Live from La Farine: A question about the estimable Gerry Friedman:
How can an increase in government spending of $1.4 trillion/year generate a $14 trillion increase in spending in the year 2026? But it really looks to me like he has both:
- the very dubious assumption that all 10%-points of the shortfall from the trend as of 2007 can be made up relatively easily', and
- a multiplier of not the 3-in-and-near-a-liquidity trap I carry around in the back of my head, but 10.
But Friedman’s text claims his multiplier is not even 3, but less than 2, and averaging roughly 1...
In short: In his runs Friedman has government spending higher in 2026 by $1.4 trillion than in baseline. He has real GDP higher in 2026 by $14 trillion. What other components of real spending are higher by how much in order to make that real GDP number in the year 2016 higher than baseline by $14 trillion? And what mechanisms are making those components higher?
It’s fine to propose aspirational policies based on a hope that the world is such that things will break your way. It’s not so good to put the world breaking your way forward as a central-case forecast of what your policies will do. And it’s distressing that I cannot figure out how to make Freidman’s analysis hold together quantitatively even if I do allow the assumption that the entire output relative to the pre-2007 potential-output trend can be closed easily…