Newspaper article International New York Times

A Flawed Economic Analysis ; Study Praised by Sanders Predicts Huge Boom, but Is Based on Faulty Math

Newspaper article International New York Times

A Flawed Economic Analysis ; Study Praised by Sanders Predicts Huge Boom, but Is Based on Faulty Math

Article excerpt

A professor's analysis of Bernie Sanders's economic program predicted a boom but based it on a belief that temporary stimulus has a permanent effect.

An academic study that predicted Bernie Sanders's economic platform would cause an enormous economic boom turns out to have been based on faulty math, or bad economic logic.

The analysis produced by Professor Gerald Friedman, an economist at the University of Massachusetts at Amherst, got a lot of attention when it argued that fully enacting the Sanders program would lead per capita gross domestic product -- a measure of average income -- to grow one-third higher in 10 years' time than it otherwise would. In this economic nirvana, jobs would be plentiful, unemployment rare, poverty low, inequality less severe and the budget in surplus. The study is not an official campaign document, but it has been lavishly praised by Mr. Sanders's campaign.

It's such an eye-popping claim that four leading Democratic economists, all former leaders of the Council of Economic Advisers, countered that it "cannot be supported by the economic evidence," scolding Mr. Friedman that it makes "it that much more difficult to challenge the unrealistic claims made by Republican candidates." And that in turn led to a thousand think pieces, accusations (and denials) of bad faith and an ugly public spat.

The problem is that for all the name-calling, none of Mr. Friedman's critics had figured out what he had gotten wrong. Until now.

Christina Romer and David Romer, two of the leading macroeconomists of their generation and both professors at the University of California, Berkeley, have just released a careful forensic examination of Mr. Friedman's analysis. (Ms. Romer was one of the four original Democratic economists who had criticized Mr. Friedman's work. And full disclosure: Mr. Romer was for many years my collaborator in editing the Brookings Papers on Economic Activity.)

Their excavation uncovered one crucial but buried tidbit, and it's basically the whole shebang.

But first, some background. Most economists believe that temporary increases in government spending will yield temporary increases in output. To see why the effect of stimulus is temporary, realize that if raising government spending raises output, then because the end of a stimulus program means cutting government spending, the same forces are later set in motion, but in reverse. And so in the standard story, a temporary stimulus improves the economy, but only temporarily.

Mr. Friedman's calculations assume that removing a stimulus has no effect. The result is that temporary stimulus has a permanent effect.

The issue here is all about levels versus changes. In the usual telling, changes in government spending lead to changes in output. In Mr. Friedman's spreadsheets, changes in government spending permanently raise the level of output. Asked about this, Mr. Friedman confirmed that this was how he had made his calculations. …

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