What Is “Solid Economic Reasoning”?

Writing in The Nation, Robert Pollin asserts:

All of [Bernie Sanders’s] major proposals are grounded in solid economic reasoning and evidence.

Reading this statement, I was quite surprised. Despite the fact that many of the proposed policies would, in my opinion, likely prove beneficial — greater infrastructure spending for instance — the key question surrounds the impact of the Sanders plan on growth. Without a sufficiently large and persistent boost to growth, it is not possible to square the circle.

Liberal critics of Sanders, led by Krugman as well as four former Chairs of the Council of Economic Advisers under both Clinton and Obama, became especially incensed over a paper by my colleague Gerald Friedman that estimated the impact of Sanders’s overall program on jobs and economic growth. Friedman concluded that it could raise the average annual US growth rate to 5.3 percent over a 10-year period after Sanders assumed office. This contrasts dramatically with the average growth rate of 3.3 percent between 1950 and 2015, and the much weaker recent average growth performances of 1.4 percent under Obama and 2.1 percent under George W. Bush. In fact, these critics were correct that Friedman’s specific growth estimate was overly optimistic. But here again, the critics have missed the forest for the trees.

Overall, the Sanders program is capable of raising living standards and reducing insecurity for working people and the poor, expanding higher educational opportunities, and reversing the decades-long trend toward rising inequality. It could bring Wall Street’s dominance under control and help prevent a repeat of the financial crisis. It will also strongly support investments in education, clean energy, and public infrastructure, generating millions of good jobs in the process.

None of Sanders’s liberal critics have shown how, overall, these developments would be harmful to economic growth. In fact, there are several channels through which they support growth. A single-payer healthcare system would relieve businesses of having to cover health insurance costs for their employees. Higher average wages and greater overall equality will put more money in the pockets of most US consumers, enabling them to buy more from US businesses. Investments in education and infrastructure will raise US productivity and global competitiveness over the long term, as well as expand job opportunities in the short term. …

I don’t count myself as a dogmatist. I’m willing to entertain all sorts of models. But I do want a model, and equations that can be solved, so that one can see if the effects are of a requisite size. Without the model, one can’t say what is, or is not, a “solid economic analysis”.

Moreover, in my mind, the question revolves around the quantitative magnitudes, and on these counts, the article is silent (with the exception of the revenue implications of the proposed financial transactions tax). In the Friedman tabulation, a higher level of growth results a higher level of tax revenues; but as discussed in depth in this post, the magnitude of the growth effect is only consistent a very special model incorporating big hysteresis effects. Using the multipliers in a conventional macroeconometric model implies a much smaller output effect, and hence a bigger deficit, as shown in this post.

In fact, according to the OECD New Global Model, if output is near potential, the nearly 8 percentage point of GDP boost in Federal spending is likely to result in a nearly 5 percentage points of GDP increase in the budget deficit three years into the stimulus. Inflation will be nearly 7 percentage points higher than baseline, and interest rates 12 percentage points (see Table 3 of this handout). I don’t think we are at potential right now, but even with a couple of percentage points of slack, these hardly seem like trivial concerns.

Professor Pollin concludes:

In short, if something like a Sanders program is enacted in the United States, the critical point will not be whether GDP grows, on average, at 3 percent, 4 percent or 5.3 percent. A Sanders economy will be fully capable of growing at healthy rates. But more than just growing, a Sanders economy will also deliver standards of well-being for the overwhelming majority of Americans, as well as the environment, in ways that we have not experienced for generations.

You’ll excuse me if I think trees are as important as the forest, in the sense that the trees have to add up to the forest. If real policy analysts require a quantitative assessment of the Ryan plan, or the Romney plan (as I have [1], [2]), then they should also demand the same of the Sanders plan. Hence, it is incumbent upon the proponents of such plans to show us the model. Otherwise, this is an exercise in faith, not economic analysis.