I just got through reading Gerald Friedman’s response to David and Christina Romer’s criticism of his assessment of Bernie Sanders economic proposals, and I must say, he defends himself very well. His citation of Blanchard lends strong support, and adds a Maoist touch besides – the quote from Blanchard begins on a reference to Mao Zedong’s “Hundred Flowers” campaign of 1956. A really smart rhetorical move on Friedman’s part, I think.
Friedman also summarizes the issue at the center of the debate well as “are we 11% below capacity…or are we 2-4% below?” Understanding what’s at stake, in my view, depends on how you see the American electorate. If what Americans want is robust, sustained economic growth over the next decade, then Friedman has been right all along, and the Sanders plan is roughly the correct one.
Friedman writes “Economic models matter because they guide policy.” This is true – and it is why I am surprised at this whole debate. The Romers have models that produce the sort of numbers acceptable to the establishment – Friedman should know that he isn’t the establishment, that the models he uses aren’t acceptable to the establishment on account of their methods but because of their implications for policy. Back in 2009, when the economic stimulus package was being debated, the word was that the total amount could not exceed one trillion dollars. Was there some good, sensible reason for this? No! Its because so many people were already freaked out by the idea of government intervention in the economy, which they had been told for decades was a risky proposition at best by conservative economists. Many, many Americans don’t really trust capitalism as it is – whenever you start talking about numbers that end in the suffix “-aire” they just get nervous, if not angry.
It is, I think, extremely unwise for the left to debate economics as if the right does not exist. Galbraith criticizing Christina Romers’ errors in her estimations of the stimulus as grounds for theoretical re calibration would only make sense if she were doing those estimations in a political vacuum. As he points out in his response, “Active Keynesian policy maintained faster growth rates…From 1947-73, the unemployment rate averaged 4.7% and annual GDP growth averaged 4.0%; output in 1973 was 13% higher than it would have been at earlier growth rates. Only when we abandoned Keynesian policies after 1973 did growth rates fall.” Two observations about this remark: 1) while economic growth was very strong between 1947-1973, the United States went through a period of intense political turbulence in which the country was transformed and which terminated in a political realignment that rejected Keynesian policy in favor of more conservative policy; and 2) if (to reiterate an earlier point) economic growth were the sole objective of policy, why would the government have not returned to Keynesian policies after the 1970s or at least the early 1980s?
Alan Greenspan, perhaps the least Keynesian of all major economic policy actors of the past 30 years, became Federal Reserve chairman in 1987, and was widely lauded during nearly two decades in that position – although not, perhaps, by the heterodox community. Nevertheless, his general popularity should not be overlooked. That a slower rate of growth would inspire praise from the business community indicates that economic growth was not, and is not, the only policy objective economists ought to keep in mind when considering models, methods, and theory.
That robust, sustained economic growth from 1947-1973 produced a political situation that would reject Keynesian policy indicates, to me, that growth, despite its desirability as an outcome, has other important consequences for social stability. Capitalism dissolves social structures in a radical way. In the post-war period, there were many stories of people who came out of traditional upbringings to establish new identities within the world created by modern economics. And I think the idea that you don’t have to be trapped by the narrow ideologies of the past is one of the best, and most powerful, appeals of capitalism. However (at least in my view) capitalism needs democratic governance to ensure social stability. Hence, to quote Ha-Joon Chang, “economics is a political argument.” To ignore the political context of economic policy is folly. Which is why Krugman and Romer and the other liberal establishment economists concerns ring true to me. Its not that Friedman economic analysis is incorrect – its that, in the context of politics right now, it undermines the stability of a left-oriented political coalition. If the Democratic party gets to the convention and is torn asunder over bitter resentments, it doesn’t help any of us. Not that I really have any claim on knowing what the right thing to do would be, or would have been, or whatever.