An Undergraduate’s Question about Economic Policy

By Thomas Palley

Cross-posted from the author’s blog.  Note: for a primer on neoliberalism, see our two-part article by David Kotz (here). 

I received an e-mail from an undergraduate economics student who was curious about economic policy in Washington, DC. His question says a lot about the current state of affairs. Here it is with my reply.

From: Xxxxxxx Xxxxxxx [mailto:xxxxxxxxxxxxxx@xxxx.com]
Sent: Saturday, October 1, 2016 10:56 AM
To: mail
Subject: Question from an undergraduate
Dear Dr. Palley,
I am a first-year undergraduate in economics and political theory, and a longtime admirer of your work.
What are your thoughts on how Keynesian/Post-Keynesian ideas are treated in current political discourse?

I was in Washington D.C. recently and I had conversation with a Brookings fellow who told me that he thought Joseph Stiglitz was an “extremist who isn’t taken seriously by anyone who knows their way around the Beltway.”

Does it worry you that ideas which used to be considered “mainstream” (like social democracy) are now increasingly considered “extreme”?
Deeply grateful for your time and attention
Sincerely
Xxxxxxx Xxxxxxx

From: Thomas Palley [mailto:mail@thomaspalley.com]
Sent: Saturday, October 1, 2016 3:59 PM
To: ‘Xxxxxxx Xxxxxxx’
Subject: RE: Question from an undergraduate

Dear Xxxxxxx,

Thanks for your e-mail.

I am saddened (but not surprised) to hear Joe Stiglitz described in that way. And yes, I worry that ideas which used to be “mainstream” are now considered “extreme”.

Economics, like all social thought, is a contested space. Neoliberals have an interest in controlling economics since control helps them advance their political and economic project by helping them sell their policy ideas.

Brookings is a core neoliberal institution in Washington DC, so it does not surprise me that a Brookings fellow would describe Stiglitz as an extremist. That is how neoliberals perceive him, and it is also a way they try to discredit him.

In my view they are profoundly wrong. Our challenge is to open space (in the academy and public discourse) for all ideas (including neoliberal ideas) that make passable sense of the economy. After that comes political debate about which ideas we will believe and be guided by. That is the function of politics, and different political parties will be guided by different economic ideas.

Neoliberals try to close down the space of political debate and social possibility by excluding all except neoliberal ideas. The tragedy of the past forty years is they have been succeeding. In the academy there is a neoclassical monopoly, and in politics Labor and Social Democratic parties have been captured by the Trojan horse of the Third Way, creating a neoliberal political monopoly.

Reversing this state of affairs is a massive challenge. The academy is a club that will refuse to include those who disagree, and politics has been significantly captured by the one percent owing to the importance of money in politics. That is a toxic combination: the academy delegitimizes ideas opposed to neoliberalism, while the neoliberal political monopoly blocks alternative ideas getting on to the political table.

This noose has been tightening for years, but the inequality and stagnation that neoliberalism has produced is generating a political backlash from below. That is a hopeful opportunity, but it is also dangerous because backlashes are unpredictable and can go horribly wrong.

Lastly, I am a great fan of the student movement for change in economics. Their case is right. However, I fear the club of academic economists will either belittle the students, ignore them, or deceptively disarm them by appointing milquetoast critical economists who produce “gattopardo” change (i.e. change that keeps things the same).

Best wishes with your studies,
Tom Palley

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.