The Plausibility of 5% Annual GDP Growth

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I still remain skeptical that GDP Growth >5% is likely if were to adopt Sanders’ economic program – or any other candidates economic program.  I’m skeptical but I no longer think it’s ridiculously optimistic.  I’d call it fairly optimistic but not extremely so.  (If you’re just tuning in, the context here is that UMass economist Gerald Friedman predicting the Sanders’ economic plan could boost GDP growth to 5.3%.  Some well-respected economists responded that 5.3% growth is nuts.  The debate is ongoing.)   Why has my outlook changed?  Because I’ve read pieces by reality-based economists arguing that 5% is entirely plausible.  “Plausible” doesn’t mean that it would happen.  It means that it’s not unreasonable to believe that it could.   Here are the links:

I maintain that Sanders’ principal merits as a candidate have little do with what his proposals might do for economic growth but it’s worth noting that it seems reasonable to believe that they could have a strong positive effect.

UPDATE 2/20/2016:

Mason follows up his Can Sanders Do It? post with a chart which puts Friedman’s prediction in context:

plausibility-1

He writes:

[The graph] shows the initial deviation of real per-capita GDP from its long run trend, and the average growth rate over the following ten years, for 1925 through 2005. The long run trend is based on the 1925-2005 average growth rate of real per-capita GDP of 2.3%. The points in the upper left are the ten-year periods beginning in 1931 through 1941.

and

I just calculated a long run trend of real per capita GDP from 1925 through 2005 based on the average growth rate over the whole period. Then I compared the deviation from that trend in each year, with the growth rate over the next ten years. What you see is that the only period with output as far below trend as it is now, in fact saw subsequent growth rates equal or greater to those in the Friedman paper. You don’t see it in this figure, but 1934-1936 saw growth rates around 10 percent — about what Friedman suggests for the first year of a Bernie stimulus. So the historical evidence suggests that those kind of growth rates are just what you would expect when you are climbing out of a hole as deep as we are in now. Not implausible at all.

No, in the context of the data, Friedman’s prediction doesn’t look at all implausible.

UPDATE 2/23/2016:

Economists Brad DeLong, Paul Krugman, and Mark Thoma weigh in:

I’m an interested observer of macroeconomic predictions.   I lack the knowledge the make them myself but I read enough about macro, understand enough applied math, and about modeling in general that I think I’m reasonably capable of distinguishing bullshit from ~bullshit.  I believe DeLong’s criticisms are appropriate.  I’d bet that Krugman’s estimate of growth prospects are about right, maybe a touch on the low side.  (His estimate is about half of what Friedman predicted with his model and a bit better than current growth.)  Krugman notes, “Maybe we can do better, but we shouldn’t count on it.”    Thoma speaks to the possibility of “maybe we can do better.”   In the end, my outlook is pretty much unchanged from a week ago:  1)  Friedman’s prediction seems very optimistic but not delusional, 2) the Sanders plan seems likely to boost GDP by at least a modest amount (fiscal stimulus would be beneficial under current conditions), 3) macro models aren’t high fidelity so take their predictions with a grain of salt (they usually get the sign right but the magnitude? not so much)  and 4) GDP growth is beside the point.

Re point #4, because GDP forecasts usually get the sign of the growth rate right and negative growth is correlated with a decline in quality of life I’d care if the predictions were that Sanders’ plan would result in negative growth (i.e., contraction) but I’ve yet to see an argument that it will so I’m not sweating the possibility that Friedman’s prediction is high by a fair amount.   I care more about how gains are distributed, ending the state of perpetual war, changing the culture so that people don’t feel the need to arm themselves to the teeth and ending our assault on the natural world than about the particulars of what the GDP growth rate might be.  Bottom line:  Pay attention to bigger picture quality of life issues.   It is misguided to care deeply about the details of GDP growth.  Yes, it is good to get the right number but there are far more important things in this world that you should be concerned about.

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