What exactly is the end game here?
Judge Garland is preferable to the GOP to whomever would be nominated at the beginning of a Clinton presidency (or a Sanders presidency), or, for that matter, a Trump presidency (because who the hell knows what that would look like).
A Trump nomination - which isn't a lock yet, but it's pretty damn close - suddenly puts control of the Senate in play, because (a) Republicans opposed to Trump will mostly stay home rather than turn out to vote down ballot, and (b) who knows whether Trump voters will bother to vote down ballot.
A Democratic Senate likewise means a worse outcome for the GOP, no matter who becomes President.
There is no political capital to be gained, because there is no such thing as political capital for the Republican establishment right now. They're in a situation where any capital they build up with their voter base accrues, almost certainly, to Trump, the person who is destroying their party - and, if they lose the Senate, solely to him.
I don't buy the notion that the plan is to block the SCOTUS nomination until the Republican national convention and then confirm if Trump wins the presidential nomination, or block it until the general election (if Trump doesn't get the presidential nomination) and then confirm if a Democrat wins.
(1) If Trump becomes the nominee, I don't see the Senate having the guts to drop their opposition after the convention. And if he wins the general, there's no way they'll confirm Obama's nominee after the election.
(2) If the Democrats take the White House and the Senate, I actually think there's a good chance that either Senate Democrats will filibuster, or a lame-duck President Obama will withdraw the nominee and let his successor make it with a friendlier Senate. Maybe I'm way off base there, but that seems pretty reasonable and pretty likely to me.
So the relevant scenario is (3) a Democrat as president-elect and a continued GOP Senate.
I think that's the most likely scenario (though I'm prepared to be surprised by the current American electorate). So that could be the plan - score a few points for themselves now, on the assumption that a Trump nomination can still be stopped and thus that their grandstanding won't ultimately help him, and then get away with confirming in December if they have to, based on the argument that they're saving the country from a worse possibility.
The first flaw there is the idea that they would get away with it - i.e. that Republican voters would accept handing a victory to a lame-duck Obama in order to avoid a future threat, and thus the GOP Senators wouldn't end up worse off than they would have been if they had confirmed before the lame-duck period. But maybe it's not unreasonable to think they'd get away with it.
My real reason for thinking this isn't the strategy is that I believe (a) Senate Republicans time-discount hyperbolically, not exponentially, and (b) the leadership (at least) knows that this is what they do, and doesn't know how to stop it.
So they know that the Senate Republicans would never be able to follow through on a plan to block now and then yield in November, because as the time to yield approached, the preferences of most GOP Senators would invert, and they'd pick avoiding the near-term pain of confirming for a lame-duck Obama over avoiding the greater but more distant pain of having the next President pick the nominee - their current public faux preference for refusing to consider Obama's pick would become their actual preference.
Maybe I'm giving the leadership too much credit here. Maybe this is the strategy and they really don't know that it's not one they'll be able to stick to. But I think they have at least that much awareness of what their members are like and of what situation they're in.
It really looks like there is no strategy here. From every angle, this works against their own interests. There's nothing here but a 7-years-deep unwillingness to work with Obama.
The fact that that's enough to overcome any other consideration is beyond pathetic. At least when they had something to gain from their childishness, it was at least possible to believe that they were motivated by the gain. But no; they really are just a bunch of emotionally stunted, overgrown children.
Update 23 March: The most plausible argument for there being a strategy here just went out the window.
Wednesday, 16 March 2016
Monday, 14 March 2016
Rethinking Donald Trump, Again
Trump's positions on immigration would probably last about as long as Trump Vodka and Trump Steaks.
But his dangerous treatment of critical journalists, protesters, and anyone else who believes they have a right to be free from violence while saying negative things about him - that isn't going anywhere. It is only going to get worse.
The GOP primary has offered plenty of bad options, but the threat posed by Trump is now proving to be second to none.
The GOP will have to commit suicide on national television to stop him, but the alternative is failing the American people on a scale unknown in the modern era.
So here's hoping they find the courage, and the news media helps them find it by finally doing its damn job.
But his dangerous treatment of critical journalists, protesters, and anyone else who believes they have a right to be free from violence while saying negative things about him - that isn't going anywhere. It is only going to get worse.
The GOP primary has offered plenty of bad options, but the threat posed by Trump is now proving to be second to none.
The GOP will have to commit suicide on national television to stop him, but the alternative is failing the American people on a scale unknown in the modern era.
So here's hoping they find the courage, and the news media helps them find it by finally doing its damn job.
Saturday, 5 March 2016
Uncovering the Bad Math and Logic (and the Bias) at the New York Times
"The point of studying economics is so as not to be fooled by economists."
- Joan Robinson
Just as I was finishing my long post on the controversy over Gerald Friedman's analysis of Bernie Sanders' policy program, the debate entered a new stage. Christina and David Romer stepped up to the challenge that was issued by defenders of Friedman's work, and released a critique which at least took that work seriously, while still disagreeing with its methods and conclusions in the strongest possible terms.
The Romers' paper was then featured in an installment of the NYT's The Upshot written by Justin Wolfers - a professor of public policy at the University of Michigan - titled "Uncovering the Bad Math (or Logic) Behind Bernie Sanders' Economic Plan".
Because The Upshot has a wide readership, and is likely to be taken by many people as a source for accurate and informed discussion, I'm going to go through Wolfers' piece first, and then I'll go on to say something about the points in the Romers' actual paper which it doesn't cover.
There are two takeaways:
(1) This may be the most ironically named piece the Times has ever published, since it contains a mathematical error which is both elementary and significant to the discussion.
(2) Wolfers reproduces the theoretical biases of the Romers, failing to subject them to any scrutiny - and as we'll see, they deserve quite a lot.
First, the mathematical error. Let's look at the following quote from the piece:
The issue here is all about levels versus changes. In the usual telling, changes in government spending lead to changes in output. In Mr. Friedman’s spreadsheets, changes in government spending permanently raise the level of output. Mr. Friedman confirmed to me that this was how he had made his calculations.
The same levels-versus-changes confusion leads Mr. Friedman’s calculations to show that a permanent increase in the level of government spending — like that proposed by Senator Sanders — will yield a permanent rise in the rate of change of output. This is the reason he finds that the Sanders plan has such enormous effects on economic growth...
The multiplier he uses is on average 0.89. In the Congressional Budget Office models that he’s drawing from, this means that if the government spends $100 more today, output will rise by $89 this year, but when that stimulus is withdrawn next year, output will then fall back to its earlier level.
From start to finish, that $100 extra government spending yields $89 worth of more stuff. By contrast, in Mr. Friedman’s figures, output stays $89 higher each year, forever. Over a 10-year period, this means that $100 of government spending yields a total of $890 worth of more stuff, implying a 10-year multiplier of 8.9.
This is not a conservative estimate; it’s so high that I know of no study that suggests such large effects, nor of any economist who would defend this view.
Friedman includes estimates of the fiscal multiplier for government spending for the years 2015-2026, inclusive - that is, for twelve years. Wolfers averages those 12 numbers, to arrive at the 0.89 figure. But Friedman is doing a 10-year estimate of the impact of Sanders' policies starting from the beginning of 2017 - i.e. from when Sanders would become President.
The average for 2017-2026 is 0.84.
Now, taking this correction into consideration, one might think Wolfers made a small error, and Friedman actually applies a 10-year multiplier of 8.4 to Sanders' permanent spending increase.
One would be wrong.
Friedman attributes a 9% increase in GDP as of 2026 due to Sanders' increase in non-healthcare federal spending. But that increase isn't 1% of GDP - as it would have to be for Wolfers' analysis to make sense, given his (incorrectly calculated) 10-year multiplier. The permanent portion of the non-healthcare spending increase in Sanders' plan is 1.4% of GDP. So even if, following the Romers, Wolfers were to insist that that growth derive solely from the permanent portion of that spending increase, he should, by his own lights, have inferred that Friedman was applying a 10-year multiplier of 6.4 - which is about what the Romers think his 10-year multipliier is - not 8.9 (or 8.4).
That's still a huge multiplier. But here we come to point (2). To put it bluntly:
This isn't what Friedman is doing.
Wolfers thinks this is what Friedman is doing because the Romers think this is what Friedman is doing. But the Romers think this is what Friedman is doing because it's the only way to make sense of Friedman's results, from the perspective of the model they use to estimate future effects of economic policy. Friedman, however, is using a very different sort of model.
Ron Baiman, in his comment on the Romers' paper, gives a clear and succinct statement of what Friedman is actually doing. He is assuming that Sanders' policies are going to change the current CBO baseline for GDP growth; and when he applies a yearly multiplier, he is applying it to the new, changed baseline, rather than to the old CBO baseline, because the old baseline will no longer reflect the potential of the economy, once Sanders' policies are in place.
This point brings us to the heart of a deep theoretical disagreement.
The Romers, as Friedman observes in his response to them, belong to a school of thought according to which it makes no sense to talk about economic policies like Sanders' budget proposals changing the economy's potential productive capacity or potential for growth. That potential is not something we can exercise control over. And if adverse events cause the economy to fall below its potential capacity, it will eventually return to it all by itself.
To be a "liberal" economist of this school - like not only the Romers, but also Krugman and DeLong - is to believe that policy interventions can return the economy to capacity a little more quickly. To be conservative is to believe that policy interventions will only lengthen this process.
This - believe it or not - is what separates liberals and conservatives on the power of public policy, within the confines of mainstream macroeconomics.
Friedman, on the other hand, doesn't accept any of this (and he's not alone). We'll come to the question of why in a bit. But first, back to Wolfers and the Times.
We've discussed permanent spending changes, but what about short term ones - specifically, Sanders $1 trillion infrastructure program? Let's look at another quote:
Most economists believe that temporary increases in government spending will yield temporary increases in output. To see why the effect of stimulus is temporary, realize that if raising government spending raises output, then because the end of a stimulus program means cutting government spending, the same forces are later set in motion, but in reverse. And so in the standard story, a temporary stimulus improves the economy, but only temporarily.
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.
It hardly needs pointing out that Wolfers' argument as stated is question-begging. (There's the bad logic. Wolfers' piece, despite its title, fails to identify a single logical error in Friedman's work.) A fair statement of the relevant question would be: Can temporary government spending programs ever shift the economy's baseline - and even potential - growth trends, such that they cause the economy to reach higher output levels long after they've ended?
We know Friedman's answer. As he confirmed in his discussion with Wolfers, he is using a model according to which temporary changes in government spending can permanently change the level of output - they do this by causing structural changes in the economy which push the actual and potential growth trends up. That second point is the one Wolfers doesn't seem to grasp, and that's why his simple arithmetic example doesn't match up with Friedman's results.
Once we understand Friedman's answer, we have to ask whether we agree with it.
If the temporary spending in question is (a) a large investment in (b) core infrastructure (like transportation and telecommunications) which is (c) currently in terrible shape, then there is good reason to think the answer is Yes. In other words, what "most economists realize" (if they do) is wrong.
One quick aside before we look at some of that evidence - The two points of Wolfers' which I've quoted are a bizarre combination. I've made a guess about how he arrives at his estimate of Friedman's 10-year multiplier, but that guess assumed he was only working from the average value of the yearly multipliers (which he calculated incorrectly), and Sanders' proposal for permanently increased spending (which he also got wrong). But now we see that he believes Friedman is treating the effects of the 2017-2021 infrastructure spending (totaling $1 trillion, or 5% of a single year's GDP) on the GDP level as permanent. So based on his assumptions about what Friedman is doing, and the fact that Friedman estimates that all non-healthcare spending increases are responsible for that 9% of extra GDP as of 2026, Wolfers shouldn't even have attributed to Friedman a 10-year multiplier of 6.4. It should have been in the neighborhood of 4.6 - still very high (the hard upper limit on fiscal multipliers is around 3), but considerably less than 8.9. Since his assumptions about what Friedman is doing are wrong, though, this point needn't detain us.
On to the evidence.
The research of David Anschauer, of the Chicago Fed, has shown that the stock of nonmilitary public capital, and in particular of core infrastructure, is one of the major determinants of the productivity of private capital.
In plain English, business owners get more out of the stuff they use to do business - like trucks, say - when the places they do business in have a lot of high quality core infrastructure - like roads and bridges.
Military capital, on the other hand, is of very little importance to productivity growth. Anschauer's findings on this point can be supplemented by Mike Kimel's conclusion that changes in federal non-military spending explain over 94% of the change in the real GDP growth rate during the New Deal - a conclusion which is especially relevant if the US is currently stuck in a low-employment equilibrium (more on that below).
Alice Munell, of the Boston Fed, then extended Anschauer's research, and applied it to the question of falling multifactor productivity (of private capital and labor) over the period 1969-1987 as compared with the rising productivity of 1948-1969:
[M]uch of what had been attributed to multifactor productivity growth in the first half of the period really reflected increased output that was due to the buildup of public infrastructure. And much of the decline in multifactor productivity growth after 1969 has reflected the near cessation of public investment. In other words, much of the drop in published multifactor productivity numbers may reflect the omission of public capital from the calculation of inputs rather than a decline in technological innovation.
That last point is important. As Friedman observes in his response to the Romers, they belong to the school of thought that must - in the absence of large-scale destruction of land or capital, population decline, or shifts in individual preferences (none of which have been observed) - attribute declining productivity to a decline in technological innovation. They cannot attribute it to something like a decline in public investment.
Anschauer's original conclusion, that investment in core infrastructure has a robust and long-term positive impact on productivity (and thus, output) has held up well in contexts - like the contemporary United States - in which large infrastructure systems have fallen into disrepair and have urgently needed investment for some time.
He has recently also argued that public capital investment pushes up the national investment rate by encouraging private investment in the capital stock - which also increases productivity (and thus, output).
Alan Harvey applies the point about public capital investment encouraging private investment (leading to higher productivity, leading to higher levels of output) to the present debate:
Romer appears to suggest in the Wolfers piece that multipliers act only during the period of stimulus spending, and she faults Friedman for misunderstanding stocks and flows. It should be obvious, however, that a measure which provokes additional private investment can claim credit for economic activity induced by that additional investment. If Prof. Romer is suggesting otherwise, she is wrong. Investment in equipment and facilities by government contractors and investment in housing by newly employed workers would be among the most likely sources of induced stimulus.
Before moving on to discuss some other aspects of the Romers' paper, let's finish with Wolfers' piece:
When I pointed Mr. Friedman to this critique of his analysis, he simultaneously accepted and rejected it.
He accepted it, telling me that “I may have made a mistake.”
But he also rejected this critique, arguing that his figures are based on an alternative view of the world, stating: “To me, when the government spends money, stimulates the economy, hires people who spend, that stimulates more private investment. That remains, and at the next year, you’re starting at the higher level.” He admits that this “is not standard macro,” and described it as the understanding of an earlier generation of economists — a sub-tribe of Keynesians he called “Joan Robinson Keynesians.” (Joan Robinson was a contemporary of John Maynard Keynes at Cambridge.)
When I pressed Mr. Friedman on whether he was right to conclude that standard assumptions suggest that Mr. Sanders’s economic program will have such large effects, he said, “I have to stop saying ‘standard.’ ” It became apparent in our conversation that he simply hadn’t realized that he had mischaracterized mainstream economics, leading him to describe his disagreement with Ms. and Mr. Romer as “a measure of my ignorance of modern macro, and my disagreements with modern macro.”
Yes, Friedman may have made a mistake - in what he was actually trying to do; namely, estimating the changes to actual and potential output levels which would result from the structural changes in the US economy caused by the full implementation of Sanders' policies, and applying estimated yearly multipliers to the changed baseline for GDP growth. Perhaps he did and perhaps he didn't - the details of his work are as open to scrutiny as anyone else's, and no one with an appreciation of the complexity of these issues would fail to countenance the possibility of error. But we know that he did not make the mistake Wolfers thinks he made, because it is Wolfers' sums which don't add up.
Once we understand what Friedman is doing, the next sentence becomes clear. His is a view of the economy according to which government spending can encourage private investment, which can increase productivity, which increases output levels. The increase in output levels which results from higher productivity (from higher private investment) remains after the temporary government spending which encouraged that investment - substantial spending on badly neglected core infrastructure - ends. And the evidence for that view of the economy is good.
All Wolfers manages to achieve then, is a retraction by Friedman of his claim that his assumptions were all "standard". I endorsed this claim myself in my first post on this debate, because I - like Friedman, I presume - had a broader understanding of what counted as standard than those in the very middle of the mainstream apparently do.
Well, so be it. Thus far, it is Friedman's "non-standard" view that should be winning adherents. And the case for it is about to get even stronger.
As far as the Times' coverage of Sanders' proposals and Friedman's analysis thus far, all I can say is: Gentlemen, you have got to do better than this.
The attentive reader will have noticed that although we've spent some time examining the claim that public investment in core infrastructure can push up actual and potential long-term growth trends, we haven't yet talked about the influence of Sanders' specific permanent measures.
As Ron Baiman explains, Sanders' permanent measures - increased healthcare and non-healthcare spending; more progressive taxation; and regulatory reforms such as a higher minimum wage, tougher rules on overtime pay, and the pro-labor Workplace Democracy Act - would dramatically reduce inequality in America.
Lower inequality reduces the national savings rate, because the wealthy have a much lower marginal propensity to consume. This translates into higher demand, and higher private investment and employment to meet that demand. From there, via Verdoorn's Law, comes higher labor productivity and thus higher output. (See the discussion of Verdoorn's law at the end of my previous post on the debate over Sanders' policies.)
This growth in employment - as Friedman points out - would itself contribute to raising the employment-population ratio, as those who had given up on looking for work are encouraged to try again. Sanders' policies - particularly funding youth job training and creation, closing the gender pay gap, instituting guaranteed paid maternity leave, and funding affordable childcare - would also contribute to increasing labor force participation. Increasing demand and productivity translate into further increased employment from those re-entering the labor market, and increased real wages (and there's plenty of room for those to increase, as I also discussed in my previous post). This would likewise boost demand, private investment, productivity, and output, even further.
Essentially, this entire debate over Friedman's projections comes down to two questions:
The first, emphasized by Lars Syll, is whether Verdoorn's Law applies to the modern US economy - and the evidence says that it does, however much the Romers insist that it doesn't.
The second, emphasized by Friedman, is whether the US economy is stuck well below its potential capacity in a low-employment equilibrium.
If it is - and that sure as hell is what it looks like - then the Keynes-Verdoorn story told above - Friedman calls this "the Keynesian-Kaldor case with equilibrium unemployment and growth dependent on the level of the output gap" (Verdoorn's Law is often called the Verdoorn-Kaldor Law, after the Post-Keynesian economist Nicholas Kaldor whose research led to similar conclusions) - is the right one. Policy can push the economy toward higher employment, higher capacity utilization, higher growth, and even higher potential capacity and growth, in the long-term.
The Romers, of course, reject this as a description of the state of the US economy. But their reasons for doing so boil down to (1) a theory-based rejection of the claims that (a) the economy can get stuck at a low-employment equilibrium, and that (b) productivity can be determined by forces other than endowments, preferences, and technological innovation; and (2) a belief that the Fed's estimate of the NAIRU, which puts it at the current rate of U3 unemployment, is reasonable, and that being at the NAIRU is the right way to understand what it means for the economy to be at capacity.
I addressed (2) at length in my previous post - the belief doesn't hold up. We've covered (1)(b) in this post. So let's deal with (1)(a).
I can't do it any better than James Galbraith. Here is a quote from Ch. 10 of his 2014 book "The End of Normal", which he made publicly available as part of his own response to the Romers' paper:
[Christina] Romer and [Jared] Bernstein, senior economists with the incoming Obama team and in Bernstein’s case the progressive economists’ lone representative on the team, predicted that with no stimulus package unemployment would peak at about 9 percent in early 2010.
With stimulus, they held that the peak would be around 8 percent in early 2009, a mis-forecast for which they were criticized somewhat unfairly. The more important point is that with or without stimulus, Romer-Bernstein projected that unemployment would return to near five percent by 2014. And they projected that a return to unemployment below 6 percent, expected in 2012, would be delayed only by six months if there were no stimulus...
Of course forecasting failures became apparent quite quickly when the economy did not remain on the growth track anticipated in early 2009. 2010 was a disappointment, as were 2011 and 2012; from the trough of the slump economic growth never exceeded 2.5 percent. The ratio of employment to population never improved, and unemployment declined largely because in increasing numbers people ceased looking for work. Residential investment in 2012 was half its 2005 levels; total investment remained more than ten percent below its previous peak.
And what happened when the economy did not cooperate with the forecasts? Did this bring on a review of the models? Again, one might hope so. Again, one would be disappointed. The simple response of the forecasters to the failures was to run the models again, with a new starting point. Thus the five-year window for the start of a full recovery kept receding into the future, year by year, like a desert mirage. In 2009, full recovery was expected by 2014; in 2010, the date became 2015, and so forth. Each year, the forecasters told us, the world would be “back to normal” – with full employment, recovered output, and high investment – five years hence.
It’s plainly unsatisfactory, to forecast in this way. But what’s the alternative? To develop a different point of view, one needs a model capable of generating a picture of the future that does not necessarily yield a mirror of the past. To do that, one needs a structured grip on the underlying mechanics. One needs a vision of how the economy works, and one needs to have the courage to assert that vision – ironically – in spite of the fact that it cannot be derived from the past statistical record. This is the hard part. But only in this way can one see that the baseline is baseless, that equilibrium is vacuous, that the past growth path is not the single best forecast. There is no way to build such a model for use by functionaries, and hence no easy escape from the mental traps of statistical prediction.
One final point, to put things in perspective: Friedman's analysis predicts a net 32% increase in GDP as of 2026 if Sanders' full policy program is implemented. We've only been exploring his claim that part of that increase, 9%, would result from non-healthcare spending measures. That's quite a bit less than the estimated impact of the switch to single-payer healthcare, and less even than what's estimated for the regulatory reform. Even if the Romers were right about the impact of Sanders' non-healthcare spending proposal, that would hardly be, to quote Wolfers, "the whole shebang".
- Joan Robinson
Just as I was finishing my long post on the controversy over Gerald Friedman's analysis of Bernie Sanders' policy program, the debate entered a new stage. Christina and David Romer stepped up to the challenge that was issued by defenders of Friedman's work, and released a critique which at least took that work seriously, while still disagreeing with its methods and conclusions in the strongest possible terms.
The Romers' paper was then featured in an installment of the NYT's The Upshot written by Justin Wolfers - a professor of public policy at the University of Michigan - titled "Uncovering the Bad Math (or Logic) Behind Bernie Sanders' Economic Plan".
Because The Upshot has a wide readership, and is likely to be taken by many people as a source for accurate and informed discussion, I'm going to go through Wolfers' piece first, and then I'll go on to say something about the points in the Romers' actual paper which it doesn't cover.
1. Government Spending and the Output Level
There are two takeaways:
(1) This may be the most ironically named piece the Times has ever published, since it contains a mathematical error which is both elementary and significant to the discussion.
(2) Wolfers reproduces the theoretical biases of the Romers, failing to subject them to any scrutiny - and as we'll see, they deserve quite a lot.
First, the mathematical error. Let's look at the following quote from the piece:
The issue here is all about levels versus changes. In the usual telling, changes in government spending lead to changes in output. In Mr. Friedman’s spreadsheets, changes in government spending permanently raise the level of output. Mr. Friedman confirmed to me that this was how he had made his calculations.
The same levels-versus-changes confusion leads Mr. Friedman’s calculations to show that a permanent increase in the level of government spending — like that proposed by Senator Sanders — will yield a permanent rise in the rate of change of output. This is the reason he finds that the Sanders plan has such enormous effects on economic growth...
The multiplier he uses is on average 0.89. In the Congressional Budget Office models that he’s drawing from, this means that if the government spends $100 more today, output will rise by $89 this year, but when that stimulus is withdrawn next year, output will then fall back to its earlier level.
From start to finish, that $100 extra government spending yields $89 worth of more stuff. By contrast, in Mr. Friedman’s figures, output stays $89 higher each year, forever. Over a 10-year period, this means that $100 of government spending yields a total of $890 worth of more stuff, implying a 10-year multiplier of 8.9.
This is not a conservative estimate; it’s so high that I know of no study that suggests such large effects, nor of any economist who would defend this view.
Friedman includes estimates of the fiscal multiplier for government spending for the years 2015-2026, inclusive - that is, for twelve years. Wolfers averages those 12 numbers, to arrive at the 0.89 figure. But Friedman is doing a 10-year estimate of the impact of Sanders' policies starting from the beginning of 2017 - i.e. from when Sanders would become President.
The average for 2017-2026 is 0.84.
Now, taking this correction into consideration, one might think Wolfers made a small error, and Friedman actually applies a 10-year multiplier of 8.4 to Sanders' permanent spending increase.
One would be wrong.
Friedman attributes a 9% increase in GDP as of 2026 due to Sanders' increase in non-healthcare federal spending. But that increase isn't 1% of GDP - as it would have to be for Wolfers' analysis to make sense, given his (incorrectly calculated) 10-year multiplier. The permanent portion of the non-healthcare spending increase in Sanders' plan is 1.4% of GDP. So even if, following the Romers, Wolfers were to insist that that growth derive solely from the permanent portion of that spending increase, he should, by his own lights, have inferred that Friedman was applying a 10-year multiplier of 6.4 - which is about what the Romers think his 10-year multipliier is - not 8.9 (or 8.4).
That's still a huge multiplier. But here we come to point (2). To put it bluntly:
This isn't what Friedman is doing.
Wolfers thinks this is what Friedman is doing because the Romers think this is what Friedman is doing. But the Romers think this is what Friedman is doing because it's the only way to make sense of Friedman's results, from the perspective of the model they use to estimate future effects of economic policy. Friedman, however, is using a very different sort of model.
Ron Baiman, in his comment on the Romers' paper, gives a clear and succinct statement of what Friedman is actually doing. He is assuming that Sanders' policies are going to change the current CBO baseline for GDP growth; and when he applies a yearly multiplier, he is applying it to the new, changed baseline, rather than to the old CBO baseline, because the old baseline will no longer reflect the potential of the economy, once Sanders' policies are in place.
This point brings us to the heart of a deep theoretical disagreement.
The Romers, as Friedman observes in his response to them, belong to a school of thought according to which it makes no sense to talk about economic policies like Sanders' budget proposals changing the economy's potential productive capacity or potential for growth. That potential is not something we can exercise control over. And if adverse events cause the economy to fall below its potential capacity, it will eventually return to it all by itself.
To be a "liberal" economist of this school - like not only the Romers, but also Krugman and DeLong - is to believe that policy interventions can return the economy to capacity a little more quickly. To be conservative is to believe that policy interventions will only lengthen this process.
This - believe it or not - is what separates liberals and conservatives on the power of public policy, within the confines of mainstream macroeconomics.
Friedman, on the other hand, doesn't accept any of this (and he's not alone). We'll come to the question of why in a bit. But first, back to Wolfers and the Times.
We've discussed permanent spending changes, but what about short term ones - specifically, Sanders $1 trillion infrastructure program? Let's look at another quote:
Most economists believe that temporary increases in government spending will yield temporary increases in output. To see why the effect of stimulus is temporary, realize that if raising government spending raises output, then because the end of a stimulus program means cutting government spending, the same forces are later set in motion, but in reverse. And so in the standard story, a temporary stimulus improves the economy, but only temporarily.
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.
We know Friedman's answer. As he confirmed in his discussion with Wolfers, he is using a model according to which temporary changes in government spending can permanently change the level of output - they do this by causing structural changes in the economy which push the actual and potential growth trends up. That second point is the one Wolfers doesn't seem to grasp, and that's why his simple arithmetic example doesn't match up with Friedman's results.
Once we understand Friedman's answer, we have to ask whether we agree with it.
If the temporary spending in question is (a) a large investment in (b) core infrastructure (like transportation and telecommunications) which is (c) currently in terrible shape, then there is good reason to think the answer is Yes. In other words, what "most economists realize" (if they do) is wrong.
One quick aside before we look at some of that evidence - The two points of Wolfers' which I've quoted are a bizarre combination. I've made a guess about how he arrives at his estimate of Friedman's 10-year multiplier, but that guess assumed he was only working from the average value of the yearly multipliers (which he calculated incorrectly), and Sanders' proposal for permanently increased spending (which he also got wrong). But now we see that he believes Friedman is treating the effects of the 2017-2021 infrastructure spending (totaling $1 trillion, or 5% of a single year's GDP) on the GDP level as permanent. So based on his assumptions about what Friedman is doing, and the fact that Friedman estimates that all non-healthcare spending increases are responsible for that 9% of extra GDP as of 2026, Wolfers shouldn't even have attributed to Friedman a 10-year multiplier of 6.4. It should have been in the neighborhood of 4.6 - still very high (the hard upper limit on fiscal multipliers is around 3), but considerably less than 8.9. Since his assumptions about what Friedman is doing are wrong, though, this point needn't detain us.
On to the evidence.
The research of David Anschauer, of the Chicago Fed, has shown that the stock of nonmilitary public capital, and in particular of core infrastructure, is one of the major determinants of the productivity of private capital.
In plain English, business owners get more out of the stuff they use to do business - like trucks, say - when the places they do business in have a lot of high quality core infrastructure - like roads and bridges.
Military capital, on the other hand, is of very little importance to productivity growth. Anschauer's findings on this point can be supplemented by Mike Kimel's conclusion that changes in federal non-military spending explain over 94% of the change in the real GDP growth rate during the New Deal - a conclusion which is especially relevant if the US is currently stuck in a low-employment equilibrium (more on that below).
Alice Munell, of the Boston Fed, then extended Anschauer's research, and applied it to the question of falling multifactor productivity (of private capital and labor) over the period 1969-1987 as compared with the rising productivity of 1948-1969:
[M]uch of what had been attributed to multifactor productivity growth in the first half of the period really reflected increased output that was due to the buildup of public infrastructure. And much of the decline in multifactor productivity growth after 1969 has reflected the near cessation of public investment. In other words, much of the drop in published multifactor productivity numbers may reflect the omission of public capital from the calculation of inputs rather than a decline in technological innovation.
That last point is important. As Friedman observes in his response to the Romers, they belong to the school of thought that must - in the absence of large-scale destruction of land or capital, population decline, or shifts in individual preferences (none of which have been observed) - attribute declining productivity to a decline in technological innovation. They cannot attribute it to something like a decline in public investment.
Anschauer's original conclusion, that investment in core infrastructure has a robust and long-term positive impact on productivity (and thus, output) has held up well in contexts - like the contemporary United States - in which large infrastructure systems have fallen into disrepair and have urgently needed investment for some time.
He has recently also argued that public capital investment pushes up the national investment rate by encouraging private investment in the capital stock - which also increases productivity (and thus, output).
Alan Harvey applies the point about public capital investment encouraging private investment (leading to higher productivity, leading to higher levels of output) to the present debate:
Romer appears to suggest in the Wolfers piece that multipliers act only during the period of stimulus spending, and she faults Friedman for misunderstanding stocks and flows. It should be obvious, however, that a measure which provokes additional private investment can claim credit for economic activity induced by that additional investment. If Prof. Romer is suggesting otherwise, she is wrong. Investment in equipment and facilities by government contractors and investment in housing by newly employed workers would be among the most likely sources of induced stimulus.
Before moving on to discuss some other aspects of the Romers' paper, let's finish with Wolfers' piece:
When I pointed Mr. Friedman to this critique of his analysis, he simultaneously accepted and rejected it.
He accepted it, telling me that “I may have made a mistake.”
But he also rejected this critique, arguing that his figures are based on an alternative view of the world, stating: “To me, when the government spends money, stimulates the economy, hires people who spend, that stimulates more private investment. That remains, and at the next year, you’re starting at the higher level.” He admits that this “is not standard macro,” and described it as the understanding of an earlier generation of economists — a sub-tribe of Keynesians he called “Joan Robinson Keynesians.” (Joan Robinson was a contemporary of John Maynard Keynes at Cambridge.)
When I pressed Mr. Friedman on whether he was right to conclude that standard assumptions suggest that Mr. Sanders’s economic program will have such large effects, he said, “I have to stop saying ‘standard.’ ” It became apparent in our conversation that he simply hadn’t realized that he had mischaracterized mainstream economics, leading him to describe his disagreement with Ms. and Mr. Romer as “a measure of my ignorance of modern macro, and my disagreements with modern macro.”
Once we understand what Friedman is doing, the next sentence becomes clear. His is a view of the economy according to which government spending can encourage private investment, which can increase productivity, which increases output levels. The increase in output levels which results from higher productivity (from higher private investment) remains after the temporary government spending which encouraged that investment - substantial spending on badly neglected core infrastructure - ends. And the evidence for that view of the economy is good.
All Wolfers manages to achieve then, is a retraction by Friedman of his claim that his assumptions were all "standard". I endorsed this claim myself in my first post on this debate, because I - like Friedman, I presume - had a broader understanding of what counted as standard than those in the very middle of the mainstream apparently do.
Well, so be it. Thus far, it is Friedman's "non-standard" view that should be winning adherents. And the case for it is about to get even stronger.
As far as the Times' coverage of Sanders' proposals and Friedman's analysis thus far, all I can say is: Gentlemen, you have got to do better than this.
2. Labor: Productivity and Employment
The attentive reader will have noticed that although we've spent some time examining the claim that public investment in core infrastructure can push up actual and potential long-term growth trends, we haven't yet talked about the influence of Sanders' specific permanent measures.
As Ron Baiman explains, Sanders' permanent measures - increased healthcare and non-healthcare spending; more progressive taxation; and regulatory reforms such as a higher minimum wage, tougher rules on overtime pay, and the pro-labor Workplace Democracy Act - would dramatically reduce inequality in America.
Lower inequality reduces the national savings rate, because the wealthy have a much lower marginal propensity to consume. This translates into higher demand, and higher private investment and employment to meet that demand. From there, via Verdoorn's Law, comes higher labor productivity and thus higher output. (See the discussion of Verdoorn's law at the end of my previous post on the debate over Sanders' policies.)
This growth in employment - as Friedman points out - would itself contribute to raising the employment-population ratio, as those who had given up on looking for work are encouraged to try again. Sanders' policies - particularly funding youth job training and creation, closing the gender pay gap, instituting guaranteed paid maternity leave, and funding affordable childcare - would also contribute to increasing labor force participation. Increasing demand and productivity translate into further increased employment from those re-entering the labor market, and increased real wages (and there's plenty of room for those to increase, as I also discussed in my previous post). This would likewise boost demand, private investment, productivity, and output, even further.
Essentially, this entire debate over Friedman's projections comes down to two questions:
The first, emphasized by Lars Syll, is whether Verdoorn's Law applies to the modern US economy - and the evidence says that it does, however much the Romers insist that it doesn't.
The second, emphasized by Friedman, is whether the US economy is stuck well below its potential capacity in a low-employment equilibrium.
If it is - and that sure as hell is what it looks like - then the Keynes-Verdoorn story told above - Friedman calls this "the Keynesian-Kaldor case with equilibrium unemployment and growth dependent on the level of the output gap" (Verdoorn's Law is often called the Verdoorn-Kaldor Law, after the Post-Keynesian economist Nicholas Kaldor whose research led to similar conclusions) - is the right one. Policy can push the economy toward higher employment, higher capacity utilization, higher growth, and even higher potential capacity and growth, in the long-term.
The Romers, of course, reject this as a description of the state of the US economy. But their reasons for doing so boil down to (1) a theory-based rejection of the claims that (a) the economy can get stuck at a low-employment equilibrium, and that (b) productivity can be determined by forces other than endowments, preferences, and technological innovation; and (2) a belief that the Fed's estimate of the NAIRU, which puts it at the current rate of U3 unemployment, is reasonable, and that being at the NAIRU is the right way to understand what it means for the economy to be at capacity.
I addressed (2) at length in my previous post - the belief doesn't hold up. We've covered (1)(b) in this post. So let's deal with (1)(a).
I can't do it any better than James Galbraith. Here is a quote from Ch. 10 of his 2014 book "The End of Normal", which he made publicly available as part of his own response to the Romers' paper:
[Christina] Romer and [Jared] Bernstein, senior economists with the incoming Obama team and in Bernstein’s case the progressive economists’ lone representative on the team, predicted that with no stimulus package unemployment would peak at about 9 percent in early 2010.
With stimulus, they held that the peak would be around 8 percent in early 2009, a mis-forecast for which they were criticized somewhat unfairly. The more important point is that with or without stimulus, Romer-Bernstein projected that unemployment would return to near five percent by 2014. And they projected that a return to unemployment below 6 percent, expected in 2012, would be delayed only by six months if there were no stimulus...
Of course forecasting failures became apparent quite quickly when the economy did not remain on the growth track anticipated in early 2009. 2010 was a disappointment, as were 2011 and 2012; from the trough of the slump economic growth never exceeded 2.5 percent. The ratio of employment to population never improved, and unemployment declined largely because in increasing numbers people ceased looking for work. Residential investment in 2012 was half its 2005 levels; total investment remained more than ten percent below its previous peak.
And what happened when the economy did not cooperate with the forecasts? Did this bring on a review of the models? Again, one might hope so. Again, one would be disappointed. The simple response of the forecasters to the failures was to run the models again, with a new starting point. Thus the five-year window for the start of a full recovery kept receding into the future, year by year, like a desert mirage. In 2009, full recovery was expected by 2014; in 2010, the date became 2015, and so forth. Each year, the forecasters told us, the world would be “back to normal” – with full employment, recovered output, and high investment – five years hence.
It’s plainly unsatisfactory, to forecast in this way. But what’s the alternative? To develop a different point of view, one needs a model capable of generating a picture of the future that does not necessarily yield a mirror of the past. To do that, one needs a structured grip on the underlying mechanics. One needs a vision of how the economy works, and one needs to have the courage to assert that vision – ironically – in spite of the fact that it cannot be derived from the past statistical record. This is the hard part. But only in this way can one see that the baseline is baseless, that equilibrium is vacuous, that the past growth path is not the single best forecast. There is no way to build such a model for use by functionaries, and hence no easy escape from the mental traps of statistical prediction.
One final point, to put things in perspective: Friedman's analysis predicts a net 32% increase in GDP as of 2026 if Sanders' full policy program is implemented. We've only been exploring his claim that part of that increase, 9%, would result from non-healthcare spending measures. That's quite a bit less than the estimated impact of the switch to single-payer healthcare, and less even than what's estimated for the regulatory reform. Even if the Romers were right about the impact of Sanders' non-healthcare spending proposal, that would hardly be, to quote Wolfers, "the whole shebang".
Wednesday, 2 March 2016
The Establishment Hits the Panic Button
Plan B for stopping Trump is shaping up: deny him a majority of pledged delegates, and broker a victory for another candidate at the convention.
But there's a fundamental problem with this strategy: it can't work for the candidate in second place.
Ted Cruz is not going to be able to win enough people over to his side at the convention, because he's, well, Ted Cruz. But he's the candidate in second place, so he definitely isn't going to drop out any time soon - especially if Rubio loses Florida.
And that means Rubio's delegate count is going to stay embarrassingly low. Even if Rubio starts picking up a higher vote share in April and May, Cruz's continued presence is going to mean Trump victories in plenty of winner-take-all states (and things get even bleaker if Kasich doesn't drop out). An embarrassingly low delegate count robs him of a lot of the credibility he needs to broker a convention victory. A loss in Florida would wipe out the rest.
Essentially, I see no plan to stop Trump that can overcome this.
Not to mention that, if this plan were to work, it could very well be that aegrescit medendo.
But there's a fundamental problem with this strategy: it can't work for the candidate in second place.
Ted Cruz is not going to be able to win enough people over to his side at the convention, because he's, well, Ted Cruz. But he's the candidate in second place, so he definitely isn't going to drop out any time soon - especially if Rubio loses Florida.
And that means Rubio's delegate count is going to stay embarrassingly low. Even if Rubio starts picking up a higher vote share in April and May, Cruz's continued presence is going to mean Trump victories in plenty of winner-take-all states (and things get even bleaker if Kasich doesn't drop out). An embarrassingly low delegate count robs him of a lot of the credibility he needs to broker a convention victory. A loss in Florida would wipe out the rest.
Essentially, I see no plan to stop Trump that can overcome this.
Not to mention that, if this plan were to work, it could very well be that aegrescit medendo.
Monday, 29 February 2016
No, Trump Wouldn't Beat Clinton...
...but it might be close, and that could be a very good thing.
I don't think anyone should be worried about President Trump, no matter what happens on the Democratic side.
This isn't because of his incredibly high unfavorability numbers - when he rushes to the center in the general election (and he will), those will go up considerably.
But no Republican can win the White House without endorsing comprehensive and humane immigration reform - that's the one law of political gravity that can't be violated right now, even by Trump.
He'll move well to the center on that issue as well, and it may even be that he's developed enough of a pure, Mao-style cult of personality among his supporters that they'd stick with him even through that.
But he won't fool Hispanic voters, not with any level of pandering, not after the primary campaign he's run.
With that said, the arguments going around that Trump could beat Clinton, while failing to establish that claim, do provide plenty of reasons for believing Clinton would only beat him narrowly. And if Clinton is the nominee, I hope that's exactly what happens.
If Trump gets crushed, the GOP will be back where it was right after election day 2012 - thinking the only thing they've done wrong is oppose immigration reform. If it's close, there's a chance they'll realize that was the only thing Trump did wrong - at least from a general election standpoint (obviously he'd never win the nomination without it). What follows that will be a full-scale crisis for the GOP. Then there's a chance - though probably a small one - that this realization could be the first step toward a new right-of-center party that resembles the current conservative wing of the Democratic Party.
If that were to happen, then all roads lead to the Democratic Party becoming a genuine left-wing workers party.
Either (a) Bernie wins and does it himself; or (b) a Clinton presidency - which would be disastrous in terms of foreign policy (Catherine Liu has just done a great job of pointing out that nothing would look so much like a Trump presidency as a Clinton presidency), and oversee nothing but a continuation of the ongoing slow-motion disaster on the domestic side - will finish Bernie's job for him, and the the Democratic Party will move well to the left in 2024.
Update: 1 March 9am
Going into what is likely to be a dominant performance on Super Tuesday, Trump is already signalling his shift on immigration.
2nd Update: 1 March 2pm
I may have spoken too soon.
From Politico:
"But while the GOP moderates may feel a break from their party, they're also hostile to Democrats, meaning that bringing them over would require a total rebranding of the Democratic Party in their eyes. In an online poll of 800 likely Republican primary voters, conducted from Feb. 11 to Feb. 16, Democracy Corp found that anti-Democrat attitudes are the most potent driver of Republican primary voters — and their antipathy for Hillary Clinton outweighs even their dislike for President Barack Obama and the Democratic Party as a whole, a feeling that cuts across ideology.
Still, the poll shows that GOP moderates may be pliable."
This is terrifying, and potentially very dangerous both in November and in the long-term.
If we end up with Clinton v. Trump, the worst thing that could happen is a Democratic rush to the right.
(1) It completely takes the Left for granted, at a time when it is reawakening - Sanders has gone from 4% national support among likely primary voters to 40% in 13 months.
(2) What lies to the right of where Clinton is now is not even the pretense of an attempt to address the entrenched structural socio-economic challenges facing the country.
If this election looks like a revolt, just wait.
And of course, this is a plan that could definitely backfire in a big way - given all the reasons why Sanders is already more electable than Clinton, and the distinct possibility of you-know-who siphoning off some of those unexpected Sanders supporters from Clinton, in the general.
And if it does backfire...well, the end result (almost) rhymes with "Drumpf".
3rd Update: 2 March 9am
1. Trump is playing in New England. He's big in New Hampshire, huge in Massachusetts, even winning in Vermont - all states where Kasich came in second. He's not just winning over many voters who have Cruz as their second choice; he's also winning over many voters who have Kasich as their second choice. He's not just winning over very conservative evangelicals; he's also winning over business-oriented moderates.
2. Trump and Clinton won almost identical states last night. (And where they differed - Clinton winning Texas, losing Vermont; Trump winning Vermont, losing Texas - they were still alike in that each lost to a home-state candidate.)
3. Trump's big victories are being delivered by record-shattering voter turnouts. Democratic turnouts are down compared to 2008.
I don't like the way this is shaping up.
I don't think anyone should be worried about President Trump, no matter what happens on the Democratic side.
This isn't because of his incredibly high unfavorability numbers - when he rushes to the center in the general election (and he will), those will go up considerably.
But no Republican can win the White House without endorsing comprehensive and humane immigration reform - that's the one law of political gravity that can't be violated right now, even by Trump.
He'll move well to the center on that issue as well, and it may even be that he's developed enough of a pure, Mao-style cult of personality among his supporters that they'd stick with him even through that.
But he won't fool Hispanic voters, not with any level of pandering, not after the primary campaign he's run.
With that said, the arguments going around that Trump could beat Clinton, while failing to establish that claim, do provide plenty of reasons for believing Clinton would only beat him narrowly. And if Clinton is the nominee, I hope that's exactly what happens.
If Trump gets crushed, the GOP will be back where it was right after election day 2012 - thinking the only thing they've done wrong is oppose immigration reform. If it's close, there's a chance they'll realize that was the only thing Trump did wrong - at least from a general election standpoint (obviously he'd never win the nomination without it). What follows that will be a full-scale crisis for the GOP. Then there's a chance - though probably a small one - that this realization could be the first step toward a new right-of-center party that resembles the current conservative wing of the Democratic Party.
If that were to happen, then all roads lead to the Democratic Party becoming a genuine left-wing workers party.
Either (a) Bernie wins and does it himself; or (b) a Clinton presidency - which would be disastrous in terms of foreign policy (Catherine Liu has just done a great job of pointing out that nothing would look so much like a Trump presidency as a Clinton presidency), and oversee nothing but a continuation of the ongoing slow-motion disaster on the domestic side - will finish Bernie's job for him, and the the Democratic Party will move well to the left in 2024.
Update: 1 March 9am
Going into what is likely to be a dominant performance on Super Tuesday, Trump is already signalling his shift on immigration.
2nd Update: 1 March 2pm
I may have spoken too soon.
From Politico:
"But while the GOP moderates may feel a break from their party, they're also hostile to Democrats, meaning that bringing them over would require a total rebranding of the Democratic Party in their eyes. In an online poll of 800 likely Republican primary voters, conducted from Feb. 11 to Feb. 16, Democracy Corp found that anti-Democrat attitudes are the most potent driver of Republican primary voters — and their antipathy for Hillary Clinton outweighs even their dislike for President Barack Obama and the Democratic Party as a whole, a feeling that cuts across ideology.
Still, the poll shows that GOP moderates may be pliable."
This is terrifying, and potentially very dangerous both in November and in the long-term.
If we end up with Clinton v. Trump, the worst thing that could happen is a Democratic rush to the right.
(1) It completely takes the Left for granted, at a time when it is reawakening - Sanders has gone from 4% national support among likely primary voters to 40% in 13 months.
(2) What lies to the right of where Clinton is now is not even the pretense of an attempt to address the entrenched structural socio-economic challenges facing the country.
If this election looks like a revolt, just wait.
And of course, this is a plan that could definitely backfire in a big way - given all the reasons why Sanders is already more electable than Clinton, and the distinct possibility of you-know-who siphoning off some of those unexpected Sanders supporters from Clinton, in the general.
And if it does backfire...well, the end result (almost) rhymes with "Drumpf".
3rd Update: 2 March 9am
1. Trump is playing in New England. He's big in New Hampshire, huge in Massachusetts, even winning in Vermont - all states where Kasich came in second. He's not just winning over many voters who have Cruz as their second choice; he's also winning over many voters who have Kasich as their second choice. He's not just winning over very conservative evangelicals; he's also winning over business-oriented moderates.
2. Trump and Clinton won almost identical states last night. (And where they differed - Clinton winning Texas, losing Vermont; Trump winning Vermont, losing Texas - they were still alike in that each lost to a home-state candidate.)
3. Trump's big victories are being delivered by record-shattering voter turnouts. Democratic turnouts are down compared to 2008.
I don't like the way this is shaping up.
Sunday, 28 February 2016
Bernie Sanders, Social Democracy, and Economic Growth - Part I
By now you've probably heard about the controversy caused by economist Gerald Friedman's paper estimating the economic impacts of Bernie Sanders' policy proposals.
Regardless of this month's outcomes in the primaries, the question of the implications for the US economy of Sanders' comprehensive social democratic program remains an essential one. As I'll argue, a set of policy actions and reforms of the sort Sanders is advocating is the best hope for rejuvenating the US economy - as well as for making American society more just. That remains true whether he becomes President or not. (I won't be discussing Sanders' hugely beneficial healthcare proposal below, as I've already written a post on the weak criticisms and objections being made to that.)
The major point of contention - and as we'll see in a moment that's putting things mildly - in the Friedman controversy is the claim that if the full Sanders agenda were to be enacted, the US economy would grow by an average of 5.3% over the next decade (2017-2026). That average, we should note from the outset, incorporates a very high spike in growth in 2017, owing largely to Sanders' heavily front-loaded proposal for $1 trillion in government spending on infrastructure. The average over 2018-2026 is 4.4%.
The storm around Friedman's work began when four former chairs of the President's Council of Economic Advisors denounced the report as unsupported by any credible economic research, lacking in evidence, and filled with irresponsible arithmetic. The report has since elicited cries of "voodoo" from Paul Krugman, been condemned as an abandonment of "analytical standards" by Brad Delong, and described as a "fantasy" by Jordan Weissmann in Slate and a trip to "Neverland" by Kevin Drum in Mother Jones - though Mr. Drum has recently thought better of his initial assessment, and made some good observations which we'll return to below.
Much of the critical response to Friedman's analysis can be dealt with swiftly. As Friedman himself, James K. Galbraith, and William K. Black have all pointed out: Friedman uses entirely mainstream macroeconomic models and assumptions to arrive at his conclusions, while the CEA chairs' letter contains no evidence or argument whatsoever - it resembles nothing so much as an authoritative proclamation issued by the members of a priestly caste.
Krugman, DeLong, and a host of economic journalists do no better, apparently believing that an incredulous stare (or the written equivalent of one) suffices as a response to Friedman's projections.
Krugman's counter-attack does come in for special mention, in virtue of how intentionally misleading it is. He uses the term "voodoo" to draw a comparison between Friedman's work and the standard practice in GOP Congressional budgets of using "magic asterisks" to mark savings from unspecified spending cuts, and increases in tax revenue resulting from cutting taxes on the wealthy (as predicted by supply-side - aka "voodoo", and here the moniker is entirely appropriate - economics). Nothing - absolutely nothing - comparable is to be found in Friedman's work, as the above linked responses make clear.
All of this puts anyone who is really interested in this issue - and the issue, in the most general sense, is the possibility for a bold and wide-ranging set of social democratic policies and reforms to have a major positive impact on the performance of the American economy - in a challenging position. We need to figure out what actual reasons there are for thinking that this could not or would not be the case - the reasons the public critics of this idea are failing to give - and then determine whether or not there are better reasons for thinking that it would.
J.W. Mason, writing in Jacobin, helpfully divides the general issue into three parts: 1) Could any set of policy actions and reforms have such an effect? 2) Could Sanders-style social democratic policies have such an effect? and 3) Would Sanders' specific policies have the specific effect projected by Friedman?
Mason also puts his finger on the overarching reason for answering question 1) in the negative: "The argument against Friedman's piece comes down to the claim that the economy is already close to potential."
I'll refer to Mason's writings on this controversy - as well as to the writings of a number of other economists and economic journalists - in what follows. But no one has yet provided a single, integrated, big-picture view of what is going on in this debate over the US economy's potential. That will be my goal in this post. We'll find that there are many strong reasons for giving an affirmative answer to both of the first two questions.
In a separate post, I'll discuss some general reasons, beyond the ones that can be gleaned from Friedman's work, for thinking that social democratic policy proposals of the type Sanders is advocating are exactly the right sort for fostering stable and robust economic growth. I'll also offer some reflections on the cultural implications of the dynamics of the controversy itself.
I'll leave it to others to get into the nitty-gritty of question 3). As Galbraith acknowledges, the finer aspects of a number of Friedman's assumptions are open to question. Let's hope they get the detailed and intellectually responsible attention they deserve soon.
and that US Gross Fixed Capital Formation as a % of GDP, which was slightly above the OECD average in 2006, has not yet closed the gap which opened up after its steeper decline during the recession.
The US currently stands in need of $3.6 trillion of infrastructure investment, according to the American Society of Civil Engineers, which gives the current state of US infrastructure a grade of D+. The low quality of the US public capital stock points toward the possibility of significant gains in total factor productivity, and thus, GDP growth, given a large investment in infrastructure. Recall that just such an investment is a major plank of Sanders' policy plan, and is responsible for the huge front-loaded GDP gains in Friedman's analysis which drive up the 10-year average.
Of course, the most significant trend the US economy has failed to return to is the real GDP trend itself; and as FT's Matthew Klein has pointed out, Friedman's projections would merely have put the economy back on trend as of the middle of 2023:
As we would expect given the terrain we've covered so far, decreases in government spending have a lot to do with this shortfall.
Now, none of this will persuade you that the US economy has room for the kind of growth Friedman countenances if you don't think it currently has the potential - or would have the potential, given any remotely feasible set of policy actions - to revert to historic norms with respect to the levels and trends we've looked at. If that's the case, you almost certainly think that such a return is prevented for reasons having to do with the US labor force - there is no other remotely plausible explanation.
Regardless of this month's outcomes in the primaries, the question of the implications for the US economy of Sanders' comprehensive social democratic program remains an essential one. As I'll argue, a set of policy actions and reforms of the sort Sanders is advocating is the best hope for rejuvenating the US economy - as well as for making American society more just. That remains true whether he becomes President or not. (I won't be discussing Sanders' hugely beneficial healthcare proposal below, as I've already written a post on the weak criticisms and objections being made to that.)
The major point of contention - and as we'll see in a moment that's putting things mildly - in the Friedman controversy is the claim that if the full Sanders agenda were to be enacted, the US economy would grow by an average of 5.3% over the next decade (2017-2026). That average, we should note from the outset, incorporates a very high spike in growth in 2017, owing largely to Sanders' heavily front-loaded proposal for $1 trillion in government spending on infrastructure. The average over 2018-2026 is 4.4%.
The storm around Friedman's work began when four former chairs of the President's Council of Economic Advisors denounced the report as unsupported by any credible economic research, lacking in evidence, and filled with irresponsible arithmetic. The report has since elicited cries of "voodoo" from Paul Krugman, been condemned as an abandonment of "analytical standards" by Brad Delong, and described as a "fantasy" by Jordan Weissmann in Slate and a trip to "Neverland" by Kevin Drum in Mother Jones - though Mr. Drum has recently thought better of his initial assessment, and made some good observations which we'll return to below.
Much of the critical response to Friedman's analysis can be dealt with swiftly. As Friedman himself, James K. Galbraith, and William K. Black have all pointed out: Friedman uses entirely mainstream macroeconomic models and assumptions to arrive at his conclusions, while the CEA chairs' letter contains no evidence or argument whatsoever - it resembles nothing so much as an authoritative proclamation issued by the members of a priestly caste.
Krugman, DeLong, and a host of economic journalists do no better, apparently believing that an incredulous stare (or the written equivalent of one) suffices as a response to Friedman's projections.
Krugman's counter-attack does come in for special mention, in virtue of how intentionally misleading it is. He uses the term "voodoo" to draw a comparison between Friedman's work and the standard practice in GOP Congressional budgets of using "magic asterisks" to mark savings from unspecified spending cuts, and increases in tax revenue resulting from cutting taxes on the wealthy (as predicted by supply-side - aka "voodoo", and here the moniker is entirely appropriate - economics). Nothing - absolutely nothing - comparable is to be found in Friedman's work, as the above linked responses make clear.
All of this puts anyone who is really interested in this issue - and the issue, in the most general sense, is the possibility for a bold and wide-ranging set of social democratic policies and reforms to have a major positive impact on the performance of the American economy - in a challenging position. We need to figure out what actual reasons there are for thinking that this could not or would not be the case - the reasons the public critics of this idea are failing to give - and then determine whether or not there are better reasons for thinking that it would.
J.W. Mason, writing in Jacobin, helpfully divides the general issue into three parts: 1) Could any set of policy actions and reforms have such an effect? 2) Could Sanders-style social democratic policies have such an effect? and 3) Would Sanders' specific policies have the specific effect projected by Friedman?
Mason also puts his finger on the overarching reason for answering question 1) in the negative: "The argument against Friedman's piece comes down to the claim that the economy is already close to potential."
I'll refer to Mason's writings on this controversy - as well as to the writings of a number of other economists and economic journalists - in what follows. But no one has yet provided a single, integrated, big-picture view of what is going on in this debate over the US economy's potential. That will be my goal in this post. We'll find that there are many strong reasons for giving an affirmative answer to both of the first two questions.
In a separate post, I'll discuss some general reasons, beyond the ones that can be gleaned from Friedman's work, for thinking that social democratic policy proposals of the type Sanders is advocating are exactly the right sort for fostering stable and robust economic growth. I'll also offer some reflections on the cultural implications of the dynamics of the controversy itself.
I'll leave it to others to get into the nitty-gritty of question 3). As Galbraith acknowledges, the finer aspects of a number of Friedman's assumptions are open to question. Let's hope they get the detailed and intellectually responsible attention they deserve soon.
1. Prospects for US Growth I - Production and Productive Investment in Capital
The question of whether the US economy is currently operating at or close to its potential is an ambiguous one. For many of the participants in this debate, it is a question about whether one way of measuring unemployment - the U3 or "official" unemployment rate, which reflects the number of jobless individuals who have actively sought work in the past 4 weeks - is at or close to the U3 NAIRU, or "Non-Accelerating Inflation Rate of Unemployment" - a theoretical level of the U3 rate below which gains in employment would cause inflation. This is a topic we'll return to.
First, however, we should observe that there are senses of our question about whether the economy is at potential to which the answer is clearly or plausibly "No."
Let's look, for instance, at the rate of productive capacity utilization across all industries:
At 77% and situated on a downward trend since late 2014, this is low historically (where the average is approximately 81.5%), and low for any context other than the midst of a recession or an upward trend shortly after the end of a recession. (It is also well below the rate at which concerns about inflation begin to emerge, which is > 82%, at least). 9 years out from the technical end of the last recession, and it is still almost 4% below where it stood at the end of 2007 - a neighborhood where it has spent almost all of its time since 2012.
Further plausible reasons for thinking the economy is not operating at potential are that the growth of the value of the Capital Stock has not yet managed to return to its pre-recession trend;
Further plausible reasons for thinking the economy is not operating at potential are that the growth of the value of the Capital Stock has not yet managed to return to its pre-recession trend;
and that US Gross Fixed Capital Formation as a % of GDP, which was slightly above the OECD average in 2006, has not yet closed the gap which opened up after its steeper decline during the recession.
The US currently stands in need of $3.6 trillion of infrastructure investment, according to the American Society of Civil Engineers, which gives the current state of US infrastructure a grade of D+. The low quality of the US public capital stock points toward the possibility of significant gains in total factor productivity, and thus, GDP growth, given a large investment in infrastructure. Recall that just such an investment is a major plank of Sanders' policy plan, and is responsible for the huge front-loaded GDP gains in Friedman's analysis which drive up the 10-year average.
Of course, the most significant trend the US economy has failed to return to is the real GDP trend itself; and as FT's Matthew Klein has pointed out, Friedman's projections would merely have put the economy back on trend as of the middle of 2023:
As we would expect given the terrain we've covered so far, decreases in government spending have a lot to do with this shortfall.
Now, none of this will persuade you that the US economy has room for the kind of growth Friedman countenances if you don't think it currently has the potential - or would have the potential, given any remotely feasible set of policy actions - to revert to historic norms with respect to the levels and trends we've looked at. If that's the case, you almost certainly think that such a return is prevented for reasons having to do with the US labor force - there is no other remotely plausible explanation.
Prospects for US Growth II - Employment and the Labor Force
Perhaps the current US economy's long-term GDP growth trend is simply lower than it had been in the second half of the 20th century. In fact, there is very good evidence that since the end of the last recession, the US GDP long-run growth trend has dropped to 2.25%.
If that is the current situation, there are obviously two questions we need to ask: (1) Why? and (2) Is this permanent?
Friedman's critics, at the very least, do not believe the kind of GDP growth trend he projects is possible any more in developed capitalist economies like the US - so they're answer to (2) is at least a qualified yes. They're answer to (1) is complicated, but at its core are demographic shifts.
The populations of these economies are growing more slowly (graph via Gavyn Davies);
and they are also aging - or more to the point, less and less of that population growth is accounted for by the working-age population (graph via Wikinomics):
Gavyn Davies also points out that the growth of labor productivity has been slowing:
So: The US and other wealthy countries seem like they're looking at a future of (1) fewer productive people and (2) slower productivity gains.
If you're very impressed by these trends, then you might think that the US economy is operating at potential, or close to it, after all - despite low capacity utilization, the non-recovery of gross fixed capital formation, and growth in the value of the capital stock and GDP below their pre-recession trends - now that the U3 unemployment rate has fallen all the way back to its pre-recession level.
The general idea behind this conclusion would be that the US labor market can no longer sustain capacity utilization levels or GDP growth much above what we're currently seeing, and decreased capital investment is to be expected in this environment.
And if you do think the economy is at potential on account of these limitations of the labor force, then, as Mason stresses, you also think that the U3 unemployment rate is now equal to the NAIRU - the rate of unemployment below which inflation rears its ugly head.
We've spent a good deal of time talking about Friedman's GDP projections; but there's another projected impact of Sanders' agenda which is just as important for this debate: Friedman's estimate that unemployment would drop all the way to 3.8%. For many convinced that less unemployment than we have now would spark inflation, that's a bad thing. Of course, Friedman's critics doubt that it is possible, just as they doubt his GDP projections. But they haven't given any detailed reasons - just more incredulous stares.
So now we've accumulated three questions: 1) Is a big drop in unemployment currently possible? 2) Would that be a good thing? and 3) Even if the answers to the first two questions are both positive, is the declining growth of labor productivity enough of a reason to be less sanguine about growth potential?
The general idea behind this conclusion would be that the US labor market can no longer sustain capacity utilization levels or GDP growth much above what we're currently seeing, and decreased capital investment is to be expected in this environment.
And if you do think the economy is at potential on account of these limitations of the labor force, then, as Mason stresses, you also think that the U3 unemployment rate is now equal to the NAIRU - the rate of unemployment below which inflation rears its ugly head.
We've spent a good deal of time talking about Friedman's GDP projections; but there's another projected impact of Sanders' agenda which is just as important for this debate: Friedman's estimate that unemployment would drop all the way to 3.8%. For many convinced that less unemployment than we have now would spark inflation, that's a bad thing. Of course, Friedman's critics doubt that it is possible, just as they doubt his GDP projections. But they haven't given any detailed reasons - just more incredulous stares.
So now we've accumulated three questions: 1) Is a big drop in unemployment currently possible? 2) Would that be a good thing? and 3) Even if the answers to the first two questions are both positive, is the declining growth of labor productivity enough of a reason to be less sanguine about growth potential?
3. Unemployment: How Low Can (and Should) We Go?
As we've seen, the case that's been made for the US economy being at or close to its potential, despite some of the data we've looked at above, has mainly to do with structural demographic shifts.
But there are several reasons for thinking, as Friedman himself has pointed out, that these demographic shifts are not all that important, and should not be taken as reasons for believing the economy is anywhere near its potential.
First and foremost is the point, which Ron Baiman has made, that even taking demographic shifts into account, the US Employment-Population Ratio is still much lower than it was pre-recession, and is taking an incredibly long time to come back up:
That's a shortfall of millions of jobs. The fact is that far fewer Americans are working than would be expected this long after the end of the recession.
Looking just at prime working-age Americans, labor force participation continued falling after the technical end of the recession, and has now been stuck at a relatively low level for two-and-a-half years:
Looking just at prime working-age Americans, labor force participation continued falling after the technical end of the recession, and has now been stuck at a relatively low level for two-and-a-half years:
Especially alarming is the fact, pointed out by Michael Gavin at Barclays Capital, that the labor participation of prime working-age women is now starting to decline, after growing through the 70s, 80s, and 90s (participation of prime-age men has been dropping for decades):
The San Francisco Fed has described the decline in prime-age participation as being caused in part by "an increase in people deciding they'd rather have single-income families...For whatever reason, they've traded a second paycheck for spending more time at home, whether it's for child-care, leisure, or simply that it's a better lifestyle fit."
Apparently, there are a few important facts that have escaped their notice.
Like the fact that in many states, childcare is more expensive than rent.
Or more expensive than college tuition.
Of course, that Sanders' policy proposals include plans for more affordable childcare, guaranteed paid maternity leave, and addressing the gender pay gap has a lot to do with that low projected unemployment number.
Matthew Klein points out two more reasons to doubt the prevailing pessimism about future growth potential. One is that there is no relationship between the size of the prime working-age population and the number of employed Americans:
The second (which actually originates with none other than Brad DeLong) is that demographic shifts are predictable, and so can fairly reliably be taken into account in forecasting; and yet, the gap between the GDP predictions most economists were making in 2007 and the ones they are making now is "massive and growing".
Yet another reason is the fact that far more senior citizens than ever before are remaining in the labor force - probably, as Yves Smith has suggested, because they've seen their retirement savings evaporate in the financial crisis.
So there are plenty of good reasons for thinking both that the US economy has sufficient potential capacity remaining to employ many more workers, and that there are a great many people available to be put to work. There is a strong case to be made for an affirmative answer to our first question about unemployment. And given that potential capacity, if those many more potential workers were actually put to work, we would expect to see big gains in output.
Everyone should be able to agree that continuing to lower unemployment would be a good thing if it could be done in the absence of inflation. We should also be able to agree that at some level greater than 0% the unemployment rate would be low enough that adding more workers will start to drive prices up.
So let's break our second employment-related question into two parts: a) How near are inflationary pressures? and b) How bad would it really be if unemployment did dip low enough to start spurring inflation?
The first part of our question is just another way of asking whether the Fed's current estimate of the NAIRU, which puts it at the current unemployment rate, is a reasonable one.
Now, it might seem like enough has already been said to cast a great deal of doubt on the reasonableness of that estimate. After all, we've reviewed a lot of evidence for the conclusion that the US economy is not operating close to potential, that there is plenty of room for growth over the next several years. And we started by observing that many of the critics of Sanders' proposals and Friedman's analysis had an understanding of what it means for the economy to operate close to potential which is based in large part on whether the unemployment rate is at the NAIRU.
But we are dealing with two different understandings of "economic potential" here. As J.W. Mason explains in an excellent essay, for unemployment to drop to the level at which it begins to cause inflation is not for it to have dropped to the level at which productivity gains and increases in the wage share cease, and inflation is the only effect of further decreases in unemployment.
The latter level, where there are no further productivity gains to be had from hiring, and real wages cannot further increase with the bidding up of nominal wages, is one way - to my mind, a more defensible way - to denote full employment and to characterize an economy which is operating at its potential, as compared with understanding these concepts in terms of the NAIRU.
That is not to say that full employment/operating at potential in this sense should be the goal - inflation may (almost certainly would) still be much too high for the economy to be stable in this scenario.
But this distinction explains why we still have to ask, at this point in the analysis, both whether it is reasonable to believe that we are at the NAIRU, and whether it would be so bad to go a bit below it.
One source of inflationary pressure is the fact that for businesses, wages are a cost. This is why, when unemployment is low enough, the bargaining position of workers is strong enough to push wages to the point where further increases are passed along in the form of higher prices.
But there are many reasons for thinking there's plenty of room for business to absorb higher wages, most significantly the immense gap between productivity growth and wage growth, and the fact that corporate profits have rebounded since the end of the recession while wages have not.
Another source of inflationary pressure would be a shortage of goods, in the event that unemployment fell far enough for wages to rise high enough to bring demand above the potential capacity to satisfy it.
But based on our examination of the productive potential of the economy, there's plenty of room on this front for wages (and thus demand) to rise.
So based on the evidence we've already reviewed, there are good reasons for thinking the Fed's current NAIRU estimate is too high - a statement many economists would agree with.
And in answer to the second part of our question, we can observe, as Dean Baker recently has, that according to the estimates of the President's Council of Economic Advisers (yes, that Council of Economic Advisers), if the official unemployment rate were to drop from its current 4.9% to 3.9% - assuming that 4.9% equals the NAIRU - and stay there for an entire year, the effect on inflation would be an increase of 0.1 percentage point - from its current 1.6% to 1.7% - by the end of that year.
In other words, even if the Fed's NAIRU estimate is right, Friedman's projections imply a slow and modest increase in inflation - and not an indefinite one either, since the positive effects of Sanders' proposed policies on both investment and demand would likely lower the NAIRU over time.
Two other points are worth mentioning.
The first is that if Sanders' entire policy program were to be enacted, and we found that unemployment began dropping too far too fast and inflation did begin to become a problem, never in modern history has the Fed been in such a strong position to beat it back through monetary policy.
The second is that the Fed's obsession with inflation to the exclusion of full employment, and its low (by historical standards) inflation target of 2%, are the result of the lessons purportedly learned during the 1970s, and these were all the wrong lessons.
Apparently, there are a few important facts that have escaped their notice.
Like the fact that in many states, childcare is more expensive than rent.
Or more expensive than college tuition.
Of course, that Sanders' policy proposals include plans for more affordable childcare, guaranteed paid maternity leave, and addressing the gender pay gap has a lot to do with that low projected unemployment number.
Matthew Klein points out two more reasons to doubt the prevailing pessimism about future growth potential. One is that there is no relationship between the size of the prime working-age population and the number of employed Americans:
The second (which actually originates with none other than Brad DeLong) is that demographic shifts are predictable, and so can fairly reliably be taken into account in forecasting; and yet, the gap between the GDP predictions most economists were making in 2007 and the ones they are making now is "massive and growing".
Yet another reason is the fact that far more senior citizens than ever before are remaining in the labor force - probably, as Yves Smith has suggested, because they've seen their retirement savings evaporate in the financial crisis.
So there are plenty of good reasons for thinking both that the US economy has sufficient potential capacity remaining to employ many more workers, and that there are a great many people available to be put to work. There is a strong case to be made for an affirmative answer to our first question about unemployment. And given that potential capacity, if those many more potential workers were actually put to work, we would expect to see big gains in output.
Everyone should be able to agree that continuing to lower unemployment would be a good thing if it could be done in the absence of inflation. We should also be able to agree that at some level greater than 0% the unemployment rate would be low enough that adding more workers will start to drive prices up.
So let's break our second employment-related question into two parts: a) How near are inflationary pressures? and b) How bad would it really be if unemployment did dip low enough to start spurring inflation?
The first part of our question is just another way of asking whether the Fed's current estimate of the NAIRU, which puts it at the current unemployment rate, is a reasonable one.
Now, it might seem like enough has already been said to cast a great deal of doubt on the reasonableness of that estimate. After all, we've reviewed a lot of evidence for the conclusion that the US economy is not operating close to potential, that there is plenty of room for growth over the next several years. And we started by observing that many of the critics of Sanders' proposals and Friedman's analysis had an understanding of what it means for the economy to operate close to potential which is based in large part on whether the unemployment rate is at the NAIRU.
But we are dealing with two different understandings of "economic potential" here. As J.W. Mason explains in an excellent essay, for unemployment to drop to the level at which it begins to cause inflation is not for it to have dropped to the level at which productivity gains and increases in the wage share cease, and inflation is the only effect of further decreases in unemployment.
The latter level, where there are no further productivity gains to be had from hiring, and real wages cannot further increase with the bidding up of nominal wages, is one way - to my mind, a more defensible way - to denote full employment and to characterize an economy which is operating at its potential, as compared with understanding these concepts in terms of the NAIRU.
That is not to say that full employment/operating at potential in this sense should be the goal - inflation may (almost certainly would) still be much too high for the economy to be stable in this scenario.
But this distinction explains why we still have to ask, at this point in the analysis, both whether it is reasonable to believe that we are at the NAIRU, and whether it would be so bad to go a bit below it.
One source of inflationary pressure is the fact that for businesses, wages are a cost. This is why, when unemployment is low enough, the bargaining position of workers is strong enough to push wages to the point where further increases are passed along in the form of higher prices.
But there are many reasons for thinking there's plenty of room for business to absorb higher wages, most significantly the immense gap between productivity growth and wage growth, and the fact that corporate profits have rebounded since the end of the recession while wages have not.
Another source of inflationary pressure would be a shortage of goods, in the event that unemployment fell far enough for wages to rise high enough to bring demand above the potential capacity to satisfy it.
But based on our examination of the productive potential of the economy, there's plenty of room on this front for wages (and thus demand) to rise.
So based on the evidence we've already reviewed, there are good reasons for thinking the Fed's current NAIRU estimate is too high - a statement many economists would agree with.
And in answer to the second part of our question, we can observe, as Dean Baker recently has, that according to the estimates of the President's Council of Economic Advisers (yes, that Council of Economic Advisers), if the official unemployment rate were to drop from its current 4.9% to 3.9% - assuming that 4.9% equals the NAIRU - and stay there for an entire year, the effect on inflation would be an increase of 0.1 percentage point - from its current 1.6% to 1.7% - by the end of that year.
In other words, even if the Fed's NAIRU estimate is right, Friedman's projections imply a slow and modest increase in inflation - and not an indefinite one either, since the positive effects of Sanders' proposed policies on both investment and demand would likely lower the NAIRU over time.
Two other points are worth mentioning.
The first is that if Sanders' entire policy program were to be enacted, and we found that unemployment began dropping too far too fast and inflation did begin to become a problem, never in modern history has the Fed been in such a strong position to beat it back through monetary policy.
The second is that the Fed's obsession with inflation to the exclusion of full employment, and its low (by historical standards) inflation target of 2%, are the result of the lessons purportedly learned during the 1970s, and these were all the wrong lessons.
4. Labor Productivity Growth, Very Briefly
When we looked at reasons for doubting the US economy's potential for large gains in GDP, we left one issue unresolved: the decline in labor productivity growth.
There are two main reasons to think Sanders' policy program would boost labor productivity.
In the long term, his plan to make public colleges and universities tuition free and, especially, to institute single-payer healthcare are enormous investments in the development of human capital. Healthier, smarter workers are more productive.
In the long term, his plan to make public colleges and universities tuition free and, especially, to institute single-payer healthcare are enormous investments in the development of human capital. Healthier, smarter workers are more productive.
But Friedman also projects a huge boost in labor productivity in the short-term. The force behind this, which Kevin Drum explores in his re-evaluation of Friedman's work, is GDP growth itself.
Friedman justifies his productivity projections by way of a relationship between output growth and labor productivity growth known as "Verdoorn's Law".
Remember that in Friedman's analysis, big gains in GDP growth are jump-started by a very large front-loaded government investment in infrastructure, as well as a host of other stimulative spending measures. As we've seen, there is plenty of room for the labor market to absorb many more workers in response to this government-created demand. And there is plenty of room for real wages to rise along with employment. That rise becomes a new source of increased demand, which is sustainable given how far below productive capacity the economy is currently operating. That increased demand prompts businesses to invest in replacing aging capital stock, and take advantage of more recent technological developments (whose potential impact on productivity can only be realized if they are installed in the first place), as well as in R&D for new technologies. That new private investment in capital boosts labor productivity - it gives workers the tools to work more productively - and that productivity increase leads to a further increase in output. This is Verdoorn's Law in action: growth leads to greater productivity, which leads to more growth.
Remember that in Friedman's analysis, big gains in GDP growth are jump-started by a very large front-loaded government investment in infrastructure, as well as a host of other stimulative spending measures. As we've seen, there is plenty of room for the labor market to absorb many more workers in response to this government-created demand. And there is plenty of room for real wages to rise along with employment. That rise becomes a new source of increased demand, which is sustainable given how far below productive capacity the economy is currently operating. That increased demand prompts businesses to invest in replacing aging capital stock, and take advantage of more recent technological developments (whose potential impact on productivity can only be realized if they are installed in the first place), as well as in R&D for new technologies. That new private investment in capital boosts labor productivity - it gives workers the tools to work more productively - and that productivity increase leads to a further increase in output. This is Verdoorn's Law in action: growth leads to greater productivity, which leads to more growth.
Friedman derives all of the labor productivity growth he projects from projected GDP growth in this way. And as Drum points out, these big productivity gains are not as anomalous, from a historical perspective, as they might at first seem.
Where Drum has failed to do his homework is in his assessment of Verdoorn's law itself, which is well supported empirically in the recent history of the US economy.
Drum also makes an important observation - though unintentionally so - when he criticizes the relationship posited by Verdoorn's law as seeming "a bit circular". Indeed it is, but not viciously so. Verdorrn's law is in fact an example of circular cumulative causation in macroeconomics - an entirely consistent concept developed by the Swedish evolutionary-institutional economist (and Nobel Prize recipient) Gunnar Myrdal.
Drum's comment reveals the dominance in America of one side of an important divide in economics itself, between the general equilibrium approach to understanding the macroeconomy - which major liberal economists like Krugman, DeLong, and Stiglitz share with more conservative economists - and non-equilibrium approaches. This divide will turn out to be significant for the further discussion of Sanders' proposals, and of what the debate over them reveals about American intellectual culture, in Part II of this post.
Drum also makes an important observation - though unintentionally so - when he criticizes the relationship posited by Verdoorn's law as seeming "a bit circular". Indeed it is, but not viciously so. Verdorrn's law is in fact an example of circular cumulative causation in macroeconomics - an entirely consistent concept developed by the Swedish evolutionary-institutional economist (and Nobel Prize recipient) Gunnar Myrdal.
Drum's comment reveals the dominance in America of one side of an important divide in economics itself, between the general equilibrium approach to understanding the macroeconomy - which major liberal economists like Krugman, DeLong, and Stiglitz share with more conservative economists - and non-equilibrium approaches. This divide will turn out to be significant for the further discussion of Sanders' proposals, and of what the debate over them reveals about American intellectual culture, in Part II of this post.
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