CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Robert Samuelson: "Bye Bye Darwin?"

Robert Samuelson: "Bye Bye Darwin?"

Monday, 19 December 2011 05:21

Okay, Samuelson actually wants to say goodbye to Keynes, but he would have had a better case if he was talking about Darwin and the theory of evolution. After all, when we have seen nothing but confirming evidence for years, why should we still accept the theory?

Samuelson tells readers:

"The eclipse of Keynesian economics proceeds. When Keynes wrote “The General Theory of Employment, Interest and Money” in the mid-1930s, governments in most wealthy nations were relatively small and their debts modest. Deficit spending and pump priming were plausible responses to economic slumps. Now, huge governments are often saddled with massive debts. Standard Keynesian remedies for downturns — spend more and tax less — presume the willingness of bond markets to finance the resulting deficits at reasonable interest rates. If markets refuse, Keynesian policies won’t work."

It seems the problem here is that Robert Samuelson has not heard about the euro. The countries he has identified as reaching a situation where they "lose control over their economy" are all on the euro. These are countries that do not issue their own currency. In this sense they are like Ohio and Texas. These states cannot freely run deficits because the Federal Reserve Board has no explicit or implicit commitment to back up their debt. Greece, Italy and Spain are in the same situation, as the European Central Bank (ECB) has repeatedly insisted that it will not back up the government debt they issue.

Samuelson says it is "unclear" why, given our own debt and deficit, interest rates are still just 2 percent and investors are willing to lend us trillions of dollars. Actually it is very clear. The Federal Reserve Board stands behind the debt of the United States government and there are few good investment opportunities in the current economy. 

Comparing the interest rate on government debt of countries with similar debt/deficit situations, it is very clear that being able to issue currency makes an enormous difference. For example, the interest rate on Spain's and Austria's debt is much higher than the interest rate on UK debt, even though both countries have much lower debt to GDP ratios. In short, Samuelson finds mystery and confusion where in fact there is none.

He does the same in warning us off stimulus. First he cites Christine Romer, President Obama's former chief economic adviser, as saying that determining the exact number of jobs created by the last stimulus is "incredibly hard." As Barbie would say, so is math.

We can't know the exact number of jobs generated by the stimulus because a hell of a lot things were going on in the economy at the time and it is very difficult to construct a proper counterfactual. This does not amount to an argument against stimulus.

It is incredibly hard to determine the counterfactual if the United States did not enter World War II. In Samuelson's world that would be a compelling argument against having fought Hitler. The research that has attempted to measure the number of jobs created found that the impact was pretty much along the lines predicted by the Obama administration, but yes, there is a large degree of uncertainty around these numbers.

Finally, he comes up with a harsh warning against trying the more stimulus route. Quoting Berkely economist Barry Eichengreen, he tells readers:

"At some point, however, investors will recognize this behavior for the Ponzi scheme it is. ... If history is any guide, this scenario will develop not gradually but abruptly. Previously gullible investors will wake up one morning and conclude that the situation is beyond salvation. They will scramble to get out. Interest rates in the United States will shoot up. The dollar will fall. The United States will suffer the kind of crisis that Europe experienced in 2010, but magnified."

So Eichengreen, through Samuelson, is telling us that if we go the route of more stimulus we will get a really bad situation. There are two issues here. First is Eichengreen's story credible? And second, what is the alternative?

Eichengreen presumably has not made the same mistake as Samuelson, but again we issue our own currency, so the United States can never literally be in the same situation as Europe in 2010. We can always pay our debt, it is denominated in dollars and we issue dollars.

But Eichengreen tells us the "dollar will fall." Actually, the official policy of both the Bush and Obama administrations were that we want the dollar to fall (mostly against the yuan). This is the only plausible way to address our trade deficit. A lower valued dollar will make imports more expensive, leading us to buy less of them, and make our exports cheaper, causing foreigners to buy more.

If we could get the dollar to fall enough to balance our trade it would create over 5 million jobs in manufacturing. This is more than 250 times the number of jobs that the oil industry claims will be created by the Keystone pipeline. Why would we be concerned about this prospect?

If Eichengreen means that the dollar would go into a free fall -- reaching 3 or 4 dollars to a euro, 2 cents to a yen, 40 cents to a yuan -- this is more than a bit hard to imagine. Under such circumstances U.S. exports would be hyper-competitive and our import market for other countries would vanish. Maybe Eichengreen wants to bet that this is a plausible future, but I doubt that many others would.

If for some reason investors really did send the dollar into a free fall, our trading partners would have no choice but to intervene in order to avoid the enormous damage that such a collapse would imply for their own economies. (Of course it is worth remembering that the long-term deficit horror stories are entirely driven by health care costs, a fact that Samuelson used to know.)

In short, the horror story is nice for little kids, but not terribly plausible in the real world. (Japan's debt to GDP ratio is over 200 percent, we have a very long way to go before we get there. It can borrow long-term in financial markets at interest rates a bit over 1.0 percent.)

Finally, what is the alternative? Tens of millions of people are supposed to go unemployed or underemployed. These are people unable to care for their children properly, unable to prepare for their own retirement, and in many cases, unable to keep their homes. Absent major stimulus, things are not going to get better for these people anytime soon. And given the consistently overly optimistic track record of forecasters, it may be close to a decade until we have fully recovered from the downturn.

It is important to remember that the unemployed/underemployed are not in financial trouble because they messed up. They are in financial trouble because people like Alan Greenspan, Ben Bernanke, and Robert Rubin messed up. They are in financial trouble because news outlets like the Washington Post only had room in their news and opinion pages for people whining about budget deficits. (This is back in 2004-2007, when deficits were small.) They had no room for the people warning that the housing bubble would inevitably burst and sink the economy.

But Samuelson says that we have no choice but to make these people suffer because if we don't then something really bad will happen. It is difficult not to ask whether Samuelson's assessment of this risk of the bad unknown may be somewhat different if it was his family that was facing unemployment and eviction.



Samuelson ended his column by saying:

"Were Keynes alive now, he would almost certainly acknowledge the limits of Keynesian policies. High debt complicates the analysis and subverts the solutions. What might have worked in the 1930s offers no panacea today."

As Gary Burltess reminds me, the debt to GDP ratio in the UK in the mid-30s when Keynes was writing The General Theory was close to 200 percent.

Comments (28)Add Comment
written by Chris, December 19, 2011 6:50
Samuelson is such a nitwit, it is cruel to beat up on him so hard.
Spender of Last Resort
written by Robert Salzberg, December 19, 2011 7:24
When the Free Market leaves a large percentage of a country's population unemployed, there is one and only one actor capable of decreasing unemployment, the Spender of Last Resort, government.

We don't need make work projects because we have over 2 trillion dollars worth of infrastructure work that needs doing and according to American Society of Civil Engineers, the current state of our infrastructure costs us over a 100 billion a year today due to it's inefficiency.

A large scale plan to fix our infrastructure and put people back to work would boost both our economy and our future deficit outlook.

Properly structured single payer health insurance would seal the deal on fixing the deficit.
written by tom michl, December 19, 2011 7:48
Well said! With regard to Samuelson's idea that government debt was small in Keynes's day, it is worth remembering that the debt-GDP ratio in the UK in the 1920s was very high, probably around or over 200% as I recall. This did not prevent Keynes from advocating aggressive use of fiscal policy, as he did in "Can Lloyd George Do It?".
dont go there Dean
written by frankenduf, December 19, 2011 8:15
this is a good smackdown on samuelson, but he got over excited and used the H word- apparantly Dean can't say Bye Bye Godwin?!
written by LSTB, December 19, 2011 8:36
Dean, where can I get some of whatever fuels your righteous anger?

Nice whoopin'.
"Gullible" Bond Investors of the World
written by Paul, December 19, 2011 8:46
When you think about international bond investors, the first word that comes to mind is not usually "gullible" unless you are some ideological charlatan like Samuelson who can't even understand that interest rates on 10-year Treasury bonds are NOT +2%; they are NEGATIVE 1% in real terms because inflation is over 3%.

In other words, international bond investors are paying us to take their money. And it is not unclear why they they do this; inflation in the U.S. has been lower over the past 3 years of the Fed's $2T money "printing" and Obama's "reckless" stimulus spending than during the budget surplus years of the Clinton administration.

Maybe Samuelson is just upset because he bought gold at $1900.
Hard To Take
written by Jeffrey Stewart, December 19, 2011 9:11
It's absurd and hilarious that anything non-economist Robert Samuelson writes could have any effect on the validity or acceptance of Keynesian economics. This conclusion requires the Samuelson to know Keynes's economic analysis, which it's pretty clear he doesn't.

Keynes's principle of effective demand holds that aggregate demand positively effects and determines employment and total output. For validation of this principle, one need only look to additional seasonal employment before Christmas where temporary workers are hired because of the additional demand for goods and services.

It's unclear to Samuelson why interest rates are so low when deficits and debt are so high because he doesn't know or understand the Keynesian liquidity trap analysis.

Samuelson should keep writing his nonsense to serve as a cautionary example of an uninformed ideologically motivated hack.
written by Union Member, December 19, 2011 9:46

Your mocking of Samuelson deflects from Dean's incredibly pointed and valid criticism, which is, would Washington's pundits and itspolicy maker's aggitate for such nonsense if they and their families were just as subject to its harmful consequences. The fact that Washington elites and their families don't have to suffer the predictable ill effects of their own creation is another way to sheild the powerful from accountability.
Washington is the Capitol of cruelty; you could say it is its leading export, and this lack of accountability (i.e. Justice) is the great incentive for Washington not to represent the legitimate interests 300 million Americans .
And Samuelson being a "nitwit" is just part of the disguise. Look at the entire field of republican presidential hopefuls, everyone of them is a replica of Kim Jong-il. Can Obama seriously claim to be anymore authentic?
written by skeptonomist, December 19, 2011 9:52
Currently US and German government bonds are regarded as safer than those of countries such as Greece, Italy, Spain, etc., so when there is uncertainty money flows to them. This could change, if some other country comes to be viewed as the safe refuge. The obvious candidate for the next safe refuge is China if their economy continues to grow at current rates. It would be some time before this could happen, and there is no reason to think that China will not have setbacks - Krugman's column today brings up some possible trouble points in China's economy. In 1989 Japan was viewed much as China is today.

People have always been excessively afraid of national debt. They said the same thing about Britain's debt all through the 19th and 20th centuries, and even before. It was especially great after the Napoleonic wars. The historian Macaulay wrote in 1885 "At every stage in the growth of that debt the nation has set up the same cry of anguish and despair ...Nevertheless ...the nation [became] richer and richer" (quoted in A History of Interest Rates, by Homer and Sylla).

Please watch the lazy sexism, Low-rated comment [Show]
written by Kat, December 19, 2011 10:49
You realize that there was a Barbie that spouted "Math is hard."?
I've never read anything sexist on this blog.

as for the captcha-- I thought the cyrillic (style?) letters were bad, but really- fuzzy inverted letters?
written by Max, December 19, 2011 10:58
Samuelson says that Keysnianism was "plausible" in the 1930s. That was certainly not the view of fiscal conservatives at the time! Far from plausible, they found it incomprehensible and dangerous. The only thing that has changed are the excuses used by fiscal conservatives. In the 1930s it was maintaining the sanctity of the gold standard. Now it is mythical bond vigilantes.
Pretzel Logic
written by Robert Weiler, December 19, 2011 1:01
The really troubling thing about Samuelson's position is that he prefers to allow suffering now because he fears something that might or might not happen, at some indeterminate future time, whose effects he can't even begin to quantify. In Samuelson's world, we should ignore the real wolves snapping at our heals because if we keep running, we might run smack into the boogeyman of our nightmares. Of course, for some unknown reason, Samuelson keeps his job, so as far as he is concerned there is no unemployment problem.
..., Low-rated comment [Show]
Alice in conservativeland
written by BOSS, December 19, 2011 1:58
The crisis will have taught us at least two useful things:
1-So, far new keynesian economics have been right;
2-Some people are economists, others are religiously apologetic of their beliefs (in fiscal austerity).

Krugman on his NT blog left a post with a link to this article and actually did expose the actual evolution of the debt-to-GDP ratio since 1830 in the UK. For their information, the debt as Keynes thought out his works and wrote was hoovering between 180 to 200% of the GDP (that's from 1921 to 1935) and it peaked around 1945 at about 260%... It's a curious fact given that the following 30 years (1945-1975) are called the "Glorious Thirty."

So, what we see now is simple... conservatives are humans like everyone and, as such, have presented to themselves their ideas in a manner that appeared justified. Being faced with an inconveniently contradictory cognition that constitutes facts with regard to their ideas, the most rigid term will remain and the other one will bend around. What's more rigid, do you think? Their beliefs in fiscal austerity and their untouchable conviction in markets and, as such, reality will be the term that bends around it.

It seems cruel, but that's a vulgarized version of the personal belief confirmation bias and of cognitive dissonance. So, what this framework allows me to tell you is that they will keep packing excuses, re-interpretations and couple them with some "wait and you will see."

Welcome to conservativeland! They're not willingly bad; they're only either deluded or stupid: you be the judge!
written by Union Member, December 19, 2011 2:09
Keynes's countrymen - and women - initiated its much loved National Health Service (NHS)in 1947, a time when a can of Spam was a luxury good.
written by fuller schmidt, December 19, 2011 2:46
"As Barbie would say..." - perfect satire!! And don't the greedhead pundits twist themselves into pretzels pretending it's a foregone conclusion that taxes cannot be raised on the 0.1%-ers?
To Kat
written by Anthony, December 19, 2011 3:18
"You realize that there was a Barbie that spouted "Math is hard."? "

Yes - but that doesn't make it right to repeat here in this context - you are saying that women are stupid (and call themselves stupid). You don't see that? You are re-enforcing the stereotype that "Barbie" can't do math.

"I've never read anything sexist on this blog. "

Me neither - that is why I pointed it out.
written by Chris, December 19, 2011 3:27
Another Samuelson pratfall today:
written by billyblog, December 19, 2011 4:44
A suggestion for Anthony.

Show Samuelson's and Baker's columns to the women in your life and then:

1. Unprompted, ask them if they have any problem with what Baker wrote in response to Samuelson.

2. Tally how many fastened on the Barbie comment as objectionable when unprompted, and how many didn't.

3. For those who did not find it objectionable -- whether or not they even noticed it unprompted -- prompt them to say whether they found the comment objectionable from THEIR point of view, not from the point of view of some imagined feminist.

4. Report your results to us.

Your other option is to not do empirical research and continue to go with your gut on this, sort of like Samuelson was doing with actual debt history when he wrote his column.

The point?

Context is everything, at least when it comes to rational -- as distinguished from Republican -- discourse.

And no, Anthony, I am not trying to slime you as being a Republican.
written by Kat, December 19, 2011 4:56
I appreciate your concern. I really do! I just don't happen to find the quote sexist in the least (in this context, of course).
After reading countless paeans to Christopher "women aren't funny" Hitchens it is difficult to get worked up about this.
written by S. D. Jeffries, December 19, 2011 5:46
The actual comment that was programmed into some Barbie dolls in 1992 was, "Math class is tough!" The only thing that could be construed as sexist in this phrase is the fact that Ken didn't say it.
written by james hogan, December 19, 2011 8:57
The main problem here is that some people do not understand what money is and how it works in the real economy. Samuelson's problem is that he still believes that the US is on the gold standard. That is the only way to construct his comments and have them make sense. Visions of "bond traders" (or "bond vigilantes", as Krugman calls them),are a remnant of that era.

Anyone who does not recognize that the countries in the Eurozone are in the fix they're in is because they have forsaken their monetary sovereignty doesn't understand how the system keeps score. This is the hang-up, in the scoring system. He's not the only one who doesn't understand this.

written by kharris, December 20, 2011 9:54
It seems almost a waste of electrons to point this out, given that Samuelson is the writer in question, but apart from Baker's explanation for a reality Samuelson finds mysterious, there is the simple fact that Samuelson fails to account for reality. Central to his argument is that "markets" (that's "people" to us commoners) won't lend at low rates to countries with high high debt ratios. He notes that people will lend at low rates to the US (and UK, and Japan) despite what he considers high debt ratios, and declares this to be a mystery. Samuelson is trapped. We don't need to offer an explanation for the low yields on Treasuries. The very fact that they are low means Samuelson's analysis is wrong. If the world doesn't work the way Samuelson says it must, then he is necessarily wrong about the way the world works.

It's nice to have an understanding of why Samuelson is wrong, but that explanation is not necessary in order to know that Samuelson is wrong. The fact that Samuelson is willing to insist on a view of the world that is contradicted by the facts raises the question, once again, of why the Post affords him high-priced journalistic real estate.
All True But
written by bill, December 20, 2011 11:09
...you and DeLong and Krugman don't really seem to want to smack down Eichengreen. What gives? Is he a useful idiot, to borrow Krugman's label or not, and if not why not? He is giving cover to the dolts of the economic sphere which is in turn picked up by the Ryans and such of the world.
..., Low-rated comment [Show]
written by Rodger Malcolm Mitchell, December 20, 2011 6:41
By the way, for a Monetarily Sovereign nation, debt/GDP is a meaningless ratio.

GDProduct = Federal Spending + Private Investment and Consumption + Net exports
Federal Deficits – Net Imports = Net Private Savings

Those who worry about GDP/Debt should examine those two equations.

Rodger Malcolm Mitchell
balanced trade => 4,000,000 new manufacturing jobs!?
written by Luke Lea, December 20, 2011 9:59
Exports equal to imports implies four million new jobs? If true, a tariff policy designed to produce such a balance would seem to be a no brainer. Trade is supposed to be balanced. Infrastructure employs construction workers only. Not everyone can be a construction worker. Factories employ all kinds of people. 4,000,000 new factory jobs would generate additional jobs in the service industry too, wouldn't it? 4,000,000. Recheck those figures Mr. Baker! I hope they are right.

Write comment

(Only one link allowed per comment)

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


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.