Here’s Why Bernie Sanders’ 5% Growth Plan Isn’t Crazy After All
(Mark Thoma is one of my fave economists. Reasonable, measured. Plus, he had the first great economics blog Economists View . I imagine he is neither on Team Bernie nor Team Hillary. Maybe I am projecting, though.)
http://www.thefiscaltimes.com/Columns/2016/02/23/Here-s-Why-Bernie-Sanders-5-Growth-Plan-Isn-t-Crazy-After-All
By Mark Thoma
Excerpt:
Because of this uncertainty, we should not take it as given that our ability to grow over the next few years is as limited as the graph above might imply. An aggressive policy such as Senator Sanders has in mind could, in the end, result in inflation as we butt up against and try to push past the constraint implied by the estimates of potential output. But there is considerable uncertainty about this and there may be more room than we think. As I see it, accepting that our capacity to grow is limited when in fact there is considerable room for growth is a much bigger error than attempting to grow and finding that the gap is small.
In the first case, people who could be working remain unemployed, while in the second there would be inflation. Inflation is relatively easy for monetary authorities to reverse, and the costs fall mainly on the wealthy. Unemployment is much harder to overcome, and the costs fall mainly on the working class. Thus, if we are going to make a mistake, it ought to be shooting for more employment than we need rather than too little.
In addition, the long-run trend rate of economic growth depends upon economic policy. If we implement policies that promote both public sector and private sector investment, it’s possible to lift our long-run potential above where it is today. Actual output would then be chasing a moving target as we try to close the output gap, and we might be surprised at how much our productive capacity, and hence our ability to provide jobs, can be increased.
Narayana Kocherlakota argues “that there are good reasons to believe that, with appropriate stimulus, it would be possible to achieve growth outcomes of around 5-6 percent per year for the next four years.” But we won’t know unless we try. The inflation risk is minimal, and we owe the households who have struggled so much during the recession and the long, drawn out recovery the best possible chance we can give them of finding a decent job.
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