Galbraith Summary of the Friedman v. Romers Debate

By 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.   Via Naked Capitalism.

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 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.

Lesser points

Jerry Friedman probably does not believe this, but is working in the Keynes tradition of underemployment equilibrium, according to which one-time changes in the scale of public activity generate permanently higher levels of output and employment. This is consistent with the view that the New Deal and WWII ended the Depression, which did not return after the war ended.

There could be a “math error” in the Friedman paper; if so it should be acknowledged and corrected. But the Romers’ main complaint is a point of theory, which holds, in their words, that “temporary spending could cause a temporary boom, but its effect on the level of GDP a few years after its end will be, to a first approximation, zero.” This is a point of theory, and it is not holy writ.

A counter-example may be helpful. Suppose a temporary jobs program establishes an employment history and income stream for a household, sufficient to make them “creditworthy” going forward, when they weren’t before and would not have been otherwise. In that case, the higher level of activity initiated by the public program devolves upon and can be sustained by the private sector afterward; you don’t return to the prior status quo even though the public program comes to an end.

As a matter of history, the effect of forced saving under price control in WWII on household balance sheets worked in this way. During the war there was far more income than could be spent on civilian goods at current prices. Since price controls forestalled inflation, households had a strong incentive to buy and hold Series E or “Victory Bonds.” After the war, these bonds served to anchor the financial standing of American families, and therefore helped lay the foundation for postwar growth.

The return to fiscal balance over ten years in the Sanders program as it stands would probably produce a drag on growth. There may also be other bumps-in-the-road that would have to be dealt with as time goes on.

Returning to point (1): these matters have no bearing on the desirability of Sanders’ program.