« 'A New Deal for Europe' | Main | Links for 02-27-16 »

Friday, February 26, 2016

'My View on the Controversy over Sander's Economic Plan'

Here's my view on the controversy over Sander's economic plan:

I do not believe that we can sustain 5% growth over the next eight years. In the short-run -- over the next two to four years -- the situation is different. In that timeframe, our ability to achieve rapid growth depends upon the size of the output gap, the effectiveness of monetary and fiscal policy at boosting the economy (fiscal policy in particular), the difficulty in overcoming the factors that caused the recession in the first place, and the responsiveness of potential output to policy measures and the recovery itself (i.e. how much of the decline in potential output is permanent, and how much is cyclical).

The main point of emphasis is familiar: it would be a bigger mistake not to try and increase output if there actually is more room to expand than we think than it would be to push for expansion and find the gap is small. In the first case, we’d have people who could be employed remaining idle, a costly error, in the second inflation which the Fed can reverse fairly quickly. So it’s the same asymmetric cost tradeoff many of us have been pounding the Fed about.

I’m worried people will accept without question that the gap is small due to the pushback against Friedman's analysis of the Sander's plan, and that will justify policy passivity when we need just the opposite. So let's stop arguing, put the policies we need in place, and push as hard as we can to increase employment until inflation reveals that we have, in fact, hit capacity constraints. Maybe that happens quickly, but maybe not and we owe it to those who remain unemployed, have dropped out of the labor force but would return, or took a job with lousy wages to try. People who had nothing to do with causing the recession have paid the costs for it, and if we experience a short bout of above target inflation I can live with that. We've been wrong about this before in the 1990s, and we may very well be wrong about this again.

    Posted by on Friday, February 26, 2016 at 12:01 PM in Economics, Politics | Permalink  Comments (152)


    Feed You can follow this conversation by subscribing to the comment feed for this post.