August 11, 2014
Regular readers of the Washington Post have grown fond of Robert Samuelson’s repeated calls for cuts to Social Security (e.g. here, here, here, here, here, here, here, here, here , and here). At the core of Samuelson’s complaints are long-term projections from the Congressional Budget Office (CBO), and other sources, that the country will have large deficits 15 years, 25 years, or further in the future.
He likes to say that these deficits are due to Social Security and Medicare, although the main driver is the fact that U.S. health care costs are vastly out of line with costs in the rest of the world. If our doctors, drug companies, and other health care providers got paid the same as their counterparts in other wealthy countries, the projections would show huge surpluses, not deficits. But Samuelson prefers to go after poor and middle class seniors rather than highly paid people in the health care sector.
But this is secondary to the big issue with today’s column. Samuelson’s repeated hyperventilations about Social Security and Medicare are based on budget projections made for the distant and very distant future. For this purpose Samuelson apparently is willing to accept that economics can be a very precise science even though the past track record of budget forecasters has been atrocious. (For cheap thrills check out these projections for large deficits in the year 2000, big surpluses in 2003, or modest deficits in 2010. In each case the overwhelming source of error was in the economic projection, not policy changes.)
But for today’s column arguing that the Fed should be looking to raise interest rates sooner rather than later Samuelson has serious reservations about the quality of economic predictions:
“Although economists are arguing furiously over this [whether the Fed should be raising interest rates], there’s no scientific way to measure slack. Economic policymaking is often an exercise in educated guesswork, built on imperfect statistics, shaky assumptions, incomplete theories and political preferences. This is an instructive case in point.”
He concludes the piece:
“The Fed is expected to begin raising rates in 2015, but the time and pace are unknown. The danger of waiting too long or going too slow is that inflation, now controlled in the market and in Americans’ thinking, will escape these convenient bounds. Once that happens — as the double-digit inflation of the 1970s and early 1980s showed — inflation takes on a life of its own and becomes self-fulfilling. It can be suppressed only through tight credit, recession and high unemployment. We don’t want to go there.”
Really? Let’s just be clear what Samuelson is advocating. He wants the Fed to keep millions of people from getting jobs. He wants to keep tens of millions of people from getting pay increases because when the unemployment rate is high most workers do not have the bargaining power to secure wage increases. He wants children to grow up with unemployed parents. (Concern over children is one Samuelson’s often expressed reasons for wanting to cut Social Security.)
And Samuelson wants much larger budget deficits. Back in the mid-1990s most economists (including those at the CBO) did not think the unemployment rate could get below 6.0 percent without causing spiraling inflation. Alan Greenspan, who was then chair of the Fed, ignored the conventional view in the profession and allowed the unemployment rate to keep falling. It hit 4.0 percent as a year-round average in 2000 and inflation was nowhere in sight. As a result of this decision, the budget shifted from the deficit of 2.5 percent of GDP projected by CBO in 1996 to a surplus of 2.5 percent of GDP. This shift from deficit to surplus of 5.0 percentage points of GDP would be equivalent to $10 trillion over the next decade.
So there you have it: big hits to the unemployed, to low and moderate wage workers, to tens of millions of children and to the budget deficit, but Samuelson thinks it’s more important to slow the economy because of his fears of inflation. These are fears that have zero relationship to anything seen in the real world for more than three decades. But hey, we all have our priorities.
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