Yes, It's Monday Morning and Robert Samuelson Is Worried About Budget Deficits

January 27, 2020

It’s amazing how Samuelson can continue to push his concerns about the budget deficit when all the evidence points to it not being a problem. In his latest tirade he tells us the problems of the deficit:

“First: As government debt piles up, it increasingly crowds out private investment. This, in turn, weakens productivity growth, which is a major source of higher living standards. With interest rates now so low, this doesn’t seem a problem — which is why it is.

“Second: The truly scary possibility is a run on the dollar. If huge budget deficits subvert global confidence in the dollar — causing investors to dump the currency — restoring that confidence might require deep cuts in federal spending and steep increases in taxes.”

Okay, that first one is a real head scratcher. The classic story is that large budget deficits lead to high interest rates, which then crowd out investment. That slows productivity growth, which makes us poorer in the future.

The problem with this story in the current environment is that interest rates are not high, they are extraordinarily low. The interest rate on the 10-year Treasury bill is hovering around 1.7 percent. That compares to rates around 4.5 percent back in the late 1990s when we were running budget surpluses. (Inflation in the two periods is comparable, so comparing the nominal rates gives us a rough comparison of the real rates.) Samuelson acknowleges that rates are low, which he says is why the budget deficit is a problem.

This is a bit like being accused of murder, then bringing in the alleged victim alive and healthy, and then have the prosecutor tell you that this is the problem with your defense. This is loon tune land. If interest rates are low, they cannot be crowding out investment: full stop.

The run on the dollar story is also problematic for anyone who gives it a moment’s thought. The real value of the dollar is actually quite high now, about 20 percent higher than it was a decade ago. Let’s say that it fell by 20 percent to its levels of 2010, would that be a crisis? That’s a bit hard to see.

Could it fall further? Well, how would the EU, China, Japan and other countries feel about us putting 25-30 percent tariffs on their exports to us? A drop in the dollar of this magnitude is equivalent to a tariff of the same size, except it is worse for their trade position. A drop in the dollar of 25-30 percent is also equivalent to a subsidy to our exports of 25 to 30 percent. The reality is that an uncontrolled fall in the dollar is at least as much a threat to our trading partners as it is to the United States, which is why we don’t have to worry about it as long as we have an otherwise healthy economy that produces tens of trillions of dollars of goods and services.

There are a couple of other points about Samuelson’s piece that need correcting. He tells readers:

“Let’s concede that higher deficits are one problem that can’t be blamed on President Trump. Since the 1970s and 1980s, Democrats and Republicans alike have evaded the hard questions required to balance the budget.”

Umm, no, we absolutely can blame higher deficits on Donald Trump. The deficit was relatively modest when he took office, with the debt to GDP ratio nearly stable. This is easy to show, we can just look the projections from the Congressional Budget Office. In January of 2017, before Trump’s tax cuts, we were projected to have a deficit this year of 2.9 percent of GDP in 2020. The most recent projections show a deficit of 4.5 percent of GDP.

The difference is entirely attributable to a drop in projected tax revenue equal to 1.8 percent of GDP. In other words, we can absolutely attribute our large current deficit to Donald Trump’s tax cuts.

Now just to qualify this point, the larger deficit was a good thing. It has helped to boost the economy, reduce the unemployment rate, and give workers more bargaining power to secure wage gains. Increasing the deficit by giving more money to rich people was just about the worse way to do this (we could have spent the money on education, infrastructure, clean energy etc.), but we are still better off with this larger deficit than a smaller one.

The last point is that Samuelson ignores the costs of government granted patent and copyright monopolies. These forms of implicit debt dwarf the actual debt over which Samuelson and others obsess, but I guess forcing people to pay hundreds of billions extra each year to drug and software companies is not the sort of thing that bothers Samuelson.


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