Monday, July 9, 2012

Yet Again, Robert J. Samuelson Proves He Is No Economist

In today's Washington Post, the regularly execrable Robert J. Samuelson yet again proves that the only reason anybody thinks he is able to write anything intelligent about economics is because they mistakenly think he is related to the late Paul A. Samuelson.  He blames economic advisers of JFK in the 60s, one of whom unofficially was in fact the better Samuelson, for our economic problems today, pretty much all of them in fact, although in particular our high debt/GDP ratio and supposedly resulting inability to get our economy going again. It was those darned neo-Keynesians back in the 60s whispering in JFK's ears all their heresies about deficit spending being OK!

Now, our old friend Dean Baker does an excellent takedown of this remarkably silly column at .  Among other things he points out that the debt/GDP ratio continued to decline for more than a decade after JFK's tax cuts, and that it was with the Reagan presidency that it began to rise.  Also, it declined under Clinton, but rose again afterwards under Bush, Jr. and now Obama, although RJS somehow never mentions the names of either Reagan or Bush, Jr.  They are missing actors in his tragicomedy.

So, I want to pile on more, mostly by just pointing out some further absurdities in the column.  The first is that he does not recognize that those advising JFK were never of the "deficits don't matter" school.  They always argued that one should watch the debt/GDP ratio and the costs of servicing the debt as well.  They also tended to be of the "balance the budget over the business cycle" view, and indeed the column itself shows evidence of this.  It is in the citing of LBJ's income tax surcharge that came into effect in 1969, motivated by a desire to restrain emerging inflationary pressures, which led to a budget surplus that year.  This clearly reflected the views of this old group of neo-Keynesians who argued that one should use short-term fiscal fine tuning to control aggregate demand. 

There were two clear problems with this outdated view.  One was that people do not respond nearly as strongly to policies announced to be short term than to ones announced to be long term, particularly involving tax changes in either direction, although they do respond somewhat.  The other is that there is a political asymmetry regarding fiscal policy that has only gotten more extreme over time: it is much easier to engage in expansionary fiscal policy than to do the opposite.  That LBJ made his income tax increase a temporary surcharge was an early sign of this, which is now much more fully entrenched with the Grover Norquist-enforced total GOP opposition to any tax increases.

This shows up further in RJS's sneering remarks about the surpluses during the Clinton years of 1997-2001.  He says they only occurred because of high economic growth and were unexpected.  There is some truth to this, but it is way over-exaggerated and ignores the enormous efforts that Clinton made to move the budget towards balance.  His economists were projecting reaching a balanced budget by around the end of his presidency, which RJS should recognize, and that the balance did better and went into surplus was indeed due to high growth.  But, the cost of Clinton's efforts were that the GOP took control of Congress in 1993 after not a single one of them voted for the tax increases that Clinton implemented in order to undo the wild deficits of the Reagan era, with most of them loudly forecasting a major recession, which most certainly never happened, although none of them have ever admitted how totally wrong they were.

In any case, none of this is noted by RJS, and he certainly does not mention how we fell from the period of Clintonian surpluses into our current condition of a rapidly rising debt/GDP ratio.  It was the Bush wars and tax cuts, followed by our plunge into the worst recession since the 1930s, also somehow not mentioned by our wise columnist.  I remember the Bush team citing Reagan and his claims that tax cuts pay for themselves (although Cheney more honestly declared that "deficits do not matter"), not the long lost neo-Keynesian advisers of JFK.  Maybe today Obama is harking back to them a bit, but he has indeed inherited an awful situation, and saying that the fiscal problems he faces are due to JFK and his advisers rather than Reagan and Bush, Jr. and their advisers is really a scandalous distortion of history.


The Arthurian said...

Hi Barkley. Interesting post. As a point of information I would like to quote you:

[Robert Samuelson] does not recognize that those advising JFK were never of the "deficits don't matter" school. They always argued that one should watch the debt/GDP ratio and the costs of servicing the debt as well. They also tended to be of the "balance the budget over the business cycle" view...

And I would like to parry that with excerpts from Time magazine, 31 December 1965:

In an application of the Keynesian argument that an economy is likely to grow best when the government pumps in more money than it takes out, they boosted Federal spending to a record high of $121 billion and ran a deficit of more than $5 billion.

Nor, in perhaps the greatest change of all, do [economists and businessmen] believe that Government will ever fully pay off its debt, any more than General Motors or IBM find it advisable to pay off their long-term obligations; instead of demanding payment, creditors would rather continue collecting interest.

Keynesianism made its biggest breakthrough under John Kennedy, who, as Arthur Schlesinger reports in A Thousand Days, "was unquestionably the first Keynesian President." Kennedy's economists, led by Chief Economic Advisor Walter Heller, presided over the birth of the New Economics as a practical policy and set out to add a new dimension to Keynesianism...

Kennedy was intrigued by the "growth gap" theory, first put across to him by Yale economist Arthur Okun... Under the prodding and guidance of Heller, Kennedy thereupon opened the door to activist, imaginative economics.

[reprinted in Stabilizing America's Economy, George A. Nikolaieff, editor.]

goot said...

The plot in the article by Dean Baker does not seem to agree with data I've collected at

Also, check out the corresponding plot at which gives a different perspective.

Don Levit said...

According to the Federal Reserve, Total Credit Market Debt Owed (TCMDO) and GDP were about the same from 1950 to 1975.
Then, the 2 started diverging, so that in 2010, GDP was $15 trillion, and TCMDO was $53 trillion.
see, their latest story.
Don Levit

Barkley Rosser said...

The Arthurian,

US government debt has only been paid off once briefly back in the late 1830s. Otherwise, the just keep rolling over the debt and keeping some of it around has been SOP for over two centuries. The invocation of business attitudes is about right. That means exactly as I said, that these people paid attention to debt/GDP and service cost/GDP ratios just like businesses watch their debt/revenues and debt cost/revenues ratios.

The Arthurian said...

Goot, Dean Baker's graph shows Federal debt-to-GDP. Steve Keen's shows private debt-to-GDP. Myself, I prefer to look at private debt relative to Federal debt, and leave GDP out of the picture.

Thanks, Barkley. But what about "the new economics"? What about Okun and potential GNP?? (Back then it was GNP. I remember.) What about the Phillips curve??? Before Friedman crapped on it, I mean.


Robert said...

Arthurian you really can't decide a debate on the thought of Heller and P Samuelson by quoting a Time magazine article which doesn't quote them. This should be obvious.

As to the Phillips curve as presented by Solow and Samuelson in 1960 what exactly did Friedman add ? I assert only the claim (overwhelmingly rejected by later data) that cyclical unemployment can't become structural (in modern terms that there is no hysteresis).

If you choose to respond to my challenge, please confine yourself to quotations of Samuelson or Solow or their joint work.

Barkley. You assert that "people do not respond nearly as strongly to policies announced to be short term than to ones announced to be long term, particularly involving tax changes in either direction, although they do respond somewhat."

Can you reject the null that the responses are the same at standard significance levels ? What data do you use ? Surely you are not making an assertion about the economy based on a priori reasoning alone, so I am sure you have the answer at your fingertips. I sure don't.

To be clear, I am not asserting that Macroeconomics has made no demonstrably important theoretical progress since 1960. In fact, I believe that macroeconomics has made no demonstrably important theoretical progress since 1936. My public challenge to counter that claim remains open.

The Arthurian said...

Hey Robert, thanks for the link.

ProGrowthLiberal said...

There is something else this Time article written in December 1965 missed, which were the discussions from the Council of Economic Advisors with President Johnson in the very same month. You see - they wanted some aggregate demand stimulus back in 1963 which led to the 1964 tax cut. Which BTW did bring us back to full employment leading to at least some offset in terms of revenues to the tax rate cut. But by late 1965, the CEA recognized that with the surge in defense spending (Vietnam) and increases in transfer payments ala the Great Society, we were getting too much demand stimulus. So they were already advocating fiscal restraint lest the FED have to jack up interest rates (see the 1966 Credit Crunch) or watch inflation rise. So the CEA got it right - something else Robert (no relation to Paul) Samuelson apparently does not know.

Barkley Rosser said...


Well, the temporary tax surcharge of LBJ did not slow down AD and the temporary tax cut of Gerald Ford did not stimulate it much, whereas the "permanent" tax cuts of both JFK (instittued by LBJ as pgl notes) and that of Reagan did stimulate AD more.


If you go back to Samuelson and Solow's original paper they did set it in concrete and recognized that a PC might move around based on changing conditions.

Friedman's crapping simply amounted to asserting that if expectations are fulfilled, the PC will be vertical at the "natural rate of unemployment." First of all, I think rational expectations are crap and often unless there are supply shocks one way or the other, downward-sloping PCs exist, and second, that natural rate of unemployment is a highly questionable concept (with the NAIRU even more so), although curiously enough it can be linked to the Okun concept. Both are in some sense target levels of GDP/GNP (the distinction is unimportant for the US economy).

Bruce Webb said...

Sheesh. SOME amount of U.S. Debt is necessary simply because of the dollar's function as a reserve currency for both domestic and international (e.g. foreign reserve) purposes and to provide the crucial 'flight to safety' function to smooth out market shocks. That is Greenspan was not insane in 2001 when he argued about the danger of the disappearance of the Long Bond. Now his preferred policy solution of tax cuts on the wealthy as opposed to say expanding the welfare state via Single Payer (which would have adequately sucked up that huge ten year surplus he was all worried would kill the bond market) was proven wrong, particularly when coupled with a massive even then predicted expansion in military and war spending under Bush (because anyone who wasn't expecting that wasn't watching)but the fundamental point that you need SOME U.S. debt simply as a lubricant was right on. And the proper measure of that debt level was some combination of debt to GDP coupled with debt service to GDP. That is given some not too obsessive attention to inflation and hence real interest rates there was no real problem running higher levels of nominal debt.

Christ isn't the distinction between 'nominal' and 'real' and between 'debt' and 'debt service' even taught to Glibertarians these days?