Steve Roth — Why Tyler Cowen Doesn’t Understand the Economy: It’s the Debt, Stupid

It’s the debt, stupid = doing economics without balance sheets and awareness of finance.

It’s as if Irving Fisher and Hyman Minsky had never written.

Conventional economists seem to do their thinking without tethering it to the real world though finance as a source of funds and accounting as the record of what actually happens in market exchange. If economists are looking for microfoundations, this is where it is, rather than in "preferences," "expectations" and "confidence."

Asymptosis
Why Tyler Cowen Doesn’t Understand the Economy: It’s the Debt, Stupid

Steve Roth

Gerald Friedman — Why Liberal Economists Dish Out Despair

The angry reaction to my report [about Bernie Sander's economic program] revealed that by some combination of rationalization and the dominance of neoclassical microeconomics since the 1970s, liberal economists have virtually abandoned Keynesian economics, which supported the notion that governments can and must intervene in the economy to ensure the best results for society. These economists went back to pre-Keynesian thinking, where price fluctuations are supposed to equilibrate supply and demand at full employment with an optimal distribution of good and services. The very suggestion that government action can result in increases in growth rates or wages is now taken to be obviously wrong. Adopting the language of neoclassical micro welfare economics, everything is already as good as can be — all that government can do is to make it worse. Criticisms of the orthodox model and its policies are deemed worthy of scorn, to be dismissed tout court because they are obviously at variance not only with textbook economics, but with what we need to believe to rationalize failure.

The reaction to my paper — the casual and precipitous conclusion that it must be wrong because it projects a sharply higher rate of GDP growth — comes from the assumption that the economy is already at full employment and capacity output. It is assumed that were output significantly below full employment, then prices would fall to equilibrate the two. This is the political counsel of despair. It is based on classical economic theory and the underlying acceptance of Say’s Law of Markets (named for the great Classical economist Jean-Baptiste Say), which says that total supply of goods and services and the total demand for goods and services will always be equal. The shoe market creates the right amount of demand for shoes — it works out so neatly that the true measure of the supply of shoes, of potential output, can be taken by measuring actual output. This concept is used as a justification for laissez-faire economics, and the view that the market mechanism finds a harmonious equilibrium. It explains why even in the depths of the economic crisis, Christina Romer, former Chair of the Council of Economic Advisers in the Obama administration, who was always skeptical of fiscal policy and Keynesian economics, and why Jared Bernstein, former Chief Economist and Economic Adviser to Vice President Joseph Biden under Obama, who should have known better, wrote that the economy would return on its own to full employment. They predicted, quite wrongly, that the proposed Obama stimulus would accelerate this recovery by 6 months.

The return of Say’s Law has distorted the way liberal policy elites view the economy.… This reevaluation says to policy elites, “Hey, we are doing as well as can be expected.” To the general public it says, “Sorry, nothing more can be done for you.” TINA.…

Controversy reflects the disagreements and uncertainty that alone can lead to intellectual progress. It is time to inject some of these into orthodox macroeconomics. We have been ill-served by a smugly sure macroeconomics both in imagination and policy. Amazingly, the crisis of 2007-9 has left intact the dominant pseudo-Keynesian orthodoxy; maybe the kerfuffle around my report will help to open some space for constructive dialog in a profession that has clearly grown too complacent. 

INET
Why Liberal Economists Dish Out Despair 

Gerald Friedman | Professor of Economics, UMass, Amherst

See also at INET

​The Road not Taken (about Axel Leijonhufvud)
Arjun Jayadev

Gerald Friedman Responds to the Romers on the Sanders Plan: Different Models, Different Politics

Differences between my evaluation of the impact of the Sanders economic program from that of the Romers reflect different views of the economy, the difference between a static model where national income and employment are largely fixed and a dynamic one where these are shaped by effective demand and are, therefore, susceptible to change in response to economic policy. There are no errors in arithmetic.* It is a fundamental difference in vision that divides our approaches; the same distinction that divided John Maynard Keynes from those he labelled the Classicals in his General Theory of Employment, Interest, and Money.…

Naked Capitalism
Gerald Friedman Responds to the Romers on the Sanders Plan: Different Models, Different Politics
Gerald Friedman, Professor of Economics, University of Massachusetts at Amherst

James Sherman — Uncovering the Bad Math and Logic (and the Bias) at the New York Times

Excellent summary and analysis of the debate over Gerald Friedman's projections about the Bernie Sanders economic plan. It's a Post Keynesian takedown of Justin Wolfers and Christina and David Romer for failure to understand and address Friedman's actual position.

The Body Politick
Uncovering the Bad Math and Logic (and the Bias) at the New York Times
James Sherman, lecturer in the Program in Ethics, Society, and Law at Trinity College, University of Toronto, a research fellow of the University of Toronto’s Centre for Ethics, and the recipient of a Social Sciences and Humanities Research Council of Canada fellowship
ht David Fields

Gerald Friedman responds to Christina and David Romer

The Romers, and I suppose other neoclassical macro economists, believe that the economy tends towards full employment equilibrium and will move there on its own without need for government intervention or stimulus. They would acknowledge that following a negative shock, government stimulus spending may accelerate the recovery somewhat, as Bernstein and Romer in 2009 anticipated the Obama stimulus would speed recovery by about 6 months. They deny, however, that stimulus spending could change the permanent level of output because the economy will on its own return to full employment at a capacity output set without regard to the level of employment by factor endowments, by preferences, and by the level of exogenous technology. From this perspective, because a period of prolonged measured slow growth cannot be caused by involuntary unemployment, it must, by a priori assumption, be due to a decline in the exogenously determined growth rate in capacity. Like mosquitos on an otherwise delightful summer afternoon, slow growth is unfortunate but there is little that can safely be done about it.

Or maybe we can find safe pesticides. Here I agree with John Maynard Keynes that the economy can have a low-employment equilibrium because of a lack of effective demand, and I agree with Nicholas Kaldor and Petrus Verdoorn that productivity and the growth rate of capacity can be increased by policies that push the economy to a higher level of employment. And to the contrary, periods of prolonged unemployment and underutilization of capacity can lower capacity by discouraging workers and reducing the incentive to invest, to innovate, and to raise productivity. Unfortunately, this is what has been happening in the US for the last few years; and, fortunately, there is reason to believe following Keynes/Kaldor/Verdoorn that policy can reverse this decline by pushing the economy to a higher level of output and thus a higher level of productivity….

Gerald Friedman responds to Christina and David Romer

James Galbraith — The Friedman v. Romers Growth Debate on the Sanders Plan – A Summing Up

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

Major points

1) The growth projections have no bearing on the desirability of Sanders’ program, which consists of major structural reforms in health care, education, and public investment, in public governance and in the distribution of the tax burden.
2) The original mudslinging by four past Chairs of the Council of Economic Advisers was based on nothing, except that Friedman’s growth numbers looked high. No analysis preceded that claim.…

Naked Capitalism
James Galbraith: The Friedman v. Romers Growth Debate on the Sanders Plan – A Summing Up
James K. Galbraith, Professor of Government/Business Relations at the Lyndon B. Johnson School of Public Affairs, the University of Texas at Austin. His most recent books are Inequality and Instability and The End of Normal

James K. Galbraith — Economic Forecasting Models and Sanders Program Controversy

The Romer/Romer letter to Professor Gerald Friedman marks a turning point. It concedes that there are indeed important issues at stake when evaluating the proposed economic policies of Presidential Candidate Bernie Sanders. These issues go beyond the political debate and should be discussed seriously between and among professional economists.

All forecasting models embody theoretical views. All involve making assumptions about the shape of the world, and about those features, which can, and cannot, safely be neglected. This is true of the models the Romers favor, as well as of Professor Friedman’s, as it would be true of mine. So each model deserves to be scrutinized.

In the case of the models favored by the Romers, we have the experience of forecasting from the outset of the Great Financial Crisis, which was marked by a famous exercise in early 2009 known as the Romer-Bernstein forecast. According to this forecast (a) the economy would have recovered on its own, in full and with no assistance from government, by 2014, (b) the only effect of the entire stimulus package would be to accelerate the date of full recovery by about six months, and (c) by 2016, the economy would actually be performing worse than if there had been no stimulus at all, since the greater “burden” of the government debt would push up interest rates and depress business investment relative to the full employment level.

It’s fair to say that this forecast was not borne out: the economy did not fully recover even with the ARRA, and there is no sign of “crowding out,” even now. The idea that the economy is now worse off than it would have been without any Obama program is, to most people, I imagine, quite strange. These facts should prompt a careful look at the modeling strategy that the Romers espouse.…

Dare I say smackdown. 

INET
Economic Forecasting Models and Sanders Program Controversy
James K. Galbraith

Lars P. Syll — Bernie Sanders and the Verdoorn law

So, the nodal point is — has the Verdoorn Law been validated or not in empirical studies?

There have been hundreds of studies that have tried to answer that question, and as could be imagined, the answers differ. The law has been investigated with different econometric methods (time-series, IV, OLS, ECM, cointegration, etc.). The statistical and econometric problems are enormous (especially when it comes to the question, highlighted by Romer & Romer, on the direction of causality). Given this, however, most studies on the country level do confirm that the Verdoorn law holds — United States included. Most of the studies are for the period before the subprime crisis of 2006/2007, but if anything, it is more in line with Friedman than Romer & Romer.

Lars P. Syll’s Blog
Bernie Sanders and the Verdoorn law
Lars P. Syll | Professor, Malmo University

Dean Baker — Romer and Romer Do the Numbers on Friedman-Sanders

Since I had been critical of elite economists for using their authority rather than evidence to trash Gerald Friedman’s analysis of Bernie Sanders’ program, I should acknowledge a serious effort to do exactly the sort of analysis I advocated. Christina Romer, one of the four former heads of the Council of Economic Advisers who signed the earlier letter criticizing Friedman’s analysis, along with David Romer (both of whom are now Berkeley economics professors), did a detailed critique of the Friedman analysis.

I could quibble with aspects of their critique, but I would say it is basically right.…

Beat the Press
Romer and Romer Do the Numbers on Friedman-Sanders
Dean Baker | Co-director of the Center for Economic and Policy Research in Washington, D.C

Peter Dorman — Romer^2 on Friedman on Sanders

Oh dear. Today's Romer and Romer response to Gerald Friedman’s paper on the economic consequences of Sanders seems to have identified the core problem in GF’s analysis, confusing one-time and ongoing stimulus effects. According to the R team, F attributed increases in economic growth in perpetuity to single bursts of stimulus, and not just once but repeatedly—in his treatments of demand stimulus, income redistribution and health care. That plus his belief that the output gap is large enough to accommodate extremely rapid growth over a full decade, explains his headline numbers. If this is true it’s an embarrassment.…

Econospeak
Romer^2 on Friedman on Sanders

Peter Dorman | Professor of Political Economy, The Evergreen State College

See also

ProGrowth Liberal, Authority Figures Criticizing the Junk Science from Gerald Friedman

Christina D. Romer — MONETARY POLICY IN THE POST-CRISIS WORLD: LESSONS LEARNED AND STRATEGIES FOR THE FUTURE

Sumerlin Lecture, Johns Hopkins University, October 25, 2013

The Big Picture
MONETARY POLICY IN THE POST-CRISIS WORLD: LESSONS LEARNED AND STRATEGIES FOR THE FUTURE

Christina D. Romer

Bill Mitchell — The myth of compassionate deficit reduction

Bill Mitchell turns his attention on the US today and deftly rips "progressive" deficit doves a new one as only he can.

Bill Mitchell — billy blog
The myth of compassionate deficit reduction
Bill Mitchell

The truth comes out — Romer recommended 1.8 trillion stimulus

As Scheiber writes, members of the president's economic team felt that if they were to properly fill the hole caused by the recession, they would need a bill that priced at $1.8 trillion -- $600 billion more than was previously believed to be the high-water mark for the White House 

The $1.8 trillion figure was included in a December 2008 memo authored by Christina Romer (the incoming head of the Council of Economic Advisers) and obtained by Scheiber in the course of researching his book 

"When Romer showed [Larry] Summers her $1.8 trillion figure late in the week before the memo was due, he dismissed it as impractical. So Romer spent the next few days coming up with a reasonable compromise: roughly $1.2 trillion," Scheiber writes 

Read the whole sad story at The Huffington Post
'The Escape Artist': Christina Romer Advised Obama To Push $1.8 Trillion Stimulus
by Sam Stein

That figure would have generated a fiscal deficit that would have come close to offsetting the demand leakage to non-government surpluses due to increased saving desire. That would have drastically curtained the rise in unemployment and resulted in a speedier recovery. What a tragic waste!

Strongest argument yet against "being practical" instead of following principle. If Obama becomes a one term president it will be largely due to Summers' penchant for political pragmatism. Apparently, the president never saw Romer's memo.

As has now become the stuff of Obama administration lore, when the final document was ultimately laid out for the president, even the $1.2 trillion figure wasn't included. Summers thought it was still politically impractical. Moreover, if Obama had proposed $1.2 trillion but only obtained $800 billion, it would have been categorized as a failure. 

"He had a view that you don't ever want to be seen as losing," a Summers colleague told Scheiber.

Kevin Drum — Why Summers nixed Romer's recommendation for a larger stimulus

Summers believed that it was only possible to come up with $225 billion in direct spending that had a high stimulus value. Further money could be targeted at tax cuts and aid to states, but it had a lower stimulus value. So there was a sense of diminishing returns here.

Now, that might have been wrong, but it's a fairly defensible position.

Read it at Mother Jones

The Real Reason Larry Summers Didn't Advocate a $1 Trillion Stimulus
by Kevin Drum

Romer on Reinhart-Rogoff

The Reinhart-Rogoff study emphasizes common patterns across crises. It eschews complicated statistical techniques, relying instead on simple graphs and averages. And the averages are stunning. For 14 major crises since 1929, the associated decline in real per capita gross domestic product averaged 9.3 percent. For postwar crises, it took an average of 4.4 years for output to return to its pre-crisis level.

But study their charts more closely and you’ll find that those averages mask remarkable variation.....

What explains the variations? Crises don’t happen in isolation. They’re often accompanied by other factors, which differ across episodes. For example, financial crises that happen along with currency crises tend to be followed by much more severe recessions.

Likewise, some panics follow particularly big declines in house and stock prices, which have damaging effects on their own. The most recent recession would likely have been severe — and the recovery slow — even if the financial system hadn’t been stressed, simply because of the decline in wealth and the climb in household indebtedness.

BUT an even larger determining factor is the policy response. Why was the Great Depression so much worse here than in Spain? According to an influential paper by Ehsan Choudhri and Levis Kochin, Spain benefited from not being on the gold standard. Its central bank was able to lend freely and increase the money supply after the panic. By contrast, in 1931, the Federal Reserve in the United States raised interest rates to defend its gold reserves and stay on the gold standard, setting off further declines in output and exacerbating the banking crisis.

Likewise, the policy response largely explains why output fell after the American banking panics in 1930 and 1931, but rose after the final wave in early 1933. After the first waves, the Fed did little, and President Herbert Hoover signed a big tax increase to replenish revenue. After the final wave, President Franklin D. Roosevelt abandoned the gold standard, increased the money supply and began a program of New Deal spending....

Read the whole post at The New York Times
A Financial Crisis Needn’t Be a Noose

Christina D. Romer, economics professor at the University of California, Berkeley, and former chairwoman of President Obama’s Council of Economic Advisers

So close and yet so far.