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Michael Meeropol: Economists Debate Over The Potential Impact Of A Bernie Sanders Presdiency

Perhaps listeners have heard about the debate over an economist’s efforts to predict what would occur if Senator Bernie Sanders’ program were enacted.   An economist at the University of Massachusetts in Amherst, Gerald Friedman, took a look at Senator Sanders’ proposals --- increased spending for infrastructure, free college education at state universities, an expansion of social security, replacing the current crazy-quilt health insurance system with a “Medicare for all” single payer system for health insurance, and numerous expenditures to address the threat of climate change.   All of these expenditure increases would be funded by tax increases that would increase the over-all progressivity of the system, by, in Senator Sanders’ words making the billionaires pay their fair share of taxes.

Friedman asked what the impact would be on the rate of growth of the economy, median incomes, real wages and the rate of unemployment if the Sanders program were to be enacted.   Note, this was not an effort to calculate the political feasibility of actually getting any aspect of the Sanders program through either this Congress or any conceivable future Congress (remember, it was a Democratically controlled Congress that refused to pass President Clinton’s health care program – and a Democratically controlled Congress that refused to include a public option in President Obama’s health care program).   Instead, Professor Friedman was engaging in an exercise testing the economic impact of the various proposals.

[The original Friedman analysis is contained in two articles in the magazine Dollars and Sense and can be accessed at http://dollarsandsense.org/archives/2015/1115friedman.html and at http://dollarsandsense.org/archives/2016/0116friedman.html]

The result was totally unsurprising.  Because of the large increase in spending followed by a lagged increase in tax collections, the initial stimulus will raise incomes dramatically, reduce unemployment quickly and therefore lead to rising wages.   That is what any model of the economy tells you will happen.   It is, by the way, similar to what happened in the years 1983-1985 when the economy was recovering from the deep 1982-83 recession.  

Four economists ---  former heads of the Council of Economic Advisers under Democratic Presidents  -- decided that the conclusions of the Friedman analysis were “absurd” and said so in an open letter. 

Here is their letter:  https://lettertosanders.wordpress.com/2016/02/17/open-letter-to-senator-sanders-and-professor-gerald-friedman-from-past-cea-chairs/

Paul Krugman of the NY Times made that letter the focus of a column in which he accused Friedman of doing exactly what Republicans who worship tax cuts do --- predict outrageously high rates of economic growth due to their preferred policy.

Here’s a blog by Krugman:  http://krugman.blogs.nytimes.com/2016/02/17/worried-wonks/?_r=0

The problem with these criticisms of Professor Friedman is that they did not go over his research to see what was wrong with it --- they just used their positions of authority to claim that the results he predicted (5.3% real income growth for example) were so high as to be absurd.  In fact, however, all the figures show is that when the government engages in large scale economic stimulus the result will be quite large.

[This point was made forcefully by economist James Galbraith in a letter to the four CEA economists --- See http://big.assets.huffingtonpost.com/ResponsetoCEA.pdf]

This letter is a most unfortunate example of members of the economics profession deciding that because the results of a particular piece of research might be uncomfortable – namely that large deficits for short periods of time can create very positive impacts --- the research – and the researcher – needs to be trashed.

This point is very important.  Many economists who work for Democratic Presidents often feel constrained to appear to believe that high levels of deficit spending does harm to the economy.   I have argued countless times in my commentaries that this position is utter nonsense.  When there is insufficient aggregate demand in an economy, deficit spending does a lot of good --- it raises incomes and reduces unemployment rapidly and does not raise either interest rates or the rate of inflation.

What is the substance of the disagreement between the establishment economists and Professor Friedman?   The issue boils down to how far from our economy’s potential are we?   In economics terminology, what is the “output gap”?

[Two of the signers of the original letter belatedly tried to actually take apart Friedman’s analysis:   See https://evaluationoffriedman.files.wordpress.com/2016/02/romer-and-romer-evaluation-of-friedman1.pdf   Though Paul Krugman immediately proclaimed them correct in their analysis, Friedman has promised an answer and James Galbraith has suggested that they were actually using a flawed model to predict the result of the Sanders program.  http://www.nakedcapitalism.com/2016/02/james-galbraith-describes-major-forecast-failure-in-model-used-by-romers-to-attack-friedman-on-sanders-plan.html]

Every economics student learns that during the Great Depression, and in all subsequent recessions, the economy produced less than its potential because there were unemployed resources --- idle factories, land not being cultivated, unoccupied buildings and, of course most importantly, people out of work.

It took the so-called Keynesian revolution of the 1930s to convince the economics profession that INVOLUNTARY UNEMPLOYMENT could occur.   Up until that time, except for writers like Karl Marx and other economists outside of the pale of acceptability, the story told by economists was that there was no such thing as involuntary unemployment except during short periods of adjustment.  Their argument was that if there were a surplus of laborers offering to work at the going wage, all that needed to happen to increase employment is for wages to fall.   In this argument, it is the failure of wages to fall that keeps unemployment high.   (This, by the way, is the key to the argument of many economists that raising the minimum wage will increase unemployment).  The Great Depression proved that assertion nonsense.   Wages fell and employment did NOT bounce back.  The reason is obvious.  If wages fall, incomes fall and the demand for the products of business falls as well.  Thus, businesses have no incentive to hire more workers even if wages are lower --- because business revenue is lower as well.  John Mayard Keynes provided the theoretical analysis in The General Theory of Employment, Interest and Money to explain why the traditional view of the impossibility of involuntary unemployment is nonsense.  There was insufficient aggregate demand (spending by consumers, businesses or governments) to employ all the available resources –including the unemployed people.  This problem could be corrected by an increase in aggregate demand --- as was proven during World War II.

The so-called output gap --- the key to why Professor Friedman argued that the Sanders program would increase employment and incomes so rapidly --- measures how much incomes would increase if we took strong steps to employ all the unemployed resources.

The recovery from the Great Recession of 2008 – 2009 has been painfully slow.  There is still a significant output gap which provides a lot of opportunity to raise incomes and employment.   Even if Professor Friedman’s numbers in his analysis are optimistic, it is hard to believe it wouldn’t be worthwhile trying to achieve them.

Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author (with Howard Sherman) of Principles of Macroeconomics: Activist vs. Austerity Policies.

 
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