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Article Artículo

If Only the Washington Post Could Get Its Hand on the Social Security Trustees Report

It might help editorial page editor Fred Hiatt understand how the budget works. He is appalled because "reactionary defenders" of Social Security think that seniors should be able to get the benefits they paid for. (I wonder if it's reactionary to think that Peter Peterson type billionaires should be able to get the interest on the government bonds that they paid for.)

Anyhow, the basis for Hiatt's fury is that John Podesta, now a top advisor to President Obama, is boasting about entitlements having been brought under control. To Hiatt this is outrageous.

"Federal debt has reached 74 percent of the economy’s annual output (GDP), 'a higher percentage than at any point in U.S. history except a brief period around World War II,' the CBO says, 'and almost twice the percentage at the end of 2008.' With no change in policy, that percentage will hold steady or decline a bit for a couple of years and then start rising again, to a dangerous 78 percent by 2024 and an insupportable 106 percent by 2039."

Yep, the debt is much higher today than in 2008, so what? Millions of people lost their jobs due to the collapse of the economy. The deficits of the last six years created demand that would not otherwise have been there. It led to more growth and put people back to work. To those in the real world, people losing their jobs and losing their homes, would be the big story. This means kids growing up with unemployed parents and maybe hustling from house to house or even living on the street. But hey, Fred Hiatt wants us to worry about the deficit in 2039.

Just to be clear, the gloom and doom story is all Hiatt's not CBO's, although some readers may be confused by the presentation. There is no obvious negative consequence to a debt to GDP ratio of 74 percent, although readers can get that Fred Hiatt doesn't like it. Nor is there any obvious negative consequence to a debt to GDP of 78 percent by 2024, even if Fred Hiatt calls it "dangerous."

And the assertion that a debt to GDP ratio of 106 percent is insupportable is just Fred Hiatt's invention. There are many countries that have much higher debt to GDP ratios today (Japan's is more than twice as high) and continue to pay very low interest rates on long-term debt. In other words, Fred Hiatt is just like the little kid who who is worried about the monster under his bed when the lights are turned off. Undoubtedly it is very real to him, but when you turn on the lights you can see there is nothing there.

Dean Baker / October 06, 2014

Article Artículo

Defending Economics from Robert Samuelson – See Addendum on China and the Dollar

I am not usually inclined to defend the economics profession, but Robert Samuelson brings out my defensive impulse in his discussion of Financial Time columnist Martin Wolf's new book (which I have not read). Before getting to the main matter at hand, it's worth making a couple of other points.

First, Samuelson tells us that Wolf's explanation of the financial crisis goes via the way of the U.S. trade deficit:

"The trade-surplus countries couldn’t spend all their export earnings, so they plowed the excesses into dollar investments (prominently: U.S. Treasury bonds) and euro securities. This flood of money reduced interest rates. The resulting easy credit induced dubious lending, led by housing mortgages."

This is partly right and partly wrong. (I don't know if the problem is in Wolf's book or Samuels' retelling.) The wrong part is the claim that the trade surplus countries couldn't spend all their export earnings. This makes no sense on its face. They have no need to spend their export earnings. If they have dollars that they don't want they just dump the dollars. It's just like if someone who has shares of a stock they don't want. They dump the stock.

What happened in this period is that foreign central banks bought the dollars from their exporters and then used the money to buy up U.S. government bonds. This was a conscious decision to prop up the value of the dollar against their currencies. This was done to preserve their export advantages.

If they had just sat back and let the market clear, the dollar would have fallen and the U.S. trade deficit would have shrunk. This is all pretty much econ 101 stuff that Wolf should have gotten straight (perhaps he did).

The part that is completely right is that the gap in demand created by the trade deficit (our spending was creating demand in Europe and China, not the United States) created a huge hole in demand that could be filled by the housing bubble. If we had something closer to balanced trade back in the middle of the last decade then the buildup of a housing bubble would have almost certainly led to higher interest rates and higher inflation. This would have choked off the bubble before it grew too large. So in this sense, Wolf is 100 percent on the money in blaming the bubble on the trade deficit.

Dean Baker / October 06, 2014