UC-Berkeley economists Christina and David Romer have provided a detailed evaluation and critique of Gerald Friedman’s analysis of predictions of the economic effects Senator Sander’s economic plan. Their Conclusion:
The bottom line of our evaluation of Professor Friedman’s analysis is that it is highly deficient. 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. Even very generous estimates of the amount of slack still present in the American economy would not be enough to accommodate demand – driven growth of anything near what Friedman is estimating. As a result, inflation would soar and monetary policy would swing strongly to counteract them. Finally, a realistic evaluation of the impact of Senator Sanders’s policies on productive capacity (something that is neglected in Friedman’s analysis) suggests that those impacts are likely small and possibly negative.
Though we have been frankly critical of Professor Friedman’s analysis, he has provided a service to public debate by posting his analysis so that other economists can evaluate its validity. We are posting our evaluation in the same spirit.
They provide ample basis for their conclusion that Friedman’s predictions are overly optimistic but leave several important questions unanswered.
In the their introductory paragraph they state “[Friedman predicts that] output in 2026 would be 37% higher than it would have been without [Sanders’] policies, and employment would be 16% higher.]” Two questions which logically follow:
- What do Romer and Romer think output and employment would be with Sanders’ policies? How much do they believe Friedman overestimated? (Do they believe his estimate is high by a factor of two? A factor of ten? By 10%?)
- What confidence intervals do they put on their estimates of growth and employment with and without Sanders’ policies? (Is his estimate outside their 95% confidence interval? Outside their 80% confidence interval? How unlikely do they believe his predictions to be?)
Related to question #2:
- Jared Bernstein, Charles Manski on the importance of accounting for policy uncertainty [Ed.: I’ve run out of free WaPo views for the month so the link is to the link on Bernstein’s site.]
- David Dayen, The Pious Attacks on Bernie Sanders’s “Fuzzy” Economics
Manski explains that in the UK it’s standard practice to include confidence intervals along with the predicted central value. Manski states:
I often give talks in Washington and in London. I have found that British government personnel and policy analysts readily accept the importance of transparent expression of uncertainty when presenting estimates and forecasts. Moreover, they act on it…. In D.C., on the other hand, I am regularly told that I am right in principle but that expression of uncertainty is politically a nonstarter. For example, I have recommended that the CBO (Congressional Budget Office) present upper and lower bounds as well as a central forecast when it scores legislation. The consistent response has been that this is not feasible because Congress does not want to hear about uncertainty.
That’s depressing. It’s not at all surprising but it is depressing. Working in the physical sciences, I can’t imagine not including confidence intervals. Predictions don’t mean much – anything? – if you don’t know the limits of interpretation.
Dayen shows graphs comparing predicted GDP growth with actual growth. The models almost always get the sign right but the magnitude is only good to about a factor of two. So I’d say take predictions with a grain of salt.
Romer and Romer critiqued Friedman’s prediction, which is fine. But their critique falls well short of being an analysis of Sanders’ proposals. An analysis would address Questions 1 and 2 above.
End note #1: To be fair, Friedman provided no confidence intervals with his predictions. In a better world both he and the Romers would have done so.
End note #2: While I believe Romer and Romer’s criticisms are legitimate, I’m reminded of something I heard years ago, “You are correct, but it is not the devastating point you believe it to be.”