The debate continues
from David Ruccio
A week ago, I noted the pushback against liberal mainstream economists’ attacks on Bernie Sanders’s plans and Gerald Friedman’s analysis of those plans.
The first set of attacks, as Bill Black explained, plumbed “new depths of moral obtuseness, arrogance, and intellectual dishonesty.”
More recently, Christina D. Romer and David H. Romer (pdf) have responded with a more detailed critique of Friedman’s calculations, which has led to additional gloating by Paul Krugman and more publicity to only one side of the debate in the pages of the New York Times.
But, fortunately, that didn’t end the debate.
James K. Galbraith reminded us that “all forecasting models embody theoretical views.”
All involve making assumptions about the shape of the world, and about those features, which can, and cannot, safely be neglected. This is true of the models the Romers favor, as well as of Professor Friedman’s, as it would be true of mine. So each model deserves to be scrutinized.
In the case of the models favored by the Romers, we have the experience of forecasting from the outset of the Great Financial Crisis, which was marked by a famous exercise in early 2009 known as the Romer-Bernstein forecast. According to this forecast (a) the economy would have recovered on its own, in full and with no assistance from government, by 2014, (b) the only effect of the entire stimulus package would be to accelerate the date of full recovery by about six months, and (c) by 2016, the economy would actually be performing worse than if there had been no stimulus at all, since the greater “burden” of the government debt would push up interest rates and depress business investment relative to the full employment level.
It’s fair to say that this forecast was not borne out: the economy did not fully recover even with the ARRA, and there is no sign of “crowding out,” even now. The idea that the economy is now worse off than it would have been without any Obama program is, to most people, I imagine, quite strange. These facts should prompt a careful look at the modeling strategy that the Romers espouse.
Mark Thoma, for his part, argues that, while he does not believe that “we can sustain 5% growth over the next eight years. In the short-run—over the next two to four years—the situation is different.”
I’m worried people will accept without question that the gap is small due to the pushback against Friedman’s analysis of the Sander’s plan, and that will justify policy passivity when we need just the opposite. So let’s stop arguing, put the policies we need in place, and push as hard as we can to increase employment until inflation reveals that we have, in fact, hit capacity constraints. Maybe that happens quickly, but maybe not and we owe it to those who remain unemployed, have dropped out of the labor force but would return, or took a job with lousy wages to try. People who had nothing to do with causing the recession have paid the costs for it, and if we experience a short bout of above target inflation I can live with that. We’ve been wrong about this before in the 1990s, and we may very well be wrong about this again.
Finally, there’s a much more mainstream supporter of the idea that it’s not technologically impossible to imagine “materially super-normal rates of growth in the coming four years”: former Minneapolis Federal Reserve President and University of Rochester economist Narayana Kocherlakota. His view is that “given current economic circumstances, demand-based stimulus is likely to be more effective than supply-based stimulus.”
Why? Because, as Kocherlakota explained elsewhere, labor’s share remains extremely low by historical standards. So, faster growth would serve to push the share of income going to labor back to their historical (pre-1990) ranges and thus boost economic growth above the so-called consensus among economists.
And that’s exactly the basis of Bernie Sanders’s economic plans and Friedman’s analysis : raising labor’s share via redistributive measures is a spur to faster economic growth and encouraging unemployed and underemployed workers to take decent, better-paying jobs will sustain those faster rates of economic growth.
As I’ve written before, that’s not so much a forecast of what will happen as a mirror that demonstrates how diminished are the expectations created by contemporary capitalism and the policies that continue to be put forward by liberal mainstream economists.