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.


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, VTDigger.org, 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.