Gerald Friedman vs. Romer & Romer8 March, 2016 at 19:56 | Posted in Economics | 3 Comments
The Romers critique of my work comes from this old, pre-Keynesian model where the economy tends towards full employment equilibrium and moves to full employment on its own without need for government intervention or stimulus … Government stimulus spending is only expected to slightly speed recovery, bringing the return of full employment forward by about 6 months. Without stimulus, the economy will return on its own to full employment at a capacity output set without regard to the level of output and employment reached under the stimulus … This is a static model in the sense that output is determined outside of the model itself; increasing economic output now has no lasting benefit … Like mosquitos on an otherwise delightful summer afternoon, slow growth is unfortunate but there is little that can safely be done about it.
I think that we can find safe ways to enjoy even buggy summers. Instead of the static Classical model, I would use that developed by John Maynard Keynes for periods of slow economic growth in the 1920s (in the United Kingdom) and the 1930s (throughout the world), models extended by him and by his students and colleagues … With Kaldor, Kalecki, Robinson, Petrus Verdoorn, and Joseph Schumpeter, he went further to reject the very idea that capacity output is fixed without regard to the past level of employment and production: faster growth promotes faster growth by encouraging investment, greater labor force participation, and more technological innovation with higher productivity growth. Drawing on these theories, I would argue that in the United States today, productivity and the growth rate of capacity can be raised by policies that push the economy, drawing more into the labor force and by increasing investment and productivity.