The key takeaway from the fuss over the projected growth effect of Senator Bernie Sanders’ economic program is that it doesn’t matter. Sanders’ reforms for health, public education, investment, and for social fairness stand on their own. Whether they would produce economic growth at 3 percent or 5 percent, for five years or 10 years, is a secondary issue.
The entire fuss is over an independent estimate of the growth effects, which certain prominent economists found implausible, mainly because such high growth rates have not been seen recently in this country. On that basis, four past chairs of the Council of Economic Advisers decided to brand the author of the paper, Professor Gerald Friedman of the University of Massachusetts, as a nut.
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Now two of the attackers, Christina Romer and her husband David, of the University of California, have decided to engage more seriously, with an 11-page critique. The epithets have been dropped. This is a good thing — if a bit late.
The Romers now maintain (mainly) that Friedman made a math error, confusing levels of output with rates of change. But this complaint isn’t actually about math; it’s about economic theory.
To see the issue, ask yourself: did the American Reinvestment and Recovery Act of 2009 make any difference to the level of economic output that we experience today? Equally, did the New Deal help to end the Great Depression? How about the Second World War?
The Romers say no. They admit a temporary effect only. According to them, the economy of the 1930s would have recovered in full, eventually, without the New Deal or World War II. And the American economy today would be exactly where it is, or even a bit further ahead, even if there had been no recovery act — and also, for that matter, had there been no automatic stabilizers such as unemployment insurance or food stamps.
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Back in the 1930s, John Maynard Keynes would have disagreed. His followers today, including me, believe that the Reinvestment and Recovery Act and the automatic stabilizers were necessary. We believe that without the stimulus bill, economic performance today would be worse. We believe that if the bill had been bigger, performance today would be better. That, essentially, is the proposition built into Friedman’s paper.
One can argue over many details: the size of the multipliers, the available labor supply, the trade balance, resource markets, the banking sector. Personally I’m more pessimistic than Friedman’s paper; I fear problems that are difficult to model — such as speculative movement in oil markets — will emerge after three or four years of strong growth. (I do think the Romers’ contention that “inflation would soar” is unsupported and absurd.) But Friedman was conducting an exercise — that of running the Sanders’ program through a model. He did it fairly, setting out his assumptions in detail. He concentrated on the essentials. He was correct to report the results and not to try to fudge or suppress them.
The Romers’ view of automatic recovery with no permanent effects from policy — however popular as an academic theory — is not received truth. And while simple math errors are not unknown in economic papers — when found, they should be corrected — disagreement with a theory is not a “math error.”
It may strike readers as peculiar that Christina Romer, who became chair of the Council of Economic Advisers in 2009 during a critical moment in our economic history and who back then argued for a far larger stimulus program than we got, actually believes, as she and her husband now write, that “temporary spending could cause a temporary boom, but its effect on the level of GDP a few years after its end will be, to a first approximation, zero.” Really? All that work and struggle was about getting a temporary boost to a recovery that would have happened anyway? It did not seem that way at the time.
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And does President Obama believe that his great economic policy triumph in the face of the Crisis of 2009 had no lasting impact? Does he agree that had the American Reinvestment and Recovery Act never been proposed, the economy would have recovered anyway, just a few months later than it actually did? I rather doubt that the president thinks this. Is he even aware, that this is the deeply-held view of his own chief economic adviser at the time?
Somehow I doubt that too.
James K. Galbraith is the author of “Inequality: What Everyone Needs to Know.’’