Comprehensive Report Predicts: 26 Million New Jobs, Median Income Up $22k, Unemployment Will Dip to 3.8%
My guest today is Gerald Friedman, professor of economics at University of Massachusetts, Amherst. Welcome back to OpEdNews, Jerry.
JB: You and I were in touch just a few weeks ago for the first time to discuss Hillary's perhaps inadvertent distortion of the numbers behind Bernie's single-payer policy: Econ Prof Protests Gross Distortion of Work by WSJ and Clinton Campaign [1.19.2016]. I certainly wasn't expecting to talk to you again so soon! But I was hooked when I read an article on CNN that quoted you: Under Sanders, income and jobs would soar, economist says. I'm sure that this isn't what Bernie's opponents want to hear. Tell us more, please.
GF: Such criticisms led me to do this work. This goes back to the September article in the Wall Street Journal, charging that Sanders would bankrupt the United States by increasing federal spending by $18 trillion over 10 years*. When I read the article, I said to a friend that this needed a real dynamic analysis because much of the spending Sanders proposes would replace other spending, so it is not new spending, and it would increase revenues by promoting faster economic growth. She asked me how someone could do this analysis and, foolishly optimistically, I suggested it would be easy; anyone could do it, because all you need are a few multipliers and elasticities. Naturally, she suggested that I do it.
A friend once told me that only optimists ever get anything done because if people knew how difficult it would be to do things, no one would ever start.
JB: There's something to that. So, how did you go about this?
GF: So, after nearly four months of almost nonstop work, I have my multipliers, elasticities, and good estimates of how much Sanders would increase spending, taxes, and what it would do to the federal deficit. For each of of over a dozen spending programs, I calculated the various "offsets": moneys that would have been spent in these areas but were not because of the new Sanders program. I then calculated for the entire spending program, the sum of these programs, the effect on national income and employment, and the "offset" in reduced spending on social services, due to increased employment. In short, I did the same for the tax program and for the various regulatory changes, including higher minimum wages, pay equity, and others. For each tax, spending, regulatory program, I also had to estimate who would bear the burden or receive the benefits, because at different income levels, people respond differently to increases or reductions in income. (Economists label this the Marginal Propensity to Consume at different income levels. I used estimates of this from the Congressional Budget Office.)
JB: Okay. I'm with you so far.... But, go easy! Economics is clearly not my first language.
GF: By the way, all of this required that I contact the Sanders campaign where they generously helped me to identify exactly what he was proposing in taxes, spending, and regulations. That is how I came to share with them my own work on financing a national single-payer program. Thus, I came full circle back to my original single-payer work!
JB: The Sanders campaign is not only aware of what you're doing but supplied numbers so you could better do your work. Interesting.
GF: The net result of all these calculations of net changes in spending is a number: the change in effective demand associated with the Sanders program, and the change for each year 2017-26. (For simplicity sake, I assumed that his program was enacted entirely as he proposes on January 1, 2017.) I then used estimates from the Congressional Budget Office of the current value of the "multiplier," or the effect on national income of an increase in effective demand. (In order to minimize any estimate of the positive benefit of the Sanders program, I projected the value of the multiplier going forward from now on the assumption that it would fall steadily as the economy expanded.) With this annual multiplier, I projected the effect of the Sanders program on GDP. With the value of GDP, I estimated employment using a relationship that economists call "Okun's Law" or the relationship between changes in employment and GDP. With the value of employment, I estimated the unemployment rate, assuming changes in immigration (which is pro-cyclical or increases when the economy is doing well) and movements in-and-out of the labor force. With the unemployment rate, I estimated changes in wages (adjusting for the effect of regulatory changes such as the minimum wage and the effect of the Improved-Medicare-for-All program). Finally, with GDP, employment, wages and taxes, and regulatory changes, I estimated the effect on income for different groups.
JB: Yikes! I didn't realize there are quite so many variables to take into account.
GF:There are a lot of numbers and a lot of spreadsheets here. And a lot of equations and assumptions. Many times, I woke up in the middle of the night worrying that I had forgotten something, had made a wrong assumption or entered a wrong equation, and that everything I had done was wrong! Several times, I went downstairs to my computer and there my wife would find me at 4AM or 5AM checking. One fun thing about this is the way all the results are interconnected so when I change one number, I can watch all the other numbers change and my graphs change. It is as close to choreography and the grace of a dance as economics ever gets.