My old professor Jerry Friedman wrote a piece several weeks ago, arguing that a combination of increased public spending and income redistribution (higher minimum wages and other employment regulation favorable to labor) proposed by the Sanders campaign could substantially boost growth and employment during his presidency. As readers of this blog know, this piece has gotten a lot of attention in the past couple of days. Most notably, it inspired a letter from four former CEA chairs strongly rejecting the claim that Sanders proposals could “have huge beneficial impacts on growth rates, income and employment that exceed even the most grandiose predictions by Republicans about the impact of their tax cut proposals.” A number of prominent liberal economists have endorsed the CEA letter or expressed similar doubts.
I want to try to clarify the stakes in this debate. There are three questions, each logically prior to the other.
1. Is it reasonable to think that better macroeconomic policy could deliver substantially higher output and employment?
2. Are the kinds of things proposed by Sanders capable in principle of getting us there?
3. Are the specific numbers in Sanders’ proposals the right ones for such a really-full employment plan?
The second question doesn’t matter until we’ve answered yes to the first one. And the third doesn’t matter until we’ve answered yes to the first two.
The first question is not only logically prior, it also seems to be what the public debate is actually about . The CEA letter, and almost all the other criticism of the Friedman paper I have seen, focuses on whether the outcomes described are plausible at all, not the specific ways they are derived from the Sanders proposals. Almost all the pushback I have seen has been to the effect that 5 percent real GDP growth and 275,000 new jobs per month are not possible results of any conceivable macro policies.
As I’m sure Jerry Friedman would agree, there are plenty of ways his estimates could be improved. But it’s pointless, even disingenuous, to debate the specific numbers before agreeing on the larger questions. I want to focus on the first question here, both because it is the premise of the others and because it is where the debate is currently located.
So: Is it plausible that there could be 5 percent-plus real GDP growth and 300,000 new jobs per month over the eight years of a Sanders presidency? I think it is — or at least, I don’t think there is a good economic argument that it’s not.
I want to make five related points here. First, conventional wisdom in economics is that an exceptionally deep recession should be followed by a period of exceptionally strong growth. Second, the growth in output and employment implied by the paper are more or less what is required to return to the pre-recession trend. Third, discussions of macroeconomic policy in other contexts imply the possibility of growth qualitatively similar to what Jerry describes. Fourth, it is not necessarily the case that the employment Jerry projects would exceed full employment in any meaningful sense. Fifth, if you don’t believe a growth performance at this level is possible, that implies a sharp slowdown in potential output, for which you need a credible story. The last point is probably the most important.
1. It’s not controversial to say that a historically deep recession ought to be followed by a period of historically strong growth. Every macroeconomics textbook teaches that changes in GDP can be split into two components: short-run variation driven by aggregate demand and by monetary and financial factors, and a long-run trend driven by population growth and technological change. While all sorts of things that constrain or inhibit spending can cause temporary dips in production, over time it should converge back to the fundamentals-determined trend. Unless they involve the destruction of real resources — and they don’t — recessions should not have lasting effects. A direct corollary of this textbook view is that the deeper the recession, the stronger should be growth in the following period — otherwise, there’s no way to get back to trend. The people who are saying that Jerry’s growth numbers are impossible on their face are implicitly saying that that we should expect all output losses in recessions to be permanent. This is not orthodox economic theory, at all. Orthodoxy says that the exceptionally deep recession should be followed by a period of exceptionally strong growth — and if it hasn’t been, that suggests some ongoing demand problem which policy can reasonably be expected to solve.
2. Friedman’s growth estimates are just what you need to get output and employment back to trend. This point is well made by Matthew Klein. As Klein puts it, this “supposedly ‘extreme’ and ‘unsupportable’ forecast implies American output will return to its previous trend just as Sanders would be finishing up his second term, in the third quarter of 2024.”
As Klein and others point out, the level of GDP projected by Jerry for the end of Sanders’ second term is right in line with what the CBO and other establishment forecasters were saying just a few years ago. I just now was looking at the CBO’s forecasts as of January 2013; they were projecting 4-4.5 percent real GDP growth over 2016-2017. This is, of course, exceptionally high by historical standards — Paul Krugman says that Jeb Bush was “rightly mocked” by progressives for suggesting he could deliver growth at that level. But the CBO was making the same prediction and it’s no mystery why — a period of growth well above historical levels is the logical condition of a return of output to trend. By the way, I should emphasize that Friedman’s growth estimates were not derived this way. It’s just a lucky coincidence — if it holds up — that the measures proposed by the Sanders campaign happen to be the right magnitude to close the output gap over eight years.
Similarly, Friedman’s employment numbers (around 277,000 new jobs per month) are indeed way above what we have seen recently. But if you want to get the employment-population ratio back to its 2006 levels by 2024, you need even more than that — about 300,000 new jobs per month, by my calculations. Many respectable economists — including at least one of the CEA signers — have written that the employment ratio is a better indicator of labor-market conditions than the unemployment rate, and expressed concern about its decline. A few years ago, Brad DeLong had no doubt that more expansionary policy could raise the employment population ratio back to 60.8 percent, if not to the pre-recession level of 63 percent: “we could still put 5.5 million more people to work with appropriate demand-management policies.” To do that by 2024 would imply monthly job growth around 220,000 — less than what Friedman claims for the Sanders proposals, but about double what we are seeing now more than double what the CBO is currently projecting for 2017-2024. It’s just arithmetic: you can’t raise the employment-population ratio without a sustained period of job growth substantially higher than what we are seeing now. So it makes no sense to talk about that as a goal if you think that faster job growth is not a feasible outcome for policy.
It is true, of course, that the aging of the population implies a long-term fall in the employment ratio, all else equal. But let’s put this in perspective. DeLong, for example, suggests that 0.13 points per year is probably an overestimate of the decline due to demographics. David Rosnick, applying the 2006 employment ratios of various age groups to the population projected for 2026, finds a larger decline due to demographics, on the order of 0.25 points per year. But even that leaves most of the fall in employment unexplained by demographics. By any standard, there is a lot of room to do better. But we have to agree that this is something that, in principle, demand side policy can do.
3. In other contexts, it’s taken for granted that more expansionary policy could deliver substantially higher growth. Anyone who says that the zero lower bound is a constraint on monetary policy, or who suggests that the “natural rate of interest” is negative, is saying that output could be substantially higher given more expansionary monetary policy. Presumably, this is true for other forms of expansionary policy as well. (In terms of the model beloved by undergraduate textbooks and New York Times columnists: If the preferred point in ISLM space is to the right of the current one, we should be able to get there by shifting the IS curve just as well as by shifting the LM curve.) Obviously, the transition to that higher level of GDP would involve a period of much higher growth. It would be interesting to ask how fast output would have grown if we’d been able to remove the ZLB constraint in, say, 2010; I suspect the numbers might not look that different from Friedman’s.
Similarly, most participants in this debate agree that the ARRA stimulus of 2009 was effective, with multipliers above 2.0 for at least some categories of spending. Many also think that it should have been bigger. If increased government spending could boost output in 2008, then why couldn’t it today? And if the right answer to “how big?” then was “enough to close the output gap,” why isn’t that the right answer today? Yes, it would be a big number. (Again, it’s a lucky coincidence — if correct — that it happens to be close to what Sanders is proposing.) But so what? If “a trillion has a lot of zeroes” wasn’t a good argument against an adequate stimulus in 2009, then it isn’t one today.
Or again: If we think that austerity explains a big part of poor growth in European countries, we have to at least consider the the same might be true here. It would be very good luck, to say the least, if years of feuding between the administration and Republican congresses had somehow delivered exactly the right fiscal balance. In general, this discussion has been muddied by the fact that the pragmatic choice to delegate demand management to central banks, has been turned into an axiom in economic theory. From where I’m sitting, the statement “it would be helpful if the central bank set a lower interest rate” is equivalent, for most macroeconomic purposes, with the statement “it would be helpful if the level of public spending were higher.”
4. Friedman’s projections are unreasonable only if you think the US is already at full employment. The unstated but central premise of the critics is that we are at or near full employment, so there is no space for further demand policy. Friedman’s paper says that by the end of a second Sanders term, unemployment would be at 3.8%. Krugman replies: “It’s possible that we can get unemployment down under 4 percent, but that’s way below any estimates I’ve seen of the level of unemployment consistent with moderate inflation.” Now here we have an interesting question. Whether we are at full employment today depends, first, on how much you think the fall in the employment-population ratio reflects weak demand as opposed to structural or demographic factors — or in other words, to what extent faster job growth would draw nonworkers into the labor market, as opposed to pushing down the unemployment rate. But it also depends on what you think full employment means.
If you believe that any demand-induced acceleration of nominal wage growth will be passed to higher prices, or if you think that price stability should be the sole concern of macro policy, then there will be a hard floor on unemployment, which may not be much lower than where we are today. But if you think some appreciable fraction of faster nominal wage growth would go to an increase in the wage share (or faster productivity growth) rather than to inflation, and if you think some acceleration in inflation is acceptable (or even desirable), then “full employment” becomes a broad region rather than a sharp line. (I wrote a bit about these issues here.) In this case there will even be an argument — made by plenty of mainstream people, including some of the ones criticizing Friedman now — that a period of “overfull” employment would be desirable to bring the wage share back up from its current historically low levels. To believe that a 3.8% unemployment rate is ruled out by price stability considerations is to claim that faster wage growth cannot raise the wage share, which I don’t think is well supported either theoretically or empirically. (Or that raising the wage share is not desirable.) Also worth recalling: In the debates around the NAIRU in the 1990s, the general conclusion was that the idea of a hard floor to unemployment below which inflation will rise uncontrollably, is not in fact a useful guide for policy.
5. The argument against Friedman’s piece comes down to the claim that the economy is already close to potential. If this is the case then, yes, claims that increased public spending can achieve large gains in output are delusional. I think this is a useful debate to have, but I’m not sure how the CEA chairs would make the case. First, again, many of those criticizing Friedman’s numbers have supported the idea of more expansionary policy in other contexts. Second and more fundamentally, the persistent fall in the employment population ratio and the deviation of output from pre-recession trend seem very hard to explain in “supply” terms. Yes, there are demographic changes, but again, even if you hold the age distribution of the population constant, the employment ratio is still 3 points lower than at the start of the recession. That’s a deficit of 10 million jobs. Closing that gap requires an extended period of above average growth, qualitatively similar to what Friedman describes. If you believe that’s impossible, you have to explain why.
Logically, there are a couple possible answers. Either you argue that the earlier estimates of potential GDP were exaggerated, and we were at overfull employment prior to the recession. If you take this route, you have to be ready to make the case that the country needed substantially slower growth and higher unemployment in the 2000s, despite the noticeable lack of wage growth or rising inflation. Or, you can claim that something happened in 2008-2009 that permanently reduced potential output. So then, what is the negative technological shock that hit the economy in 2008-2009? Is Casey Mulligan right that American businesses have been crippled by the red tape of Obamacare? I don’t think either of those are good options for liberals. Another possibility is to talk about hysteresis and so on — the persistent effects on the laborforce and productivity growth from periods of weak demand. Here you will be on firmer ground — there is plenty of evidence that deep recession inflict lasting harm on workers and businesses. But this kind of reasoning makes Friedman’s numbers more plausible, not less. Because if weak demand can drag potential output down, strong demand can presumably pull it up.
The bottom line is this. Ten years ago, the CBO expected GDP to be $20.5 trillion (correcting for inflation) as of the end of 2015. Today, it is $18.1, trillion, or about 12 percent lower. Similarly, the employment-population ratio fell by 5 points during the recession (from 63.4 to 58.4 percent) and has risen by only one point during the past six years of recovery. Either these facts — unprecedented in the postwar period — reflect a shortfall of effective demand, or they don’t. If they do reflect a lack of demand, then there is no reason the expanded pubic spending and downward redistribution that Sanders proposes cannot close the gap, with a period of high growth while output and employment return to trend. (The fact that such high growth hasn’t been seen in the postwar period is neither here nor there, since there also has been no comparable deviation from trend.) Alternatively, you may think that the shortfall relative to previous growth rates reflects a decline in potential output. But then you need to offer some explanation of why the growth of the economy’s productive capacity slowed so abruptly, and you need to apply this belief consistently. I think it’s more reasonable to believe that the gaps in output and employment reflect a demand shortfall. In which case, the Sanders plan could in principle have the kind of results Friedman describes.
UPDATE: There was a significant error in section 2, which I’ve corrected.
So what? Sanders is a socialist–call me a bigot. I will not allow socialism/communism to sneak in on us.
Excellent blog post. Bernie might win Nevada and so the establishment wonks are on the attack.
http://big.assets.huffingtonpost.com/ResponsetoCEA.pdf
Jamie Galbraith has a letter.
Yes I read it. Should have linked to it. Will write a followup tonight probably and mention it there.
Hi, Josh,
Nice post–no disagreement with the fundamental thrust, but the math needs to be clarified a bit. As I’m sure you know, but don’t bring out in the post, you don’t need a very “strong” growth rate to “catch up” to a previous growth rate that had been temporarily depressed. You only need a growth rate that is epsilon bigger than the previous trend rate, for some epsilon.
That is, since growth rates are compounded (i.e., exponential), a growth rate of, say, 3.0001% will eventually allow GDP to catch up to (and surpass) the amount of GDP projected to occur at a trend level previous growth rate of 3.0%. It will of course take a much longer time to do so than if the new growth rate is 5%, but it will happen…
Your other points are all well-taken, but this one is somewhat crucial. The opposition to Friedman seems to imply that something has changed, so that we will (or can) only catch up very, very slowly–maybe 3.1% sustained is feasible, but not 5%. This may contradict more optimistic timelines that were previously promulgated, but it does not contradict an (eventual, lengthy) return to previous growth trends.
But such a “no 5% possible” argument does obviously at least implicitly make political assumptions, so you are certainly correct to emphasize the dependence on the (implicit) political takes, rather than on some fantasized “apolitical” version of purely “economic” constraints. 5% is certainly possible given political positions with which the majority of the population agree, if not those who hold actual power.
Yes, this is right. Though to be clear, some on the other side (such as Brad DeLong) do explicitly claim that the output losses in Great Recession were permanent — no catchup is possible
Two separate issues: 1) can deficit spending create jobs and 2) is Bernie proposing deficit spending?
As a student of the post-Keynesian camp, I certainly agree that deficit spending can create jobs.
But is Bernie proposing deficit spending? It’s not clear. He is proposing the biggest tax increase in history, including regressive taxation on the working class to “pay for” health care & sick leave. I personally would see my disposable income shrink by 8.9%. That will kill jobs, not create them. It will also transfer wealth upward (from the currently uninsured to doctors and other health care providers).
Friedman claims that a Sanders budget would produce a surplus after a few years. If true, that would likely induce a recession, according to the post-Keynesian worldview.
All of this is complicated by political realities — a Republican congress will not approve most of Bernie’s taxes on the rich, but might go along with regressive taxes on the poor and working class. Likewise most of Bernie’s spending proposals will be dead in the water.
Combine that with Bernie’s track record as a fiscal conservative (i.e. he supported PAYGO legislation), and I have no confidence in his economic ideas, but for different reasons than the CEA. The CEA oppose Bernie’s plan because they fear it will result in too much deficit spending, I fear Bernie’s plan because it may result in not enough deficit spending.
This is an interesting question that’s been sort of sidelined here. For macroeconomic purposes, can we reasonably reduce the fiscal position to a single statistic, the overall surplus or deficit? For a lot of purposes, it’s reasonable, and it’s certainly convenient. But I wouldn’t want to exclude the possibility that e.g. a big increase in public spending financed by a highly progressive income tax could be expansionary overall.
I hope it doesn’t seem overly combative to say that I think this is a weakness of the MMT approach. The effect of government spending on private demand comes through changes in private incomes, not only by changes in private balance sheets.
But this isn’t a side question, it’s sort of important. Standard Keynesian logic says that it’s *deficit* spending which stimulates the economy. So in an ironic way, it’s exactly because Sanders is claiming he can do all this stuff *without* running a deficit that his plan would not be stimulative. The wishful thinking here is not just “we can get above 5% growth because we’ll use Keynesian policies”, it’s worse than that – it’s “we can get above 5% growth without stimulating the economy with Keynesian policies”
This is a very interesting post(although I’m not an USA citizien and I’ve never been in the USA I root a lot for Sanders), however I have a nitpick.
You say:
“If you believe that any demand-induced acceleration of nominal wage growth will be passed to higher prices, or if you think that price stability should be the sole concern of macro policy, then there will be a hard floor on unemployment.”
In fact, it is logically possible to have higher inflation, a fixed wage share and lowe unmployment, and it might indeed be a desirable policy option (I think it’s true that the wage share can increase though, and also that output can increase).
You’re right. The “or” should be an “and”.
Great post. Thank you.
I posted the following to friends on my FB page today: Okay Krugman’s beginning to lose my respect. His post today on the Freidman paper tries to refute it by displaying a chart of historical growth rates. As JWMason points out, it is economic conventional wisdom that periods of severe downturn can (should) be followed by exceptionally high rates of growth. The problem with the chart Krugman thought would be elucidating is that the first year displayed 1957 well after to high post-Depression, post WWII growth rates. Was this intentional or just really dumb?
The CEA letter does not disagree with your point #1. They all believe that better policy could increase growth and reduce unemployment. However, there are too many unlikely assumptions behind a 5% increase. The most unrealistic assumption is that a huge fiscal expansion would be accommodated by a compliant monetary policy.
One reason we don’t hit 5% growth is the Fed. They take away the punch bowl by raising interest rates. 5% growth would necessitate a compliant Fed. The Fed currently wants to raise interest rates and keep a 2% inflation ceiling, not allow growth to expand at a much faster pace. How long would it take to get enough new Fed appointments through Congress to change the Fed outlook? The president has slow influence on the Fed through appointment over time, staggered 14 year terms of 7 members. 12 Bank presidents are controlled by the banks and rotate in 5 positions. Presidents can influence but not control monetary policy.
The CEAs all see that better but more moderate fiscal policy proposed by Obama is blocked by a GOP Congress and undermined by GOP controlled state governments. They would all agree that proposals by Obama, Sanders and Clinton wouldl move in the same direction. They disagree with the magnitude of the achievable effect. The idea that Sanders could achieve 5% is theoretical but requires too many unrealistic assumptions.
This is actually one of the main reasons why I’m defending the Friedman piece. The Fed is not imposed on us from outer space, it is part of our democratic government, run by people appointed by the president. If the main obstacle to faster growth in output and employment is the Fed, then that needs to be part of the political conversation. I’d like to get to a point where people talked about the Fed the way they talk about the Supreme Court – as one of the main ways in which presidential appointments are used to advance a political program. I’d like to get to a point where appointing a pro-growth, inflation-dove Fed chair was as big a deal for a Democratic presidential candidate as appointing Supreme Court justices who will vote to uphold Roe. So from my point of view, if people respond to Jerry’s piece with “can’t happen because of the Fed” that’s great — then we can move onto the next step of seeing the leadership of the central bank as the critical political question it is.
I am not an economist.(Lawyer with a BA in political Science). Two five hour honors economic courses at Ohio State U. in the early 1970’s taught by a fan of Friedman and the Chicago School didn’t teach me much.
I’ve been reading economic books and texts non-stop since the Great Recession to figure out how so many intelligent academic, business, and political leaders could be so wrong and nearly collapse the world economy.
Your blog was helpful to me to tie up various aspects of this debate about Sander’s plan.
And I agree with your comment about shining more light on the politics of picking Fed appointments.
“then there is no reason the expanded pubic spending and downward redistribution that Sanders proposes cannot close the gap”
You’ve made a rather amusing spelling-error in here that you may wish to correct 🙂
Thanks!
Has anyone else noticed the hypocrisy here? The CEA letter defends evidence-based policy — but speaks only from the authority of pronouncing hard truths.
Do they not have research assistants? Where is their projection?
If these are not VSPs, who is?
Sander’s New-NewDeal will work for the people.
“So what Krugman calls implausible is the unprecedented fiscal expansion necessary to increase the employment-population ratio to the level he has been arguing it would need to be in a strong recovery. Krugman in the 1930s would have claimed that we shouldn’t follow the pipe dreams of FDR and his implausible plans. We should probably stick with a Southern Dixiecrat that didn’t rock the boat and implemented policies similar to Hoover. ”
Since those (congress, pundit, media) establishments put their dirty hands all over the systems, it would be hard to achieve.
http://nakedkeynesianism.blogspot.com/2016/02/getting-history-right-krugman-continues.html?m=1
Sure. But let’s not confuse the political question with the economic one.
Can I beg you and your readers recognize two roadblocks being ignored by the media that promise to totally hijack a future Sanders administration, both caused by really horrible trade policy.
1. Due to services liberalisation, increases in US spending likely wont lead to US jobs, it would lead to jobs for the lowest bidding qualified firms and lots of L1 visas being granted. Welcome to the 21st century, my American friends.
Also, a similar dynamic exists in health care, please read about this in the following paper. http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.405.5725&rep=rep1&type=pdf in the cold light of reason, it seems obvious to me that Obamacare is nothing like what it is represented to be and is instead some kind of delaying tactic while the negotiations in Geneva on TiSA and or the WTO GATS which has faltered several times in part its said due to US and other developing countries failure to deliver. But a convenient “healthcare crisis” or “education crisis” might mean that those goals could deceptively be completed, and services globalized, wages greatly lowered, and “progressive liberalisation” leveraged, a “grand bargain” abandoning millions of Americans and a fraying social contract and dashing to bits the assumption that US policy would help people instead of the drug and insurance companies- instead doing all this to continue huge waste which adds no value.
The failure to disclose this set of facts by both political parties and the US media is absolutely inexcusable.
I am sorry about the typos above, its been a long day and I am exhausted.
Please read Skala’s paper, its striking how incredibly far from the facts the national narrative on Obamacare has drifted.
Here is a document from the state of Maine from 2006 that fills in some key facts, one of which verifies my assertion that the real barrier to affordable health care is this bad trade policy, especially GATS/TiSA – another interesting fact revealed by this document is that the TiSA negotiations have been going on for ten years, not just three as they assert.
http://www.maine.gov/legis/opla/ctpchlthcaresub.pdf
Please also read this EU document. You may have to save it to disk with a generic filename and a .pdf extension to view it. This is a declassified EU document that contains a road map to TiSA but one needs to know the lingo and also look up the references GATS articles, line by line.
http://data.consilium.europa.eu/doc/document/ST-6891-2013-ADD-1-DCL-1/en/pdf
People also may want to read this, which contains a summary up to 2014 of the “state of play” as they call it. Note how East African service providers are gearing up to offer services to the US market and the discussion about whose wages should apply when.
http://www.cuts-geneva.org/pacteac/images/Documents/EAC%20Forum/Forum17/EAC%20Geneva%20Forum-%20WTO%20Note%2017.pdf
“I just now was looking at the CBO’s forecasts as of January 2013; they were projecting 4-4.5 percent real GDP growth over 2016-2017. This is, of course, exceptionally high by historical standards — Paul Krugman says that Jeb Bush was “rightly mocked” by progressives for suggesting he could deliver growth at that level. ”
But all that says is that we could have ONE year were growth was high. That’s not what Paul Krugman was criticizing (and it’s a bit… misleading, of you to characterize him that way). What Krugman was criticizing is Jeb’s, and also Sanders’, claim that we could have EIGHT years like that. And as Krugman pointed out, closing the gap and returning to trend increases the annual growth rate by only 1/3 of 1%
it all depends what you think the gap is. If you define the gap as the difference between the pre-2006 trend growth rate of per capita GDP and the current projections for 2024, then you need about 4.5 percent average over the next eight years to close it. If you define the gap using the CBO’s projections for 2024 as of 2006, you need a bit less but still well above any previous 8-year period since WWII. On the other hand, if you define the gap based on the CBO’s current estimate of potential, then you need very little additional growth to close it. So the disagreement is largely about whether it is reasonable to regard current actual and projected GDP as close to potential in some relevant sense. There obviously we differ. I don’t think Krugman would disagree with that characterization of the debate and I don’t think anyone reading my posts would get a different idea. We can debate the substance without accusing anyone of dishonesty, I think.
Also btw when I wrote “over 2016-2017” I meant during both years, a two year period.
Go back further and you’ll see similar high numbers predicted for 2015, 2014, 2013. CBO’s estimate of potential is continuing to be revised downward as growth comes in below forecast.
You’re right that this has a lot to do with it. But the fact we would need to extraordinary, pretty much unprecedented period of growth to catch up to the “old trend line” is rather evidence that the cost of the 2007 recession is sunk. It’s done. Can’t get that GDP back. Trend shifted (or rather “trend” isn’t linear).
That is a point of view and you are entitled to it. But I don’t think the fact that the downturn was unusually large and unusually persistent is, in itself, an argument that it is not worth trying to get back to the earlier trend. It could just as easily be taken as an argument for why it’s more urgent.
The view that lost output is gone forever (1) is not obviously supported by economic theory — every textbook tells us that large downward deviations from trend should be followed by periods of rapid growth back toward it. (2) If you are arguing that the new trajectory is the *result* of the financial crisis and severe recession of 2008-2009 (as opposed to just happening to coincide with it) then it seems to me that is actually an argument for being more optimistic about the potential effects of a big stimulus. Since if negative demand shocks have such persistent effects, presumably positive ones can too. (3) Obviously, there’s a great deal of uncertainty about all of this, so you have to ask yourself, on which sides are the risks greater? If we think the gap is big and it isn’t what do we get? — a bunch of new public spending; higher inflation; a rising wage share; interest rates well above the ZLB; insurance against another negative demand shock. None of them bad things from where I am sitting. Whereas if we think there is no space when there actually was, a lot of people have to suffer material deprivation and un(der)employment for no reason at all. So it seems to me that operationally, “we can definitely do it” and “I really doubt it but maybe” and are much closer to each other than “no way, we just can’t, forget it.” Are you really that sure?
But this isn’t a debate about the desirability of a fiscal stimulus. It’s not about “should we do it?” It’s a debate about whether the costs and benefits of Sanders’ proposals are an accurate reflection of reality or are these based on fantastical assumptions about the economy’s growth rate.
“CBO’s estimate of potential is continuing to be revised downward as growth comes in below forecast.”
But that’s not an argument for Sanders/Friedman is it?
Well, in the sense that it’s an illustration of how lower actual output mechanically gets translated into lower estimates of potential. So the CBO estimate can’t be taken as independent evidence for a small gap.
I don’t know, I guess it just comes down to the question – do you think that realistically the US economy can have a sustained 5%+ growth rate for a period of ten years? And the answer to that is one hair short of “no way”. Nothing like that has happened since WW2, all kinds of crazy things would have to work out “just rights”, the most optimistic estimates and predictions would have to come true, etc.
Or put it another way – is it realistic to assume that per capita gdp in 2026 will be close 90,000 per year?
Well, that’s what we’re trying to decide here!
Notsneaky, a question. Suppose there’s a big but temporary negative demand shock (Fed raises rates or whatever you like) and unemployment rises. What would you expect to happen to unemployment in subsequent years? Return to its old level, or something else?
Some hysterisis aside, return to its previous level. Oh, and paribus those ceteris of course.