San­ders veers off into Fan­ta­sy­land

The Pak Banker - - OPINION - Noah Smith

ABIT of a civil war has bro­ken out within the left-lean­ing wing of the eco­nom­ics bl­o­go­sphere. Ger­ald Fried­man, an econ­o­mist at the Univer­sity of Mas­sachusetts at Amherst, re­cently wrote a pa­per­sum­ma­riz­ing Sen­a­tor Bernie San­ders's eco­nomic pro­pos­als. But many econ­o­mists and bloggers are crit­i­ciz­ing the pres­i­den­tial can­di­date's spend­ing pro­pos­als for in­clud­ing un­re­al­is­tic as­sump­tions about growth.

A group of econ­o­mists who worked in the Clin­ton and Obama ad­min­is­tra­tions have writ­ten an open let­ter to San­ders and Fried­man, warn­ing that Fried­man's claims "can­not be sup­ported by the eco­nomic ev­i­dence" and urg­ing a re­turn to ev­i­dence-based pol­icy. Obama's for­mer chief eco­nomic ad­viser Aus­tan Gools­bee puts it rather more floridly, say­ing that San­ders's plans have "evolved into magic fly­ing pup­pies with win­ning Lotto tick­ets tied to their col­lars."

What are th­ese magic fly­ing pup­pies? Much of what San­ders is propos­ing con­sists of more govern­ment spend­ing on pub­lic ser­vices, such as education and health care, and higher taxes on the rich. But the lat­ter are not big enough to pay for the for­mer if the econ­omy stays on its cur­rent mod­er­ate-growth path.

In or­der for San­ders's pro­pos­als to be fea­si­ble in the long term, they must avoid putting the U.S. fis­cal deficit on an un­sus­tain­able path. The only way that will hap­pen is if pro­duc­tiv­ity grows at a his­tor­i­cally rapid rate and la­bor force par­tic­i­pa­tion rises to his­toric highs. Specif­i­cally, Fried­man as­sumes that un­der San­ders, real gross do­mes­tic prod­uct growth will in­crease to a tor­rid 4.5 per­cent from its re­cent rate of just over 2 per­cent. That is even higher than the 4 per­cent be­ing promised -- un­re­al­is­ti­cally, I might add -- by the Jeb Bush cam­paign. Fried­man projects that un­der San­ders, me­dian house­hold in­come will soar to more than $82,000 by 2026, up from the cur­rent level of around $55,000. That would be an un­prece­dented bo­nanza.

To get to 4.5 per­cent growth, Fried­man as­sumes that in a San­ders pres­i­dency, pro­duc­tiv­ity growth will dou­ble from its cur­rent rate of around 1.6 per­cent, to around 3.2 per­cent. To jus­tify this, Fried­man re­lies on the his­tor­i­cal cor­re­la­tion be­tween un­em­ploy­ment and pro­duc­tiv­ity. His­tor­i­cally, times of strong growth in pro­duc­tiv­ity also tended to be times when most peo­ple had jobs. So Fried­man's logic is this: San­ders will re­duce un­em­ploy­ment, and higher pro­duc­tiv­ity growth will be the re­sult. But Fried­man is mis­in­ter­pret­ing cor­re­la­tion as cau­sa­tion. How will low­er­ing un­em­ploy­ment ac­tu­ally cause pro­duc­tiv­ity to rise? If any­thing, we'd ex­pect the re­verse -the last work­ers to get jobs as un­em­ploy­ment goes down are usu­ally the least pro­duc­tive, mean­ing that fall­ing un­em­ploy­ment will usu­ally put a lit­tle bit of a drag on pro­duc­tiv­ity.

Even ac­cept­ing this highly un­re­al­is­tic idea, a sus­tained 3.2 per­cent growth rate in la­bor pro­duc­tiv­ity would be his­tor­i­cally un­prece­dented: Only for very brief pe­ri­ods has pro­duc­tiv­ity ever reached the level that Fried­man as­sumes it will av­er­age un­der San­ders for the fore­see­able fu­ture. Fried­man also as­sumes that un­der San­ders, the em­ploy­ment-to-pop­u­la­tion ra­tio will rise to 65 per­cent. As Kevin Drum at Mother Jones points out, that has never hap­pened.

In ad­di­tion, Fried­man doesn't take ag­ing into ac­count. The pop­u­la­tion is a lot older than it used to be, and it's get­ting older. Older peo­ple don't work very much, be­cause they re­tire. That means that we should ex­pect the max­i­mum em­ploy­ment-to-pop­u­la­tion ra­tio to be lower than in the past. Fried­man ig­nores this com­pletely. So not only does Fried­man make some very dodgy the­o­ret­i­cal as­sump­tions, but he also as­sumes that San­ders's plans will be so good for the econ­omy that they will make both pro­duc­tiv­ity and em­ploy­ment much stronger than they have ever been in the post­war pe­riod -- much, much bet­ter than in the boom­ing 1960s or the late 1990s.

But it gets worse. Even if San­ders were able to pro­duce all of th­ese pie-in-the-sky re­sults, they won't be enough to pay for his spend­ing pro­pos­als in the long term. A rise in the em­ploy­ment ra­tio only lifts GDP growth tem­po­rar­ily -- af­ter that, all avail­able work­ers have been em­ployed. But San­ders's spend­ing pro­pos­als would last for­ever. Even­tu­ally, growth must slow, even al­low­ing for the mag­i­cal pro­duc­tiv­ity in­creases that Fried­man prom­ises. At that point, the deficit will start ris­ing on an un­sus­tain­able path once again.

In other words, the as­sess­ments of Gools­bee and other econ­o­mists are cor­rect: San­ders' eco­nomic prom­ises, as ex­pressed by Fried­man, are highly un­re­al­is­tic. Some left­lean­ing com­men­ta­tors con­tend that it's OK to make un­re­al­is­tic prom­ises, since the Repub­li­cans do this all the time.

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