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Samuelson's Hooveritis: A Religious Belief That Won't Go Away

letsgetitdone's picture

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.

(Also posted at firedoglake.com and the Alllifeisproblemsolving blog where there may be more comments)

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three wickets's picture
Submitted by three wickets on

On the fiat currency system. It is possible that the knowledge we could always print more money is one of the reasons our economy became so overleveraged and overextended in recent decades. That cycle would not seem sustainable.

letsgetitdone's picture
Submitted by letsgetitdone on

The over-leveraging was all private. In the public sector they weren't leveraging anything except the wars.

three wickets's picture
Submitted by three wickets on

My understanding is the public debt is at 9.5t plus additional 3.5t for social security and medicare.

letsgetitdone's picture
Submitted by letsgetitdone on

CBO's projection of debt held by the public at the end of 2010 is 9.221 T. See the link above.

Submitted by jawbone on

this time next year. No reason, given as it was the ending segment where he calls out for quick predictions.

My first reaction: Oh, damn, that's right down Obama's alley.

Obama will use the Repubs' and deficit hawks' arguments to do this (if indeed he does; plus, it's so anathema to Dem Party principles that he just might think it's "the right thing to do" and it would allow him to honor St. Ronnie).

On Inside Washington, Nina Totenberg is playing perfect prog blogger, er, commenter: There may be problems with Obama opening new coastal areas to oil exploration (and drilling would surely follow), but if Dems can get an energy bill due to this move by Obama, they'll come around.

Krauthammer was replaying Repub talking points by pointing out how few areas off the southern Atlantic Coast would appear to have likely oil deposits, and that it will be small potatoes in terms of production. He also said that Obama was doing this for poitical reasons, which made it suspect. He expected regulations to result in extremely few areas having actual drilling.

But Evan Thomas and Colby were both fully on board on what Obama's doing, especially breaking the taboo of Dems being for coatal drilling.

Isn't that special?

letsgetitdone's picture
Submitted by letsgetitdone on

They're all villagers serving Versailles.

mass's picture
Submitted by mass on

A national sales tax? Jesus H. Christmas, he must be joking! Milton Friedman would be so proud. A freaking national sales tax? Obama has never proposed such a thing, has he? That is absolutely the most regressive sort of taxation. Seriously, there is no way he would propose something that ridiculous, would he?

The liberty of democracy is not safe if people tolerate growth of private power to a point where it becomes stronger than their democratic state itself. That, in its essence, is fascism.---FDR

Submitted by hipparchia on

has been pushing the idea of a vat or similar tax for for a long time, and since he blogs for the center for american progress, and since the center for american progress was founded by john podesta, and since john podesta was a part of the obama transition team ... connecting the dots, i figure it's just a matter of time before we start hearing about it as a serious solution.

mass's picture
Submitted by mass on

I had no idea. What total f*cking jerks.

If that happens seriously we may as well just vote in Huckabee for President.

The Democrats are freaking cowards! How about an asset tax on the estates of those with 5 mill or more in assets? That's a Robert Reich idea. For crissakes, there are so many better taxes, like, you know, those that are not regressive. What the hell has happened to the Democrats?

The liberty of democracy is not safe if people tolerate growth of private power to a point where it becomes stronger than their democratic state itself. That, in its essence, is fascism.---FDR

Submitted by hipparchia on

What the hell has happened to the Democrats?

all the moderate and left-leaning republicans have been driven out of that party, and having nowhere else to go, they took over ours.

at first, i used to give yglesias the benefit of the doubt on this, since many of the european countries that are more socialist than we are have such taxes [and so does canada] and he's constantly pointing this out as justification for having such taxes here. but those countries also have much better social safety nets and much less income inequality, so regressive taxes there aren't quite as regressive as they would be here, not that you can get a lot of 'progressives' to understand this, nor do they understand the reason why we need 'confiscatory' taxes on the very rich. i have yet to figure out if these people [like yglesias] are stupid or purposely disingenuous.

mass's picture
Submitted by mass on

If Americans traveled more they would be shocked to find how little they get for their tax dollars.

Now that I am prepared for what may be coming, I'd like to hear what it is, a VAT or a national sales tax. But what I worry about with these freaks who have absolutely ruined the Democratic Party, is that once again they will try to recapture the heart of David Brooks, who recently wrote:

"The task ahead is to save this country from stagnation and fiscal ruin. We know what it will take. We will have to raise a consumption tax. We will have to preserve benefits for the poor and cut them for the middle and upper classes. We will have to invest more in innovation and human capital."

http://www.redstate.com/racebannon/2010/...

That's essentially how health care went. These Obama Democrats keep thinking the middle class just has too much to spare. They either don't understand that welfare programs don't have sustainable support compared to universal programs like social security or Medicare, or they just don't care. Meanwhile, VAT taxes that are eventually passed along to consumers, or worse, a national sales tax, that is absolutely regressive, not only hurt those few they set out to preserve the safety net for, but further screw over the middle class, to the point where they may win the David Brooks vote, but who the hell else is going to vote for them? I really believe part of the problem is these pols are millionaires but they think they are middle class. Obama for example seems to believe he comes from "modest means".

The liberty of democracy is not safe if people tolerate growth of private power to a point where it becomes stronger than their democratic state itself. That, in its essence, is fascism.---FDR

letsgetitdone's picture
Submitted by letsgetitdone on

Or is it our problem? Is that he hasn't been where he comes from for many, many years. Harvard created him a member of the privileged class.

letsgetitdone's picture
Submitted by letsgetitdone on

with purposely disingenuous.

Submitted by hipparchia on

i tend to think it's stupidity, but it never pays to underestimate people, so i always keep an open mind that it could be either [or both] whenever i'm wondering if any pundit or politician is either stupid or lying.

letsgetitdone's picture
Submitted by letsgetitdone on

I agree. It's hard to tell whether people are stupid or lying. In particular, whenever I see Lynn Wolsey attempt to represent the progressive cause, I find myself thinking stuuuupid; but whenever, I see Debbie Wasserman Schultz perform, I find myself thinking liiiiiar. On the other hand, I'm sure others have their own different and subjective reactions.

letsgetitdone's picture
Submitted by letsgetitdone on

Do we have a problem that a VAT will solve?

Submitted by hipparchia on

but it's the solution that's been floated by the very serious people involved with and orbiting around this administration. ezekiel emanuel wanted to fund healthcare with it iirc, and various healthcare pundits across the internet muttered approvingly.

matt yglesias is the 'progressive' blogger i've seen mentioning it most often and most approvingly, but talk of a vat and/or national sales tax crops up disturbingly often in other conversations among too many people on the supposed left.

letsgetitdone's picture
Submitted by letsgetitdone on

So if we have no deficit problem, why give them that ground and bother discussing the merits or demerits of a VAT or a sales tax? We need to join the issue about the deficit and beat them there. It's time we educated people about the role of Government in producing savings for the private sector and it's time we persuaded them that when there's a recession, there is only one priority and that's getting everybody working again by introducing enough productive stimulus that the recession goes away and the economy adds real value again.

The deficit is really never the issue in such contexts. The first issue is ending the recession, and after that the issue is avoiding inflation, so that the recovery must be watched carefully for signs of inflation. If these are visible then progressive taxation ought to be used to cool the growth rate of the economy; not raising interest rates -- a very blunt instrument that in the short run will only add to inflation and in the longer run will cause a recession as in the United States and the UK in the 1980s.

madamab's picture
Submitted by madamab on

except Versailles?

Joe and Jane America know what the real issues are: they need jobs, they need to be able to stay in their homes, they need to be able to retire, they need to pay for their health care.

Certainly if Obama implements a higher tax in a time of a "jobless" recovery, Joe and Jane America will scream bloody murder - especially if there is nothing "good" (like "health insurance reform") attached to it.

Never vote for people who hate you.

ERA Now!

The Widdershins

letsgetitdone's picture
Submitted by letsgetitdone on

That'll be 19.99 and a dollar for Mr. Obama. That should get him re-elected real fast in 2012. -- not!

Submitted by hipparchia on

so you don't have to!

more seriously, like identifying the drumbeat leading up to the iraq war, and the one that seems to be leading up to declaring war on iran, i feel compelled to keep track, a little at least, of who is pushing for this, and what their justifications/methods are.