Samuelson's Hooveritis: A Religious Belief That Won't Go Away
In my last post I discussed the Washington Post's Hooverite anti-deficit campaign and Fred Hiatt's recent piece in the deficit hysteria genre. Now, let's look at the latest effort of Robert Samuelson, a well-known WaPo columnist to frighten us some more.
Like Fred Hiatt, Samuelson wants President Obama to pivot from health care reform and do something serious about “deficit control,” regardless of whether this will hurt economic recovery and leave us with high unemployment rates for a long time. He says:
”When historians recount the momentous events of recent weeks, they will note a curious coincidence. On March 15, Moody's Investors Service -- the bond rating agency -- published a paper warning that the exploding U.S. government debt could cause a downgrade of Treasury bonds. Just six days later, the House of Representatives passed President Obama's health-care legislation costing $900 billion or so over a decade and worsening an already-bleak budget outlook.”
”Should the United States someday suffer a budget crisis, it will be hard not to conclude that Obama and his allies sowed the seeds, because they ignored conspicuous warnings.”
Of course, this assumes that the United States, a sovereign nation with full control over its fiat currency system can ever have “a budget crisis.” And it also raises the question of what, exactly, “a budget crisis” is for such a sovereign nation. Samuelson implies that such a crisis would ensue if bond rating agencies downgraded US Treasuries because, supposedly that might drive up interest rates on them, and then he goes on to characterize “a budget crisis” in more detail:
”Let's be clear. A "budget crisis" is not some minor accounting exercise. It's a wrenching political, social and economic upheaval. Large deficits and rising debt -- the accumulation of past deficits -- spook investors, leading to higher interest rates on government loans. The higher rates expand the budget deficit and further unnerve investors. To reverse this calamitous cycle, the government has to cut spending deeply or raise taxes sharply. Lower spending and higher taxes in turn depress the economy and lead to higher unemployment. Not pretty.”
So, “a budget crisis” appears to be characterized by conditions of rising debts and deficits that lead to a vicious cycle. “Spooked investors” lead to higher interest rates on Government debt instruments, which further expand the deficit, which lead to further “spooking” and so on. Samuelson's remedy? Why cut spending and raise taxes which, as he says, will depress the economy and create more unemployment. So, what's a person to do?
Well, according to Samuelson, once you're in this cycle, there's nothing you can do to get a happy outcome. You can either stay in it and explode the deficits or you can have more unemployment. Can you stop the rise in interest rates? Samuelson doesn't seem to think so, since he never mentions that the Government can absolutely ensure that rates do not rise and even fall by not borrowing to cover every dollar of spending. I've explained this somewhat in my discussion of Hiatt. But the best treatment of this I've seen is Bill Mitchell's. I'll let you read that for yourselves. But the upshot is that if the Government wants to, it can short-circuit Samuelson's vicious cycle immediately, without either raising taxes or cutting spending. All it has to do is to spend without issuing debt. Samuelson doesn't see that because he thinks the US Government must have money before it can spend. But that is not true. The Government spends first and gets money through taxation or borrowing only later. It must tax only to make its currency valuable and to control inflation. It must borrow only to control interest rates. By the way, Bill Mitchell has some very interesting things to say about ratings agencies like Moody's, including that they are criminal organizations that ought to be outlawed. His posts on the ratings agencies are here and here, and are not to be missed. The bottom line is that downgrading the credit ratings of sovereign nations who have an unlimited capacity to spend and no debts denominated in any currency other than their own, makes no sense because these nations cannot possibly be forced to default on their debts. Thus, downgrading such nations is pure scaremongering, and, moreover, is likely to lead not to higher interest rates on debt instruments, but to the sovereign nations involved spending without issuing debt and, as a result driving short-term interest rates to near zero as the Japanese have done. So, the bottom line here, is that there is no vicious cycle of Samuelson's in the offing for the United States, and that the only reason why he thinks so, is because he thinks the United States is like his own family and is fiscally constrained in the same way. I'll come back to this view of Samuelson's later. For now, however, let's move on to his example of a budget crisis.
”Greece is experiencing such a crisis. Until recently, conventional wisdom held that only developing countries -- managed ineptly -- were candidates for true budget crises. No more. Most wealthy societies with aging populations, including the United States, face big gaps between their spending promises and their tax bases. No one in Congress could be unaware of this.”
AAh! Greece. Since Zimbabwe left the headlines, Greece has become the bad example the deficit hawks never tire of offering up to scare people. So, let's get very clear on one thing. Greece is a member of the EU. As such, it doesn't have control over its currency. It cannot just spend Euros without having tax revenues or borrowed money first. Greece did a very foolish thing in joining the EU and giving up sovereign control over its own currency. But for that very reason, it does not provide an example of a budget crisis that is relevant for the United States. Greece can become insolvent and may one day have to repudiate its Euro denominated debt. But the US never has to default on its debt denominated in US dollars, because when that debt comes due, all it has to do to pay it, is to use its computers to mark up the number of dollars in the savings accounts of its creditors at the Fed. It need not borrow money to do this. It need not raise taxes to do this. Again, all it has to do is to mark up the dollar value of those accounts. It has full authority to do this so it can never go broke so long as Congress doesn't, foolishly, prohibit such spending. Samuelson continues on:
”Two weeks before the House vote, the Congressional Budget Office released its estimate of Obama's budget, including its health-care program. From 2011 to 2020, the cumulative deficit is almost $10 trillion. Adding 2009 and 2010, the total rises to $12.7 trillion. In 2020, the projected annual deficit is $1.25 trillion, equal to 5.6 percent of the economy (gross domestic product). That assumes economic recovery, with unemployment at 5 percent. Spending is almost 30 percent higher than taxes. Total debt held by the public rises from 40 percent of GDP in 2008 to 90 percent in 2020, close to its post-World War II peak.”
Well, first, 90 percent is not close to our post-world war II peak debt to GDP ratio. That peak was at 121% in 1946, and is as far from 90% as that figure is from 60%, so I think Samuelson is showing his deficit hawkism, neo-liberal ideological bias here. Apart from that, however, Samuelson seems to have no hesitation in accepting these projections of CBO's even as he expresses plenty of doubt about their projection that the Health Care Reform bill will actually produce a the savings CBO projects for it. I agree with Samuelson's view that there are all sorts of reasons why it is unlikely that CBO's projection of HCR savings will materialize, but unlike him, I think it is just as unlikely that the CBO projections about the economy, and the deficits and debt, he quotes, will actually occur.
In my earlier discussion of Hiatt's latest Hooverite contribution to the annals of deficit hawkism, I pointed out that the CBO projections were very sensitive to small changes in assumptions. And in particular, to the assumption that GDP would grow only by 1.55 between 2010 and 2020, and also the assumption that interest rates on the public debt would rise from .023 to ,045 over the period of that decade. Tables One and Two from my post on Hiatt, show the changes that result if one assumes that the growth ratio will be more in line with historical levels, at 2.0, and also that the Government takes steps to ensure that interest rates stay constant at .023. Those two changes result in a totally different picture in which the absolute value of the national debt increases from $9.2 Trillion in 2010 to $10.7 Trillion in 2020, and the debt to GDP ratio declines from 69% in 2010 to 37% in 2020. Now, one can certainly argue over which assumptions are the best ones to use for projecting the next decade's economic performance. However, two things are clear. First, CBO, along with everyone else, is very bad at projecting actual GDP growth out more than a couple of years, and as its projections get into the second half of a decade you can forget about any kind of accuracy in their GDP or revenue or cost projections. They are pure fiction. If you doubt that look at their record. And second, CBO is certainly on insecure ground in predicting the rise of interest rates on Federal debt. To see this all you have to do is look at the Japanese example, where national debt much higher than the United States co-exists with nearly zero interest rates on debt instruments. So, there is plenty of reason to think that the CBO projections and Samuelson's opinions based on them are alarmist in the extreme. Samuelson goes on:
”Suppose the CBO estimate is correct. So? The $143 billion saving is about 1 percent of the projected $12.7 trillion deficit from 2009 to 2020. 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 It's self-indulgent and reckless.”
Now this comment is pure Hooverite “deficit hawkism.” First, Samuelson is suggesting that Obama should have proposed both the tax increases in the HCR bill, and the cuts in Medicare expenditures without actually doing any of the spending specified in the Bill, and the devil take the consequences for the economy of such an anti-stimulative move, so long as the deficit and the debt are reduced. Of course, deficit hawks like Samuelson never tell you that a move such as that might very well actually add to the deficit by removing about $One Trillion from the economy over the period of a decade, causing a further slide into depression, and even more depressed tax revenues than we have now. But that's their modus operandi. For them, deficit reduction is a religious belief, resistant to facts, and to cogent economic theory. Its economic impact is of no importance because balancing the budget is its own reward in heaven.
And second, in the last line of the above paragraph, we have the deficit hawk's favorite analogy. In fact, it's one frequently used by the President himself. The Government is like a family, you see. And just as “a highly indebted family's taking an expensive round-the-world trip because it claims to have found ways to pay for it,” is being “self-indulgent and reckless,” so is the Obama Administration, in buying a new health care reform program without a more certain way to pay for it.
Well, Mr. Samuelson, let me tell you that the Government is not like a family, and it is not like a church, and it is not like a corporation of whatever size and grandeur, and it is not like a State Government, or a provincial Government, or even like a national Government that has debts in currencies that it does not control. Unlike any of these other collectives and social institutions, the United States Government is sovereign in its own currency, and it can spend freely in that currency if its Legislative and Executive branches wish to make the expenditures in question. Unlike a family or any other collective, it need not fund these expenditures first through tax revenues, or through borrowing, or by “earning” the money first. Unlike a family, or any other collective, It has the authority to just spend money in return for available goods and/or services, or to pay previously incurred interest or other obligations of the Government. None of this means that the Government was right to pass the HCR bill. Indeed, I think it is a bad bill and should have been killed. But that doesn't change the fact that it was not financially irresponsible to pass the bill, however, foolish and irresponsible it was from a policy point of view. Nor does it change the fact that this bill introduces no greater risk of insolvency or “a budgetary crisis” than existed before its passage. There is no such “risk” and there is no such crisis. That one exists, is purely a product of the misunderstandings and fevered imaginations of deficit hawks like Samuelson, and his other mates at The Washington Post, a newspaper that has traded its progressive/liberal credentials for the garments of neo-liberal Hooverism.