The Poverty of Neoclassical Economic Analysis

By Ron Baiman, Chicago Political Economy Group

 

 

When I first got wind of the denunciation of Prof. Gerald Friedman’s Bernienomics impact estimates by prominent liberal Economists two questions came immediately to mind.  Who were these “liberal economists” and what were their objections?  A little googling around got me the first answer in a jiffy.  The liberal economists were four former Chairs of the Council of Economic Advisors (CEA) under Democratic Presidents Clinton and Obama: Alan Kreuger, Austan Goolsbee, Christina Romer, and Laura D’Andrea  Tyson.  It took more time and more work to establish the second answer.  According to their three paragraph letter, they: “are concerned to see the Sanders campaign citing extreme claims by Gerald Friedman” (Italics mine) that Bernienomics  could have: “huge beneficial impacts on growth rates, income and employment”  because these “exceed even the most grandiose predictions by Republicans about the impact of their tax cut proposals” and “no credible economic research supports economic impacts of these magnitudes”.

As Friedman’s  comprehensive and detailed analysis (56 pages with four Appendices, 22 Tables, and 12 Figures) uses public data and standard techniques to estimate the economic impact of 9 major policy, 11 Revenue Enhancement, and 6 regulatory, Acts or proposals raised by the Sanders’ campaign, I tried to find out what techniques, data, or estimation errors, the CEA’s objected to?  I was not able to find anything.  As Jamie Galbraith has pointed out in his excellent retort there are no specifics.  The CEA’s three paragraph letter presumes that Friedman’s report does not even warrant careful study as growth rates, income, and employment, have not reached these levels in recent years.  Adding insult to injury, the former CEA chairs imply that Bernienomics , and Friedman’s estimates of its impacts, is equivalent to Republican “Laffer Curve”  assertions that have never passed muster in any standard impact analysis of the kind that Friedman has subjected the Sanders proposals to.

As Galbraith, citing Mathew Iglesias  notes, the CEA’s appear to believe that their status entitles them to a blanket dismissal, without a shred of argument or analysis, of a standard economic analysis of a raft of economic proposals the scale and scope of which have not been seen since the New Deal. Far from being an “extreme” analysis, the Friedman study conservatively uses standard techniques such as those employed by the CBO, OMB and CEA to estimate economic impacts.  In another excellent retort Matthew Klein shows that real GDP growth rate projections of 5.3%  by the end of a Sanders second term (one of the Friedman estimates that the CEAs believe is not credible) is in line with pre-2007  estimates of long-term U.S. trend growth.  Klein points out that short-falls in government spending and residential construction can explain much of the gap.  But under Bernienomics government spending would undergo a massive increase so that it is not hard to imagine infrastructure and direct green energy job creation programs including housing and energy retro-fitting providing a more productive economic boost than pre 2007 residential housing construction – see for example CPEG jobs program.

Klein and Iglesias also both discuss the extra-ordinarily low post-2007 Emp/Pop ratio in the U.S. , see Figure 1 below:

Baiman-fig.1

The U.S. Emp/Pop ratio is more than 5% below its pre Lesser-Depression 2007 level.  This is a lot of labor market slack that could be drawn upon by large scale job creation programs that should be able to at increase employment above its pre-2008 level.    To the argument that changing demographics have made prior Emp/Pop ratios unobtainable, see Figure 2 below shows that the current ratio is roughly r3% below its demographically adjusted pre-2008 Emp/Pop ratio.  Paid Family leave, child care, equal pay, youth job programs, should significantly drive up the Emp/Pop ratio, whether this is measured after adjusting for demographics or not. As Klein points out, is it really that unrealistic to hope that we can achieve things are a reality in Canada?

Bernie’s economic program is exposing the long politically dormant deep fissure within economics between generally “progressive” economists who still broadly adhere to mainstream Neoclassical (NC) economic theory and “radical” economists who have long rejected core NC theory. I don’t know Prof. Friedman personally but he teaches at one of the five “heterodox,” or “radical” in U.S. economics parlance, Ph.D. granting economics departments in the U.S. The “radical” moniker stems from the name of the major professional organization of left leaning heterodox economists in the U.S. – the “Union for Radical Political Economics” (URPE).  Jamie Gailbraith is a prominent Post-Keynesian heterodox economist.  In contrast, the four former CEA Chairs all teach in mainstream NC economics departments that reject heterodox economics as unscientific value-laden deviance. To be fair the CEA foursome are known as political liberals who, like Paul Krugman,  another generally progressive NC economist, have often been stalwart supporters of politically progressive economic policies and principles, using data analysis that is indistinguishable for all practical purposes from that employed by radical economists.  But this time apparently, the structural economic changes that Sanders is proposing have simply gone too far for them.

Baiman-fig.2

The CEA’s blanket argument is that economic outcomes that have not occurred in the recent past are not possible.  This reminds one of the, similar, refusal of the vast majority of NC economists to contemplate the 2008 crash because this had never happened in recent history, and the optimistic estimates of the CEA, based on the average of post-war recessions, of the impact of the woefully inadequate Obama stimulus.  I believe that the former CEA chairs are, like 99% of economists in the U.S., a victim of the NC economic school that they have been trained in. They think of economics as an objective “science” and cannot accept the possibility that a fundamental change in the basic structure of the economy can lead to impacts that have not been seen in recent years, because they cannot accept the possibility of fundamental structural economic changes.  The New Deal raised U.S. real GDP growth rates by over 10% in years of government spending expansion.  Is 5.2% late in a second Sanders term unrealistic assuming these programs are passed?

And this brings me to my final point. No one assumes that Bernie’s economic program will be passed as currently conceived.  The fate of these proposals depends on the power of the “political revolution” that the Sander’s campaign is leading.  Like the Clinton campaign, the, NC economics trained, former CEA Chairs exhibit abundant “pessimism of the intellect” but little “optimism of the will”. This is not a technocratic economic debate. It’s a political and ideological debate that reflects the deep division in fundamental  theoretical outlook between NC progressive and radical democratic socialist economists.   For more background on this see my upcoming book: The Morality of Radical Economics: Ghost Curve Ideology and the Value Neutral Aspect of Neoclassical Economics (Palgrave, 2016).

Postscript  (2/21/2016)

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.

 

 

Notes and Links on the Democratic Primaries

A round-up of some of the best things I’ve seen on the battle so far between Clinton and Sanders:

Gerald Friedman, What Would Sanders Do.  We have posted the research report by Friedman that is the basis of his two columns for us, What Would Sanders Do?, Part 1: The Dynamic Effects of Seven Sanders Initiatives, and What Would Sanders Do?, Part 2: Wages, Poverty, and Inequality. Soon we will post Friedman’s column for our March/April issue, “Bernie Sanders’s Health Care Revolution,” with the numbers behind Sanders’s “Improved Medicare for All.” We have already posted the research report behind that: Friedman Response to Thorpe. (Meanwhile, the Times mentioned Jerry Friedman in Left-Leaning Economists Question Cost of Bernie Sanders’s Plans, but didn’t bother to interview him. They seem to have scoured the universe for left critics of Sanders; as Lambert Strether of Naked Capitalism says, “When Jared Bernstein is at the far left, you know you’re looking at establishment stenography.” And I loved Matt Taibbi’s tweets about this article: “The hysterical concern over how to pay for Bernie’s plans is hilarious. Nobody worries about how we afford the F-35. Nor do we ask how we afford non-negotiated Medicare drugs, the Littoral Combat Ship, the carried interest tax break, or other idiocies.”)  And a reminder:  the whole point is that single-payer would cost less than the current system, and provide health care to many more people.

Holly Wood, The Village VoiceFeeling the Yern: Why One Millennial Woman Would Rather Go to Hell than Vote for Hillary. A hilarious riposte to Madeleine Albright’s “there’s a special place in Hell” remark. Best parts: “Capitalism, as Vonnegut explained, is ‘what the people with all our money, drunk or sober, sane or insane, decided to do today.” And: “there’s a special place in Hell for war criminals who launch hedge funds.”

Bhaskar Sunkara, Aljazeera America: Enter the Sanders Democrat:
Whether or not he defeats Hillary Clinton, Bernie Sanders has awakened a powerful new constituency. Excellent analysis from the founding editor of Jacobin.

Benjamin Studebaker, at his blog, Why Bernie vs Hillary Matters More Than People Think (also at HuffPo). A great blog post that has a bigger historical perspective, with some economics.

Benjamin Studebaker, at his blog, Why Bernie Sanders Is More Electable than People Think.  A follow-up, also very good.

Jeff Spross, The Week: How class could eventually remake the Democratic Party. Similar to Sunkara’s article.

Jedediah Purdy, Huffington Post: Dismissing Sanders: Democratic Condescension and the Mythic Political Grown-up.  Takes on Paul Krugman and the New Yorker‘s Alexandra Schwartz.

Thomas Piketty in the Guardian (originally in Le Monde): Thomas Piketty on the rise of Bernie Sanders: the US enters a new political era.  More recent than the others; similar points.

Greenmountainboy, Daily Kos, Crossover Appeal: Bernie Sanders Wins 2,095 Write In Votes in Republican Primary – Washington Post.  The WashPo article is Bernie Sanders won 2,095 votes in the New Hampshire Republican primary; the headline sums it up. Find the official NH results from the Secretary of State here (for the Republican side) and here (for the Democrat side).  This on top of his having gotten more NH primary votes than any candidate in either party ever, and having won by a larger margin, than in any contested NH primary in either party in history.

I agree that the votes he got in the Republican primary is a good sign for Sanders’s crossover appeal (about four times as many as Clinton got, by the way).  But as someone who lives in NH and who canvassed for Sanders here, I don’t think it is quite as good a sign as some people are making it out to be.  As most people know, NH is an “open primary” state, which means that you don’t have to be a party member to vote in a party’s primary. But I think most people don’t know the mechanics of how it works here:  you can only vote in (e.g.) the Democratic Party’s primary if, when you walk into the polls, you are registered as a Democrat or if you are unaffiliated, in which case, on the day of voting, you can switch your registration to Democrat. If you walk into the polls registered as a Republican, you can only vote in the Republican primary. (I think you can switch your affiliation up to two weeks before the primary.)  Also, many NH voters strategically switch their party affiliation (switching it back to “unaffiliated” or to the other party after they vote) depending on where they think they can have a meaningful impact. But some people forget to switch their affiliation back. Given all this, I think it’s likely that many of the people who wrote in Sanders (or Clinton) in the Republican primary may have been Democratic-leaning unaffiliated voters, or even people who are “really” Democrats (i.e., that’s where their heart is and they are usually registered as Democrats), but who had forgotten to switch their affiliation back after some previous election.  Still, I think it’s true that there’s great crossover appeal for Sanders among Republicans.  Evidence: a relative of mine, who is normally a registered Republican and went into the primary intending to vote for Chris Christie, discovered when she walked in that she was still registered as a Democrat from some previous election. So she voted for Bernie. (Don’t ask me how she can support both Christie and Bernie, but I still think it’s a good sign for Bernie that there are people like this out there.)