Friedman’s response to Romer & Romer29 February, 2016 at 18:27 | Posted in Economics | 3 Comments
As yours truly wrote the other day, reading the different reactions, critiques and ‘analyses’ of Gerald Friedman’s calculations on the long term effects of implementing the Sanders’ program, the whole issue seems to basically burn down to if the Verdoorn law is operative or not.
In Friedman’s response to Romer & Romer today this is made even clearer than in the original Friedman analysis:
The Romers … would acknowledge that following a negative shock, government stimulus spending may accelerate the recovery somewhat …They deny, however, that stimulus spending could change the permanent level of output … Like mosquitos on an otherwise delightful summer afternoon, slow growth is unfortunate but there is little that can safely be done about it.
Or maybe we can find safe pesticides. Here I agree with John Maynard Keynes that the economy can have a low-employment equilibrium because of a lack of effective demand, and I agree with Nicholas Kaldor and Petrus Verdoorn that productivity and the growth rate of capacity can be increased by policies that push the economy to a higher level of employment … I see an economy at low-employment equilibrium where discouraged workers have abandoned the labor market and firms have had little incentive to innovate or to raise productivity. In this situation, additional stimulus can not only temporarily raise output but by priming the pump and encouraging additional private spending and investment, it can push the economy upwards towards capacity. And, beyond because at higher levels of employment, more people will look for work, more businesses will invest, and employment will grow faster and productivity will rise pushing up the growth rate in capacity. That is why I see lasting effects from a government stimulus when, as now, the economy is in a low-employment equilibrium.