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Thursday, February 18, 2016

'Wonkery Has A Well-Known Liberal Bias'

Paul Krugman:

Wonkery Has A Well-Known Liberal Bias: ... So, about wonks and progressive values: the reason the joke about facts having a liberal bias rings so true is that this really has become a defining difference between the two sides of our political chasm. On the right, allegiance to voodoo has become obligatory — leading Republican economists fell right in line when Jeb! announced his 4-percent solution. On the left, real policy research and political positions have marched hand in hand. The push for higher minimum wages, to take a not at all arbitrary example, has been mightily helped by the research literature showing that higher minimums don’t cost jobs, a line of research pioneered by Alan Krueger, one of the signatories of that open letter.
And in general, progressivism in America has valued intellectual integrity and openness to evidence, while conservatism increasingly rejects all of that — which is why scientists overwhelmingly lean Democratic.
But what if the political left starts behaving like the political right, making support for implausible claims a litmus test of loyalty, declaring that anyone raising hard questions is ipso facto corrupt? That would become very uncomfortable, to say the least. ...
So I hope that the Sanders campaign doesn’t just brush off this criticism as the “establishment” doing its corrupt thing, and realizes that it really is in danger of losing not just an election but an important part of what it should be standing for.

Narayana Kocherlakota (note that this is about "above-normal growth"):

Faster Growth IS Possible - And It May Well Be Desirable: Professor Gerald Friedman has argued here that, by adopting Senator Bernie Sanders’ economic proposals, the US economy would grow in excess of 5% per year over the next decade. Previously, former Governor Jeb Bush put forward (different) proposals that he has argued would lead to 4% economic growth over an extended period. These kinds of growth outcomes are often dismissed as prima face unachievable given the historical behavior of the US economy. (That’s one way that some readers have interpreted this letter.)

In this post, I make three points related to this discussion:

  1. There is no technological reason why real gross domestic product (GDP) cannot grow at 4% or even over 5% per year over the coming decade.
  2. Given (1), the relevant issue is: are the benefits of achieving such a growth path higher than the costs of doing so? I suggest that there are good reasons to believe that the answer to this question is more likely to be positive than at any time since the end of World War II.
  3. If the answer to (2) is affirmative, the question becomes: what set of economic proposals will best allow the country to achieve those positive net benefits? I don’t attempt a detailed examination of the consequences of Senator Sanders’ proposals or those of Mr. Bush. I only make the broad point that, given current economic circumstances, demand-based stimulus is likely to be more effective than supply-based stimulus.

My first point is familiar to all economists. Technologically speaking, the US can grow much faster over the next ten years than is currently forecast if two changes take place. The first is that Americans allocate a much larger share of expenditures than is forecast to physical investment (like hospitals or housing) as opposed to current consumption. The second change is that Americans work a lot more hours in ten years' time than is forecast. (Of course, the super-normal growth will be followed by sub-normal growth unless these changes are sustained over time.) Neither change is in any way technologically impossible. The question is whether they are desirable or not.

With that in mind, my second point is about the benefits versus the costs of a higher growth path. Economists often attempt to answer this question by referring only to the historical time series behavior of quantities (like GDP or employment). But it’s a cost-benefit question - we surely have to use market prices. The behavior of the relevant prices is without precedent in the post-World War II period.

For example, the real interest rate is very low (and yet still seems to be too high to be consistent with full resource utilization). This price signal suggests that Americans are willing to give up a lot of current resources for the promise of certain future resources - that is, they seem unusually willing to forego consumption for growth. In terms of employment, wages remain unprecedentedly low relative to (average) worker productivity. This price signal suggests that there may be large net social benefits available associated with drawing many more Americans into the labor market.

My third point is about the right policy steps to take in order to achieve a higher growth path. Here, again, the macroeconomic circumstances matter. If the Fed and other central banks were well away from the zero lower bound, then I would be more favorably inclined to incentive-based supply-side interventions as the best way forward. But that’s not the situation. Around the world, aggregate demand remains low. In Larry Summers’ words, aggregate demand interventions like physical infrastructure investment may not be a free lunch - but it certainly seems like a cheap lunch.

To sum up: above-normal growth is always possible. The current data on market prices like interest rates and wages suggest that above-normal growth might well be desirable. The ongoing constraints on monetary policy suggest that we can best achieve that faster growth through demand-oriented policies.

    Posted by on Thursday, February 18, 2016 at 10:46 AM Permalink  Comments (180)


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