On the Neglect of Class in Neoclassical Macroeconomics

A Response to the Romers’ Critique of Friedman Bernienomics Analysis

By Ron Baiman of the Chicago Political Economy Group

To her credit Christina Romer, one of the four former CEA Chairs who wrote a scathing four paragraph letter dismissing Gerald Friedman’s detailed study of the impact of the Sanders economic program, has acknowledged that Friedman’s estimates warrant a detailed and substantive analysis.  Romer has, with her husband and prominent fellow “Neoclassical (NC) Keynesian” Economist, David Romer, produced a more detailed critique that attempts to back up the stridently critical statements of the CEA Chair’s letter.

As Friedman notes, in his detailed rebuttal, the Romers’ major critique appears to be that a stimulus program that ramps up from $300 billion in 2016 to $600 billion by 2021 and then declines to the $300-$400 billion per year range from 2022 to 2026 (Romers, p. 2) cannot produce permanent gains in GDP growth rates via increased emp/pop ratio and productivity rather than a one-time boost in output that tapers off as the stimulus declines.   Indeed, the Romers appear so sure of their NC methodological approach that they speculate that Friedman must have made an elementary miscalculation by not calculating multiplier impacts off of an unchanged (for 10 years) CBO baseline.

But as the Sanders economic program is directed toward positive radical structural changes in the economy using an unchanged baseline is inappropriate. As prominent Post Keynesian (PK) economist Jamie Galbraith has related in detail, Romer made the same mistake in estimating the impact of the Obama stimulus after the 2008 Lesser Depression which also radically changed the underlying structural parameters in a negative way.  The massive long-term stimulus from the Sanders economic program will continuously reduce the aggregate savings rate by dramatically reducing inequality (Friedman estimates the 95 to 5 percentile income ratio declining from 27.5 to 1, to 10.1 to 1), and thus lead to large sustainable increases in private sector investment propelling productivity increases per Verdoorn’s Law (see Freidman and Lars Syll responses on this point).  Other Sanders programs will rapidly drive up the U.S. labor force participation rate (Friedman, Figure 6). The modest public spending multipliers that Friedman uses, especially in the out years (Friedman, Table 22) are thus, as far as I can tell, appropriately applied to prior year baselines that reflect these changed parameters and not to a CBO baseline that does not.

A lack of awareness of the importance of changes in class structure (via income distribution) is another important distinction between mainstream Neoclassical  (NC) Keynesian macroeconomics and the Keynesian-Kaldor  PK macroeconomic tradition that Friedman is working out of.  Left PK heterodox economists incorporate class analysis as a fundamental driver of macroeconomic outcomes, whereas it is largely absent in mainstream NC macroeconomics as a fundamental driver of economic growth.  Again, I refer readers to my forthcoming book: The Morality of Radical Political Economics: Ghost Curve Ideology and the Value Neutral Aspect of Neoclassical Economics,  Palgrave, 2016, for more on this.


Galbraith Summary of the Friedman v. Romers Debate

By James K. Galbraith, Professor of Government/Business Relations at the Lyndon B. Johnson School of Public Affairs, the University of Texas at Austin. His most recent books are Inequality and Instability and The End of Normal.   Via Naked Capitalism.

Here is a brief summary of the state-of-debate over the Sanders economic program and the growth projections made by Professor Gerald Friedman.

Major points

1) The growth projections have no bearing on the desirability of Sanders’ program, which consists of major structural reforms in health care, education, and public investment, in public governance and in the distribution of the tax burden.

2) The original mudslinging by four past Chairs of the Council of Economic Advisers was based on nothing, except that Friedman’s growth numbers looked high. No analysis preceded that claim.

Lesser points

3) The Romers believe that the economy would recover along a baseline track, irrespective of whether there was stimulus or not.

4) Jerry Friedman probably does not believe this, but is working in the Keynes tradition of underemployment equilibrium, according to which one-time changes in the scale of public activity generate permanently higher levels of output and employment. This is consistent with the view that the New Deal and WWII ended the Depression, which did not return after the war ended.

5) There could be a “math error” in the Friedman paper; if so it should be acknowledged and corrected. But the Romers’ main complaint is a point of theory, which holds, in their words, that “temporary spending could cause a temporary boom, but its effect on the level of GDP a few years after its end will be, to a first approximation, zero.” This is a point of theory, and it is not holy writ.

6) A counter-example may be helpful. Suppose a temporary jobs program establishes an employment history and income stream for a household, sufficient to make them “creditworthy” going forward, when they weren’t before and would not have been otherwise. In that case, the higher level of activity initiated by the public program devolves upon and can be sustained by the private sector afterward; you don’t return to the prior status quo even though the public program comes to an end.

7) As a matter of history, the effect of forced saving under price control in WWII on household balance sheets worked in this way. During the war there was far more income than could be spent on civilian goods at current prices. Since price controls forestalled inflation, households had a strong incentive to buy and hold Series E or “Victory Bonds.” After the war, these bonds served to anchor the financial standing of American families, and therefore helped lay the foundation for postwar growth.

8) The return to fiscal balance over ten years in the Sanders program as it stands would probably produce a drag on growth. There may also be other bumps-in-the-road that would have to be dealt with as time goes on.

9) Returning to point (1): these matters have no bearing on the desirability of Sanders’ program.