Must-Read: Christina D. Romer and David H. Romer: Senator Sanders's Proposed Policies and Economic Growth: "According to an analysis by Gerald Friedman...

...Senator Sanders’s proposed policies would result in average annual output growth of 5.3% over the next decade, and average monthly job creation of close to 300,000. As a result, output in 2026 would be 37% higher than it would have been without the policies, and employment would be 16% higher. Although we share many of Senator Sanders’s values and enthusiastically support some of his goals, such as greater public investment in infrastructure and education, we also believe it is vitally important to be realistic about the impact of policies on the performance of the overall economy.

For this reason, it is worth examining Friedman’s analysis carefully. Moreover, Friedman has made available an extensive report describing his methodology and assumptions, allowing others to examine the specifics of his analysis. 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.

  1. 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.
  2. 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.
  3. 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...