Monday, July 09, 2012

Robert Samuelson's Wrong Approach to the Wrong Deficit

Robert Samuelson has written an interesting editorial in which he all-but-states that President Obama was correct to attempt massive stimulus spending, that Paul Krugman was correct about the economics of the recession and how to best get out of it, and that our nation would be better off had it focused on having smaller deficits during good times in order to be able to afford stimulus spending during difficult times. Samuelson has made similar suggestions in the past - he has been relatively consistent, and has credited Obama's stimulus with saving millions of jobs - but I don't believe he has previously laid out his opinion this clearly.

It's a shame that he chose not to make this argument three years ago, although it's difficult to tell what part of the explanation Samuelson's past reticence results from politics and what part results from his obsessive concern... not that we'll have deficits, but that we'll borrow to pay for programs he doesn't support. I suspect it's primarily the latter, as otherwise one would expect him to be calling for another substantial round of stimulus spending. Instead, he wrings his hands about the deficit.
Until the 1960s, Americans generally believed in low inflation and balanced budgets. President John Kennedy shared the consensus but was persuaded to change his mind. His economic advisers argued that, through deficit spending and modest increases in inflation, government could raise economic growth, lower unemployment and smooth business cycles.

None of this proved true; all of it led to grief.
The problem with Samuelson's argument is that the 1960's do not represent a magical turning point at which public debt went from bad to good. While gross public debt has increased since the 1960's, the debt to GDP ratio was much higher during WWII, and did not again rise significantly until the Reagan presidency. To the extent that the 1960's factor in, Samuelson would have to mention a different deficit - the trade deficit. In simple terms, the books have to balance: a nation with a trade deficit has to make up for it by having more public or private debt on its books.

It is also fair to observe that Samuelson is not even slightly concerned with how the changes of the past half-century have affected the wealthy - those best positioned to bring about change. In fact, any suggestion that the massive increase in wealth accumulation by the wealthiest Americans is anything but good is a "backlash against the rich". Does Samuelson truly believe we can balance the budget without increasing taxes - magic away the social safety net and "we're all good"? If not, observing that the rich are doing better than ever and proposing a modest tax increase on the very wealthy would seem to be a no-brainer for him - not a solution to debt and chronic deficit spending, but a necessary part of the solution.

Also, while Samuelson is correct that we had very high inflation for a period of time in the 1970's, and that very high inflation is a problem, he also notes that it was quashed in the early 1980's - a fact that undermines Samuelson's notion that deficit spending leads inexorably to high inflation. Let's note here, also, that the housing bubble was born of out-of-control inflation in housing markets, but that was seen by many in Samuelson's circle as a good thing. But even if overall inflation remains under control, inflation in an important sector of the economy that leads to an asset bubble is not a good thing.

The problem of deficits became much worse, not better, starting in the 1980's yet inflation has remained under control. Arguably we have a larger problem with low inflation than with the potential for high inflation - and that a modest, sustained increase in the inflation rate for a few years would help assets appreciate (including housing) and help resolve the "debt overhang" from the collapse of the housing market. Recall, our trade deficit has not disappeared, and we still have to come up with the difference either through deficit spending or private debt.

Robertson lectures us that past deficit spending "has limited government’s ability to 'stimulate' the economy through higher spending or deeper tax cuts", an argument that is not actually true. Our government has ample ability to borrow large amounts of money, and could easily implement a stimulus program of $1 trillion or more. For all of Samuelson's complaints that we are somehow hostage to a fifty year legacy of spending like there's no tomorrow, how could he lose track of the fact that the constraints on additional stimulus spending are political, not financial.

Implicit in Samuelson's argument is the notion that the deficit is currently so high that we should forego stimulus spending, even though it is our best hope of accelerating the recovering, getting back to full employment, and restoring the nations' tax base - part of our deficit, after all, results from the recession itself. When you fund government by taxing income, revenues drop when employment and (collective) incomes fall. It should be easy for Samuelson to identify areas (e.g. infrastructure) in which stimulus spending could be directed in no small part as an investment - our nation has to build and maintain basic infrastructure in order to remain competitive, we've not done a good job with such obvious targets for investment as the electrical grid, and right now we can borrow at very low interest rates.

After lecturing us on how sustained, excessive borrowing can be harmful, Samuelson proposes,
Now, imagine that the country had adhered to its balanced-budget tradition before the crisis. Some deficits would have remained, but the cumulative debt would have been much lower: plausibly between 10 percent and 20 percent of GDP. There would have been more room for expansion. Balancing the budget might even have forced Congress to face the costs of an aging society.
The problem being, we don't have the luxury of living in an imaginary world. We have to make the best of this one. And in this one, part of the problem that keeps deficits high and causes accumulation of debt is that people like Robert Samuelson see us as having a blank check for their pet projects, and only get upset when money is spent on the "wrong" things - in this case, seemingly the stimulus spending that Robertson sees as crucial to accelerating recovery but... but what?

Let's take a look for a moment at a half-truth Samuelson shares about balanced budgets:
Since 1961, the federal government has balanced its budget only five times. Arguably, only one of these (1969) resulted from policy; the other four (1998-2001) stemmed heavily from the surging tax revenue of the then-economic boom.
Well, yes, the Clinton era budget surplus arose due to factors that were largely accidental, and arguably irresponsible.

The Internet bubble burst and Clinton was on his way out the door, and we might have avoided a recession had we sacrificed some of the economic growth and tax receipts that resulted from the bubble. But you cannot look at Clinton's balanced budgets and Bush's deficits without acknowledging that the two parties took a very different view of their budgetary responsibility.

Clinton saw an opportunity to balance the budget, while Bush preferred to give massive tax cuts to the rich even though it meant returning to deficit spending. Bush also chose to ignore the growing housing bubble - a growth of private debt that, as previously mentioned, helped sustain massive trade deficits as Bush directed his massive increases in government spending at other targets, including Medicare Part D and a massively expensive war of choice.

In the past, Samuelson has taken positions that are inconsistent with each other, as well as inconsistent with his present position on stimulus spending. Now, nobody can be consistent all the time, given enough time and enough arguments made we'll all be inconsistent at times, and it's a good thing to be able to reflect, see past errors and inaccuracies in your premises and thinking, and change your mind. But that's not what I'm talking about. For example, in 2010 Samuelson argued,
If the administration has $1 trillion or so of spending cuts and tax increases over a decade, all these monies should first cover existing deficits -- not finance new spending. Obama's behavior resembles a highly indebted family's taking an expensive round-the-world trip because it claims to have found ways to pay for it. It's self-indulgent and reckless.
That statement was made in relation to providing health insurance to the uninsured. I truly doubt that Samuelson sees his own health insurance as a form of self-indulgence. His choice of works reflects his reflexive dislike of social spending, no matter what its merits. But if you were to assume that it is possible to locate that $trillion, why not initiate a $800 billion stimulus bill to be paid for over the decade - you would boost the economy, bring down unemployment, and still have money left over.

A fetishistic desire to reduce government spending should not substitute for sensible prioritization. It would seem that somebody in Samuelson's position, not somebody who favored helping the working poor or reviving the economy, would be the person best described as "shortsighted and self-centered", not the person who didn't put deficit reduction above all else.

Samuelson has had his feet held (gently) to the coals over a column in which he suggested that the Iraq war could be paid for with pocket change. Back in 2007, he issued a non-apology for what he admits was a ridiculously optimistic estimate of the cost of the war,
The war on terrorism has clearly worsened the long-term budget outlook. How then can I treat that so lightly? What's missing is context. Dominated by Social Security and health care, the federal budget now totals nearly $3 trillion annually. Suppose the war's ultimate costs reach $2 trillion by 2017 (the figure is cumulative, not in any one year). That's a big number, perhaps too big. It's also a wild guess. Still, the CBO estimates all federal spending over the same period (2002-17) will total $48 trillion; war spending would be about 4 percent. In the same period, the income of the U.S. economy (gross domestic product) would total an estimated $248 trillion; war spending would be less than 1 percent of that. The point, as I said in 2002, is that we're so wealthy we "can wage war almost with pocket change."...

But I am certain -- now as then -- that budget consequences should occupy a minor spot in our debates. It's not that the costs are unimportant; it's simply that they're overshadowed by other considerations that are so much more important. We can pay for whatever's necessary.
When it comes to Samuelson's priorities, a $trillion, $2 trillion? The numbers remain something akin to "pocket change". By that logic we could easily afford a $1 trillion stimulus bill right now. And just as with the war, we should not delude ourselves into thinking that "any 'savings' will rescue us from our long-term budget predicament" - one might expand on Samuelson here by pointing out that an invigorated economy with significantly improved employment will be much better able to reduce deficits and pay for social programs, as well as the war spending Samuelson would prefer for us not to even consider relevant to long-term budgeting.

But again, and don't go looking for internal consistency, for Samuelson this type of spending is always a huge risk.
Suppose a new stimulus — beyond renewal of the payroll tax cut — did succeed at significant job creation. By piling up more debt, it would still risk aggravating a larger crisis later. There is no long-term plan to curb deficits.
Irrelevant for a $2 trillion war, but an overwhelming concern for a much smaller stimulus program? It's as if nobody has ever explained to Samuelson that dollars are fungible. Yes, every little bit hurts - every new obligation makes it more difficult to bring the budget into balance. The impact of each new dollar of debt is the same, whether or not Samuelson approves of the expenditure.

Update: Paul Krugman documents the actual history of the ratio of US federal debt to GDP.
I’d add that the recent rise in debt/GDP is very different from what happened in the 80s; this time around we really had a crisis that required fiscal support for the economy. What happened in the 80s had no such justification.

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