Sunday, February 28, 2016

"it is vitally important to be realistic about the impact of policies on the performance of the overall economy" -- Romer & Romer

The most disturbing part of the Open Letter criticizing Gerald Friedman's analysis of the Sanders plan:

Making such promises runs against our party’s best traditions of evidence-based policy making and undermines our reputation as the party of responsible arithmetic.

And the most disturbing part of Romer & Romer's Senator Sanders’s Proposed Policies and Economic Growth (PDF, 11 pages) to me is their claim that the predicted economic improvement is "far too large to be credible". (Emphasis by Romer & Romer.)

Unrealistic. Too large to be credible. Too good to be true. That's not evidence.

Romer and Romer object to Gerald Friedman's projection of 5.3% average annual output growth over the next decade. They consider it unrealistic. It's easy to agree with that assessment. But that doesn't make the Romers right.

It's easy to guess the future wrong. Time magazine, 31 December 1965:
The Labor Department reckons that businessmen's exuberant capital spending—they have invested $190 billion in new plants and machines in the past five years—will pay off with a 3% productivity gain in 1966. That will serve to temper inflation...

Economists in and out of Government are much more bullish than they were a year ago. The economy is not only running close to optimum speed, but has no serious excesses and few soft spots.

Obviously over-optimistic.

It's easy to guess the future wrong. But it's just plain sad to think economists today would dismiss an economic strategy simply because they find it too optimistic. We still do need a plan that turns out well.

From Gerald Friedman's paper:
The Sanders economic policy will achieve broad-based and sustained prosperity with the following:

The growth rate of the real gross domestic product will rise from 2.1% per annum to 5.3% ...
Faster economic growth and redistributive taxation will raise the growth rate of median income from 0.8% per annum to 3.5% ...
The unemployment rate will fall to 3.8% ...
There will be sustained increases in real wages ...
The gap between rich and poor will narrow dramatically ...
After increasing in the first years of the Sanders Administration, the Federal budget’s cash deficit will drop sharply ...

(I left a lot out.) The way I look at it, everybody's economic plan has a happy ending. You have to take it with a grain of salt.

But what I want from economists like Romer and Romer is not outright rejection because the happy ending is unrealistic. I want them to throw away their assumptions and look at things with fresh eyes.

I need them to wonder what can we do to make it happen.

The fact that policymakers have been unable to restore vigor to economic growth is not evidence that the goal is unreachable. It is at least as likely the problem is that wrong policies have been used. And for the record, I don't just mean wrong policies that the other guys have used.

The difficulty lies, not in the new ideas, but in escaping from the old ones.

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