Can the United States economy achieve 5 percent growth?
This is the deceptively simple, endlessly complicated question now at the heart of the Great Bernie Magic-Math Battle of 2016. And it is an important one, thanks to the actual magic of compound interest. Imagine an economy, any economy: If it grew at 2 percent a year, as the U.S. is currently doing, it would be 22 percent bigger after a decade. If it grew at 5 percent a year, it would be 63 percent bigger. On the massive scale of our economy, the difference between 2 percent and 5 percent growth is measured in the trillions.
An independent analysis of Bernie Sanders’s economic plans — single-payer health care, an increase in the minimum wage to $15 an hour, free tuition at public colleges, new taxes on the rich, among other proposals — by an economist who supports Clinton promises such 5 percent growth. (Not surprisingly, it has been repeatedly touted and defended by the Sanders campaign.) Four former Democratic chairs of the White House’s Council of Economic Advisers, all lauded academics, called these estimates fantastical. That kicked off a giant wonk brawl — a small sample of posts: Krugman, Yglesias, Galbraith, Ip, Thoma, Chait, yours truly — that now centers on the question of whether 5 percent growth is really so impossible to imagine.
It helps to understand how Gerald Friedman, the author of the independent analysis, got to that 5 percent growth number in the first place. He assumes that our economy is running well below capacity — leaving what economists call an “output gap” that could be closed with deficit spending. Once the Sanders political revolution happens, if his proposals were enacted, Uncle Sam would go crazy buying goods and services. Businesses would speed up hiring, which would draw more workers into the labor force. A hotter job market would bolster productivity. More workers, each doing more work, would translate into a lot more growth.
The idea that government stimulus would help the economy is uncontroversial, at least on the left. Obama’s own economists have lamented the fact that the deficit has fallen so quickly on his watch. And Hillary Clinton is proposing things like infrastructure investment to help boost jobs and juice growth. So maybe it is not so crazy to presume that the United States could, with the kind of huge policies Sanders is running on, close the gap — as Kevin Drum and Matthew C. Klein have argued. Maybe the real problem is that the technocrat lefty wonks have small imaginations.
The Bernie supporters argued the Bernie detractors were making more of a political statement than an economic statement. “This isn’t just a bad case of tribalism and intellectual dishonesty,” Yves Smith wrote. “This is purveyors of a failed orthodoxy refusing to indulge any consideration of plans that would show how badly they’ve mismanaged the economy.”
They argued that Bernie’s critics failed to look closely at Friedman’s assumptions and missed how reasonable they were. “There is no ‘magic asterisk,’ no strange theory involved here,” the economist James K. Galbraith wrote in an open letter in response to the CEA open letter. “And the main effect of adjusting the assumptions, which would be a perfectly reasonable thing to do, would be to curtail the growth rate after a few years — not at the beginning, when it would matter most.”
Worst of all, they argued, the Bernie detractors were underestimating the ability of the economy to grow, and for government spending to help it do so. “It’s possible the critics think the economy will never recover the losses from the crisis, in which case the arguments for radical financial reform are even stronger,” Klein argued at FT Alphaville. “More likely, they think the deviation from trend is misleading because ‘structural forces’ just happened to have emerged at exactly the same time as the worst financial crisis since the Depression — and that policy is powerless to lean against these ‘structural forces.’”
But these critiques still left open the technical question of whether Bernie’s plans would really produce 5 percent growth, as the CEA economists had disputed in their letter. So I asked Austan Goolsbee, one of its co-authors and an ex-adviser to President Obama, to walk me through the logic: Isn’t there an output gap, and couldn’t deficit spending close it? “If you misinterpreted [Friedman’s] findings and asked, ‘Could you get short-term [growth over 4 percent]?’ Yes, if you had stimulus plus some favorable world developments, that would be doable,” Goolsbee said.
The main problem with Friedman’s analysis, according to Goolsbee, is it presumes not just 5 percent growth in year one of a Sanders administration, but 5 percent growth over ten years. That means that in the first year — when most of the stimulus would go into effect — the economy would need to be expanding at something like a 10 percent rate. (The last time we hit a 9 percent rate was in 1959.) Then growth would need to remain twice as fast as it is right now, for years and years after that. “It’s ridiculous — as are a whole rash of assumptions in the work,” Goolsbee said.
Let’s delve into the weeds. For Friedman to find such a gigantic boost to growth, both productivity and employment would need to shoot to eyebrow-raising levels. According to Friedman’s analysis, the strong labor market would boost productivity back to where it was during the full-employment boom times of the late 1990s. But many economists believe that productivity growth has been on a long-term secular decline, and doubt whether a hot economy would bring it back up to those levels — particularly on a sustained basis.
The employment side of Friedman’s ledger seems yet more outlandish. Labor-force participation would have to return to rates that seem absurd given the aging of the population and the retirement of the baby-boomers. The Congressional Budget Office expects the proportion of the adult population working or looking for work to decline from about 63 percent today to 60 percent over the coming years. In a universe where all of Sanders’s proposals were implemented, Friedman sees it jumping back up to more than 67 percent. Even presuming that a better economy would nudge more older adults to work, Bernie’s expansion of health coverage and Social Security would encourage early retirement.
On top of that, the unemployment rate would have to fall below 4 percent, with the economy growing quickly and inflation rising — all without the Fed slamming on the brakes. “I assume that monetary policy will accommodate the increase in growth without raising interest rates,” Friedman writes. That seems like a crazy assumption, given that the Fed has already started to raise rates now, with growth around 2 to 2.5 percent.
The truth is that it seems impossible for Sanders’s economic plans to do what Friedman thinks they would. But the whole debate has underscored that our current growth rates are as much a function of policy as they are of anything else, and that we need not resign ourselves to growing at 2 percent a year, year after year. Maybe the technocrat wonks are right. But maybe Hillary Clinton should be promising to try for 5 percent growth herself. Smarter policies — infrastructure investment, early childhood education, making work pay, rebuilding the safety net, declining to raise interest rates and choke off a recovery — would all help bolster the economy. Five percent growth over a decade might be fantastical, but 5 percent in a few years might not be.