Posts Tagged ‘economists’

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A week ago, I noted the pushback against liberal mainstream economists’ attacks on Bernie Sanders’s plans and Gerald Friedman’s analysis of those plans.

The first set of attacks, as Bill Black explained, plumbed “new depths of moral obtuseness, arrogance, and intellectual dishonesty.”

More recently, Christina D. Romer and David H. Romer (pdf) have responded with a more detailed critique of Friedman’s calculations, which has led to additional gloating by Paul Krugman and more publicity to only one side of the debate in the pages of the New York Times.

But, fortunately, that didn’t end the debate.

James K. Galbraith reminded us that “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.

Mark Thoma, for his part, argues that, while he does not believe that “we can sustain 5% growth over the next eight years. In the short-run—over the next two to four years—the situation is different.”

I’m worried people will accept without question that the gap is small due to the pushback against Friedman’s analysis of the Sander’s plan, and that will justify policy passivity when we need just the opposite. So let’s stop arguing, put the policies we need in place, and push as hard as we can to increase employment until inflation reveals that we have, in fact, hit capacity constraints. Maybe that happens quickly, but maybe not and we owe it to those who remain unemployed, have dropped out of the labor force but would return, or took a job with lousy wages to try. People who had nothing to do with causing the recession have paid the costs for it, and if we experience a short bout of above target inflation I can live with that. We’ve been wrong about this before in the 1990s, and we may very well be wrong about this again.

Finally, there’s a much more mainstream supporter of the idea that it’s not technologically impossible to imagine “materially super-normal rates of growth in the coming four years”: former Minneapolis Federal Reserve President and University of Rochester economist Narayana Kocherlakota. His view is that “given current economic circumstances, demand-based stimulus is likely to be more effective than supply-based stimulus.”

Why? Because, as Kocherlakota explained elsewhere, labor’s share remains extremely low by historical standards. So, faster growth would serve to push the share of income going to labor back to their historical (pre-1990) ranges and thus boost economic growth above the so-called consensus among economists.

And that’s exactly the basis of Bernie Sanders’s economic plans and Friedman’s analysis : raising labor’s share via redistributive measures is a spur to faster economic growth and encouraging unemployed and underemployed workers to take decent, better-paying jobs will sustain those faster rates of economic growth.

As I’ve written before, that’s not so much a forecast of what will happen as a mirror that demonstrates how diminished are the expectations created by contemporary capitalism and the policies that continue to be put forward by liberal mainstream economists.

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Economists and economic commentators have started to push back against the attacks of liberal mainstream economists on Bernie Sanders’s economic proposals and the analysis of the consequences of those proposals by Gerald Friedman.

Here’s a quick rundown:

Matthew Klein notes that the “supposedly ‘extreme’ and ‘unsupportable’ forecast” that was part of Friedman’s analysis merely “implies American output will return to its previous trend just as Sanders would be finishing up his second term, in the third quarter of 2024.”

we have no insight into the macroeconomic effects of Sanders’s entire programme, which has lots of moving parts and would not just affect things like the quantity of infrastructure investment and the distribution of income, but also the incentives to work and take risks. Our point is a simple one: a prolonged period of rapid growth in the US is plausible, with the right policy mix. The burden of proof should be on those who say otherwise.

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David Dayen makes much the same point (that Friedman’s “economic growth numbers would simply eliminate the GDP gap that was created by the Great Recession and was never filled in the subsequent years of slow growth”) and then notes that the growth projections of some of the liberal critics (such as Laura Tyson, Christina Romer, Austan Goolsbee, and Alan Krueger) were themselves far off the mark.

Economist Jamie Galbraith (pdf), who was Executive Director of the Joint Economic Committee in 1981-82, agrees that “skepticism about standard forecasting methods is perfectly reasonable” but then observes that Friedman’s methods are actually pretty mainstream.

It is not fair or honest to claim that Professor Friedman’s methods are extreme. On the contrary, with respect to forecasting method, they are largely mainstream. Nor is it fair or honest to imply that you have given Professor Friedman’s paper a rigorous review. You have not.

What you have done, is to light a fire under Paul Krugman, who is now using his high perch to airily dismiss the Friedman paper as “nonsense.” Paul is an immensely powerful figure, and many people rely on him for careful assessments. It seems clear that he has made no such assessment in this case. . .

Let’s turn, finally, to the serious question. What does the Friedman paper really show? The answer is quite simple, and the exercise is – while not perfect – almost entirely ordinary.

What the Friedman paper shows, is that under conventional assumptions, the projected impact of Senator Sanders’ proposals stems from their scale and ambition. When you dare to do big things, big results should be expected. The Sanders program is big, and when you run it through a standard model, you get a big result.

Finally, economist Joshua Mason makes five main points about Friedman’s analysis of of the results one might expect from Sanders’s programs.

First, conventional wisdom in economics is that an exceptionally deep recession should be followed by a period of exceptionally strong growth. Second, the growth in output and employment implied by the paper are more or less what is required to return to the pre-recession trend. Third, discussions of macroeconomic policy in other contexts imply the possibility of growth qualitatively similar to what Jerry describes. Fourth, it is not necessarily the case that the employment Jerry projects would exceed full employment in any meaningful sense. Fifth, if you don’t believe a growth performance at this level is possible, that implies a sharp slowdown in potential output, for which you need a credible story.

In Mason’s view, the fifth point is the most important. And the bottom line is this:

Ten years ago, the CBO expected GDP to be $20.5 trillion (correcting for inflation) as of the end of 2015. Today, it is $18.1, trillion, or about 12 percent lower. Similarly, the employment-population ratio fell by 5 points during the recession (from 63.4 to 58.4 percent) and has risen by only one point during the past six years of recovery. Either these facts — unprecedented in the postwar period — reflect a shortfall of effective demand, or they don’t. If they do reflect a lack of demand, then there is no reason the expanded pubic spending and downward redistribution that Sanders proposes cannot close the gap, with a period of high growth while output and employment return to trend. (The fact that such high growth hasn’t been seen in the postwar period is neither here nor there, since there also has been no comparable deviation from trend.) Alternatively, you may think that the shortfall relative to previous growth rates reflects a decline in potential output. But then you need to offer some explanation of why the growth of the economy’s productive capacity slowed so abruptly, and you need to apply this belief consistently. I think it’s more reasonable to believe that the gaps in output and employment reflect a demand shortfall. In which case, the Sanders plan could in principle have the kind of results Friedman describes.

As for myself, I believe there is a debate worth having—which, alas, the liberal mainstream critics are attempting to shut down.

If however we let that debate unfold, it will show that contemporary capitalism produces a grotesquely unequal distribution of income, a crumbling physical and social infrastructure, inadequate healthcare, heavily indebted college students, a Too Big to Fail financial sector that threatens another collapse, and slow rates of growth that simply cannot employ the U.S. working-age population.

All that Sanders’s proposals and Friedman’s analysis demonstrate is how far we’ve fallen and what it would take for the United States to reverse those disturbing trends.

Yesterday, I wrote about the attacks of liberal mainstream economists on Bernie Sanders and one of his economic advisers, Gerald Friedman.

Today, Neil Irwin tries to explain why the “liberal wonkosphere has a problem with Bernie Sanders.”

there may be something broader going on here beyond the specific disagreements about growth assumptions, or cost savings from a single-payer health system, or how to regulate the financial system.

Behind closed doors, among the left-of-center policy types who populate the congressional offices, executive agencies and think tanks of Washington, I’ve seen enough eye rolls when Mr. Sanders’s name comes up to suspect something more tribal is going on.

The wonkosphere vs. Bernie clash is not just a story of center-left versus left-left. It is also a clash between those who have been in the trenches of trying to make public policy for the last seven years versus those who can exist in a kind of theoretical world of imagining what public policy ought to be.

That’s pretty much what I argued yesterday: “The liberal mainstream economists who are now attacking Sanders and Friedman seem to be taking it personally, as if their monopoly on analysis and policy has been challenged.”

Irwin concludes by asserting that Sanders needs to mend “fences with left-of-center policy wonks.”

Alternatively, liberal mainstream economists might want to put aside their delicate sensibilities and, to invoke a saying from a time when a similar standoff between liberals and radicals took place, stop being part of the problem and start being part of the solution.

Inequality

Mainstream economists have gotten much better estimating the obscene levels of inequality that exist today. But imagining equality? They still find that almost impossible.

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Emmanuel Saez, Gabriel Zucman, and Thomas Piketty have been at the forefront of estimating the extraordinary growth of inequality that has taken place since the late-1970s and early-1980s in the United States—when incomes for the top 10 percent grew about three times as fast as those of the bottom 90 percent, thus reversing the trend of more than three decades of the postwar period when they grew at roughly the same rate.

But then, when the BBC asked mainstream economists about the effect inequality has on growth and prosperity, well, they just can’t get themselves to imagine an equal or even a substantially less unequal distribution of income.

Deirdre McCloskey, of course, is very relaxed about inequality “as long as it’s not force or fraud that caused it.” Jared Bernstein, for his part, just wants a better balance between productivity and incomes for middle-class families. And then there’s Jonathan Ostry, who is worried about opportunity and not inequality, and Branko Milanovic, who think we need inequality to provide incentives.

And there, in one package, we have all the ways mainstream economists demonstrate their long-held justification of inequality and their profound inability to imagine an equal distribution of income. Basically, for them, inequality is not a problem and equality is not the goal—because capitalism alone is capable of producing growth (McCloskey); even the levels of inequality we saw in the late-1970s (when the top 1 percent captured about 10 percent of all income) are too high a goal (Bernstein); inequality is not a problem as long as there are “adequate opportunities for the less well-off in society” (Ostry); and, finally, because inequality has always existed (Milanovic).

Milanovic, at least, imagines there might be problems down the road:

“If the gaps keep on increasing as they’ve increased in the last 20 years, you would end up with two types of societies within a single country. If there is no sufficient middle class and if the poor really are very far from the rich, then you really cannot speak of a single society.

“We could end up with a kind of a global plutocracy, this global one per cent or even half a per cent that are very similar among themselves, but really belong to different nations.”

But, basically, all of them, along with most other mainstream economists, take the world as it is—based on capitalist commodity production—as normal, such that inequality is either benign (it’s what we get in exchange for more stuff) or necessary (as the condition for getting people to work).

And they simply can’t imagine anything like what the rest of us envision: a world in which we have eliminated the obscene levels of inequality that current economic arrangements are creating.

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Special mention

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Students often ask me if the discipline of economics has changed since the spectacular crash of 2007-08.

“Not much,” I tell them. “The economists and economic theories that prevailed before the crash are still pretty much the ones that are on top today.”

The good students, of course, get the irony: the mainstream economics they’ve been taught celebrates free markets and “creative destruction” but the discipline itself seems to be anything but.

And that’s exactly what Frederico Fubini found when he compared the rankings of top economists in 2006 and 2015: barely anything had changed.

Despite the profound – and largely unpredicted – financial and economic turmoil of the intervening decade, the intellectual influence of those whose theories suffered the most evidently remains undented.

After a succession of bursting multi-trillion-dollar credit bubbles, you might wonder what to make of Robert Lucas’s view that rational expectations enable perfectly calculating “agents” to maximize economic utility. You might also want to rethink Eugene Fama’s efficient markets hypothesis, according to which prices of financial assets always reflect all available information about economic fundamentals.

You must not be an economist. In fact, Lucas and Fama both moved up in the RePEc rankings during the period I examined, from 30 to nine and from 23 to 17, respectively. And the persistence at the top is striking across the board. Among the top ten economists in September 2015, six were already there in December 2006, and another two were ranked 11 and 13.

Mobility in the RePEc rankings remains subdued even after widening the sample. For example, of the top 100 economists in September 2015, only 14 were absent from the much wider top 5% in 2006, and only two others had advanced more than 200 spots over the previous decade. Among those recently ranked from 101 to 200, just 24 were not in the top 5% in 2006, and only ten others had moved up by more than 200 places. The rate of renewal among the 200 most influential economists was as low as 25% – and just 16% among the top 100 – during a decade in which the explanatory power of prevailing economic theory had been found severely wanting.

So, as mainstream economists gather in San Francisco for their annual meeting, they’ll be listening to pretty much the same figures and presenting the same ideas they did back in 2006.

Addendum

Here is the list of the top 20 economists as of November 2015:

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I don’t attend the American Economic Association annual meetings. And I’m not in San Francisco this year. However, according to Nelson D. Schwartz, mainstream economists have finally discovered the obvious: income inequality is a real problem in the United States.

The economic association’s meeting is something of a barometer of what concerns economists most, drawing more than 13,000 attendees from the ranks of academia, as well as research groups and the private sector. And in panels, research presentations and speeches, what was once mainly a preoccupation of ivory tower Marxists and other players on the margins of the profession is taking center stage. . .

At the same time, there’s a growing consensus among economists of all ideological stripes that inequality is growing — in the United States and abroad — even if the usual political fault lines appear when the discussion turns to the consequences of the trend and whether new public policies are needed to address it.

“It’s pretty much indisputable that the percentage of income being earned by the top 1 percent, or the top quarter of 1 percent, is going up,” said Richard H. Thaler, the association’s president.

“It was true five years ago, but it was not as widely recognized,” said Mr. Thaler, a behavioral economist who teaches at the University of Chicago. “As with climate change, scientific consensus takes a while to build.”

Inequality, as most people (especially “ivory tower Marxists and other players on the margins of the profession”) know, has been growing since the mid-1970s.

According to data from The World Wealth and Income Database, the top 1 percent income share (including capital gains) grew from 8.86 percent in 1976 to 21.24 percent in 2014. The top 0.1 percent share grew even more: from 0.86 to 4.89.

During the same period, the average (real 2014) incomes (including capital gains) of the top 1 percent grew 178 percent (from $353,380 to $983,896) and those of the top 0.1 percent 356 percent (from $904,450 to $4,129,983). Meanwhile, the average income in the United States increased by only 28 percent (from $46,355 to $59,346).

Now, apparently, at least some members of the American Economics Association are acknowledging that income inequality is an issue that needs to be addressed.