Friday, February 19, 2016

The Sanders Economic Analysis Flap

Not often is a single economics paper propelled to the front of the news cycle, but this is what happened to Gerry Friedman’s analysis of Sandernomics.  The bottom line as I see it is that, while Friedman was doing his best (as he saw it) to promote his candidate, he ended up harming him.  The ultimate effect will not be too great, assuming most voters forget what happened more than a week ago, and the Sanders campaign pivots a bit to limit the damage.  Nevertheless, I think there are lessons to be learned, especially for economists and similar researchers.

I suspect that what we witnessed was a sort of Rosie Ruiz moment.  Rosie Ruiz, you’ll remember, was a woman who entered the New York and Boston Marathons in 1980, leaving the routes early to hop on a subway, and then rejoining each race just before the finish line.  No one might ever have noticed, except she placed first among women in Boston by a wide margin, and then the scrutiny began.  Eyewitness reports confirmed that she had not actually completed either race, and the result is that she was stripped of her records.

Now, I’m not saying Friedman was cheating or violating any other academic rules, but he clearly cut several corners, not anticipating how the spotlight would come down on him once his work was disseminated.  My guess is that he thought the most important thing was to get his results to the public before the next round of primaries, pulled lots of late-nighters and didn’t stop to think about what would happen when he would suddenly become a focus of national attention.

So what were some of those corners?

1. He never presented his model.  The appendix to his report jumps immediately to parameter estimates, but there is no list of all parameters nor a formal model displaying how they relate to one another.  I take it that the implicit model calculates GDP growth from spending projections subject to a multiplier, and that this translates into labor demand with productivity as a residual.  The microeconomic results are determined by macro outcomes plus additional sector-specific factors.  There does not appear to be a simultaneous relationship between macro and micro (especially labor market) outcomes, which is a cause for concern.  Moreover, there is no discussion of the history of his model: who else has used it and what its track record has been.  I can imagine that these are the sorts of things one would put aside if one were in a race to publish, but Friedman should have expected that academic economists would savage him for this.

2. His estimate of the national income multiplier is suspect.  He gives a verbal description of how he calculated the multiplier, but it’s not entirely clear: “I assume the multiplier is two in first-quarter of 2009 and then falls by 20 times the reduction in the output gap.”  Can you write that equation?  But what makes it really suspect is that the multiplier remains close to 1 (.87) even at the end of the analysis horizon in 2026 after a decade of unprecedented economic growth.  It leaves the impression that Sanders can simply expand national income almost indefinitely by perpetual increases in spending.  It is the multiplier assumption, in conjunction with the structure of his model (whatever it is), that gives Friedman shockingly large predictions for income, employment and productivity gains.

3. There is no sensitivity analysis.

4. He apparently ended his work as soon as he generated his results.  This is an instructive mistake, in my opinion.  When I teach statistics and research methods, I always emphasize that, while models produce results, results test models.  Look at your output.  If it appears to be unreasonable you better be able, based on your model structure, to tell a plausible story that justifies it.  Otherwise you have evidence of a flaw in the model itself.  The highly unlikely predictions for GDP, employment and productivity should have sent Friedman back to the drawing board to see if one or more of his assumptions might be questionable.  Of course, this describes an iterative process that would make it difficult to meet what he may have believed were his political deadlines.

5. He didn’t circulate his results to skeptics.  The people you feel closest to are the most likely candidates to be reviewers, but the feedback you actually need is from those whose bias is to reject you and your work.  Friedman knew he was going to release his report to be devoured by a pack of wolves, so having an honest wolf or two provide a pre-release assessment would have been a good idea.  His list of acknowledgments does not suggest he did this.  Granted, it is not always possible to find a critic willing to play this role, but I’m pretty sure that there are Clinton partisans among economists in Gerry’s wider circle that he could have drawn on.

I realize I’m being hard on Gerry in this post mortem.  I know him a tiny bit (just a few moments here and there), and he seems like a very nice guy.  But I think he lost track of the larger picture and probably now regrets some of his choices.  The rest of us can learn from his experience.

Incidentally, for the record, I don’t for a moment believe I could have done better myself.  First, I’m not a macro guy, so I wouldn’t take on the job in the first place.  Second, the careful, comprehensive, cross-checking approach I’ve described is beyond the capacity of any one person within a short timespan.  If the Sanders people needed an economic analysis asap, before South Carolina and Nevada, they should have assembled a team to carry it out.

And as for the Sanders campaign, they should thank Gerry for his efforts and then say that, given its results, his analysis represents the upper limit of what Sanders can accomplish, and they welcome more analyses providing a range of predictions.  As most commentators have pointed out, the attractiveness of the Sanders program is not based on its performance in economic models, which are unreliable predictors in any event.  It is enough to show that the program is internally consistent and not vulnerable to large downside risks.  More finely tuned analysis can wait for the aftermath of the election, when it will be time for drafting policies in detail.

UPDATE: I’ve been taken to task for assuming that Friedman is a Sanders supporter, which I inferred from his work with the Sanders campaign on health care reform finance, as well as the flashy headline numbers from his latest study.  If he is actually for Clinton I can’t understand why he seemed to be in such a hurry to get his work out.

I’ve also been directed to Josh Mason’s defense of full-bore stimulus to get the economy back to full employment and potential output.  Overall, I agree with Josh, but I still think the extremely rapid rates of growth, year after year, for a full decade are problematic.  Our current macro situation calls for expansionary policy, but there is no precedent in a developed economy for this sort of velocity over this duration.  After such a massive downturn followed by many years of no rebound, it’s not plausible that the US can return to the pre-2007 trend in less than a decade.

To repeat (just so it’s clear): on the policy point, Mason is entirely correct.  The right thing to do is to apply large amounts of fiscal and monetary stimulus as long as incomes and employment are depressed or until these measures show signs of being counterproductive for some other reason.


Bob Michaelson said...

"Friedman was doing his best (as he saw it) to promote his candidate" - not really. Friedman is a Hillary Clinton supporter

And "he clearly cut several corners" - perhaps, but the response by Krueger/Goolsbee/Romer/Tyson only avoids that sin by not having corners to cut: they present no analysis at all.

Peter said...

Good responses from JW Mason and Jamie Galbraith.

What happened was that Krugman and the Hillary campaign elevated the paper as a point of attack. It chimed with their attack that Sanders's promises are unrealistic. It's the common centrist attack on the more ideological competitor.

The Sanders campaign didn't commission the paper. Sanders's policy guy said the work was great in a couple of media stories. They didn't link to the paper.

As I understand it he was their adviser on health care. And he plans to vote Hillary? Huh?

Charles Reinhardt said...

Yes, the strangest part of all this is that he is a Hillary Clinton supporter. The incentives others are imputing to him don't add up.

Don Coffin said...

I think the Sanders campaign bears a lot of responsibility for the hoo-haw over this. Surely they have some economists working in a consulting capacity to the campaign. (If not, they should get some.) Surely those economists could/should have said, "This would be nice, but it's not bloody likely. The only time the U.S. economy has had 10-year periods with growth rates over 5% was in the years during which we were recovering from the Great Depression and fighting WW2. There has not been a single 10-year period since then in which the economy grew at 5% per year." Why did the campaign decide to jump on this as a serious, valid result?

Sandwichman said...

"the Sanders campaign bears a lot of responsibility for the hoo-haw"

I think the Sanders campaign bears of lot of responsibility for disappearance of Judge Crater.

Sandwichman said...

"After such a massive downturn followed by many years of no rebound, it’s not plausible that the US can return to the pre-2007 trend in less than a decade."

I don't follow the reasoning here. The many years of no rebound were years of centrist policy response to the massive downturn. What does that have to do with claim that a radical policy response could have a radical outcome? I'm not saying the expectation is plausible because of the years of no rebound but I can't see any basis for an argument that it is not plausible because of no rebound.

ProGrowthLiberal said...

Well said - especially point #1 about presenting an actual model. I'm less troubled by Gerry's multipliers and more concerned about a complete lack of attention to the issue of what is potential GDP. While some might question how the CBO does this but at least they have a model. It says the output gap is 2.8% of potential and potential will grow by 2% per year. This may be conservative on both counts but isn't Gerry's responsibility to provide an alternative specification?

Anonymous said...

Much higher growth is theoretically possible. Even 5% is theoretically possible. However, it requires very unlikely assumptions. What is the probability that the Fed (2% inflation ceiling, raising interest rates) would accommodate 3% growth let alone 5%? Fiscal stimulus above the level the Fed will allow is counterproductive.

The president influences but does not control the Fed.

Much higher growth would also be possible if Obama's more modest proposals were not blocked by the GOP Congress and (mostly) GOP controlled state spending. Better policy is not worth much without political support.

john said...

Consider the asymmetry of the Sanders' proposals.

Each and every one appears to be a "good thing" for the USA.

If the spending multiplies as projected by Friedman, that would also be "a good thing".

If the multiples fail, then we still have the "good things" the money was spent on.

So there's either big upside or no downside. Even if upside probability is low (and that's the essence of the protest here, other than partisanship), this trade is a do. Let's make the investment.


Peter Dorman said...

First, I should reiterate: this post was about GF's analysis and not BS' proposals. (BS needs new initials.) The Sanders domestic platform is a good starting point in many respects.

Second, why the rate of GDP and employment growth is unlikely to be explosive across an entire decade: (a) There is no historical precedent except WWII. (b) There are current acct constraints on how much more rapidly the US can grow than the rest of its trading partners, especially given its structural trade deficit. (c) As recessionary conditions persist, people make new plans and commitments which cause friction for macro stimulus. You see this in search parameters (shifts in the Beveridge Curve), for instance. I see no reason to think that expansionary policy wouldn't be expansionary, just that it's very unlikely to be *this* expansionary. If GF's model is a better indication of what's possible than my rather general impressions (shared by quite a few other economists), it should be possible to use it that way -- to explain concretely why my impressions are wrong. Certainly if I were sending a report like this out into the world I would anticipate skepticism and include a section addressing it.

Unknown said...

“The right thing to do is to apply large amounts of fiscal and monetary stimulus as long as incomes and employment are depressed or until these measures show signs of being counterproductive for some other reason.”

Where does this sort of idea come from? I suspect from the experience we went through during the Great Depression and WWII since economists tend to think of our recovery from the Great Depression in terms of monetary and fiscal policy--in terms of graphs and charts that are mostly irrelevant.

What actually happened during the Great Depression was the New Deal came along and the government completely took over of the system during WWII: wage and price controls, 8.5 million men drafted into the armed services, government expenditures 40% of GDP, a top tax rate of 94%, and rationing as private debt fell from 141% to 67% of GDP. The income share of the bottom 90% increased over 20% during the war and didn’t fall until the 1980s. Social insurance came to be; government’s share of GDP more than twice that of the 1920s, and the financial system was strictly regulated after the war.

The economic system that emerged from the New Deal and WWII was not the system that led us into the Great Depression. It was a system of higher taxes, more government, strict regulation, and a system of distribution that witnessed a dramatic fall in inequality. It was this system that led us out of the Great Depression and into the economic prosperity we experienced following WWII, not the magical workings of free markets or the monetary and fiscal policies of Keynesian economics. And neither free markets nor monetary or fiscal policies are going to get us out of the Great Recession we face today or allow us to avoid another worldwide catastrophe comparable to WWII.

Peter Dorman said...

GHB: Keynesian macro is not based solely on US experience, much less solely on the recovery from the Great Depression. It rests on theory (several of them in fact) and a vast accumulation of policy episodes worldwide.

This is not to deny that changes in economic structure can also be very important. My main criticism of Sanders' economic program is that it bypasses most of what I would regard as the structural agenda for today's US. (Oddly enough, that's the more "socialist" part of what we need to do, although it's not the old fashioned state-managed socialism of yore.)

Unknown said...

Peter: I believe that economic structure is paramount today, just as it was in the 1930s, and that monetary and fiscal policy can do little more than maintain the status quo and create an increase in debt relative to income in today's world. I could be wrong, but I don't think so:

Soccer Dad said...

you assume that GF mean't this as a paper for peer review publication
do we know that ?
maybe this was his first draft (he sort of implies that in the fortune interview) and the whole thing got blown out of proportion by because krugman, with his huge voice, mentioned it

I really fault krugman, delong, goolsbee et al rampell etc for snarking Friedman without, apparently, carefully reading the paper and asking him for comments, and, worse, offering arguments from authority; krugman and delong and goolsbee - it took them like 8 posts before krugman finally put up an argument that normal people could understand
the econ blogosphere gets a D- in grading for writing so that ordinary people can understand

ProGrowthLiberal said...

"I’ve also been directed to Josh Mason’s defense of full-bore stimulus to get the economy back to full employment and potential output."

Menzie Chinn reads Mason's "defense" and notes that Mason is assuming that the GDP gap today is 18%. CBO says 2.8%. Maybe CBO is being too conservative - but 18%?

Sandwichman said...

implausible or unusual?


@DeanBaker13 @delong @rortybomb @paulkrugman @MarkThoma The low real wages and low r* represent a very unusual time-to-grow opportunity.

Sandwichman said...

Let the glass-house gang cast the first stone...

DAVID DAYEN @New Republic:

"There are problems with Friedman’s projections; it’s unlikely that we will regain the same labor force participation as the late 1990s when the population now is so much older, for example. But the ferocity of the response—from people who have spent their careers making flawed economic forecasts—suggests that the real issue here is that the establishment is uncomfortable with the more far-reaching aspects of the Sanders economic agenda."

run75441 said...

Yea, old folk are the entire cause of the fall in PR.

Wake the hell up, the work does not exist for many people at the level when all it took was a high school diploma and a good work ethic to get into the middle class. Old folk make a lot of money working rather than existing on SS for starters. Make it profitable for them to retire by making up the difference and sh*t-canning the F35. If you really want people back to work, look at the 40+ hour work week and kick it out the door. You will make up the difference in higher productivity. Same salary for 35 hours would do much more than hopes and fanatical dreams of politicians running for president.

Sandwichman said...

Bruce Bartlett at The Atlantic:

"Lately, Hillary Clinton and her supporters have been criticizing Bernie Sanders’s proposals not so much because they are wrongheaded, but because they are too utopian to pass Congress. I find this to be a curious line of attack because, in effect, Clinton is playing by Republican rules—saying that Democrats should only propose things that could be enacted by a Republican Congress.

"Economists would call this an example of static analysis, assuming that circumstances will not change or that leadership is incapable of altering political possibilities. If Republicans had held this same point of view, Ronald Reagan’s 1981 tax cut never would have been enacted and, very likely, they would never have gained control of Congress.

"The 1981 tax cut fundamentally altered political dynamics.This was not a result that anyone would have predicted when the Reagan tax cut was first conceived by Representative Jack Kemp of New York in 1977. At the time, he was a junior congressman much better known for his career in professional football than for his legislative accomplishments, which were modest.


"The relevance to today’s policy debates is that what may at first appear to be politically impossible can quickly become possible with the right leadership, changing circumstances, and a little luck. I’m not saying that Sanders’s ideas are necessarily good or politically doable. But I am saying that it’s wrong to oppose them simply because they could not pass Congress today. If Republicans had taken that view in the late 1970s, the world today would look very different, both politically and economically. Sometimes it’s necessary to throw the bomb and see what happens."

JW Mason said...

(late response but:)

Menzie Chinn reads Mason's "defense" and notes that Mason is assuming that the GDP gap today is 18%. CBO says 2.8%. Maybe CBO is being too conservative - but 18%?

I'm not "assuming" anything. I'm making a simple arithmetic point -- that between 1947 and 20-07, real per capita GDP grew at a fairly constant rate, and if you project that rate forward from 2007 you get an 18% gap. Whether that's a reasonable procedure we can of course debate -- but it is the case historically that periods of below-trend output were followed by above-average growth rates that returned GDP to trend.

I don't think the idea of "potential output" is well defined. It depends on the idea that there is a unique level of GDP which is both the maximum the economy can sustainably produce, and is consistent with full employment, and is consistent with constant inflation, and is consistent with constant factor shares -- and is brought about by an interest rate that happens to be the same as would exist in a Walrasian world that somehow corresponded to the actual one.

In the real world, higher demand will produce some mix of lower unemployment, a larger laborforce, higher labor productivity, a higher labor share and higher inflation. The proportions will vary, and shift more toward the later items as demand rises, but there is no magic line we can mark as "potential." Since a higher labor share and higher inflation -- and presumably higher interest rates -- are positively desirable right now, I think the burden of proof is on those who think that supply constraints will bind in a meaningful at a level of demand close to where we are.

But again, the point I was making was simpler -- it was just about the divergence from the historical trend.