Financial FAQs
It looks like Hillary Clinton’s nomination as the Democratic candidate is assured, but are Bernie Sander’s economic proposals impossible to achieve, as many mainstream economists maintain? Bernie wants to be able to introduce them into their platform at the Democratic convention.
He has some good ideas—such as tuition-free public universities, universal health care for all, a $15/hour national minimum wage, as well as achieve record economic growth, as happened from 1950’s through the 1970’s.
“As President, I will invest $1 trillion to rebuild our crumbling infrastructure to put 13 million Americans to work in good jobs, says Bernie on his website, “invest $5.5 billion to employ 1 million young Americans and provide job-training to hundreds of thousands of others, and create a Clean-Energy Workforce of 10 million good jobs through a 100 percent clean energy system.”
Not possible, say economists like Nobelist Paul Krugman: “On health care: leave on one side the virtual impossibility of achieving single-payer. Beyond the politics, the Sanders “plan” isn’t just lacking in detail; as Ezra Klein notes, it both promises more comprehensive coverage than Medicare or for that matter single-payer systems in other countries, and assumes huge cost savings that are at best unlikely given that kind of generosity. This lets Sanders claim that he could make it work with much lower middle-class taxes than would probably be needed in practice.”
Actually, yes, Bernie’s goals are attainable, and have been achievable in the past. In fact, they mirror much of what was done in President Roosevelt’s New Deal, when conditions were worse (i.e., 25 percent unemployment), and government the employer of last resort. Bernie based his proposal on University of Massachusetts economist Gerald Friedman, a full-blown Keynesian economist who believes in government intervention to pull the U.S. out of its present economic malaise. Unfortunately Bernie is no FDR, able by himself to sell his program beyond union blue collar workers and our youngest, more educated generation that is looking for another new deal.
“While economists from different perspectives will differ on these fundamental issues,” says Professor Friedman in an initial response to mainstream economists that rejected his new deal plan almost outright (such as Krugman), “we have experience in the United States that demonstrates the lasting effect of government stimulus spending. Emerging from the depths of the Great Depression, New Deal stimulus spending (including monetary easing) nearly doubled the GDP growth rate from pre-1929 levels to 7 percent per year, 1933-40, and nearly 10 percent a year from 1933-44; between the 1929 peak and 1944, output grew to a level 25 percent higher than it would have been at the pre-1929 growth rate.”
Paul Krugman, a student of the New Deal, should know. He was one of the first economists to unmask conservatives’ attempt to unravel New Deal legislation—including their attempts to dismantle social security and Medicare—in his best-selling book, The Great Unraveling, yet he doesn’t seem to believe another New Deal is possible.
“The Republican candidates have been widely and rightly mocked for their escalating claims that they can achieve incredible economic growth,” said Krugman, “starting with Jeb Bush’s promise to double growth to 4 percent and heading up from there. But 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.”
However, Professor Friedman wasn’t talking about the Republican agenda to cut government programs—just the opposite. “Active Keynesian policy maintained faster growth rates for the next quarter century as well. From 1947-73, the unemployment rate averaged 4.7 percent and annual GDP growth averaged 4.0 percent; output in 1973 was 13 percent higher than it would have been at earlier growth rates.
Graph: Trading Economics
Much of that growth was due to massive infrastructure spending like our public freeway system, NASA’s moon landing, and other public works programs. It was massive government spending, in a word, that was possible with higher revenues from a maximum tax rate of 92 percent during the Eisenhower era, and an exploding baby boomer generation. But tax rates gradually began to decline, until the ‘Reagan revolution’ cut the maximum tax rate to 40 percent.
Then we had the 1970s Arab oil embargo and skyrocketing inflation, due to the resultant gasoline shortage. Americans adopted conservative ways and began to believe government was the problem, at a time of greatest prosperity and a very low federal budget deficit.
It had also happened in 1937, when Roosevelt was convinced the Depression was over, and a Republican Congress called for a balanced budget and tax cuts. The result was a second depression that wasn’t over until WWII (hence it became the Great Depression) and government spending resulted in the full employment of women as well.
“Only when we abandoned Keynesian policies after 1973 did growth rates fall, says Friedman. “From 1973-2014, annual growth has averaged only 2.6 percent, almost a full percentage point below the pre-1929 rate, while unemployment has risen to 6.5 percent. Because of the slowing of growth rates after jettisoning Keynesian policies, output in 2007 was almost 30 percent less than it would have been at the growth rates of the 1947-73 period.”
Why the confusion over economic policy? The main disagreement seems to be the duration of government stimulus benefits. Krugman and other establishment economists believe it is short term, only, whereas Friedman and some British Keynesians say history should be the final word. Spending on improving infrastructure, education, Research and Development (such as funded DARPA and the Internet), health care, not only improves lives, but also labor productivity, which stimulates more growth.
So it’s really a matter of history repeating itself, and its lessons being forgotten. Higher growth happened until the 1970s, and we don’t (yet) have another World War to bring US together, which is when we seem to realize the importance of government policies that boost growth.
Harlan Green © 2016
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