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Home Publications Blogs Beat the Press Robert Samuelson Says Economics Is An Inexact Science, Except When He Wants to Cut Social Security and Medicare

Robert Samuelson Says Economics Is An Inexact Science, Except When He Wants to Cut Social Security and Medicare

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Sunday, 10 August 2014 19:47

Regular readers of the Washington Post have grown fond of Robert Samuelson's repeated calls for cuts to Social Security (e.g. here, here, here, here, here, here, here, here, here , and here). At the core of Samuelson's complaints are long-term projections from the Congressional Budget Office (CBO), and other sources, that the country will have large deficits 15 years, 25 years, or further in the future.

He likes to say that these deficits are due to Social Security and Medicare, although the main driver is the fact that U.S. health care costs are vastly out of line with costs in the rest of the world. If our doctors, drug companies, and other health care providers got paid the same as their counterparts in other wealthy countries, the projections would show huge surpluses, not deficits. But Samuelson prefers to go after poor and middle class seniors rather than highly paid people in the health care sector.

But this is secondary to the big issue with today's column. Samuelson's repeated hyperventilations about Social Security and Medicare are based on budget projections made for the distant and very distant future. For this purpose Samuelson apparently is willing to accept that economics can be a very precise science even though the past track record of budget forecasters has been atrocious. (For cheap thrills check out these projections for large deficits in the year 2000, big surpluses in 2003, or modest deficits in 2010. In each case the overwhelming source of error was in the economic projection, not policy changes.)

But for today's column arguing that the Fed should be looking to raise interest rates sooner rather than later Samuelson has serious reservations about the quality of economic predictions:

"Although economists are arguing furiously over this [whether the Fed should be raising interest rates], there’s no scientific way to measure slack. Economic policymaking is often an exercise in educated guesswork, built on imperfect statistics, shaky assumptions, incomplete theories and political preferences. This is an instructive case in point."

He concludes the piece:

"The Fed is expected to begin raising rates in 2015, but the time and pace are unknown. The danger of waiting too long or going too slow is that inflation, now controlled in the market and in Americans’ thinking, will escape these convenient bounds. Once that happens — as the double-digit inflation of the 1970s and early 1980s showed — inflation takes on a life of its own and becomes self-fulfilling. It can be suppressed only through tight credit, recession and high unemployment. We don’t want to go there."

Really? Let's just be clear what Samuelson is advocating. He wants the Fed to keep millions of people from getting jobs. He wants to keep tens of millions of people from getting pay increases because when the unemployment rate is high most workers do not have the bargaining power to secure wage increases. He wants children to grow up with unemployed parents. (Concern over children is one Samuelson's often expressed reasons for wanting to cut Social Security.)

And Samuelson wants much larger budget deficits. Back in the mid-1990s most economists (including those at the CBO) did not think the unemployment rate could get below 6.0 percent without causing spiraling inflation. Alan Greenspan, who was then chair of the Fed, ignored the conventional view in the profession and allowed the unemployment rate to keep falling. It hit 4.0 percent as a year-round average in 2000 and inflation was nowhere in sight. As a result of this decision, the budget shifted from the deficit of 2.5 percent of GDP projected by CBO in 1996 to a surplus of 2.5 percent of GDP. This shift from deficit to surplus of 5.0 percentage points of GDP would be equivalent to $10 trillion over the next decade.

So there you have it: big hits to the unemployed, to low and moderate wage workers, to tens of millions of children and to the budget deficit, but Samuelson thinks it's more important to slow the economy because of his fears of inflation. These are fears that have zero relationship to anything seen in the real world for more than three decades. But hey, we all have our priorities.

Comments (9)Add Comment
Robert Samuelson Has Economic Agoraphobia: Better Safe Than Sorry
written by Last Mover, August 11, 2014 5:19

Agoraphobia is a fear of the outside and open spaces.

Victims of agoraphobia cling to the safety of their homes to avoid the uncontrollable "uncertainty of guesswork, built on imperfect statistics, shaky assumptions, incomplete theories and political preferences."

Agoraphobiacs also fear history, much of which can use facts from the past to overcome the "uncertainty of guesswork, built on imperfect statistics, shaky assumptions, incomplete theories and political preferences."

The only cure for this dilemma is Obsessive Compulsive Disorder (OCD) to create ones own history, which then cures the broader problem of fear of the outside and open spaces going forward.

Like washing one's hands 20 times a day to eliminate germs, OCD overcomes the "uncertainty of guesswork, built on imperfect statistics, shaky assumptions, incomplete theories and political preferences"

For example, if an agoraphobiac goes outside and hears that "high costs of health care" drive the debt", they just rush back inside, pick up an issue of WaPo with Samuelson's column and read it for 100th time:

Social Security and Medicare Cause Out of Control Debt, We're All Going to Die

They calm down, the heart rate goes back to normal and they regain their composure from the wise words of a fellow agoraphobiac who is not afraid to tell it like it is. It is better to be safe and blissfully ignorant than to be sorry and informed.
Ten-year break-even inflation rate per the market
written by Squeezed Turnip, August 11, 2014 9:09
Currently at 2.2%. But that's only what rational people expect, not fear-mongerers like Samuelson.
Sopranos
written by Peter K., August 11, 2014 9:15
Look at the newspaper headline:

http://twitpic.com/e9vt7k

Unions could negotiate price increases into contracts back in the 70s. They're weaker now.
...
written by skeptonomist, August 11, 2014 10:02
We actually don't need to speculate about what happens when short-term interest rates are kept low for long periods, because that is what the Fed did through the Depression and WW II and up until the 60's, although they were very gradually raised starting in 1947. There were periods of inflation for very good reasons - WWII itself, the end of rationing and the Korean war - but these ended quickly without action by the Fed. There was less total inflation during this time than during the period starting around the 60's when the Fed was supposedly controlling inflation by raising interest rates to record levels.

Projections and calculations about the effect of interest rates (and other things) are certainly unreliable, but they are unnecessary - there is excellent empirical evidence on the effect of low rates.
The Point Is...
written by Larry Signor, August 11, 2014 10:08
If the government and the Fed pursued a full-employment policy, all of Samuelsons' predictions of economic disaster would become moot. A full employment policy would not include raising rates anytime soon.
housing bust
written by Peter K., August 11, 2014 11:12
It's weird how Samuelson is worried about stagflation and Volcker, when the epic housing bust and anemic recovery have cost millions of jobs and trillions of dollars. We could have funded Social Security and Medicare for hundreds of years.
Measuring slack is pretty sloppy
written by Barkley Rosser, August 11, 2014 1:51
Funny thing is that RJS is right that measurements of "slack" are pretty sloppy and all over the place. I have been watching the efforts of Edward Lambert at Angry Bear to do it, who is convinced we are now at the limit and have run out of slack. As it is, of course all your comments on RJS's inconsistently silly claims about the future are completely correct, as usual.
Addressing his points is boring
written by Dave, August 11, 2014 6:49
Let us start addressing his psychological makeup.

What kind of person acts like this without feeling shame? Isn't he afraid that he's talking about things he knows nothing about? If not, why?

We need an old friend of this guy, or a family member to give us some insight into this disorder.
Samuelson is useful though
written by Robert Weiler, August 11, 2014 7:05
You have to wonder how 'real economists' reconcile the fact that hey accept as axiomatic that people have something close to perfect information while at the same time most of those people are getting their information from billion dollar industries that are feeding them complete nonsense through 'experts' like Robert Samuelson. At some point you would think that 'real economists' would figure out that most of the things that people think they know are just flat out wrong.

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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.

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