Yet More Links on Friedman-Sanders Kerfuffle

Christina D. Romer and David H. Romer, Senator Sanders’s Proposed Policies and Economic Growth.  Finally, one of the “Gang of 4” (as Bill Black has dubbed them) has responded to Friedman’s paper with an actual substantial critique.  From the conclusion:

“The bottom line of our evaluation of Professor Friedman’s analysis is that it is highly deficient.  The estimated demand-induced effects of Senator Sanders’s policies are not just implausibly large but literally incredible. Moreover, even if they were not deeply flawed, Freidman’s enormous estimates of demand-fueled growth could not and would not come to pass. Even very generous estimates of the amount of slack still present in the American economy would not be enough to accommodate demand-driven growth of anything near what Friedman is estimating. As a result, inflation would soar and monetary policy would swing strongly to counteract them. Finally, a realistic evaluation of the impact of Senator Sanders’s policies on productive capacity (something that is neglected in Friedman’s analysis) suggests that those impacts are likely small and possibly negative.

“Though we have been frankly critical of Professor Friedman’s analysis, he has provided a service to public debate by posting his analysis so that other economists can evaluate its validity. We are posting our evaluation in the same spirit.”

James K. Galbraith, Economic Forecasting Models and Sanders Program Controversy. Galbraith comes to Friedman’s defense vigorously, again, by pointing out that they differ from him because of their theoretical assumptions and approach, not because he is in error.  And their theoretical approach has a sorry history.  The gist:

“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.”

Justin Wolfers, NYT Upshot blog, Uncovering the Bad Math (or Logic) Behind Bernie Sanders’s Economic Plan. After a phone conversation with Friedman, Wolfers tries to pick apart his analysis based on the Romers’ criticisms of it. “Here’s the problem: Mr. Friedman’s calculations assume that removing a stimulus has no effect. The result is that temporary stimulus has a permanent effect.” But by the end of the article Wolfers claims to have cornered Friedman into admitting that his model doesn’t depend on standard macroeconomic assumptions, but instead depends on “the understanding of an earlier generation of economists–a sub-tribe of Keynesians he called ‘Joan Robinson Keynesians.'” So if Wolfers is concluding that this is based on a theoretical difference, why would he suggest (and why would the Times editors allow him to suggest) that the difference is the result of math errors (or possibly errors in logic)? That would only be true if Friedman were applying the neoclassical models that the Romers and Wolfers rely on. As far as I can tell, the only error Wolfers has revealed is Friedman’s possible assumption at he was relying on standard models. That is only a real error if you assume that the standard models must be correct (and even then, it wouldn’t be a “logical” error!). There are two other problems with the Wolfers piece. One is that he is biased, having worked with David Romer, also also arguably because his partner Betsey Stevenson worked in the Obama administration until recently (and Obama and his economic advisors are supporting Clinton), which he doesn’t disclose. The other is that the title mentions “Bernie Sanders’s Economic Plan,” which mis-describes Friedman’s paper (which hasn’t been endorsed by Bernie Sanders–only mentioned favorably by someone from Sanders’s campaign).

Gerald Friedman, Response to the Romers. This is an exclusive to D&S;  he’ll have more to say soon, I’m sure.  Here’s his response in its entirety: “The Romers, and I suppose other neoclassical macro economists, believe that the economy tends towards full employment equilibrium and will move there on its own without need for government intervention or stimulus. They would acknowledge that following a negative shock, government stimulus spending may accelerate the recovery somewhat, as Bernstein and Romer in 2009 anticipated the Obama stimulus would speed recovery by about 6 months. They deny, however, that stimulus spending could change the permanent level of output because the economy will on its own return to full employment at a capacity output set without regard to the level of employment by factor endowments, by preferences, and by the level of exogenous technology. From this perspective, because a period of prolonged measured slow growth cannot be caused by involuntary unemployment, it must, by a priori assumption, be due to a decline in the exogenously determined growth rate in capacity. Like mosquitos on an otherwise delightful summer afternoon, slow growth is unfortunate but there is little that can safely be done about it.

“Or maybe we can find safe pesticides. Here I agree with John Maynard Keynes that the economy can have a low-employment equilibrium because of a lack of effective demand, and I agree with Nicholas Kaldor and Petrus Verdoorn that productivity and the growth rate of capacity can be increased by policies that push the economy to a higher level of employment. And to the contrary, periods of prolonged unemployment and underutilization of capacity can lower capacity by discouraging workers and reducing the incentive to invest, to innovate, and to raise productivity. Unfortunately, this is what has been happening in the US for the last few years; and, fortunately, there is reason to believe following Keynes/Kaldor/Verdoorn that policy can reverse this decline by pushing the economy to a higher level of output and thus a higher level of productivity. Rather than dismiss the rising output gap as orthodox macro economists have done by assuming that the United States suffered a great loss of efficiency since 2007, I see an economy at low-employment equilibrium where discouraged workers have abandoned the labor market and firms have had little incentive to innovate or to raise productivity. In this situation, additional stimulus can not only temporarily raise output but by priming the pump and encouraging additional private spending and investment, it can push the economy upwards towards capacity. And, beyond because at higher levels of employment, more people will look for work, more businesses will invest, and employment will grow faster and productivity will rise pushing up the growth rate in capacity. That is why I see lasting effects from a government stimulus when, as now, the economy is in a low-employment equilibrium.

“This theoretical point turns on empirical questions: are we 11% below capacity, as I would estimate, or are we 2-4% below, as the Romers suggest? And is capacity set or is it endogenous with respect to output levels; does it rise when the economy approaches capacity? If the Romers were right that the economy is at full employment at capacity utilization, and capacity utilization grows independently of the level of output, then there cannot be a lasting stimulus effect at a fully employed economy. In the Romer case, a stimulus can raise output only temporarily because output depends on capacity and the economy is always at or moving towards capacity. But, if the economy can be stuck at an unemployment equilibrium, if it does not move to a full employment equilibrium, or if a higher employment and output level can trigger a higher growth rate, then a Keynesian-style government stimulus can have lasting effects. Even a one year stimulus can push employment and output to a permanently higher level, and at that higher level it can generate faster growth by pulling more into the labor force and stimulating higher productivity growth. We might call this, the Keynesian-Kaldor case with equilibrium unemployment and growth dependent on the level of the output gap. In the Keynesian-Kaldor case, a one year stimulus can lead to permanently higher output both by reducing unemployment and by raising the growth rate of capacity.

“Gerald Friedman, University of Massachusetts at Amherst
February 27, 2016”

Also, here is Friedman’s new website!

Dean Baker, at his CEPR blog “Beat the Press,” The Romers Do the Numbers on Friedman-Sanders.  Disappointingly (to me, at any rate), Baker sides with the Romers:  “I could quibble with aspects of their critique, but I would say it is basically right. There clearly is still a large amount of slack in the economy which would allow for 2–4 years of exceptionally strong growth (e.g. 4–5 percent). However, it is very hard to envision a story where this sort of growth rate is maintained for a full eight years of a Sanders’ administration.” But I find this puzzling, as did at least one commenter on Baker’s blog: “This seems to be the exact opposite of what the Romers are saying. To Quote: ‘First, standard indicators of slack suggest that the output gap is currently no more than moderate. […] Second, experts think that slack is small. […] This suggests that, at least by this measure, professional forecasters see little if any slack in the current economy.'” 

John Cassidy, The New Yorker, Bernie Sanders and the Case for a New Economic-Stimulus Package.  Seems to side with Friedman against the “Post-Hope Democrats” (as Doug Henwood calls them).

“Having read Friedman’s paper pretty carefully on my return to the United States, I remain deeply skeptical of his projections for G.D.P. growth and productivity. But his analysis, which isn’t an official campaign document, was well worth spending some time with. For one thing, it is the first effort I have seen to quantify how some of Sanders’s proposals, such as raising the minimum wage to fifteen dollars and sharply raising taxes on high earners, would reduce income inequality. Friedman outlines a compelling scenario under which the ratio of the average incomes of the richest five per cent of households to the poorest twenty percent would fall from 27.5 to 10.1. And this estimate doesn’t hinge on his own macroeconomic assumptions—it mainly reflects explicit efforts to boost the wages of low-paid workers, and to redistribute post-tax incomes.

“In addition, Friedman makes a valuable contribution to the debate about how we can escape from the New Normal, or secular stagnation, or whatever other label you want to attach to our era of seemingly permanent low growth. To repeat: I think Friedman overstates the likely impact of Sanders’s policies. But he offers a timely reminder that economic growth rates aren’t set in stone, and that changes in policy—particularly those that seek to boost overall demand—can have a substantial impact, even when the official unemployment rate isn’t particularly elevated.”

Paul Starr, Politico, Why Democrats Should Beware Sanders’ Socialism
He’s a socialist, not a liberal—and there’s a big difference.  Ridiculous red-baiting here.  See also On Point with Tom Ashbrook (NPR), Debating Bernie Sanders’ Vision. With Paul Starr doing more red-baiting, and Jonathan Tasini doing a great job of calling him on his red-baiting (and explaining Sanders’s proposals).

Doug Henwood, at his blog LBO News, Liberal Redbaiting.  An excellent take-down of the liberal conniptions about Sanders; especially good on Paul Starr’s red-baiting (e.g., his ridiculous claims that single-payer will involve worrisome centralization of power).

Matthew Yglesias, Slate, Have top Democrats given up too soon on boosting economic growth?  A surprisingly good piece, though he takes a potshot at Friedman in calling his report “somewhat silly” (apparently on the basis of Brad DeLong’s criticism that it’s too late to fill the output gap left by the Great Recession–but if other high-profile economists disagree, is it fair to call Friedman’s view “silly”?).

Michael Corcoran, Truthout, The Dominant Media, “Left-Leaning” Economists and the Illusion of Consensus.  An excellent review of the kerfuffle, with an emphasis on the Times’s propaganda role.

Dave Johnson, Campaign for America’s Future, The Sanders “Economic Plan” Controversy. A very good review of the kerfuffle.

Dolphin99, Daily Kos, Sanders and the Economists.  An earlier review of the kerfuffle.

Chris Matthews, Fortune, Meet the Man Who Says Bernie Sanders Can Deliver 5.3% Economic Growth.  Another earlier piece I’d missed. (Not that Chris Matthews.)

Jordan Weissman, Slate’s Moneybox blog, Here’s Something Important That Bernie Sanders Gets Absolutely Right About the Economy. It’s on his infrastructure spending plan. Weissman seems to have been dismissive of Friedman in another post.

Max Ehrenfreund, WashPo Wonkblog, Study: Bernie Sanders’s health plan is actually kind of a train wreck for the poor.  A lazy piece–based on Thorpe’s criticisms of Sanders’s single-payer plan, with no mention of Friedman’s critique of it or Woolhandler/Himmelstein defense of Sanders’s single-payer plan.

David Sirota, International Business Times, Election 2016: Do Sanders’ Economic Plans Add Up? The Cost Of His ‘Revolution’. A great review of the kerfuffle, nicely balanced, which does (on the single-payer issue) what the Wonkblog piece failed to do–talks about both the Thorpe analysis and critiques of it.

Tim Mullaney, MarketWatch, Could it be that Bernie Sanders is the real-deal capitalist?  An offbeat take that takes Friedman’s study more seriously than some.  On the one hand, I don’t think Sanders is actually anti-capitalist.  On the other, I am guessing this author feels he has to emphasize that Sanders is the “real-deal capitalist” because he (the author) likes Sanders programs and their projected effects.

Narayana Kocherlakota, at his policy blog, Faster Growth IS Possible – And It May Well Be Desirable.  I had neglected to link to this post by the former president of the Minneapolis Fed (he has a couple more recent related posts) that lend support to Friedman’s analysis. (Hat-tip to Eileen Applebaum on Twitter for this.)

More Links on Kerfuffle about Friedman’s Sanders Analysis

Here are more links related to the kerfuffle surrounding our columnist Gerald Friedman’s research paper on the likely macroeconomic effects if Bernie Sanders economic policies were implemented. (Find the full 53-page paper here.)

David Dayen, The New Republic,  The Pious Attacks on Bernie Sanders’s “Fuzzy” Economics.  “I don’t feel it necessary to defend Friedman, though it’s worth pointing out that his economic growth numbers would simply eliminate the GDP gap [links to the FT Alphaville piece we linked to the other day] that was created by the Great Recession and was never filled in the subsequent years of slow growth—which should be the goal of public policy, however “extreme” it sounds. What I do want to challenge is the idea that there’s one serious, evidence-based way to perform economic forecasting. The truth is that most economic forecasts that look several years into the future are flawed, almost by definition.”

Dean Baker, HuffPo, The Four Economists’ Big Letter. Dean says he agrees with the substance of the CEA ex-chair’s critique (he’s skeptical of Friedman’s growth projections), but not their “tone” of authority. “I respect all four of these people as economists, but I want to hear their argument, not their credentials. How about just giving the evidence? It might not be as dramatic, but it could have considerably more impact.” More recently at his CEPR blog Beat the Press, there’s this from Dean: President Obama’s Council of Economic Advisers Confirms Sanders’ Growth Projections, in which he discusses a section of the 2016 Economic Report of the President and a section “an that provides insight into the question of how fast the economy can grow, and more importantly how low the unemployment rate can go” and the non-accelerating inflation rate of unemployment (NAIRU). Obama’s CEA report “is hardly an endorsement of the specifics or the even the size of the Sanders agenda (and certainly not the now famous growth projections from Gerald Friedman), but it does argue for pushing the envelope in terms of bringing down the unemployment rate.” (Why Dean is engaged in line-drawing here, subtly suggesting that Jerry’s not credible, is beyond me.)

Gerald Friedman, Response to Krugman.  A response to a really condescending blog post by Krugman, Lack of Power Corrupts.  Krugman really smears Friedman.

Bill Black, New Economic Perspectives blog, Krugman and the Gang of 4 Need to Apologize for Smearing Gerald Friedman.  Excellent skewering of the “Gang of 4” CEA ex-chairs. See also Yves Smith’s introduction to her reposting of Bill’s post at Naked Capitalism, Krugman and His Gang’s Libeling of Economist Gerald Friedman for Finding That Conventional Models Show That Sanders Plan Could Work.

Richard Wolff, via email: “As a colleague of Jerry Friedman for decades, I know directly of his consistently careful work in economic history and applied economics, his exceptional commitment to teaching, and the immense time and effort he has committed to doing detailed explorations of the economics of health insurance–explorations his detractors might have learned from had their commitments not been otherwise. Shame on them.”

J.W. Mason, at his blog (The Slack Wire), Plausibility.  A follow up to the earlier post of his we linked to, Can Sanders Do It?. He gives two scatter-plot graphs, one showing “the initial deviation of real per-capita GDP from its long run trend, and the average growth rate over the following ten years, for 1925 through 2005,” the other showing the same thing for just 1947-2005 (so it eliminates the Depression and WWII years). He argues that for either, Friedman’s GDP growth projections don’t look so implausible; even less so if you take out “the seven points well below the line in the middle are 1999-2005, whose 10-year growth windows include the Great Recession.” His upshot: “Should the exceptionally poor performance of this period make us more pessimistic about medium-term growth prospects (it’s sign of supply-side exhaustion) or more optimistic (it’s a sign of a demand gap that can be filled)? This is not an easy question to answer. But just counting up previous growth rates won’t help answer it.” His earlier blog post has been republished under a new title at the Jacobin website: When Wonks Attack.  Subtitle/teaser: “Beltway wonks are dismissing Bernie Sanders’s economic plan as unserious and unrealistic. Here’s why they’re wrong.”

Brad DeLong, at his blog (Grasping Reality…) No: We Can’t Wave a Magic Demand Wand Now and Get the Recovery We Threw Away in 2009.  Responding to the Mike Konczal post we linked to. I wish people would stop the talk of magic wands and unicorns and fantasy and voodoo and puppies and unicorns. It’s just uncharitable and undignified. It reminds me of the infantilizing language Republicans and Clintonites use about Sanders’ proposals (e.g., saying that he’s promising people “free stuff” including “free ponies”). It’s that grown-up stance, talking down to the rest of us.

Kevin Drum, Mother Jones blog, On Second Thought, Maybe Bernie Sanders’ Growth Claims Aren’t As Crazy As I Thought.  Back-pedaling, in light (it seems) of Jamie Galbraith’s full-throated defense of the plausibility of Friedman’s analysis.   No apology for calling his GDP growth projections “insane” without having examined the analysis. (I asked for an apology on Twitter. But that never works.)

Jasper Craven,, Economist, Others, Defend Sanders ‘Stimulus’ Plans as Realistic. A local Vermont summary of the kerfuffle. Hat-tip Nancy B. A nice piece (though he identifies the D&S Economy in Numbers columns as Jerry’s reports, but again, Jerry’s main Sanders report is “yuge”–some 53 pages long, including appendices and sources).

Andrew Perez and David Sirota, International Business Times‘ Political Capital blog, Bernie Sanders Economic Plans Questioned By Critics With Ties To Wall Street, Hillary Clinton.

Ron Baiman, Postscript (Feb 21) to his earlier D&S blog post (Feb 19), The Poverty of Neoclassical Analysis: “Unfortunately, even, politically liberal, mainstream or ‘Neoclassical’, economists do not believe that massive increases in effective demand, or other large scale public spending and policy measures, can produce lasting major and fundamental structural changes in the economy (in spite of the examples of the New Deal, WWII, etc. ). They also don’t accept Verdoorn’s law (which Friedman employs) in spite of numerous empirical studies and common sense validation: long-term growth in demand leads to increased investment and thus increases in productivity and by implication structural changes in the economy. NC ‘Keynesians’ believe only in short-term Keynesianism — not in a long term principle of effective demand. To the extent that Friedman (rightly) employs a long-term ‘Post Keynesian’ principle like Verdoorn’s law (in addition to all of the other standard techniques that he uses) he crosses a line that NC economists will not cross. I belatedly remembered after writing and posting this piece, that Friedman had employed Verdoorn’s Law in his study of the long-term economic impact of Bernienomics.”

And in case you missed it two weeks ago:

Tami Luhby, CNN Money (Feb. 8), Under Sanders, income and jobs would soar, economist says. The article that likely ignited the kerfuffle (rather than our two columns by Friedman based on his research); this is where a large audience saw Friedman’s big GDP growth estimates. And this is where the Sanders campaign appeared to endorse Friedman’s findings. “Sanders’ policy director, Warren Gunnels, also defended the estimates, noting the candidate is thinking big.”

That’s it for now. I’m sure there will be another follow-up to this post.