy and Fed arcana have left fiscal policy under-argued and under-represented.

Arguing monetary policy is for wankers. We need our intellectual leaders to stay on topic -- fiscal policy should be the lede on every single entry.
Yes, Andrew Burday
written by ellen1910, September 17, 2012 1:52

You've misread the chart, but

You're not altogether wrong. The chart should have used a dashed line to distinguish actual percentage from projected percentage.
Dear Interest/GDP graph seems inappropriate;
written by someone in the cheap seats, September 17, 2012 1:55
Methinks you're looking at a projected rate. The graph dates from 1980 to 2020. We're currently at 1.5%, roughly.
written by mike gramig, September 17, 2012 2:26
As a George Lakoff fan, may I suggest a new descriptor for "strong" dollar. How about "expensive" dollar? We don't want to repeat the macho economists' terminology .
written by JSeydl, September 17, 2012 2:32
All of this presumes that people like Samuelson are even interested in filling the demand gap. I don't think they are, which is the problem.
written by skeptonomist, September 17, 2012 4:40
Japan has actually done the things that are recommended by monetary policy supporters. It had a major round of QE over 10 years ago, and all rates have been very, very low for a long time - mortgage rates are apparently around 2.4% (google "japan mortgage rates"). The Bank of Japan announced an inflation target earlier this year, but neither inflation nor growth have responded - inflation is lower now than when the target was announced.

Dean seems to think that if the Fed buys more and more bonds this will cause inflation. This puts him in strange company - this is what conservatives have been screaming all along. Krugman has opposed this, and maintains in recent posts that what causes inflation is a shortage of goods or labor (which I agree with). What has actually happened as the Fed has bought bonds is that reserves have been bloated. Banks are not rushing to lend that money out now - will reducing long-term rates make them more eager to do so?

ellen1910 is right - bashing Bernanke and arguing about the hypothetical effects of untested moves by the Fed may be fun for economists, but it would be more constructive to keep pushing for fiscal action.
the little obama stimulus
written by mel in oregon, September 17, 2012 5:53
well let's see; obama promised hope & change. then he brought in geithner,summers & rubin, all wallstreet people. his chief of staff was rahm emanuel. he kept bernanke as fed chief. let's don't pretend obama couldn't have changed the fed & gotten rid of bernanke if he had wanted to. fdr would have booted bernanke out the door within minutes of taking office. the whole romney vs obama election is just two wallstreet worshipers against each other. romney, the out of touch poor little rich boy who has never grown up even though he is 65. what a hypocrite, he pretends to be so morally upright, yet is the biggest scammer of the system of any major party nominee in united states history. & obama, wow, has any president ever been as disappointing as this guy? if only he meant the crap he was spewing in 2008. this country is going down, make no mistake about it. we needed a stimulus of around $3 trillion, now it's way too late.
written by Gus Hamilton, September 17, 2012 10:29
Cogent and thorough analysis as usual!
post-war? which war?
written by Melissa Belvadi, September 18, 2012 7:09
Just a tiny issue, but you frequently use the phrase "post-war" in your blog, but at this point in American history, I don't think it's clear to most readers what war you're referring to. My first thought is WW2, but depending on the context, I sometimes wonder if you actually mean the recent Iraq War, or some other war. Couldn't you just say "since 1945" or whatever?
written by liberal, September 18, 2012 8:02
Melissa Belvadi wrote,
...but at this point in American history, I don't think it's clear to most readers what war you're referring to.

In writings about American economic history (in the latter half of the 20th century), post-war always means post-WWII.
Interest payment on national debt as % of GDP since 1989
written by David, September 18, 2012 9:47
Feel free to pass this on, it's based on freely available data (and made with a free opensource spreadsheet program).

mel in oregon...
written by S.D. Jeffries, September 18, 2012 11:45
The disappointment I feel with Obama can't hold a candle to the disgust I harbor in my soul for congress. Even if the president's intentions were closer to what I had hoped for, they would never have made it through the tea party Republicans and Blue Dog Democrats in congress.

But then I'm a Democratic Socialist in the same camp as Bernie Sanders, so I'm doomed to suffer disappointment.
another attempt at posting that graph (dropbox failed me!)
written by David, September 18, 2012 3:22
This shows the trend better than Dean's graph, and makes his point.

One last shot:
written by David, September 18, 2012 3:51
OK, I think I found what blocked the graph from being shared. If not, oh well!

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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.