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The Sanders controversy

Summary:
What’s at stake: A recent study claiming that Sanders policies would produce 5.3 percent growth a year over the next decade has been at the center of this week’s discussions in the blogosphere. Voodoo economics and arithmetic mistakes Ezra Klein writes that Bernie Sanders has been under assault from the technocratic wing of the Democratic Party. The charge? His campaign has circulated economic projections that show stunning — and rather implausible — benefits from Sanders’s agenda. JW Mason writes that Jerry Friedman wrote a piece several weeks ago, arguing that a combination of increased public spending and income redistribution (higher minimum wages and other employment regulation favorable to labor) proposed by the Sanders campaign could substantially boost growth and employment during his presidency. Paul Krugman writes that the Republican candidates have been widely and rightly mocked for their escalating claims that they can achieve incredible economic growth, starting with Jeb Bush’s promise to double growth to 4 percent and heading up from there. But Mr. Friedman outdoes the G.O.P. by claiming that the Sanders plan would produce 5.3 percent growth a year over the next decade. Christina Romer and David Romer writes that careful examination of Friedman’s work confirms the old adage, “if something seems too good to be true, it probably is.

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What’s at stake: A recent study claiming that Sanders policies would produce 5.3 percent growth a year over the next decade has been at the center of this week’s discussions in the blogosphere.

Voodoo economics and arithmetic mistakes

Ezra Klein writes that Bernie Sanders has been under assault from the technocratic wing of the Democratic Party. The charge? His campaign has circulated economic projections that show stunning — and rather implausible — benefits from Sanders’s agenda. JW Mason writes that Jerry Friedman wrote a piece several weeks ago, arguing that a combination of increased public spending and income redistribution (higher minimum wages and other employment regulation favorable to labor) proposed by the Sanders campaign could substantially boost growth and employment during his presidency.

Paul Krugman writes that the Republican candidates have been widely and rightly mocked for their escalating claims that they can achieve incredible economic growth, starting with Jeb Bush’s promise to double growth to 4 percent and heading up from there. But Mr. Friedman outdoes the G.O.P. by claiming that the Sanders plan would produce 5.3 percent growth a year over the next decade. Christina Romer and David Romer writes that careful examination of Friedman’s work confirms the old adage, “if something seems too good to be true, it probably is.” Brad DeLong writes that Friedman has government spending higher in 2026 by $1.4 trillion than in baseline. He has real GDP higher in 2026 by $14 trillion.

Christina Romer and David Romer writes that a glance at American history confirms the infeasibility of sustained growth over 5% as a result of demand stimulus today. Growth above 5% has certainly happened for a few years, such as coming out of the severe 1982 recession. But what Friedman is predicting is 5.3% growth for 10 years straight. The only time in our history when growth averaged over 5% for a decade was during the recovery from the Great Depression and the years of World War II. But that involved moving from 25% unemployment to an economy pushed well above its normal capacity by the necessity of fighting a world war. Today we are not starting from remotely the same level of slack (the unemployment rate is one-fifth its level at the trough of the Depression), nor facing a national imperative that would allow us to push our economy far beyond its normal limits.

Christina Romer and David Romer have a conjecture about how Friedman may have incorrectly found such large effects. Suppose one is considering a permanent increase in government spending of 1% of GDP, and suppose one assumes that government spending raises output one-for-one. Then one might be tempted to think that the program would raise output growth each year by a percentage point, and so raise the level of output after a decade by about 10%. In fact, however, in this scenario there is no additional stimulus after the first year. As a result, each year the spending would raise the level of output by 1% relative to what it would have been otherwise, and so the impact on the level of output after a decade would be only 1%. Since a permanent change would raise the level of GDP in the first year and then leave it at the higher level, summing is not appropriate.

Christina Romer and David Romer writes that even if the estimated effects of Senator Sanders’s policies on demand were correct, productive capacity constraints would be likely to bind well before output rose nearly as much as Friedman predicts. Implicit in Friedman’s focus on demand-side effects is the assumption that there is currently a very large output gap that could be closed before inflation rose significantly and the Federal Reserve raised interest rates substantially to choke off demand. Friedman then assumes that an enormous increase in output without hitting capacity constraints is feasible because demand expansion can bring the fraction of the adult population that is employed back to its level in 2000 and endogenous productivity growth would raise productive capacity by enough to prevent it from constraining output.

Productivity growth and Verdoorn’s law

Noah Smith writes that in the recent debate surrounding the economic proposals of presidential candidate Bernie Sanders, a small number of economists have started suggesting a very different justification for stimulus. Their idea: Stimulus does something more fundamental to the economy by raising long-term productivity. Economists have long noted the rapid productivity growth during the Depression. This is usually considered to be coincidental — the standard story is that humanity just happened to invent a bunch of useful stuff during the ’30s. But Verdoorn’s law says that no, it was Roosevelt and his stimulus that raised productivity. If that’s correct, then stimulus becomes a much more important tool, since its growth-boosting power would be much larger than commonly assumed even by stimulus proponents like Krugman.

Narayana Kocherlakota writes that there are good reasons to believe that policies that would generate super-normal demand growth in the next four years would also lead to super-normal TFP growth. The most striking evidence comes from the Great Depression in the US. Total factor productivity fell dramatically at the beginning of the Depression and was in fact 15% below its normal trend by 1933.   Over the following three years, in conjunction with the various forms of demand stimulus undertaken by the Roosevelt administration, TFP grew more than 5% per year faster than normal.   This super-normal growth rate of TFP was a key contributing factor to the near double-digit annual growth in real GDP from 1933-37. Of course, this is but one short period in US history.  But it seems to be illustrative of a more general and systematic pattern.  In his 2012 book, Alexander Field (chapter 7) concludes that there is a stable relationship in US macroeconomic data whereby a fall in the unemployment rate of 1 percentage point is associated with a 0.9 percentage point increase in TFP growth.

Narayana Kocherlakota writes that a mechanism for the proposition that super-normal demand growth in the next few years would generate super-normal TFP growth is that TFP growth is the product of the creation and implementation of ideas.  These are investment activities, and businesses should be willing to undertake more of these activities if they anticipate higher demand.  This basic intuition lies at the heart of a classic paper by Comin and Gertler (2006) and a more recent (and very interesting) paper by Benigno and Fornaro (2015).

Paul Krugman writes that nobody knows the secret of raising productivity growth. In general, any economist talking about potential growth should start from a position of modesty: nothing in what we know or have experienced in the past justifies making big promises. By all means we should try everything we can think of — but our policies should make sense even if it turns out that the effects on long-run growth are modest.

Sanders, Corbyn and policy wonks

Simon Wren-Lewis writes the attraction of Corbyn and Sanders is not in the coherence of their policy plans, but in the appeal they make to basic values unencumbered by conventions about what can be changed and what cannot. Both the Corbyn and Sanders campaigns seem more receptive to certain types of heterodox economics rather than mainstream economics. A particular example from the Corbyn campaign was the idea that QE should be used to finance a new National Investment Bank. It was a bad idea, because it implied that the independence of the Bank of England would end. But it was not a stupid notion. The idea of a National Investment Bank and the idea that central banks can do better with the money they create than invest it in government debt are both sensible: it was their combination in the current situation that was problematic. The good news was that once this idea was subjected to reasoned critique, it was quietly dropped.

Ezra Klein writes that it’s obvious that debating the details of campaign proposals is, on some level, fantasy football for wonks. But watching a candidate run his campaign’s policy processes is one of our best ways of predicting how he would run his White House. My worry about Sanders, watching him in this campaign, is that he isn’t very interested in learning the weak points in his ideas, that he hasn’t surrounded himself with people who police the limits between what they wish were true and what the best evidence says is true, that he doesn’t seek out counterarguments to his instincts, that he’s attracted to strategies that align with his hopes for American politics rather than what we know about American politics. And these tendencies, if they persist, can turn good values into bad policies and an inspiring candidate into a bad president.

Matthew Yglesias writes that the Friedman paper and the attacks on it from Democratic Party wonks are an interesting window into how the primary is playing out behind the scenes. Clinton has achieved such overwhelming party insider support that the Sanders campaign is largely cut off from access to the kind of para-party policy wonk universe that would allow Sanders to release campaign proposals that pass muster by the traditional rules of the game. But he’s managed to make a virtue out of this weakness and harness it to the larger significance of the Sanders project — an effort to turn the Democratic Party into a more ideological party that operates more like a progressive mirror image of the conservative Republican Party and less of a broad coalition of interest groups mediated by technocrats.

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Jérémie Cohen-Setton

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