Christy Romer, formerly of the Council of Economic Advisors, and David Romer, have provided a response to those defending the growth claims embedded in Sanders’ policies. It’s eleven pages of what looks to me like rigorous economic analysis.
From the opening of the memo:
Unfortunately, careful examination of Friedman’s work confirms the old adage, “if something seems too good to be true, it probably is.” We identify three fundamental problems in Friedman’s analysis. •
- First, all the effects of Senator Sanders’s policies that he identifies are assumed to come through their impact on demand. However, his estimates of those demand effects are far too large to be credible—even given Friedman’s own assumptions. •
- Second, in assuming that demand stimulus can raise output 37% over the next 10 years relative to the Congressional Budget Office’s baseline forecast, Friedman is implicitly assuming that the U.S. economy is (and will continue to be for a long time) dramatically below its productive capacity. However, while some output gap likely still exists, the plausible range for the output gap is much too small to accommodate demand effects nearly as large as Friedman finds. As a result, capacity constraints would likely lead to inflation and the Federal Reserve raising interest rates long before such high growth rates were realized. •
- Third, a realistic examination of the impact of the Sanders policies on the economy’s productive capacity suggests those effects are likely to be small at best, and possibly even negative.
From the closing:
The bottom line of our evaluation of Professor Friedman’s analysis is that it is highly deficient. The estimated demand-induced effects of Senator Sanders’s policies are not just implausibly large but literally incredible. Moreover, even if they were not deeply flawed, Freidman’s enormous estimates of demand-fueled growth could not and would not come to pass. Even very generous estimates of the amount of slack still present in the American economy would not be enough to accommodate demand-driven growth of anything near what Friedman is estimating. As a result, inflation would soar and monetary policy would swing strongly to counteract them. Finally, a realistic evaluation of the impact of Senator Sanders’s policies on productive capacity (something that is neglected in Friedman’s analysis) suggests that those impacts are likely small and possibly negative.
RTWT.
Also, Krugman.