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.

59 thoughts on “What Is “Solid Economic Reasoning”?

  1. Peter K.

    “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.”

    What about his taxes?

    I am not an economist. Most people are not. So unless you anti-Sanders economists put up a model of Sanders’s plan which you can explain to the layperson, we’re going to be skeptical. Arguing from authority isn’t going to work. Since Krugman, the four CEA Chairs and a number of economists went off on Friedman, Sanders won New Hampshire, Vermont, Maine, nearly tied Massachusetts, won Michigan, Colorado, Minnesota, Washington, Utah, Idaho, Alaska, Hawaii, Nebraska, Oklahoma, Kansas and he nearly tied Iowa and Nevada. And Sanders will probably win Wisconsin on Tuesday.

    Economists are always telling us inflation and budget deficits are why we can’t have nice things. Well let’s push it and find out. Let’s compare Hillary’s plan with Sanders’s and explain it in plain English.

    1. PeakTrader

      Since economists cannot create a general equilibrium model of a large economy (hundreds of vectors in n-space simultaneously) to find what a particular policy effect or change will do, it’s best to gain as much knowledge as possible using partial equilibrium models, input-output models, optimization models, intertemporal models, etc. and tie them together for a crude understanding.

    2. JustTryingToUnderstand

      Peter, I think the main points of the post are:
      – Sander’s team has not provided an economic model to support the number they predict in their plan.
      – Economists do have models for Sander’s plan:
      – Conventional macroeconometric model implies a much smaller output effect.
      – A recent OECD model predicts +5% GDP budget deficit, +7% inflation, +12% interest rates in 3 years.

      We would all love to see Sander’s team economic models, until then economists won’t be able to understand why it works.

    3. Menzie Chinn Post author

      Peter K.: Let me be blunt. In Friedman’s analysis (we have no idea what the Sanders economic team believes, because we have no idea who the Sanders economic team is; hence why the Friedman analysis has become by default the only analysis of record), a one dollar government consumption expenditure has a Keynesian multiplier effect that lasts forever. This is so far outside conventional analysis that I had to resort to inferring from other defenders of Sanders’s program to make the analysis sensible; I have posted my interpretation here. To my knowledge, Professor Friedman has not taken issue with this interpretation.

      Usually, when somebody proposes something, they say something about what will happen as a consequence. In this regard, I find it surprising how little quantitative analysis has been provided by the Sanders program (gee, to his credit, even JEB! took a stand on growth impacts).

  2. JT

    I’m not sure how much Sanders’ agenda would boost total spending. E.g., single payer would shift more health care spending to the government while also significantly reducing total spending.

    IMO, you and Pollin are both right. Obviously, Sanders’ plans should be analyzed (and they have been — by the Tax Policy Center and other organizations). I also agree with Pollin that we should pursue progressive policies because helping others and protecting the environment is the right thing to do. If they boost growth, that’s an added bonus.

  3. Paul Mathis

    Sanders does not advocate increasing the deficit to finance new spending. Instead, he wants new taxes to finance his plans.

    So there is no net increase of demand and therefore no Keynesian multiplier. Sanders is not Keynesian and therefore has no real growth plan.

    1. Menzie Chinn Post author

      in the Friedman calculations, the deficit shrinks because rapid sustained economic growth causes a surge in tax revenues. Take that away, and under mainstream macro assumptions, the deficit explodes.

      1. JT

        The TPC estimates (without optimistic growth assumptions) that Sanders’ tax plan would raise $15.3 trillion. Sanders lists $16.9 trillion of spending on his website. Thats’ only $160 billion a year of additional deficit spending.

        1. Menzie Chinn Post author

          JT: The Friedman tabulation has $17.7 trillion — given the Sanders campaign’s facility with numbers, I trust Friedman more than the Sanders campaign website. That implies right off the bat $240 bn/FY, or 1.2 percentage points additional deficit to potential GDP ratio…

    2. 2slugbaits

      It’s a little hard to disentangle how much of the Friedman paper is actually attributable to Sanders and how much is attributable to Friedman. In any event, Friedman assumes a multiplier of 0.87 and further assumes an accommodative Fed. Friedman’s interpretation of the Sanders plan assumes a large gap between actual GDP and potential GDP. He further assumes that we can return to the pre-recession trend for potential GDP. How would we return trend potential GDP to what it was before the Great Recession? I have to give him credit for some out-of-the-box thinking here. Unlike GOP proposals, Friedman/Sanders does not try to increase potential GDP through tax cuts. Instead he wants to increase immigration, empty prisons, increase educational attainments, and get rid of the labor distorting effects of employer provided health insurance. Some of these things would unambiguously increase potential GDP; e.g., increase immigration. Others might reduce potential GDP by shrinking the size of the labor force; e.g., by making it easier to retire if you’re only working today because of employer provided healthcare. So that would reduce potential GDP. More money on education might increase productivity in the long run (i.e., labor augmenting), but reduce the labor supply over the short run as people stay in school longer. Friedman assumes that aggregate demand will increase fast enough to absorb the increased potential GDP. Some of his critics doubt that aggregate demand could be increased that fast. I’m not so sure. My take is that the Sanders plan would run very large deficits, with a bigger risk of overheating the economy. For example, Friedman assumes that Sanders’ single payer plan for healthcare would control costs. It would probably reduce administrative costs, but on balance I would expect it to increase demand for health services, which would stimulate aggregate demand. I would expect single payer to increase healthcare as a percent of GDP.

      Friedman has been rightly criticized for not having an entirely coherent economic model. But to be fair his critics haven’t advanced a counter-coherent economic model that would tell us what the growth rate would be under the Sanders plan. It’s not enough to just say that his model doesn’t justify a 5.3% growth rate. If you know that it isn’t going to be 5.3%, then you need to offer a model that predicts a different number. Suppose he wouldn’t hit 5.3%. Would it still be larger than the growth rate under the Clinton or Cruz or Trump plans? I dunno. If the other plans only get us to 2.7% and the Sanders plan gets us to 3.0%, then I’m pretty sure he’ll be forgiven for not meeting the 5.3% goal.

      Finally, the Friedman explanation of the Sanders plan, even with all of its warts, is at least an attempt to explain and justify what Sanders wants to do. I could be wrong, but I haven’t seen any comparable effort coming out of any of the other candidates. You go to their websites and you get mush. Pablum. Yes, the Tax Policy Center has evaluated the tax plans of all of the major candidates, but tax plans represent a fairly cramped vision of a larger economic plan. The Sanders plan has “the vision thing” and throws out some interesting ideas even if they don’t all hang together in a complete model. You’ve got to admit, calls to increase potential GDP by emptying prisons is a pretty bold recommendation.

      1. JT

        Single payer would increase utilization of health care, but spending on health care would probably decrease. We spend a much higher percentage of GDP on health care than other rich countries. Sanders’ projected savings of $6 trillion a decade seems realistic.

        1. PeakTrader

          U.S. health care is expensive, because it’s very heavily regulated. And, because the U.S. has the best doctors, including specialists, nurses, hospitals, equipment, pharmaceutical industry, etc. in the world.

          it would be much better to allow more competition to reduce prices, while also improving quantity & quality. So, we can afford a safety net, e.g. for catastrophic health care, than to create a VA-type system, which will likely be even worse, because of increased demand.

        2. 2slugbaits

          JT Yes, we spend a much higher percentage of GDP on healthcare than other rich countries…and we don’t seem to get any better results for that extra money. But single payer would mainly affect the administrative costs associated with healthcare in general and health insurance in particular. But there’s only so much blood that you can squeeze out of that turnip, so to speak. Obamacare has already wrung out a lot of the deadweight costs associated with private insurance. Most of the remaining high healthcare costs are attributable to overpaid healthcare professionals, and they won’t go down without a fight. The AMA is a powerful lobby. Single payer might help lower pharma costs by creating something like a bilateral monopoly, but I don’t have any evidence that government negotiators would be able to leverage their monopsony position. I work for DoD and a monopsony position there doesn’t seem to translate into lower prices, so I doubt that HHS would do any better. Big Pharma has a powerful lobby as well as the AMA and we always seem to vote for the best Congress money can buy. The Sanders plan assumed that healthcare costs would grow at the Medicare rate, which is less than the private insurance rate. I’m not convinced his assumption would hold up under universal single payer. Don’t get me wrong. I’m a big fan of single payer; but setting aside the path dependency problem based on where we are today, I just don’t see how you get to single payer tomorrow. I also don’t think it would generate the kinds of savings Sanders and Friedman envision. Single provider probably could get those kinds of savings, but politically that’s a dead letter.

          1. PeakTrader

            Actually, U.S. health care has better outcomes than other countries. U.S. life expectancy is higher when adjusted for differences in how infant mortality rates are measured, auto deaths, murders, etc.. it would be even higher, excluding life expectancy of blacks.

            “Is the U.S. system inferior to those in other developed countries based on life expectancy and cancer survival rates? Not according to economists Robert L. Ohsfeldt (Texas A&M) and John E. Schneider (University of Iowa):

            For unadjusted life expectancy, the U.S. ranks #14 out of 16 countries, but for the adjusted standardized life expectancy the U.S. ranks #1 (adjusted for the effects of premature death resulting from non-health-related fatal injuries).

            The U.S. has the best record for five-year survival rates for six different cancers. In some cases the differences are huge: 81.2% in the U.S. for prostate cancer vs. 41% in Denmark and 47.4% in Italy; 61.7% in the U.S. for colon cancer vs. 39.2% in Denmark; 12% in the U.S. for lung cancer vs. 5.6% in Denmark.

            Also interesting is the fact that there is often a significant difference between white and black cancer survival rates in the U.S., e.g. prostate cancer – 82.7% for whites vs. 69.2% for blacks. But even in that case, the five-year survival rate for blacks (69.2%) is still higher than for all European countries except Switzerland.”

          2. PeakTrader

            Government made administration costs of health care expensive. So, of course, government can lower administration costs through single payer.

            Yet, according to you, it’s the insurance companies fault, the health care workers fault, the health care corporations fault, etc..

          3. JT

            The ACA made an inefficient system slightly less inefficient. There’s still a lot of administrative savings to be had (a Vox article cites an estimate of $190 billion from the Institute of Medicine). Taking on PhRMA and the AMA seems unlikely now, but so does single payer. If we get to the point where single payer has a chance of passing (the democratic party decides to take on the health insurance industry) then taking on other interest groups also seems more likely.

          4. PeakTrader

            It’s conventional wisdom the AMA is a powerful lobby. However, here’s what a doctor said a few years ago in response to Greg Mankiew.

            1. There is no medical cartel. The American Medical Association, the largest physician organization, represents fewer than one-fourth of all physicians. It has a lobbying group that has only modest influence on the government.

            2. Medical licensure is controlled by each state, not the federal government.

            3. The numbers of medical schools and the size of their classes are not controlled by practicing physicians. The numbers are controlled by the federal government. The class sizes are indirectly controlled by the federal government because the schools are dependent on federal funding, and the feds decide how many students they will support at each school. The federal government thinks we have too many physicians, not too few. It thinks that we should eliminate almost all specialists in favor of family practice doctors. The field of medicine is so vast that it is hard to keep up with a single subspecialty. The belief that care will be better with 600,000 Marcus Welbys is worse than naive. If the US believes that we need many more doctors, all the federal government has to do is help fund the expansion of our existing schools and the creation of new schools.

            4. US doctors earn more than in other countries because the vast majority of our pre-med and medical students don’t get funding from the government. The average medical school graduate has accumulated over $120,000 in debt. She will spend the next 3-7 years as a low-paid resident or fellow, but will have to pay the interest on the loans throughout this training. When a doctor finishes training and joins a practice, she has no patients yet and no revenue stream. She has to acquire patients, pay student loans, and often pay a buy-in fee to the group. Is she supposed to do all this on $75,000 a year?

            Never has an article angered me as much as this one. Greg Mankiew obviously didn’t talk with physicians and medical educators. He just took some raw facts on numbers of schools, numbers of students, and numbers of applicants and started screaming about a price-gouging medical cartel.

            My comment: U.S. doctors work twice as many hours than European doctors (60 to 80 hours vs 35 hours a week). American doctors pay for malpractice insurance, which is expensive, because of so many lawyers.

          5. baffling

            “American doctors pay for malpractice insurance, which is expensive, because of so many lawyers.”
            american doctors could cut down on malpractice costs if they were to effectively eliminate the doctors subject to malpractice lawsuits. the data seems to suggest repeat offenders are the main culprits in malpractice suits. but doctors in america do not seem willing to cast some of their own out, so they are left with the burden of higher malpractice rates-which they simply pass on to the patients.

          6. Anonymous


            ” Yes, we spend a much higher percentage of GDP on healthcare than other rich countries…and we don’t seem to get any better results for that extra money.”

            We don’t? Where does the overwhelming majority of health care innovation come from?

          7. PeakTrader

            Here’s a study on malpractice claims from 1991-2015:

            “The proportion of physicians facing a claim each year ranged from 19.1% in neurosurgery, 18.9% in thoracic–cardiovascular surgery, and 15.3% in general surgery to 5.2% in family medicine, 3.1% in pediatrics, and 2.6% in psychiatry.”

          8. PeakTrader

            The “repeat offenders” are in high risk specialties. The study I cited had a very large sample over 25 years. Some specialties are up to eight times more likely to have a malpractice claim. Your study says some specialties are twice as likely to have multiple claims than others, although over time 99% of high risk and 75% of low risk specialties will have a malpractice claim.

            “We analyzed malpractice data from 1991 through 2005 for all physicians who were covered by a large professional liability insurer with a nationwide client base (40,916 physicians and 233,738 physician-years of coverage).”

        3. Menzie Chinn Post author

          JT: What health expert says $6 trillion/decade, or $600/year health care cost saving is plausible. You can get the cost reduction, but you’ll have to squeeze out the rents built into salaries and profits over the past decades. That means you’ll have to squeeze doctors and nurses. Maybe a good idea, but probably hard to implement quickly.

  4. JBH

    Solid economic reasoning is first nonpartisan and unbiased. Secondly truthful. Third it is informed by empirical data and cognizant of economic history going way back. Solid economic reasoning must be able to successful forecast with the theoretical model that resides in the brain of the person doing the reasoning. That is, it is grounded in and uses the scientific method. All science has axioms on which that science is built. Thusly solid economic reasoning is conscious of the axioms that underlay it. Solid economic reasoning always takes cognizance of the overall context of the problem at hand. One of the most stellar examples of solid economic reasoning in all Economics is the carefully laid out thought of Carl Menger in his Principles of Economics.

    1. C Thomson

      Does EMH hold outside of financial markets – and not in all of those – there is serial correlation in FX markets.

      EMH is true with minor exceptions in equity markets where noise trading brings joy to brokers.

      Otherwise, what do you mean, Prof. Chinn?

  5. Genauer

    long term growth of GDP per capita in real PPP terms is 2.0% and there are good reasons for that being in the future a little lower
    (reduction of the agricultural and manufactioring sector, women employment and educational increase maxed out)

    http://de.slideshare.net/genauer/sampler-2-of-imf-2014-weo-data-plots page 8 for the US, page 9 for the UK

    The IMF output gap for the US in 2016 stands at less than 1%, The US government debt is with 105% GDP already at record levels, bizarre for peace times

    Sanders and friends are selling Schlaraffia

  6. Bruce Hall

    In the absence of complex economic models and analysis regarding Sanders’ proposals, I suggest the following insights:

    – During periods of low economic growth… more government spending, more taxes, budgets balanced by the magic money tree
    – During periods of moderate economic growth… more government spending, more taxes, budgets balanced by the magic money tree
    – During periods of high economic growth… more government spending, more taxes, budgets balanced by the magic money tree

    1. PeakTrader

      Keynes tried to save the economy from Sanders’s socialism, Hillary’s micromanagement, and Republican do-nothing:

      “Keynes intended government to play a much larger role in the economy. His vision was one of reformed capitalism, managed capitalism — capitalism saved both from socialism and from itself.

      Fiscal policy would enable wise managers to stabilize the economy without resorting to actual controls. The bulk of decision making would remain with the decentralized market rather than with the central planner.

      …fiscal policy — spending, deficits, and tax. These tools could be used to manage aggregate demand and thus ensure full employment.

      As a corollary, the government would cut back its spending during times of recovery and expansion. This last precept, however, was all too often forgotten or overlooked.”

    2. Menzie Chinn Post author

      Bruce Hall: Kinda similar to this mantra:

      – During periods of low economic growth… cut taxes, budgets balanced by magic
      – During periods of moderate economic growth… cut taxes, budgets balanced by magic
      – During periods of high economic growth… cut taxes, budgets balanced by magic

      Where have I heard that one before?

      1. C Thomson

        Keynesianism might work well in a society where a high proportion of politicians and senior bureaucrats had the moral honor and acute intelligence of Keynes.

        Does that pre-condition exist in the modern US?

        Of course there are such wise and learned folk in the faculty lounges and NGOs – and even in the opinion page of the NYT – but generally they don’t get to pull the trigger. That is why places like Connecticut and Illinois are broke, despite reams of learned advice.

        And why so many people want to keep as much of the taxpayers’ money out of the hands of our politicians and senior bureaucrats as possible. Let them play their little venal games with their existing toys. Reform DC with term limits, budgetary rules that aren’t a joke and so on and the world of Keynes might be possible.

      2. Bruce Hall

        Menzie, you forgot the “cut spending” part. But yes, each are the simplistic thinking of the far right and far left. The question is: is one set of simplistic thinking more correct than the other?

        Those who see no particular harm in having a national debt of $19T and growing past 105% of GDP: https://research.stlouisfed.org/fred2/series/GFDEGDQ188S are simply burying their heads in the sand. Even the CBO got its projections wrong. https://www.cbo.gov/publication/45555 (What harm could the last 7 years of fiscal policy do? Bigger question: what good did the last 7 years of fiscal policy do?)

        Those who think that we are not taxed enough may have lost historical perspective: https://research.stlouisfed.org/fred2/series/FYFRGDA188S .

        Those who think that government spending is not enough may have lost their historical perspective: https://research.stlouisfed.org/fred2/series/FYONGDA188S

        So, yes, the following would fix this situation:
        – During periods of low economic growth… tax more, spend less, and make recipients of federal program benefits upset.
        – During periods of moderate economic growth… tax more, spend less, and make recipients of federal program benefits upset.
        – During periods of high economic growth… tax more, spend less, and make recipients of federal program benefits upset.

        But no politician would ever propose that.

        So, besides budget and tax policies, what would be your solution?

        1. Anonymous


          Menzie didn’t forget the “cut spending” part. It’s not part of the establishment Republican agenda. They’ve never done it, never will.

      3. Anonymous

        You’re spot on Menzie and you know we rarely agree. Neo-cons want to grow spending and cut taxes and liberals want to grow spending rapidly and increase taxes on the “rich” but then never really pass tax increases on the rich and instead finance spending on the middle class via stealth taxes like Obamacare. Very sad!

  7. T

    I’ve been following your blog for a while but haven’t read all the past posts. Did you go after Romer-Bernstein with the same energy as you do Friedman? We can agree that Friedman confused changes in levels with changes in rates and that’s er a big mistake. However, Romer-Berstein’s policy recommendations were based on the assumption that the economy would self-correct to the previous trend. How did that work out? And that was not some policy recommendation made by a non-advisor to a candidate with only a small chance of winning. That was a policy recommendation from the sitting advisors to the president, a policy recommendation that many at the time viewed as the president’s one and only shot at a major economic policy initiative to combat the Great Recession. Talk awhile about the deficiencies in the underlying Romer-Bernstein model, the failure of the team to understand the state of the economy, and their failure of “solid economic reasoning.”

    1. PeakTrader

      The Obama tax cuts were too small and too slow (and much of the Bush tax cuts expired).

      I think, a large permanent tax cut in early 2009 (e.g. $5,000 per worker or $700 billion), along with more unemployment benefits of shorter duration, would’ve had a more powerful effect than normal, because of prior overconsumption.

      Households would’ve paid-down debt or caught-up on bills to raise monthly discretionary income and strengthen the banking system. Much of the slack in demand would’ve disappeared more quickly and the banking system would’ve been in a stronger position.

      It should be noted, dollars shifted from U.S. consumers to the federal government through annual trade deficits.

      1. PeakTrader

        Typically, when households pay-off a credit card, they run-up the card again. And, paying-off a car loan adds a significant amount of monthly income.

  8. JT

    PeakTrader, I don’t think the difference in hours is as large as you suggest. E.g., Dean et al. (2008) report a 47.9 hour workweek for French physicians in 2007, while Staiger et al. (2010) report a 51 hour workweek for American physicians from 2006-2008. Congress reduced the quotas for foreign medical residents in 1997 as a result of lobbying by physician organizations. As far as I know, this has not been reversed. If I recall correctly, Dean Baker estimates that allowing foreign doctors to practice in the US would save $100 billion a year.

    1. PeakTrader

      Yes, according to the BLS, U.S. physicians average 52 hours a week and 44% work 55 to 99 hours a week, which is the highest percentage of all occupations in that category.

    2. PeakTrader

      And, reducing standards to practice medicine in the U.S. would increase the supply of doctors.

  9. JT

    Reducing q-u-o-t-a-s would increase the supply of doctors. We could put standards in the trade deals (if doctors and other professionals were ever included in these deals).

    1. PeakTrader

      Raising f-u-n-d-I-n-g would increase the supply of doctors. We could make U.S. medical standards more in-line with the rest of the world and make U.S. lawyers richer.

      1. JT

        Let’s say for the sake of argument that foreign doctors are not as good as American ones. Does this justify protectionism? I’d argue it does not. E.g., would a person who can’t afford an American doctor be better off not receiving treatment, or being treated by a foreign doctor? Similarly, would a person who can’t afford a Mercedes be better off with a Honda, or no car?

  10. Julian Silk

    Dear Menzie,

    This is a question, not a comment. Is there any part of Friedman’s argument that calls for increased labor force participation, and conversion of part-time workers into full-time workers and entrepreneurs? If you had that, you might have 5.3% growth for a year or two – not the initial years – but not for much more than that.


  11. mclaren

    Menzie Chinn remarks: in the Friedman calculations, the deficit shrinks because rapid sustained economic growth causes a surge in tax revenues. Take that away, and under mainstream macro assumptions, the deficit explodes.

    Correct. And given the dubious nature of the 5.3% GDP growth estimates, solid economic reasoning would lead us to expect a deficit explosion under Sanders’ plan. However, as Brad DeLong and Paul Krugman and Olivier Blanchard and Joseph Stiglitz have all pointed out, near the zero lower bound in an economic environment where the borrowers actually pay the government for the privilege of loaning the government money courtesy of slightly negative real interest rates on long-term bonds like inflation-adjusted TIPS, solid economic reasoning tells us that we should be running enormous deficits, much larger than in periods of normal interest rates far from the zero lower bound.

    In fact, solid economic reasoning tells us that it’s crazy not to run huge deficits in an economic environment with negative interest rates, since the public is in effect paying the government to park money in government bonds. With the IS/LM curve near the zero lower bound, government infrastructure spending of the kind Bernie Sanders proposes will have a much larger fiscal multiplier than in ordinary economic environment where we are not at the ZLB. As GDP growth takes off (albeit not at 5.3% annual rates), the government can pay back those bonds with inflated dollars. It’s an obvious win-win situation, and solid economic reasoning tells us so.

    1. Menzie Chinn Post author

      mclaren: Seriously, please read this post which graphically depicts what conditions are necessary for the Friedman tabulations to make sense, and this post which shows the optimistic outlook taking into account the ZLB empirically (but interprets multipliers in the conventional sense).

      While you’re at it, you might consider looking at the empirical literature on fiscal multipliers, perhaps as summarized in this entry in the New Palgrave Dictionary of Economics.

      I agree that infrastructure spending has large impacts; this is documented in the 2016 Economic Report of the President, and I’ve reported empirical studies by the IMF to that effect. However, note that most of the incremental spending proposed by Bernie Sanders, as tabulated by Friedman, is not in infrastructure.

      Now, you can go back to calling me a shill for the 1%.

      1. T

        Hi Menzie –

        Maybe you missed it, but I had a question above about your view of the assumptions underlying the model used by Romer-Bernstien in support of the stimulus package in the context of your criticism of Friedman. Were you as harsh? (4/3 @ 9:41)

        1. Menzie Chinn Post author

          T: There was no reason to be harsh, re: Romer-Bernstein. The ex post deviation of output from GDP baseline, and employment from employment baseline were in accord with estimates. The actual path of employment was lower because we didn’t know at the time of the forecast how badly employment was falling. You can find this point explained in greater detail in my posts dealing with counterfactuals (use the search option).

          Here, with the Friedman-Sanders tabulation, my point is the predicted deviation from baseline stretches credulity, given what I know about macroeconomics.

          1. T

            I think that you’re more than a little bit too kind to Romer-Bernstein, especially in comparison to Friedman. Why was it that “we didn’t know at the time of the forecast how badly employment was falling?” In my view, it was the utter failure of the economics profession to understand the consequences of a financial crisis, its magnitude, and its effects. The Romer critique of Friedman is that he made a modeling error by confusing levels with changes i.e. a one-time stimulus with a continuous stimulus — an egregious error to those with basic grad school economic training. In the larger context, however, it’s like saying that Friedman was a bad Ptolomist — he really doesn’t know his epicycle theory very well. My argument with Romer-Bernstein is that they were Ptolomists in the first place — their macro foundations were just wrong.

          2. Menzie Chinn Post author

            T: I’m sorry — what is your framework? What was called the neoclassical synthesis when I was in graduate school (SR Keynesian, LR Classical model) can accommodate all sorts of factors, and the idea of a “high pressure” economy was long a mainstay of conventional macroeconomics. If that’s what you call a Ptolomist [sic], I’m happy to be called Ptolemist, but I think you have to give me an alternative model that rationalizes the outcome you predict.

            By the way, those of us who worked on emerging market financial crises (i.e., international macro types) had a pretty good idea that the downturn would be worse than many domestic macro types projected.

          3. T

            Hi Menzie —
            I hope this post is not a repeat as it seems my reply to your last comment at12:19 never made it to the thread. In any case, three points.

            First, while the international macro types did have a better idea about the magnitude of the effects of the crisis, it seems to have come from their experience with the Asian crisis rather than any theoretical foundations. The admission that the closed-economy macro types were so poor in forecasting the effects of the financial crisis is an implicit critique of the failure of their models. In particular, how can their models even pretend to “model” a financial crisis when they don’t even have an explicit financial sector? DeLong counts the failure of macroeconomists to understand the transmission mechanism from the financial sector to the real sector, much less model it, as a major failure of the profession. As would any honest macroeconomist.

            Second, we’re all Ptolomists (archaic from at least the 1700s btw.) We all know we’re wrong and we’re waiting around for Copernicus and Kepler. Knowing our ignorance (and if we didn’t in 2008 we sure as hell know now), it seems that we should be a little humbler or at least more evenhanded in our critiques. Romer-Bernstien vastly underestimated the effects of the crisis, failed to understand the transmission mechanism from the financial sector to the real sector, assumed the economy would self-correct toward trend, and used models that failed to incorporate the fundamental drivers of the recession. To put it mildly, that’s a pretty rickety bully pulpit to attack Friedman.

            Third, the original “former CEA Chair” attack on Friedman was a political attack based solely on an argument from authority. It was only later that the Romers finally addressed the merits. And we all agree that the level/rate error was a big deal. But so were the errors in Romer-Bernstein although of a different kind. And so were all the macro models in 2008. So yeah, I’m sure Romer and Bernstein are better at epicycles than Friedman. But the tone of response to Friedman seems way more political that scholarly given the obvious deficiencies of the critics own modelling history.

      2. mclaren

        Thanks for the references, Dr. Chinn. I did read the article detailing the optimistic outlook for Sanders’ policies. As mentioned in my previous comment, the 5.3% GDP growth rate predicted by the Sanders plan seems overly optimistic. I also agree with the conclusions of the article: “But whether one could increase government consumption by nearly 8 percentage points of GDP and achieve highly persistent output increases, with only a one percentage point acceleration in inflation seems to me a question with an answer that is likely to be `no.’ “ That parallels my earlier remark that even 5.3% seems excessive.

        The question then becomes whether solid economic reasoning would lead us to vote Sanders and his proposed economic policies, as opposed to voting for Hillary Clinton and her proposed economic policies. If we vote for Sanders, we certainly won’t get 8 percentage points of GDP increase, we probably won’t get even 5 percentage points of GDP increase, and I’m extremely skeptical that we’re going to get anything close to the economic results Sanders’ plan suggests within the time frame Sanders describes. However, as pointed out by the article you yourself linked to (optimistic projections of Sanders’ policies), we’re likely to get at least some significant GDP increase, very likely without significant inflation.

        Let me take a moment to explain why the optimistic projection in that article you linked seems more credible than the other high-inflation projection: at present, there is a huge shortage of high-quality safe investment vehicles world-wide. This is the most reasonable explanation for negative real interest rates on government-backed U.S. bonds. Remember that we now languish in the aftermath of a historical-outlier balance-sheet recession; these are not normal economic conditions, and consequently it seems most unlikely to me that the price expectations are anywhere near as adaptive as predicted in the first (pessimistic) analysis to which you linked. Thus, when the money supply shrinks it also seems quite unlikely that interest rates will rise anywhere near as much as that model proposes (because people will still be too busy deleveraging their debt overhang). The reason why price levels are unlikely to shift upward and that interest rates are unlikely to rise as much as proposed in that model is, quite simply, because markets are likely to recognize that the boost from Sanders’ policies is short-term and not permanent.
        In order for price expectations to rise as much as you and the author of that article seem to expect they will, and in order for interest rates to rise as much as you and that author seem to believe, we would need deep structural changes to the U.S. economy. Specifically, we would need to de-financialize much of the U.S. economy and that’s not on the horizon; we would need to break up the giant monopolies that currently extract vast rents from the U.S. economy, which inhibits the growth of smaller competing businesses and parasitically saps profits that would otherwise flow downward to the middle 80% of the population; we would need to massively overhaul current anti-union policies throughout the economy and (for example) jail Wal*Mart executives who shut down stores as soon as they unions and put in prison the executives of grossly abusive corporate experiments in sadism toward their workers like amazon.com AKA the Fortress of Ultimate Darkness. None of this is on the horizon. These economic policies are more extreme than anything Sanders has proposed. More to the point, it would take quite a few years to put these policies in place. More: we would need to overcome fanatical obstructionism from the Republican House to pass such laws. And even then, assuming we get these policies, an economy as big as the U.S. would take a long time to show significant results from such policies.
        I believe that the evidence that much of the U.S. GDP now results from what economist Umair Haque calls “the Ponziconomy” devoted mainly to extracting rents through monpolies and artificial scarcities and so on is pretty strong. See Paul Krugman’s article “Profits Without Production” from 20 June 2013 as support for my assertions that an oversized share of the U.S. economy is currently a rent-extracting Ponziconomy rather than a productive (normal) economy as assumed in the pessimistic analysis of Sanders’ policies. If rent extraction is indeed the dominant mode of economic activity in America today, then we are likely to get larger-than-expected GDP growth as the proportion of the GDP growth that goes to the top 1% shifts downward to the rest of the population due to a breakup of the large monopolies that characterize all too much of the U.S. economy. In this respect, the IS/LM model is too simplistic, and we really need a set of linked differential equations to show what would happen. We are likely to get a virtuous cycle as the economy moves from rent extraction to producing useful goods and services because as the proportion of GDP growth shifted from the top 1% to the rest of the population increases, aggregate demand is likely to increase disproportionately in a feedback cycle. I don’t believe that the IS/LM model adequately accounts for that effect.
        The empirical literature on fiscal multipliers which you cited seems solid, but makes the point that “If indeed the current output gap is -18% or so, then likely the multiplier might be bigger than 1, and perhaps is close to 1.75, as noted in this post. If on the other hand, output is already close to potential in FY2017 (when the spending is assumed to begin), then the multiplier might be closer to 0.5. So, where you think you will end up depends a lot on where you think you are now…
        The issue with that aspect of your criticism of Sanders’ policy is that we don’t actually know what the output gap is. Absent some wonderful alternative-universe-viewing-device (callout to the TV show Fringe!) we have no empirical way of proving what the output gap really is right now. We can reasonably conclude that an output gap exists, and circumstantial evidence suggests that it is large — but how big it is, we can’t say with certainty.
        So the entire criticism based on assumptions about our current output gap and consequent conclusions about the size of the fiscal multiplier seems like an argument that cannot be resolved based on current empirical observations. In this regard I would caution you that we have only two data points to go on in the literature on depressions this large — fragmentary economic data from the Great Depression of 1930 (but without much of the economic statistics that we collect today, so the data set has very big gaps), and the data from the Great Recession of 2009. Permit me to suggest that two data points do not a rock-solid empirical dataset make.

        More to the point, it seems likely that the epochal bubbles & resultant balance-sheet recessions we got in 1930 and 2009 suggest that we apply extreme caution in using standard statistical methods like the usual regression models. Aside from the usual issues of heteroskedacticity, multicollinearity, and autocorrelation (let’s agree to wave out of existence measurement errors), we still find ourselves faced with the issue that when the classical solution involves running a principal component analysis of the corresponding covariance matrix, then pulling out the eigenvector corresponding to the largest eigenvalue to deduce what linear combination of variables generates the largest variation in the data, and then ranking eigenvalues by their relative size to guesstimate the relative importance of other linear combinations, we still run into very big problems if the data matrix has been polluted by high-dimensional noise. Instead of going further into such technicalities, let me note that random matrix theory tells us that autoregression analysis proves unfortunately sensitive to assumptions about the kind of underlying statistical universe we’re dealing with — and this is a very big issue in analyzing the aftermath of rare black-swan events like the Great Depression (1930) and the Great Recession (2009) because circumstantial evidence suggests strongly that the statistics of these economic events are different from Gaussian distributions. In fact we are likely to find ourselves in what Nassim Taleb calls “extremistan,” a statistical distribution with a very different and much fatter tail than we find in a normal distribution. In such fat-tailed statistical distributions, events which are vanishingly unlikely in normal distributions occur with distressing frequency (like, oh, say, the sharp decline of the 5% of the U.S. real estate market represented by the subprime market leading to a major collapse of the entire economy); and, most important, small changes to such systems are likely to produce much larger fiscal multipliers than we would expect in more normative economic situations because the policy changes are operating in those fat tails. In “extremistan” rare phenomena like hormesis, hysteresis and path dependency occur with distressing frequency.

        The short version of my rebuttal here is that your article on fiscal multpliers in the New Palgrave Dictionary depends on a data set drawn from 1945 to 2007. It cannot have escaped your notice that this data set excludes the “black swan” events (Great Depression (1930) and Panic of 1906 and 2009 economic collapse) in which fiscal multipliers are likely to be really big. To put it bluntly, you error here is akin to a statistician who tries to extrapolate the murder rate in Los Angeles from an analysis of the murder rates of small towns across the U.S. This fails because the big cities in the U.S. exist in a different statistical universe in terms of crime rates than small towns do. If we extrapolate the murder rate of, say, New York City from the murder in a sampling of 500 small towns, we conclude from a naive analysis that the murder rate in New York City will = [population of New York City/average population of small town]*murder rate in average small town. Since a bit more than 50% of the U.S. population consists of towns with a population less than 20,000, we do our naive calculation by multiplying the approximately 1/2 murder/year in a typical small town of population 20,000 by 8.4 million/20,000 = 210 murders. This year, however, New York Cities expects 350 murders. That’s a 40% error from our estimate. My point is that analyses of fiscal multipliers which fail to take into account that we are likely in a very different underlying statistical universe in the aftermath of a “black swan” event like the Great Recession than the normal situation after a standard economic recession are likely to err by at least as much our naive estimate of New York murders did — viz., 40% or more.
        Note that I am not dismissing your empirical survey of fiscal multipliers — it’s entirely valid, and good scholarly work. What I am saying that this empirical survey applies to normal economic conditions and the aftermath of conventional recessions where the economy declines because the Fed stepped on the brake. Since your dataset excludes “black swan” Great Depression-type events, I don’t think it’s valid to apply the analysis in our New Palgrave Dictionary entry to the aftermath of a once-in-a-lifetime Great-Depression-type economic collapse…and that’s where we’re at right now, alas.

        The general sense of your reply suggests that Sanders’ plan is worthless for economic reasons. I take it your conclusive parallels that of the sources you cited, in which we get a modest bump in GDP growth followed by a slowdown and rising inflation. So my final argument against your analysis here is that even if you’re right, Sanders’ economic plan is better than Clinton’s economic plan by miles and not by itself likely to be especially harmful.

        Hillary Clinton’s economic plan boils down to tired nostrums from the 1990s which have been tried and which have uniformly failed. She wants funding for more education; but, as Larry Summers has astutely pointed out, we’ve been funding expanded higher education for 30 years, and the data clearly show that it has only produced degree inflation in hiring. In Summers’ words, this results in a “cruel game of musical chairs in which people with higher and higher degrees chase the same number of jobs.” Summers has pointed out that we need to increase the rate of job creation, not educate our workers better.
        Hillary Clinton has also proposed spending 10 billion dollars to move manufacturing back to the U.S. This is a complete non-starter, for obvious reasons: see the article “The manufacturing jobs are never coming back,” at fivethirtyeight.com. Automation has wiped out these manufacturing jobs, so even if the factories move back to the U.S., they’ll never employ more than a fraction of the workers they used to — and, because the skilled factory jobs have mostly been automated, what few jobs remain are much lower paid than they used to be. The study “Even the most educated workers have declining wages” points out that “among education categories, the greatest real wage losses between 2013 and 2014 were among those with a college or advanced degree.” So let us take it as read that proposing more funding for higher education and more funding to bring back manfuacturing jobs to the U.S. are simply not viable solutions to our current economic malaise.

        What else does Hillary Clinton propose? The usual tired nostrum of more worker training. But in a world dominated by global wage arbitrage, this is pointless. We know have excellent circumstantial evidence that the persistent claims by large U.S. corporations of a “lack of skilled workers in STEM” is nothing but a scam to justify increasing H1-B visas and thus obtain loads of low-cost skilled foreign workers who can be kept as virtual serfs courtesy of draconian U.S. immigration and work laws. The evidence that the so-called “skills shortage” in U.S. tech firms is nonexistence seems overwhelming — see “H-1B Guest Worker Fraud and the “Lacking Skills” Scam,” or Paul Krugman’s column “Jobs and Skills and Zombies,” The New York Times, 30 March 2013, or the article “Debunking the “Skills Gap”: Why Good People Can’t Get Jobs,” by Peter Capelli, faculty Director of Wharton Business School’s Advanced Management program, July 2012.

        As Paul Krugman points out: ” …the current ratio of vacancies to unemployed workers is far below normal. Meanwhile, multiple careful studies have found no support for claims that inadequate worker skills explain high unemployment.
        But the belief that America suffers from a severe “skills gap” is one of those things that everyone important knows must be true, because everyone they know says it’s true. It’s a prime example of a zombie idea — an idea that should have been killed by evidence, but refuses to die.
        Think about what we would expect to find if there really were a skills shortage. Above all, we should see workers with the right skills doing well, while only those without those skills are doing badly. We don’t.”
        [Krugman, “Jobs and Skills and Zombies,” op. cit., 2013]

        So all of Hillary Clinton’s economic proposals are on their face worthless, either prima facie useless like her nostrums about bringing manufacturing back to America, or cruelly counterproductive like her proposals to fund more higher education for workers (which merely causes degree inflation and exponentially increased college debt among workers), or mere pabulum based on long-debunked myths like the fairytale of the so-called “skills shortage” among workers.

        We thus find ourselves faced with a choice twixt Clinton’s worthless and/or counterproductive economic policies, and Sanders’ economic policies which according to your own worst-case analysis may produce a modest increase in GDP growth but only temporarily.

        Which economic policies does solid economic reasoning lead us to support? Hillary’s, or Sanders’?

        If you persist in slamming Sanders’ economic policies given such a logical antinomy, I would suggest that you are indeed a shill for the top 1%.

  12. T

    Very good point on the international macro types. But my guess is that it was do to their experience with the effects of the observed foreign crises, esp. in Asia, than due to any modern model-based explanation. Your point is also an implicit acknowledgement that the mainstream closed-economy macro types had it very very wrong. I mean really, none of those models implicit in Romer-Bernstein even had a developed financial sector. How do you deal with a financial crisis when your models don’t even have a financial sector?

    So I guess we’re all Ptolomists (archaic, by the way, as it was used as least as early as the 1700s). My question is if you know you’re a Ptolomist waiting for Copernicus, i.e. you know you are wrong, maybe show a little more sympathy to Friedman or, alternatively, take a much harder look at Romer-Bernstein. They vastly underestimated the effects of the crisis, used models that incorrectly assumed trend reversion, and had little or no clue of the transmission mechanism from the financial sector to the real economy. The last eight years of macro have been attempts to deal with these deficiencies. So turning on Friedman — the original CEA letter didn’t even have a model-based criticism — was a cheap shot.

  13. JT

    It’s not fair to criticize Sanders for an independent analysis. If you’re upset that Sanders hasn’t run his proposals through an economic model, you should also criticize all the other candidates for failing to do this (Jeb! pulled 4% out of his ass because “It’s a nice round number. It’s double the growth that we are growing at.” It’s not based on any model.)

  14. JT

    PeakTrader, I haven’t read Ohsfeldt and Schneider. According to Noah Smith, they find minor differences in life expectancies between the US and other rich countries. So we pay a lot more and get slightly better outcomes (this may simply be a correlation). Another point Smith makes is that O&S’s data is really old (80-99). Newer data shows much less difference in cancer survival rates (and the US is below average for cervical cancer).

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