Discover the miscalculations (or logic) of an economic analysis adopted by Bernie Sanders

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An academic to study who predicted that Bernie Sanders’ economic platform would cause a huge economic boom turns out to have been based on flawed calculations or bad economic logic.

The analysis produced by the teacher Gerald Friedman, an economist at the University of Massachusetts at Amherst, received a lot of attention when he asserted that the full implementation of the Sanders program would cause gross domestic product per capita – a measure of average income – to increase by one third in 10 years. than it would be otherwise. In this economic nirvana, jobs would be abundant, unemployment rare, poverty low, inequalities less severe and the budget in surplus. The study is not an official campaign document, but it was extensively praised by the campaign of Mr. Sanders.

It’s such a striking claim that four leading Democratic economists, all former chairmen of the Council of Economic Advisers, versus that it “cannot be backed up by economic evidence,” chiding Friedman that he makes it “all the more difficult to challenge the unrealistic claims of Republican candidates.” And this in turn led to a thousands of pieces of reflection, accusations (and denials) in bad faith and a nasty public quarrel.

The problem is that for all the name calling, nothing critics of Mr. Friedman had understood what he was wrong.

Until now.

Christina romer and David Romer, two of the greatest macroeconomists of their generation and both professors at the University of California at Berkeley, have just published a thorough forensic examination of Mr. Friedman’s analysis. (Ms Romer was one of the first four Democratic economists who criticized Mr Friedman’s work. And full disclosure: Mr Romer was for many years my collaborater by editing the Brookings Papers on Economic Activity.)

Their excavations uncovered a crucial but buried delicacy, and that’s essentially all of the shebang.

But first, a little background. Most economists believe that temporary increases in government spending will lead to temporary increases in output. To understand why the stimulus effect is temporary, know that if the increase in public spending increases output, then because the end of a stimulus program means a reduction in public spending, the same forces are then set in motion. , but in reverse. And so in the standard story, a temporary stimulus improves the economy, but only temporarily.

Here’s the problem: Dr. Friedman’s calculations assume that suppressing a stimulus has no effect. The result is that the temporary stimulus has a permanent effect.

The problem here is all about the levels versus the changes. Typically, changes in public spending lead to changes output. In Mr. Friedman’s spreadsheets, changes in government spending permanently increase the level Release. Mr. Friedman confirmed to me that this was how he made his calculations.

The same confusion between levels and changes leads Friedman’s calculations to show that a permanent increase in the level of government spending – like that proposed by Senator Sanders – will lead to a permanent increase in the rate of change in output. This is why he sees the Sanders plan having enormous effects on economic growth.

There are two interpretations of Mr. Friedman’s findings. The first is that he was simply wrong in his calculations. The second is that he has a different view of how the economy works. Either way, his numbers don’t represent conventional economic thinking. And they disagree with empirical studies documenting that temporary fiscal stimulus tends to have temporary effects.

Yet Friedman described his analysis as “using standard assumptions and methods.” Likewise, its most ardent defender, James Galbraith, argued that, “What Professor Friedman did was use the standard impact assumptions and forecasting methods of mainstream economists and institutions.” In many footnotes, his article draws rather intentionally from standard analyzes, such as those published by various government agencies.

The problem is that conventional analyzes relate changes in public spending to changes in output, not to its long-run level as in Friedman’s analysis. Sure enough, Friedman argues that increased government spending stimulates the economy, but cutting government spending at the end of the stimulus package has no effect. Despite all the details spelled out over 53 pages and 97 footnotes, this critical assumption is never mentioned.

Here’s why it matters. Mr. Friedman claims to “make a conservative estimate of the stimulus effect of the Sanders program by using a relatively low expenditure multiplier.”

The multiplier is a number that quantifies the influence of public spending on production. He leans on the Congressional Budget Office for the multiplier estimates and nuances them a bit, making them appear conservative. The multiplier he uses is on average 0.89. In the models of the Congressional Budget Office from which it is based, this means that if the government spends an additional $ 100 today, production will increase by $ 89 this year, but when that stimulus is withdrawn next year, production will fall back to its previous level.

From start to finish, that extra $ 100 in government spending brings in an extra $ 89. In contrast, in Friedman’s figures, production remains $ 89 higher every year, forever. Over a 10-year period, this means that $ 100 of government spending generates a total of $ 890 more, which implies a 10-year multiplier of 8.9.

This is not a conservative estimate; it is so high that I know of no study suggesting such large effects, nor any economist who would defend this point of view. This is why Ms and Mr Romer claim that Mr Friedman’s “estimates of the likely effects of demand are considerably higher than standard approaches suggest” and that his estimates are “not only implausibly high, but literally unbelievable. “.

When I directed Mr. Friedman to this critique of his analysis, he simultaneously accepted and rejected it.

He accepted it, telling me that “I may have made a mistake.”

But he also dismissed the criticism, arguing that his numbers are based on an alternative worldview, saying: “For me when the government spends money, stimulates the economy, hires people who spend, it spurs more. private investment. It stays, and the next year you start at the next level. He admits that this “is not a standard macro” and described it as the understanding of a previous generation of economists – a sub-tribe of Keynesians that he called “Joan Robinson Keynesians”. (Joan robinson was a contemporary of John Maynard Keynes in Cambridge.)

When I asked Mr. Friedman if he was correct in concluding that the standard assumptions suggest that Mr. Sanders’ economic program will have such great effects, he said, “I have to stop saying ‘standard’. It became evident during our conversation that he just hadn’t realized that he had misinterpreted mainstream economics, which led him to describe his disagreement with Ms. and Mr. Romer as “a measure. my ignorance of modern macro and my disagreements with macro. “


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