Sanders and the Economists
Yesterday four former Chairs of the Council of Economic Advisers for Presidents—Alan Krueger, Austan Goolsbee, Christina Romer and Laura D’Andrea Tyson—posted a letter to Senator Bernie Sanders and Gerald Friedman, one of Sanders’s economic advisers, in which the four say that they are “concerned to see the Sanders campaign citing extreme claims by Gerald Friedman about the effect of Senator Sanders’s economic plan—claims that cannot be supported by the economic evidence.”
Here is a link to the full letter:
lettertosanders.wordpress.com/...
The letter includes the following:
We are concerned to see the Sanders campaign citing extreme claims by Gerald Friedman about the effect of Senator Sanders’s economic plan—claims that cannot be supported by the economic evidence. Friedman asserts that your plan will have huge beneficial impacts on growth rates, income and employment that exceed even the most grandiose predictions by Republicans about the impact of their tax cut proposals.
As much as we wish it were so, no credible economic research supports economic impacts of these magnitudes. Making such promises runs against our party’s best traditions of evidence-based policy making and undermines our reputation as the party of responsible arithmetic. These claims undermine the credibility of the progressive economic agenda and make it that much more difficult to challenge the unrealistic claims made by Republican candidates.
In his blog, Paul Krugman commented on the letter by the four economists. He seems to agree with the economists’ criticism of Friedman’s claims and calls Friedman’s forecasts “very unlikely.” But Krugman offers no evidence that the outcomes that Friedman predicts are “very unlikely.”
I have some thoughts on the four economists’ letter.
First, here is a link to a statement on Sanders’s website on each of his domestic spending proposals and how he proposes to pay for them, including his health care plan:
berniesanders.com/...
Moreover, in a draft of a working paper by Friedman entitled “What would Sanders do? Estimating the economic impact of Sanders programs,” Friedman argues that if all of Sanders’ domestic proposals were implemented, it would result in the following:
- The growth rate of the real gross domestic product will rise from 2.1% per annum to 5.3% so that real GDP per capita will be over $20,000 higher in 2026 than is projected under the current policy
- Faster economic growth and redistributive taxation will raise the growth rate of median income from 0.8% per annum to 3.5%, adding nearly $22,000 to median household income in 2026
- Higher GDP comes with increased employment, specifically nearly 26 million additional jobs in 2026
- The unemployment rate will fall to 3.8% by the end of the first Sanders term in 2021, and remain at that full employment level through the end of his second term in 2025
- High employment will raise the growth rate in output per worker (labor productivity), which will double to over 3% per annum
- There will be sustained increases in real wages for the first time since the 1960s, with real wages growing at a rate of nearly 2.5% per annum
- Medicare-for-all will lower the cost of health care and contain health care inflation even while saving thousands of lives by extending insurance coverage and access to health care to all Americans
- Rising employment, increases in the minimum wage, and enhancements to social security will lower the poverty rate to 6%, the lowest recorded rate, and the poverty rate for children will fall by nearly half, to below 11%
- The gap between rich and poor will narrow dramatically, with the ratio of the average income of the top 5% to that of the bottom 20% falling from 27.5 to 10.1.
- After increasing in the first years of the Sanders Administration, the Federal budget’s cash deficit will drop sharply and there will be a significant and growing surplus in a Sanders second term. Instead of a deficit of $1.3 trillion in 2026, there will be a large budget surplus (p. 2).
According to Friedman,
With nearly $14.5 trillion in additional spending over 10 years, the Sanders spending program is a significant stimulus to an economy that continues to underperform, with national income and employment at levels well below capacity. Apart from the health care program, the annual stimulus provided by this spending is comparable to that of the American Recovery and Reinvestment Act, widely seen as responsible for creating over two million jobs annually and helping to prevent another Great Depression. By shifting income from the rich to working people and the middle class, the regulatory changes Senator Sanders proposes, including higher minimum wages, higher wages for women and overtime workers, and support for increased unionization, will also stimulate economic activity.
Like the New Deal of the 1930s, Senator Sanders’ program is designed to do more than merely increase economic activity: the expenditure, regulatory, and tax programs will increase economic activity and employment and promote a more just prosperity, ‘broadly-based’ with a narrowing of economic inequality.
On balance, the Sanders program will lead to a dramatic acceleration in economic growth and employment. It will raise wages, especially for the lowest-paid Americans, and narrow the gap between rich and poor. With these gains, economic conditions will return to the prosperity of the late-1990s, or even the mid-1960s. While, in contrast with the post-WWII decades, wages will continue to lag behind productivity growth because of the continued weakness of the American labor movement, government programs including progressive taxation will dramatically narrow the gap between rich and poor. This is different from the post-WWII period because wage increases and reductions in poverty and inequality will come more from government action, especially increases in the minimum wage, and from progressive taxation, rather than from collective bargaining or the working of competitive labor markets. The continued wage lag behind productivity reflects the weakness of the Labor Movement and labor unions despite the proposed enactment of the Workplace Democracy Act (p. 9-11).
Here is a link to an interview of Friedman conducted today by Fortune’s Chris Matthews on the four economists’ open letter to Sanders and Friedman:
fortune.com/…
Here is a link to an article on Friedman in today’s Washington Post by Jim Tankersley:
www.washingtonpost.com/…
Is Friedman correct? If all of Sanders’ proposals and tax changes were fully implemented within the next year, would the U.S. economy grow, on average, 5.3 percent over the next 10 years in terms of real GDP? It’s possible. The U.S. experienced dramatic increases in economic growth during the New Deal and during World War II, when there was significant government spending, which gave people more money so that they could buy more goods. For instance, from 1933 until 1945, the annualized nominal GDP growth rate in the U.S. was 12.22 percent and the annualized real GDP growth rate was 9.12 percent. Interestingly, the highest marginal income tax rates in the U.S. during that time were never lower than 63 percent and were as high as 94 percent. Here is a link to a recent article in The Guardian by the French economist Thomas Piketty on Bernie Sanders’s economic agenda that includes information on tax rates in U.S. history:
www.theguardian.com/...
Moreover, during the strong economy of the 1960s and the Great Society programs, there was a significant reduction in the poverty rate, from about 23 percent to about 12 percent.
In fact, if all of Sanders’s plans were fully implemented, I believe it is about 50/50 as to whether the growth rates that Friedman predicts would occur would indeed occur. This estimate is based partly on the New Deal model and World War II economy, when significant government spending, which is what Sanders has proposed, contributed to the relatively high growth rates that occurred during that period.
However, I don’t believe that there is a better than 50 percent chance of this occurring. In the U.S., the average real GDP growth rate since 1950 is about 3.16 percent. So, a 5.3 percent real GDP growth rate would be fairly outside the norm in the U.S. since 1950. Moreover, the high growth rates that occurred in the U.S. during the New Deal and World War II were very likely partly because of the massive government spending at the time. It is unclear whether the amount of spending that Sanders has proposed would be comparable (relative to GDP) to what it was during the New Deal and World War II. I would have to do more research to determine whether the amount of government spending that Sanders has proposed would be comparable (relative to GDP) to what we saw during the New Deal and World War II. That is beyond the scope of this diary.
As for Friedman’s claim that if all Sanders’s proposals were implemented, U.S. median household income would increase 3.5 percent annually until 2026. That seems possible. First, we have had many 10 year periods in U.S. history in which household income has grown by at least 3.5 percent annually over 10 years. For instance, during the 1990s, the U.S. medium household income grew by about 4.4 percent annually. Second, Sanders would be spending significantly on infrastructure. Although I’ve had a hard time finding data on median income prior to 1967, the data I’ve found suggest that household income grew much faster than 3.5 percent per year from 1933 until 1945.
However, at least some, if not all, of Sanders’s plans probably will not be fully implemented in the U.S. in the next few years. Maybe they all should be. But they probably won’t be. So, what should we do with Friedman’s predictions on the economic effects of the implementation of Sanders’s proposals? Be mindful of those predictions and the reasons he gives to support them, for instance, the high growth rates that occurred during the New Deal and World War II. But we also should be aware of what is politically possible in the U.S. over the next few years. We probably won’t be able to implement all of Sanders’s plans in full over the next few years. So, what is the best we can do in the short run, and what are the effects likely to be?
In addition, we should be aware of Friedman’s projections for the next 10, 15 and 20 years. Over this period of time, there is—arguably—a reasonably good chance that all of Sanders’ plans—or ones similar to them—would be implemented. Sanders’s proposals are, overall, popular in the U.S. now. Here is a link:
s3.amazonaws.com/...
History shows that, in societies that are at least fairly democratic, which ours is, the will of the people has a reasonably good chance of prevailing over 20 years. We saw this with the New Deal and women’s right to vote. As the popularity of the ideas became significant, these movements eventually led to changes in law and public policy.
On the issue of Sanders’s health care plan, Sanders claims that the plan, if fully implemented, would cost the United States federal government $1.38 trillion per year over the first 10 years. However, there is no evidence that I’ve seen that Sanders assumes that his health care plan would cost this amount ($1.38 trillion per year over 10 years) partly because he assumes that real U.S. GDP would grow, on average, 5.3 percent annually during the first 10 years that his health care plan is fully implemented. In other words, there is no evidence that I’ve seen that Sanders is basing the cost of his health care plan on Friedman’s prediction of the economic growth rate that would occur if all of Sanders’s proposals were fully implemented. In fact, I’m not sure what economic growth rate, if any, that the Sanders campaign assumed would occur in estimating the cost of their health care plan. A statement on Sanders’s website includes a link to a memo by Friedman on how much Sanders’s health care plan would cost. Nothing in the memo suggests that Friedman or Sanders is assuming that the economy must grow, on average, 5.3 percent per year over ten years in order for Sanders’s health care plan to cost the federal government what Sanders has claimed it would cost.
If Sanders is assuming that the economy must grow at 5.3 percent annually (in terms of real GDP) over the first 10 years in order for his health care plan to cost the government what he claims it would cost, then this, from my perspective, would be a weakness in Sanders’s health care plan. Although it is possible that if all of Sanders’s plans were fully implemented the economy actually would grow that much in the first 10 years, it seems to me to be no more likely that 50/50. And it is important not to base the cost of such a vital program on a 50/50 proposition. I wouldn’t want a situation where a (questionable) growth rate is needed to fund his plan, and the growth rate did not materialize. In that case, we would have high deficits. In addition, because of the political realities (for instance, a congress that is likely to be Republican-controlled over the next few years), it is unlikely that all of Sanders’s proposals would be implemented over the next few years.
However, the four economists offer no evidence to support their claim that “no credible economic research supports economic impacts of these magnitudes.” And the New Deal and the U.S. economy during World War II were correlated with the kinds of economic effects that Friedman predicts would occur under Sanders’s proposals. Moreover, Friedman gives reasons to support the plausibility of his forecasts. See, for instance, the pages I quote above. Do the economists think that these reasons do not make Friedman’s forecasts plausible? If so, they should say why. It would advance the debate.