Blog Post

The Sanders controversy

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.

By: Date: February 29, 2016 Global Economics & Governance Tags & Topics

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.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Blog Post

Silvia Merler

Tariffs and the American poor

What’s at stake: much has been said and debated — during the US election and beyond — about the distributional impact of free trade on the disadvantaged. But what would be the distributional impact of a new protectionism instead?

By: Silvia Merler Topic: Global Economics & Governance Date: January 23, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

The economic effects of migration

What’s at stake: migration is currently a very hot topic in both the US and the EU. Immigration issues have come to the forefront due to the problem of rapidly ageing populations, the refugee crisis, and growing anti-immigration political rhetoric. But what do we know about the economic effects of migration?

By: Silvia Merler Topic: European Macroeconomics & Governance Date: January 16, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

Compensating the “losers” of globalisation

What’s at stake: According to some, 2016’s political turmoil shows that the so-called “losers” of globalisation are striking back. There is, however, little agreement on how government should respond to this challenge.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: January 9, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

2016: The end

What’s at stake: 2016 is coming to an end. It will be remembered as an annus mirabilis and horribilis, at the same time. 2016 brought us some previously unthinkable political shocks, and admittedly took away some of our finest musicians. It also couldn’t help taking away Willy Wonka and Princess Leia, making this a much sadder Galaxy. This raises an obvious question: what are we in for, in 2017?

By: Silvia Merler Topic: European Macroeconomics & Governance Date: December 31, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

The American dream

What’s at stake: historian James Truslow Adams, in his 1931 book The Epic of America, stated that the American dream is "that dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement”. Few ideas have ever been as powerful as the “American Dream”, and many recent political events hinge on the fear that this “dream” may be dead. Meanwhile, researchers have been trying to measure the reality behind the dream.

By: Silvia Merler Topic: Global Economics & Governance Date: December 19, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

The political economy of macroprudential policy

What’s at stake: the emergence of renewed interest in macroprudential policy has characterised the aftermath of the great recession. There is not yet full agreement on what the tasks of macroprudential policy is or how it should be carried out, but there is a clear understanding that there is an important political economy dimension to it. We review some of the recent contribution on this.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: December 12, 2016
Read article More on this topic More by this author

Blog Post

Pia Hüttl

Macroeconomics in the crossfire (again)

What’s at stake: After a first go at macroeconomics and its flaws a year ago, Paul Romer kicked off the debate again with a recent essay on how macroeconomics has gone backwards. The way that this debate, along with the debate of the role of economics in general, feeds into today's election woes, has also attracted attention in the blogosphere.

By: Pia Hüttl Topic: European Macroeconomics & Governance Date: December 5, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

The Italian referendum

What’s at stake: on 4 December, Italy will hold a referendum on a proposed constitutional reform approved by Parliament in April. The reform, which was designed in tandem with a new electoral law, aims to overcome Italy’s “perfect bicameralism” by changing the structure and role of the Italian Senate. It also changes the distribution of competences between the state and regions. After the shocks of Brexit and the US election, polls are now drifting towards a defeat of the government’s position in Italy.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: November 28, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

Trumpocalypse now: first reactions

What’s at stake: this question should probably be re-formulated as “what’s NOT at stake?” On Tuesday 8 November, the US elected Donald Trump as its next President. Several aspects of Trump’s political and economic agenda appear extreme (we have previously focused on his stance on trade). After the initial shock, we review economists’ opinions on what has happened and what may happen. We will be coming back to this topic regularly.

By: Silvia Merler Topic: Global Economics & Governance Date: November 21, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

Brexit and the law

What’s at stake: last week, the UK High Court ruled that the triggering of Article 50 - and therefore the Brexit process - should involve the UK Parliament. The Government will appeal the decision but this has created a new wave of uncertainty about the timing of Brexit, and on what this involvement can mean in practice. We review the different opinions.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: November 14, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

Monetary policy at the time of elections

What’s at stake: At this week’s meeting, the Federal Reserve left interest rates unchanged. While this was largely expected, the economic blogosphere has been discussing whether and to what extent this is linked to the election, and what can be expected for the future.

By: Silvia Merler Topic: Global Economics & Governance Date: November 7, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

Should we rethink fiscal policy?

What’s at stake: there has been quite some discussion recently on whether we should rethink the framework of fiscal policy in order to make it more appropriate and effective in a world where demand seems to be chronically anemic, inflation is low and the interest rates are likely to stay close to zero (if not negative) for a long time. According to some of the authors, in the Eurozone these concerns are particularly pressing.

By: Silvia Merler Topic: Global Economics & Governance Date: October 24, 2016
Load more posts