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! http://geraldfriedmanecon.org/

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.)

Links on SYRIZA-Eurogroup Agreement

Boston--"Caution--Falling Ice!" signsLinks on Greece:  Now that the Syriza government has reached an agreement with the powers that be in Europe to extend its bailout for four months, there seems to be a lot of disagreement about how to assess it, even among commentators and sources that I trust. Most people seem to think the outcome is bad for Syriza and Greece, but some people think the jury is still out and the agreement may give Syriza some breathing room to make more headway later; others think it’s bad but Syriza was forced or even blackmailed into it; others blame Syriza’s strategy and call for it to admit failure and try a new strategy; others speak of betrayal or capitulation by Syriza. (At least none of my left trusted commentators are praising the Troika (now renamed “the Institutions”), which would really leave my head spinning!) Here is a list of links, with minimal annotation from me–I will let readers sort it out.

John Cassidy, The New Yorker, Greece Got Outmanoeuvered. His position is that Greece was outmaneuvered, did a “U-turn” in exchange for little. “In retrospect, it is clear that Tsipras and Varoufakis overplayed their hand.” But “the game isn’t over yet” because it’s just an interim agreement.

Costas Efimeros, The Press Project, “Europe trashed democracy”. The title is taken from a question that Paul Mason of Britain’s Channel 4, asked of Jeroen Dijsselbloem, president of the Eurogroup: “”What do you say to the Greek people, whose democracy you’ve just trashed?” This is a bit old–from Sunday–but it cites an anonymous Greek official as saying that “the Greek delegation were yesterday subject to outright blackmail” (the quote is of Efimeros, not the anonymous official).

Yves Smith, Naked Capitalism, ECB and IMF to Greece: No Escaping the Austerity Hair Shirt. The latest of her posts since 2/20 arguing that Syriza caved and Greece is screwed.  What really puzzles me is the commenters to this post who are comparing Syriza’s leadership with Obama’s betrayals (prompted by Yves remark that Syriza’s slogan “Hope Is Coming” is a “subconscious echo” of Obama’s “Hope and Change”). This strikes me as ultra-leftism.

Manolis Glezos, MR Zine, Before It Is Too Late.  A short statement by a Syriza member of the European Parliament; apology to the Greek people and call for Syriza supports to fight back against the Troika and Memoranda.

Stahis Kouvelakis, Jacobin, The Alternative in Greece. The “alternative” in the title is explained (sort of) in a section subtitled “How to Avert Total Defeat”:  it is to be “honest” and admit that the party’s strategy failed (“to present a defeat as a success is perhaps worse than the defeat itself.”). Cites the Glezos apology approvingly; very critical of the Syriza strategy. More from him at the website of his publisher, Verso.  One of the pieces at his author page at Verso says that the Syriza leadership was “trapped by its mistaken strategy: though I wouldn’t say it was a ‘betrayal’ or ‘capitulation’, since these are moralising terms that are of very little use for understanding political processes.” But calling for them to be “honest” isn’t moralizing, mind you.

Richard Seymour, Lenin’s Tomb, Syriza’s mauling at the EU negotiations. Another dismal view of the agreement; Seymour calls Tsipras’s account of the agreement “deluded.” A sample: “Tsipras said that the deal creates the framework for Syriza to address the humanitarian crisis.  Not with the commitment to a primary surplus and troika oversight, it doesn’t.”

William Blum, Counterpunch, The Greek Tragedy. Very interesting short piece (hat-tip Mike-Frank Epitropoulos) reviewing the history of post-WWII crushing of the Greek left (with British and American and CIA complicity and help), concluding that the Syriza negotiators may not have known what they were up against, and that: “Greece may have no choice, eventually, but to default on its debts and leave the Eurozone. The hunger and unemployment of the Greek people may leave them no alternative.”

Now for the more positive assessments:

Étienne Balibar and Sandro Mezzadra, Verso website, Syriza Wins Time—and Space. Rejoinder to the doubters. They speak of the formidable barriers that popular movements against austerity and this one left government face; “It would be naïve to imagine that the Greek government could break down these barriers all by itself.”

Mark Weisbrot, Center for Economic and Policy Research, Greek Bailout Extension Deal Represents a “Significant Retreat” by the European Authorities, CEPR Co-Director Says. This is a press release from 2/20 quoting Weisbrot, who took a much more positive view of the deal (or at least did on Friday–he may have changed his view since Monday or Tuesday).

James K. Galbraith, Social Europe, Reading the Greek Deal Correctly. Galbraith is friends with Varoufakis, who at some point taught at UT Austin where Galbraith teaches, and has been acting as an advisor to the new Greek government during the negotiations, which gives him some credibility (though maybe critics would say he’s over-invested in the same bad strategy). His reading of the deal hinges on the wording of the deal. For example:

[T]here was the lovely word “arrangement” – which the Greek team spotted in a draft communiqué offered by Eurogroup President Jeroen Dijsselbloem on Monday afternoon and proceeded to deploy with abandon. The Friday document is a masterpiece in this respect:

“The purpose of the extension is the successful completion of the review on the basis of the conditions in the current arrangement, making best use of the given flexibility which will be considered jointly with the Greek authorities and the institutions. This extension would also bridge the time for discussions on a possible follow-up arrangement between the Eurogroup, the institutions and Greece. The Greek authorities will present a first list of reform measures, based on the current arrangement, by the end of Monday February 23. The institutions will provide a first view whether this is sufficiently comprehensive to be a valid starting point for a successful conclusion of the review.”

If you think you can find an unwavering commitment to the exact terms and conditions of the “current programme” in that language, good luck to you. It isn’t there. So, no, the troika can’t come to Athens and complain about the rehiring of cleaning ladies.

Again, this was from right after the agreement was signed on Friday, but before the reform measures were submitted on Monday (Varoufakis got them in on Sunday, actually). So I wonder what he would say now.

Two interviews from the Real News Network that I haven’t watched yet, but look like they are more positive toward the agreement (and by economists whose views I trust):

Michael Hudson, Real News Network, European Banks vs. Greek Labour
Heiner Flassbeck, Real News Network, Greece Eurozone Deal a Setback or Tactical Win for Syriza?

Finally, I finally got around to reading the piece from a while ago by Varoufakis, reprinted more recently in the Guardian, How I Became an Erratic Marxist (hat-tip to TM and JFS). Not an easy read, in more ways than one: it’s pretty theoretical, and it’s depressing. He is explaining why he thinks it’s more important to save European capitalism vs. letting it crumble in the hopes that socialism will emerge from the rubble. He thinks (roughly) that the left is so weak that the right would seize power if European capitalism fails. So that goes a long way toward explaining why he seems to reject the so-called “Grexit” out of hand and doesn’t want Greece to act unilaterally.

(Note: This post’s “possibly irrelevant image” is of the falling ice signs that have proliferated all over downtown Boston (they are there every winter, but there are so many more this year). I understand what I’m supposed to do when I see a “Caution–Wet Floor” sign, but what am I supposed to do when I see a “Caution–Falling Ice” sign? Reader suggestions are welcome.  And if anyone can figure out a way that the image is relevant to the post, I’d love to hear that, too.)