In my last post I argued that Hillary Clinton, under the acknowledged influence of Paul Krugman, wrongly attacks the Sanders campaign on the ground that a hard line stand against inequality is bad “political strategy.” That’s Krugman the politician talking, and he’s serving up bad economics. Inequality is a fundamental and debilitating economic problem that must be addressed by reforming capitalism, not by gradually pursuing a political solution. I have been dismayed by Krugman’s seeming inability to understand even the simple, basic impacts of inequality growth.
Now I’m getting apoplectic: In Friday’s Op-ed (“Varieties of Voodoo,” New York Times, February 19, 2016, here), Krugman attacked the projections of the Sanders economic team, headed by Gerald Friedman, claiming they are making unrealistic projections of the income growth under the Sanders economic plan. Krugman implies that Sanders and Friedman are, somehow, lost in an “economic fantasy” comparable to the GOP’s trickle-down fantasy:
America’s two big political parties are very different from each other, and one difference involves the willingness to indulge economic fantasies.
Republicans routinely engage in deep voodoo, making outlandish claims about the positive effects of tax cuts for the rich. Democrats tend to be cautious and careful about promising too much. * * *
But is all that about to change?
On Wednesday four former Democratic chairmen and chairwomen of the president’s Council of Economic Advisers — three who served under Barack Obama, one who served under Bill Clinton — released a stinging open letter to Bernie Sanders and Gerald Friedman, a University of Massachusetts professor who has been a major source of the Sanders campaign’s numbers. The economists called out the campaign for citing “extreme claims” by Mr. Friedman that “exceed even the most grandiose predictions by Republicans” and could “undermine the credibility of the progressive economic agenda.”
The open letter (“An Open Letter from Past CEA Chairs to Senator Sanders and Professor Gerald Friedman,” February 17, 2016, signed by Alan Krueger, Austan Goolsbee, Christina Romer, and Laura D’Andrea Tyson, here), did indeed contain a stinging rebuke of the Sanders campaign and Gerald Friedman:
We are former Chairs of the Council of Economic Advisors for President Barack Obama and Bill Clinton. For many years, we have worked to make the Democratic Party the party of evidence-based economic policy. When Republicans have proposed large tax cuts for the wealthy and asserted that those tax cuts would pay for themselves, for example, we have shown that the economic facts do not support these fantastical claims. * * *
We are concerned to see the Sanders campaign citing extreme claims by Gerald Friedman about the effect of Senator Sanders’s economic plan – claims that cannot be supported by the economic evidence. Friedman asserts that your plan will have huge beneficial impacts on growth rates, income and employment that exceed even the most grandiose predictions by Republicans about the impact of their tax proposals.
These four economists have literally taken Friedman and Sanders to the woodshed, and two days later Paul Krugman – Hillary Clinton’s adviser – made sure the whole world knew about it! I’m going to be adamant about this: This is a false, politically motivated attack, based on a superficial reading of Friedman‘s January 28 report (“What would Sanders do? Estimating the economic impact of Sanders programs,” here). The letter and Krugman’s immediate endorsement of it were serious lapses of political judgment, indiscretions that can only harm the progressive objectives Hillary Clinton insists she joins Bernie Sanders in pursuing. I see four major problems with this attack:
First, it is obviously politically motivated. A challenge in a primary campaign to the credibility of economic forecasts of a fellow progressive is bizarre, and especially one coming from Paul Krugman, who has publicly admitted that the economics profession’s “dirty secret” is its inability to forecast growth. Krugman’s longstanding conviction has been that inequality is just a “political” problem lacking economic consequences, and these four former CEA chairs appear to agree, for they launch a broadside attack on an obvious attempt to relieve those consequences. If they were really concerned about the impacts of inequality, one would think, all five of them would be more cautious in critiquing proposals to counter those effects.
Second, in this letter the former CEA chairs make no distinction between “grandiose predictions” of the trickle-down effects of income tax cuts on top incomes and predictions of income growth from increasing the taxes at the top. As all five of these economists must be aware, there is a huge difference between supply-side trickle-down fantasies and demand side stimulus proposals: It is one thing to make the trickle-down claim that tax cuts on top incomes will increase tax revenues (or even, incredibly, pay for themselves), and quite another to claim that tax increases on these same taxpayers will raise more revenues and stimulate the economy. The trickle-down claim is false, and the stimulus claim is true.
I am quite dismayed by the posturing of these five economists: My question for them is this: Where have you been? For several years Paul Ryan has been proposing massive tax cuts for the wealthy in proposals he calls “The Path to Prosperity.” None of them, so far as I know, publicly called him out for claiming, as he has, that these tax cuts will pay for themselves. Nor to my knowledge did they publically challenge the Heritage Foundation when, in 2002, it predicted that the Bush tax cuts would eliminate federal debt by 2010. Challenging that kind of absurdity is a no-brainer: Why haven’t they been actively calling them out the way they are now going after the Sanders campaign, on a completely different, non-controversial, and far less serious point?
Third, why strenuously attack any progressive proposal at this point on forecasting uncertainty grounds, given that the Clinton and Sanders campaigns have agreed on economic objectives? So far as I know, none of these five economists have publically challenged CBO’s overly optimistic growth projections in recent years. CBO has declined to change its ten-year outlook even in the face of inequality-induced decline, and despite several recent quarters of zero or near-zero growth, and the Fed has been fitfully unable to raise interest rates. Lately, there has even been talk of negative interest rates.
The economic future as seen through the collective eyes of mainstream economists is so uncertain, in fact, that on the very day this blistering letter to Sanders and Friedman was published, it was reported that Fed Officials, for the first time in over a decade, refused to even issue an economic outlook statement after its most recent policy meeting:
Federal Reserve officials threw up their hands in January, deciding that they could not decide whether market turmoil would impede domestic economic growth.
The Fed in recent years has issued an assessment of its economic outlook after each meeting of its policy-making committee, but that assessment was missing from the statement after the most recent meeting in January. An official account, published on Wednesday after a standard three-week delay, makes clear that Fed officials simply did not know what to say.
* * * It was the first time since March 2003 that the Fed declined to characterize the risks to its outlook, according to Michael Feroli, chief United States economist at JPMorgan Chase. (See “Fed Officials, at Meeting, Found Economic Outlook Cloudy,” by Binyamin Appelbaum, The New York Times, February 17, 2016, here).
Fourth, the high growth expectations these five economists find so offensive simply cannot be attributed to Sanders and Friedman. Although the letter gave no specifics, Krugman did: “Mr. Friedman outdoes the G.O.P. by claiming that the Sanders plan would produce 5.3 percent growth a year over the next decade.” Of course there is no way the economy can grow at 5.3 percent a year for ten years, with the population growing at less than one percent per year! Indeed, lately annual GDP has scarcely been growing at all.
Even a cursory examination of the Friedman summary reveals that the Sanders proposals are built on CBO’s nominal base case forecast for 2015-2025. The CBO projections are the source of any and all growth expectations over this period. The average annual growth rate of CBO’s base case projection for the ten year 2014-2024 period (“The 2015 Long-term Budget Outlook,” June 2015, p. 18) is 4.5%, not much below the 5.3% Sanders figure. I checked the claim about Friedman’s exaggeration of growth, and found that the 5.3% growth rate Krugman cites merely builds on the CBO baseline forecast, factoring in the changes from the proposed Sanders plan. (“What would Sanders do,” p. 10.)
It is not, as implied in the Krugman column, a claim that growth will be increased by 5.3%. Rather, it is the claim that, given the CBO baseline 4.5% growth projection, the Sanders proposal will stimulate growth an additional 0.8% to 5.3%. Thus, the “fantastical claims” and the offense to “evidence-based economic policy” cited by the former CEA chiefs must be credited to CBO, not to the Sanders campaign or the Gerald Friedman report. I need to be clear about this: Sanders is claiming only that his proposals will increase growth by 0.8% above the CBO base case. CBO owns its base case.
Here is another question for these five incensed economists: Why, in these uncertain times, if you find the 5.3% ten-year projection you attribute to Friedman to be so offensive, have you been mute all this time about CBO’s 4.5% baseline forecast of annual growth through 2024 and 2025? Why did you wait so long to speak out, and then only to attack a fellow progressive economist whose objectives, presumably, you share?
To the extent these economists find the CBO baseline forecast overly optimistic, I agree with them: That has been my view for several years, and I have been disappointed with Krugman’s abject support of that forecast. There is nothing in this attack specifically critical of the Sanders stimulus analysis, however, and quite frankly the Sanders plan seems reasonable and modest, projecting “nearly $14.5 trillion in additional spending over 10 years,” producing “a significant stimulus to an economy that continues to underperform.” (p.9) Clearly, the plan intends to direct money deep into the economy where it is needed, with the expectation that median household income would increase by by 38% over ten years (p. 10). The report estimates that the revenue program by itself should be enough to fund the planned spending program, but adds that “the balance of revenue and spending programs will increase employment and revenue growth because the spending program has a larger fiscal multiplier than do progressive tax increases.” (p.8)
This appears to be both reasonable and responsible: Although real GDP grew at an average annual rate of 2.93% in the 1980-2008 period (i.e., from the start of the Reagan Revolution to the Crash of 2008), Census Bureau data show that median real household income rose only 0.47% over that period. The bottom income brackets lost a lot of ground in those 28 years, and even more in the last decade. These five economists don’t seem to appreciate this real impact of inequality. The Sanders plan would reduce poverty, heat up the economy, beneficially take the pressure off of government welfare programs, and modestly stimulate economic growth. It’s a redistribution plan.
Keeping in mind that that these economists purport to be sympathetic with the progressive cause jointly shared by Hillary Clinton and Bernie Sanders, it is breathtaking to see them attack the Sanders plan so ferociously less than three weeks after it was issued. Of course, the elephant in the room is “taxing the rich.” No doubt the very wealthy donors to Hillary Clinton’s super-PACs appreciate Krugman’s advice to just keep “fighting the good fight” without a big fuss over taxes. In today’s Op-ed (“Cranks on Top,” New York Times, February 22, 2016, here) Krugman contented himself with announcing that Hillary Clinton, “is the overwhelming favorite for the Democratic nomination,” and comparing how bad the tax policies of either Trump or Rubio would be for our economic future.
He’s right about GOP tax policies, of course, but along with Clinton’s wealthy supporters, he should ask himself where we would be four years from now if he was (gasp!) wrong about inequality and we had a major crash on her watch. How would he defend her against the GOP claim that she had mismanaged the economy? And how would her PAC donors feel about all the losses they had endured during her four years?
I have long felt we need a woman in the Oval Office, and I can support Hillary Clinton, if she is able (like most women) to curb her more hawkish tendencies. But she has got to learn inequality economics, and I would not want to see Paul Krugman as Chief of her CEA. He simply does not understand the importance of progressive taxation, and his advice will destroy us nearly as quickly as would a Trump or Rubio presidency. What we need now is real, progressive change. It is Paul Krugman’s lame influence, not the Sanders campaign, that is “undermining the credibility of the American progressive agenda.” Whoever the Democratic Party runs for President, the Democratic National Convention should adopt the Sanders economic plan, or something like it, as a key component of the Democratic platform for the general election.
JMH – 2/22/2016