Krugman’s blog 2/26/16

There was one post yesterday, “Romer and Romer on Friedman:”

Update: Justin Wolfers has more. Note that in this context “modern” means “since 1937″.

Christina Romer and David Romer respond to criticisms that mainstream progressive economists attacked the Gerald Friedman analysis of the Sanders plan without going into the details by going over the analysis with a fine-toothed comb. It makes painful reading.

The main points are things I was aware of — especially the second point — but are now laid out in full:

Unfortunately, careful examination of Friedman’s work confirms the old adage, “if something seems too good to be true, it probably is.” We identify three fundamental problems in Friedman’s analysis.

• First, all the effects of Senator Sanders’s policies that he identifies are assumed to come through their impact on demand. However, his estimates of those demand effects are far too large to be credible—even given Friedman’s own assumptions.

• Second, in assuming that demand stimulus can raise output 37% over the next 10 years relative to the Congressional Budget Office’s baseline forecast, Friedman is implicitly assuming that the U.S. economy is (and will continue to be for a long time) dramatically below its productive capacity. However, while some output gap likely still exists, the plausible range for the output gap is much too small to accommodate demand effects nearly as large as Friedman finds. As a result, capacity constraints would likely lead to inflation and the Federal Reserve raising interest rates long before such high growth rates were realized.

• Third, a realistic examination of the impact of the Sanders policies on the economy’s productive capacity suggests those effects are likely to be small at best, and possibly even negative.

But it gets worse. For example,

Thus, Friedman’s figures for the effect of additional government spending exceed conventional ones by at least a factor of four. He offers no evidence for such effects. Indeed, his estimates appear inconsistent with his own assumptions: he assumes that rise in government spending of $1 would typically raise real output by slightly less than a dollar (Friedman, p. 47).

We have a conjecture about how Friedman may have incorrectly found such large effects. Suppose one is considering a permanent increase in government spending of 1% of GDP, and suppose one assumes that government spending raises output one-for-one. Then one might be tempted to think that the program would raise output growth each year by a percentage point, and so raise the level of output after a decade by about 10%. In fact, however, in this scenario there is no additional stimulus after the first year. As a result, each year the spending would raise the level of output by 1% relative to what it would have been otherwise, and so the impact on the level of output after a decade would be only 1%.

Oh, dear.

I have no beef with Mr. Friedman; the campaign staff who evidently had no idea that the numbers were wildly implausible, and responded to criticism by attacking the critics’ motives, are another matter. But I hope we can now stop talking about this.

Two parting observations, however:

First, aren’t you glad not to see a candidate leading with his chin this way in the general election?

Second, this is an object lesson in the dangers of believing something because it’s what you want to hear. And that’s a lesson that applies to a lot more than economic growth projections.



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