A recent and a widely circulated paper by University of Massachusetts economist Gerald Friedman asserts that if Democratic Presidential nominee Bernie Sanders implemented all of his proposed policies, real national income growth would average 5.3% over the next decade and employment and wages would skyrocket. [1] According to Friedman, national income would be nearly 40% higher in 2026 than what the Congressional Budget Office currently projects.

Those who #FeeltheBern and have used the paper as evidence that Sanders’ policies will work, but many progressive economists and policy wonks were quick to point out that Friedman’s estimates are highly implausible. Kevin Drum at Mother Jones, for example, notes that, “Friedman is forecasting a sustained level of economic growth that’s literally never happened before in history. Not here, not in Denmark, not anywhere.” [2]

Four former Democratic Chairs of the Council of Economic advisers wrote an open letter bluntly stating that, “no credible economic research supports economic impacts of these magnitudes,” and that Friedman’s conclusions, “undermines our reputation as the party of responsible arithmetic.”

Defenders of Friedman, such as well-known economist James Galbraith, subsequently criticized his critics for merely dismissing Friedman’s results as implausible rather than actually pointing out what was wrong with them. According to Galbraith, “The Sanders program is big, and when you run it through a standard model, you get a big result.” [3]

Seemingly in response to these criticisms, Christina and David Romer, [4] two well-known New Keynesian economists, just released a detailed analysis of Friedman’s paper, and their conclusions aren’t very rosy to say the least. There are three fundamental points made by Romer and Romer:

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… Friedman’s figures for the effect of additional government spending exceed conventional ones by at least a factor of four. He offers no evidence for such effects…

The estimated demand-induced effects of Senator Sanders’s policies are not just implausibly large but literally incredible. Moreover, even if they were not deeply flawed, Freidman’s enormous estimates of demand-fueled growth could not and would not come to pass.”

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.”
There a number of other assumptions that Friedman makes in his paper that do not seem justifiable based on the available evidence, and in some instances he is open about his assumptions being based on no evidence whatsoever.

For example, on page 31, Friedman assumes that Sanders’ Paycheck Fairness Act will, “raise women’s wages by 1% relative to men’s, and there will be an increase of 0.2% a year for the next decade.” In a footnote, he literally states, “these assumptions are completely arbitrary.”

In regards to Sanders’ minimum wage proposal, Friedman assumes that the employment costs are sufficiently small such that the benefits of a $15 minimum wage clearly offset the costs. But this is nothing more than a guess, as there is no research on minimum wage increases of such a large magnitude from which plausible conclusions could be drawn.

When the Congressional Budget Office (CBO) modeled the labor market impact of a $9 and $10 federal minimum wage, they used a range of plausible employment responses to evaluate its effects and consequently produced a range of results. For some reason, Friedman does no such thing.
Moreover, the CBO’s central estimate was that 500,000 jobs would be lost in response to a minimum wage increase to $10. On the other hand, Friedman estimates that there are no disemployment effects until the minimum wage is raised past $10, and even then the disemployment effects are small relative to the wage increase. [7]

Friedman says that Sanders’ Workplace Democracy Act will increase the number of unionized workers by around 1.5 million, and that “union productivity effect will offset 80% of the wage increase [associated with unionization] with 10% coming from profits and 10% from higher prices.”
But the meta-analysis that Friedman cites to support this assumption finds that, except in the manufacturing sector, “unionization elasticities are very small, suggesting a very inelastic output response with respect to unions.” [8]

In other words, firms only increase their productivity by a small amount in response to higher union wages, so the assumption that 80% of the wage increase associated with unionization is covered by the ‘union productivity effect’ is not realistic. As he does throughout the paper, he here too assumes that higher wages do not reduce employment, seemingly unaware of evidence to the contrary.

As noted by Matthew Yglesias at Vox, Friedman also ignores the many ways Sanders’ proposals would likely reduce labor force participation, labor hours, and employment. “If you made college free, some young people who would otherwise work full time would instead go to school and work part time. Some students who currently work part time would reduce their hours or cut back to zero,” he states. Expanding programs like Medicare and Social Security would likely also have a depressing effect on workforce participation. [9]

In brief, there is very good reason to be skeptical of the plausibility of the assumptions and the validity of the methodology of Friedman’s paper and consequently the plausibility of the conclusions he comes to. Friedman arguably deserves thanks for his contribution to the debate on public policy, but his analysis is clearly not the slam dunk some of Sanders’ supporters believe it is.

References:
[1] http://www.dollarsandsense.org/What-would-Sanders-do-013016.pdf
[2] http://www.motherjones.com/kevin-drum/2016/02/bernie-sanders-responsible-gerald-friedman
[3] https://lettertosanders.wordpress.com/2016/02/17/open-letter-to-senator-sanders-and-professor-gerald-friedman-from-past-cea-chairs/
[4] http://big.assets.huffingtonpost.com/ResponsetoCEA.pdf
[5] https://evaluationoffriedman.files.wordpress.com/2016/02/romer-and-romer-evaluation-of-friedman1.pdf
[6] https://www.cbo.gov/sites/default/files/113th-congress-2013-2014/reports/44995-MinimumWage_OneColumn.pdf
[7] http://onlinelibrary.wiley.com/doi/10.1111/1468-232X.00310/epdf
[8] http://www2.gsu.edu/~ecobth/Fraser_Union_Performance.pdf
[9] http://www.vox.com/2016/2/18/11041838/bernienomics-wonks