The Counter-cyclical Stabilization Policies of the Democratic Presidential Candidates

In this post, I assess how the candidates would implement macroeconomic stabilization policy, given the big reform packages proposed by the candidates, in particular those by Senator Sanders, are highly unlikely to be passed by a fully or partly Republican Congress. On the other hand, a downturn in the next four years is much more plausible; hence, knowing the candidates’ views on macro stabilization policy is arguably more relevant.

As an aside, the growth effects arising from the implementation of single-payer universal health care, free college tuition, and social security reform as advocated by Senator Sanders (see official platform here) have been addressed in this open letter written by four past Chairs of the Council of Economic Advisers under Democratic administrations [0]; Paul Krugman has rightly characterized the economic assumptions underlying the Sanders growth and revenue projections as a left-wing version of voodoo economics (my paraphrasing of his words).

With that prologue, let’s turn to counter-cyclical policy.

Clinton: Secretary Clinton’s official economic platform website is here. One summary of her economic platform is here. A NY Times tabulation of her economic advisers from early 2015 reads like a list from mainstream macro:

Several of Mr. Clinton’s former advisers, including Alan S. Blinder, Robert E. Rubin and Mr. Summers, maintain influence. But Mrs. Clinton has cast a wide net that also includes Joseph E. Stiglitz, a Nobel laureate in economics who has written extensively about inequality; Alan B. Krueger, a professor at Princeton and co-author of “Inequality in America”; and Peter R. Orszag, a former director of the Office of Management and Budget under President Obama. Teresa Ghilarducci, a labor economist who focuses on retirement issues, is also playing a prominent role.

Focusing on professionally trained economists (Blinder, Summers, Stiglitz, Krueger, Orszag, and Ghilarducci), one can be reasonably certain that a conventional approach to macroeconomic management would be adopted. Automatic stabilizers would be retained (not true of all plans — consider Kasich’s balanced budget requirement), and discretionary fiscal policy would be used as second resort. In the background as a theoretical framework is a conventional aggregate demand-aggregate supply model.

Sanders: Bernie Sanders’ official issues page is here.

It’s hard to assess how Senator Sanders views macrostabilization policy. This is partly because Sanders refuses to name his economic advisers [1] (aside from the author of the projections of his health plan). One aspect of his policy worldview that is identifiable is monetary policy. He has been in favor of “Audit the Fed” legislation, sponsored by Rand Paul, and supported by 34 senators (all Republican). This legislation has been discussed by Jim, who makes the following observation:

The main effect of the bill would be to give Congress an additional tool to exert operational control over monetary policy. The political pressures will be very strong not to raise interest rates when the time does come to start to worry again about inflation. And when the Fed does get to raising rates, it will mean extra costs for the Treasury in paying interest on the federal debt– Congress isn’t going to like that. The primary effect of the legislation would be to give Congress one more stick with which to try to beat up on the Fed when the Fed next does need to take steps to keep inflation from rising.

An additional hint on how a Sanders presidency might approach counter-cyclical policy is provided by his previous appointments. One such, as ranking Democrat on the Senate Budget Committee is Stephanie Kelton, Professor at UM-Kansas City, a leading exponent of Modern Monetary Theory (MMT). [2] [3]

I must confess that I’ve read several accounts of MMT (e.g., [4], [5]), with little ability to determine how it all works. From one exposition by Professor Kelton, it seems that MMT invokes a rejection of the intertemporal government budget constraint:

    dt-dt-1 = [(rt-gt)/(1+gt)]× dt-1 – pt

Where d is the debt to GDP ratio, r is the real (inflation adjusted) interest rate, g is the growth rate of real GDP, and p is the primary (noninterest) surplus to GDP ratio.

In words, this constraint requires change in the debt-to-GDP ratio to equal the real interest rate growth rate gap minus the primary surplus-to-GDP ratio. In her argument, the debt-to-GDP ratio does not have to grow with deficits because the real interest rate does not necessarily rise with elevated government borrowing. Here I think the issue of “sovereignty” as defined by MMT adherents matters — the real rate is not set in the private loanable funds market, but by the monetary authority. I think the conclusion that inflation does not rise with monetary expansion is based upon the absence of observed historical correlations between debt levels and inflation.

The policy implication seems to be clear: Slack in the economy requires aggressive expansionary fiscal policy, backed up by an accommodative monetary policy that prevents interest rate increases. Output above potential GDP might suggest some fiscal restraint, but not in a manner that is symmetric (although other interpreters differ, e.g. Wray).

The underlying theoretical framework seems to be one where monetary policy is passively accommodative and the aggregate supply curve is flat. An independent monetary authority is inconsistent with this view.

More background on the advisers to the various candidates, here.

Addendum regarding a President Sanders international macro/exchange rate policy. From Ten Fair Ways to Reduce the Deficit and Create Jobs:

Establish a currency manipulation fee on China and other countries. As almost everyone knows, China is manipulating its currency, giving it an unfair trade advantage over the United States and destroying decent paying manufacturing jobs in the process. If we imposed a currency manipulation fee on China and other currency manipulators, the Economic Policy Institute has estimated that we could raise $500 billion over 10 years and create 1 million jobs in the process.

Most current estimates indicate the Chinese currency is either near, or slightly above, equilibrium, defined either using the Penn effect, or some macroeconomic balance approach. For some details, see here.