Beyond sad

Syll quotes from Romer & Romer's response to Gerald Friedman on Bernie Sanders' economic policies:

The fact that there is a correlation between output growth and productivity growth is not surprising. Periods of rapid productivity growth, such as the 1990s, are naturally also periods of rapid output growth. But this does not tell us that an extended period of rapid output growth resulting from demand stimulus would cause sustained high productivity growth …

Romer and Romer discuss "periods of rapid output growth", "periods of rapid productivity growth", and the causal relation between them. That's the wrong focus.

It's an argument about a prediction, which is ridiculous from the outset. Will productivity go up when output growth goes up? Yes says Friedman. No say the critics. Fuck all that. Let's opt for better output growth and call it a day.

But the critics would rather argue about predictions. Why? I suspect it is because they don't know how to get better output growth. Remember, they called Friedman's prediction of high growth unbelievably unrealistic.

They don't know how to get high growth, and they've given up trying.

"it is vitally important to be realistic about the impact of policies on the performance of the overall economy" -- Romer & Romer

The most disturbing part of the Open Letter criticizing Gerald Friedman's analysis of the Sanders plan:

Making such promises runs against our party’s best traditions of evidence-based policy making and undermines our reputation as the party of responsible arithmetic.

And the most disturbing part of Romer & Romer's Senator Sanders’s Proposed Policies and Economic Growth (PDF, 11 pages) to me is their claim that the predicted economic improvement is "far too large to be credible". (Emphasis by Romer & Romer.)

Unrealistic. Too large to be credible. Too good to be true. That's not evidence.


Romer and Romer object to Gerald Friedman's projection of 5.3% average annual output growth over the next decade. They consider it unrealistic. It's easy to agree with that assessment. But that doesn't make the Romers right.

It's easy to guess the future wrong. Time magazine, 31 December 1965:

The Labor Department reckons that businessmen's exuberant capital spending—they have invested $190 billion in new plants and machines in the past five years—will pay off with a 3% productivity gain in 1966. That will serve to temper inflation...

Economists in and out of Government are much more bullish than they were a year ago. The economy is not only running close to optimum speed, but has no serious excesses and few soft spots.

Obviously over-optimistic.

It's easy to guess the future wrong. But it's just plain sad to think economists today would dismiss an economic strategy simply because they find it too optimistic. We still do need a plan that turns out well.


From Gerald Friedman's paper:

The Sanders economic policy will achieve broad-based and sustained prosperity with the following:

The growth rate of the real gross domestic product will rise from 2.1% per annum to 5.3% ...
Faster economic growth and redistributive taxation will raise the growth rate of median income from 0.8% per annum to 3.5% ...
The unemployment rate will fall to 3.8% ...
There will be sustained increases in real wages ...
The gap between rich and poor will narrow dramatically ...
After increasing in the first years of the Sanders Administration, the Federal budget’s cash deficit will drop sharply ...

(I left a lot out.) The way I look at it, everybody's economic plan has a happy ending. You have to take it with a grain of salt.

But what I want from economists like Romer and Romer is not outright rejection because the happy ending is unrealistic. I want them to throw away their assumptions and look at things with fresh eyes.

I need them to wonder what can we do to make it happen.

The fact that policymakers have been unable to restore vigor to economic growth is not evidence that the goal is unreachable. It is at least as likely the problem is that wrong policies have been used. And for the record, I don't just mean wrong policies that the other guys have used.

The difficulty lies, not in the new ideas, but in escaping from the old ones.

What Vernengo said

If I was talking I'd be tripping over my tongue. But I'm writing -- writing things out of sequence, because I can't stop to organize my thoughts. I have discovered Matias Vernengo, discovered what fascinates him: Productivity and Demand.

Fascinates me, too. Matias Vernengo says

Technological determinism is widespread. The Solow model basically suggests that it is technological progress, measured incorrectly as Total Factor Productivity (TFP), that drives growth. The same is true of Schumpeterian models...

What is NOT discussed in most analyses of the technological determinism by conventional and more than a few heterodox authors is the role of demand in creating the conditions for technological change. In that case, technological change is not the cause of growth, but the result. As in Adam Smith's story, it is the extent of the market (demand) that limits the division of labor (productivity). In modern parlance the idea is known as the Kaldor-Verdoorn Law.

"Sure enough" Vernengo says, "a demand driven story has space for the sort of external supply-side effects that allow technology and innovations to thrive... [A] demand driven story does not imply that supply side factors are irrelevant, they are simply not the prime movers."

I think he's onto something. That paragraph about technological change got me going. Reminded me of Arnold J. Toynbee. Regarding the abandonment of the irrigation system in the Tigris-Euphrates Basin, Toynbee wrote: "This lapse in a matter of technique was in fact not the cause but the consequence of a decline in population and prosperity..." In other words, the lapse was due to a lack of demand.

Regarding the abandonment of Roman roads, Toynbee wrote:

When a civilization is in decline it sometimes happens that a particular technique, that has been both feasible and profitable during the growth-stage, now begins to encounter social obstacles and to yield diminishing economic returns; if it becomes patently unremunerative it may be deliberately abandoned...

An obvious case in point is the abandonment of the Roman roads in Western Europe....

Matias Vernengo says demand drives technology. Arnold J. Toynbee says the lack of demand drives the decline of technology. These are two expressions of one thought.