Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Would Bernie’s Plan Help the Economy?

U.S. Senator Bernie Sanders (D-Vermont) has proposed an economic agenda that amounts to the biggest and boldest set of spending increases since World War II. Basically, Sanders would like to spend $14.5 trillion in a 10-year period.

The $14.5 trillion number comes from an academic who seems to be sympathetic to Sanders, Gerald Friedman, a professor of economics at the University of Massachusetts at Amherst. Friedman put together an evaluation of Bernie’s agenda that should give us food for thought and perhaps worry. It’s called: What would Sanders do? Estimating the economic impact of Sanders’ programs.

Friedman thinks that Sanders’ plan will be good for the economy. In particular, he thinks the gross domestic product (GDP) will grow by 5.3% under Sanders. Currently, the GDP is growing by a rate of around 2.1% a year, which is pretty anemic. Friedman also thinks that real wages will increase by 2.5% a year and the country will achieve full employment (everybody that wants to work will have a job) by 2025.

He also predicts that the poverty rate will fall by more than half, to 6%, by 2026 – the poverty rate in 2014 was 14.8% – if Sanders’ policies are adopted. Friedman also thinks that the plan will also reduce income inequality and eliminate the federal budget deficit by 2026. The current deficit is around $1.3 trillion.


Would the Sanders Agenda Actually Help the Economy?

Okay, so how accurate is this rosy picture? That’s hard to say because Sanders’ agenda is pretty radical and there are a lot of ifs here. Friedman presumes that Congress (which controls the budget and actually sets economic policy in the United States) would go along with all of Bernie’s plan, a circumstance that seems farfetched.

The good professor also seems to assume that there will be no war or major economic downturns over the next 10 years and Sanders will serve two full terms in the White House. Both of those scenarios also seem to be extremely unrealistic.

Beyond that, there is some economic thinking behind Friedman’s examination of Sanders proposasl. His analysis does square with classic Keynesian economics the idea that government spending can drive economic growth. There’s also some history on his side – the massive spending during World War II did end the Great Depression and lead to nearly 25 years of economic prosperity in the United States.

That being said, there is no guarantee that Sanders’ programs will achieve those results. Indeed, some of his plans might actually hurt the economy and achieve the opposite results.

How the Sanders Plan Could Boost the Economy

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Strangely enough, Sanders’ plan would boost the economy and could even be good for business, at least in the short run. Here’s how:

  1. Sanders’ proposal to increase the minimum wage to $15 would lead to a lot of new consumer spending, which is the main engine that drives our economy. Some segments of the economy, particularly retail, could benefit greatly from increased spending power on the part of a lot of Americans. Other benefits would be increased government revenues in the form of higher sales taxes, expansion of retail, some job growth, and increases in the value of some stocks, mostly retailers.


  1. Sanders’ plan to subsidize free college tuition at public universities would significantly boost middle and working class income. This would occur because graduates would no longer be burdened by student loan debt and families would no longer have to save for children’s children. An added benefit of this would be higher spending. A long-term benefit would be higher incomes and less income inequality because research indicates that college graduates made around 38% more than high school grads. There would also be more economic activity because of increased business at retailers and restaurants in college towns.


  1. Sanders’ ambitious single payer healthcare plan could increase middle and working class spending power by eliminating the need for health insurance. It could also increase employment because employers would no longer need to offer health insurance, making it cheaper to hire workers. It could also reduce healthcare costs, but raise taxes by shifting the burden of medical spending to government. Medicare for all includes plans to spend up to $10.682 trillion over 10 years, which would certainly inject more cash into the economy and boost some industries, such as pharmaceuticals, healthcare, and aspects of retail, like drug stores.


  1. Sanders’ plan to spend around $1 trillion on public works and $1.198 trillion on efforts to combat climate change would inject more money into the economy. This could lead to more jobs and increased orders for industry. It could lead to more long-term economic activity.


  1. Sanders’ plan to increase Social Security benefits by $491 billion would lead to more consumer spending and boost some segments of the economy, such as retail.


The Dangers from Bernie’s Economic Plan

Okay, there are some serious dangers here, including inflation. Some of the highest rates of inflation in U.S. history was in the U.S. right after World War II. Prices increased by 34% between 1945 and 1947, which boosted economic growth.

Another danger that Friedman seems to ignore is stagflation, which occurs when the rate of inflation increases, but the economy does not expand to meet it. That happened in the United States during the 1970s and Britain in the 1960s. Stagflation often occurs when high rates of government spending do not drive increased economic growth, something that has been happening in Japan for the last 20 years.

A possibly greater drawback to the Bernie plan could be decreased employment. A higher minimum wage could drive many employers to cut the number of workers or resort to alternatives, such as automation. Employers would have a stronger incentive to replace workers with machines, algorithms, and robots. For example, Amazon would employ more Kiva robots in its factories and more stores would turn to self-checkout.

An even more destructive trend would be an increase in the black employment market. This could take the form of more employers hiring people under the table for cash or illegal immigrants to avoid paying the high wages or more people working only for cash tips.

All this means that Bernie’s plan could have great benefits, but great dangers too. We need a national discussion of Sanders’ economic agenda and now. If you want to see the Sanders’ economic agenda, Friedman’s analysis of it is available online in PDF form. It’s well worth reading.