Thursday, April 21, 2016

Friedman-Mason Version 4.0?

I wish Gerald Friedman would stop writing lines like this:
When I conducted an assessment of Senator Bernie Sanders’ economic proposals and found that they could produce robust growth, the negative reaction among powerful liberal economists was swift and vehement…liberal economists have virtually abandoned Keynesian economics
The claim that economists like Christina and David Romer bought into the New Classical revolution is both absurd and dishonest. Friedman’s “assessment” fell far short of an actual analysis as it only looked at the aggregate demand side. Putting aside whether his multipliers made sense, you cannot do an analysis without at least some consideration of potential output and it how it will grow between now and 2026. Menzie Chinn is a great place to start:
What Is the Assumed Output Gap in the Friedman Projections? Or, “Is current output really 18% below potential output?” … I do not know what the output gap actually used in the Friedman study, as it is not reported….One thing that should be remembered is that the trend line extrapolated from 1984-2007 implies that the output gap as of 2015Q4 is … -18%. A graphical comparison which highlights the implausibility of the -18% output gap is shown below…By way of comparison, the CBO’s estimate is -2.2%... I want to stress that estimating potential GDP and the output gap is a difficult task.
Menzie is noting problems with Friedman-Mason Version 1.0 (the paper with no consideration of potential output) and Friedman-Mason Version 2.0, which assumes potential GDP has been growing at a 3.5% clip since the beginning of the century. This bizarre trend line analysis was how Lawrence Kudlow tried to tell us we were having a Bush boom. The reality is that average real GDP growth over the first 7 years of this century was only 2.5% and we ended 2007 near full employment. To his credit J. W. Mason later accepted the premise that potential GDP growth was 2.5% for these years as he noted that the CBO was forecasting this trend to continue through 2015. Friedman-Mason Version 3.0 would therefore suggest that the GDP gap at the end of 2015 was 10% not 18%. Brad DeLong raises this objection:
These are principal causes of "hysteresis". I do not believe that the output gap is the zero that the Federal Reserve currently thinks it is. But it is very unlikely to be anywhere near the 12% of GDP needed to support 4%/year real growth through demand along over the next two presidential terms. We could bend the potential growth curve upward slowly and gradually through policies that boosted investment and boosted the rate of innovation. But it would be very difficult indeed to make up all the potential output-growth ground that we have failed to gain during the past decade of the years that the locust hath eaten
As I read what Brad has been saying, I would put the GDP gap at something closer to 5% rather than 10%. But let’s note how Dr. Friedman ended his latest:
we have a research agenda for many graduate student papers and dissertations. The strength of Verdoorn’s Law associating productivity growth with economic growth rates and the level of labor shortage. The impact of pro-growth government investment policies – including investment in Research and Development as well as investments in roads, bridges, and other public utilities. The investment accelerator and its role in fiscal stimulus, or in theories of secular stagnation. The determinants of changes in labor force participation and the effect of increasing employment opportunities. Responsiveness of immigration, especially undocumented, to labor demand. The sensitivity of US imports to economic growth, an issue complicated by the international role of the dollar.
I could get snarky and note that none of this was in his original paper. But is indeed a grand research agenda and I wish Dr. Friedman well as getting a credible analysis together would help in the fall elections as we know that Team Republican will have their analyzes for whatever they are worth. Two Updates: Paul Krugman gets this right:
Only after this was pointed out did they turn to declaring that the standard analysis was all wrong, and that Keynesians like Christina and David Romer are really just neoclassical types.For those of us who participated in the austerity debates, that’s pretty amazing and disheartening. Remember when Robert Lucas accused Christy Romer of corruptly producing “schlock economics to justify government spending?”
Now mind you I am not about to criticize Susan Sarandon as my post was not about politics. Rather – I’m disappointed in the latest from J.W. Mason:
Now I don’t think we want to get caught up in the specific strengths or weaknesses of that paper or the plausibility of particular numbers. I think that there are some problems with the paper. If you were to do the same exercise more carefully you would probably come up with lower numbers…Is there good reason to think that a big expansion of public spending could substantially boost GDP and employment?... The position on the other side, the CEA chairs and various other people who’ve been the most vocal critics of these estimates, has been implicitly or explicitly: “This is as good as we can do.” We’re not talking about core macroeconomic policy issues because they’re not a problem right now that we have 5 percent unemployment, which is full employment. The economy is at potential, more or less. There isn’t any aggregate demand problem to solve.
There were serious problems with the original paper but I am glad they are admitting the original assessment was on the high side. But we critics do admit we are below full employment and we have been calling for fiscal stimulus. On this score, the latest from J.W. Mason is even more dishonest than the latest from Gerald Friedman. Guys – you do not win a debate by lying about the other side’s position.

18 comments:

Robert Vienneau said...

"liberal economists have virtually abandoned Keynesian economics"

As far as I am concerned, the above is trivially true. Keynes was about theory and policy. I do not care how much I agree with your short-term policy views. If you are justifying it in theory by introducing rigidities into, say, a DSGE model, you are rejecting the tradition of Keynes' theory.

ProGrowthLiberal said...

Robert - I tend to agree that DSGE is very overblown. Noah Smith, Brad DeLong, and Paul Krugman seem to agree with you. Yes David Romer's Advanced Macroeconomics puts forth this model but it is not the only way to do sensible macroeconomics.

Peter said...

Nice to see Krugman call you out as a fellow traveler.

https://www.jacobinmag.com/2016/04/bernie-sanders-realistic-economic-policies-stimulus-recession/

Sandwichman said...

That's odd. Professor Krugman never links to any of my posts. ;-)

Peter said...

What job is Krugman angling for in a Clinton administration?

Peter said...

Where is the analysis of Clinton's plan?

Oh there is none!

I've lost all respect for Krugman. PGL is a just a mere Internet troll. A dime a dozen.

JW Mason said...

What's this Friedman-Mason business? I had nothing to do with the paper.

JW Mason said...

In terms of the interview, I was referring to two categorical claims by specific people that there is no room for substantial fiscal stimulus. I was not talking about you, so your beliefs have no bearing on my honesty.

ProGrowthLiberal said...

JW - I was specifically referring to the debate over the output gap. No - it is not zero. And people like Paul Krugman, Brad DeLong, and even the Romers are not claiming it is zero. Nor is it 18%. This is a very simple point. And yet your latest as well as Gerald's latest muddles the simple point.

JW Mason said...

There is a real debate about the size of the output gap. I quoted DeLong directly in the interview. That you can't see the existence of genuine disagreement here -- that you think anyone who doesn't share your views must be lying - says more about you than about me. But I'll tell you what is dishonest: writing "Friedman-Mason" to imply I am a coauthor of a report I had nothing to do with.

Kain said...

This is quite whiny, and unfortunately doesn't address most of the substance put forward by either Friedman or Mason. Sure, not as bad as one of the latest Krugman hit pieces against Friedman (where he uses 'appeals to authority' and comparison to the right-wing hackery instead of addressing anything substantive).

It's pretty obvious that many Keynesian analyists think the output gap is closer to 10%. Another factor that seems to be unaddressed by almost everyone except for perhaps Noah Smith (who summarily dismissed it, because, heterodox reasons!) is faster productivity growth with higher GDP output, or Verdoorn's Law. It's quite true that the "secular stagnation" hypothesis bandied about by the New Keynesian crowd either implicitly or explicitly accepts a lower level of productivity (or technological) growth that's mostly unchangeable by policy.

ProGrowthLiberal said...

JW - I never said you co-authored the 1/28/2016. But you are trying to defend the notion that the GDP gap is yuuuge. Read what I wrote again and I give you credit for evolving the original 18% trend line estimate to a 10% estimate. I was trying to give you a little credit. But I guess this has gotten so overheated - you decided that part was an attack. It was not.

Now when you claim the Romers are not Keynesian, I find that incredibly dishonest. Hence I said so.

ProGrowthLiberal said...

"Brad DeLong put up a blog post that was his big statement on this, saying roughly “no you can’t wave a magic demand wand and get back the recovery that we missed out on in 2009.” So you could’ve done it then; you can’t do it now." - JW Mason. I wonder what Brad will say when he reads this line. Brad is certainly not saying we can't have fiscal stimulus in the form of infrastructure investment. These lines are precisely what I mean by misrepresenting other folk's positions.

JW Mason said...

LMGTFY: http://www.bradford-delong.com/2016/02/no-we-cant-wave-a-magic-demand-wand-now-and-get-the-recovery-we-threw-away-in-2009.html

I'm directly quoting his post. Really, are you incapable of imagining that genuine disagreement is possible on this issue?

JW Mason said...

In the interveiw, I refer to two specific texts claiming that large fiscal stimulus is impossible today. You call me dishonest for describing DeLong's position by quoting his words. There is not a uniform block of "keynesians" who agree on everything. As for how large the space available for fiscal policy is -- well that's what we we've been discussing. Your clan seems to be that there is only legitimate view on this question, yours, and that anyone who claims to believe that more is possible is either stupid or lying.

ProGrowthLiberal said...

JW - Brad DeLong has written a lot more on these issues than that particular post. And even in that particular post - he is not saying we are at full employment. Cherry picking quotes is really not appropriate here. But if that is what you wish to do - be my guest.

Arjun Jayadev said...

PGL. Is it so hard for you to realize that calling something "Friedman-Mason 1.0" implies that there was some active co-authoring there? That you cannot see that this is what is implied is beyond belief despite your weaselly backtracking in comments. Its not hard to write an update explaining that you did not mean that. Anything less continues to be straight up misrepresentation. .

ProGrowthLiberal said...

Arjum - I was giving JW credit for trying to fill in the clear deficiency of what Friedman wrote (all by himself). I thought I made that clear but maybe not.