Tuesday, February 25, 2020

The Economic Impact of Sanders’ Radical Agenda

If fully implemented, but otherwise implemented wisely, Senator Sanders’ agenda for the economy would reduce real GDP and consumption by 24 percent.  Real wages would fall more than 50 percent after taxes.  Employment and hours would fall 16 percent combined.  There would be less total healthcare, less childcare, less energy available to households, and less value added in the university sector.  Although it is more difficult to forecast, the stock market would likely fall more than 50 percent.

Previous analysis of Medicare for All

When I was at CEA, we used an extension of the neoclassical growth model to assess the economic impact of “Medicare for All” (M4A), which we charitably interpreted as 100 percent public financing of the health sector, with (in Chapter 8 of the 2019 ERP) nobody consuming less healthcare and many consuming more than in the baseline.  We also charitably assumed that the public financing would occur with taxes that have minimum efficiency loss per dollar collected.

Arguably the Laffer curve for payroll and consumption taxes is not high enough to finance M4A, but at CEA we charitably assumed that the tax base is inelastic enough to rule out this possibility.  As reported in the 2019 Economic Report of the President, we concluded that payroll tax rates would increase 14 percentage points and tax payments would increase an average of $18,000 per household per year.  Real national income and GDP would fall 9 percent.  Real national income net of taxes and health spending would fall 19 percent.  These result from M4A by itself, and are a best-case scenario.

Considering Sanders’ Agenda More Fully: Factors of Production

My purpose here is to consider Sanders’ agenda more fully, including free public college, free childcare, and a full transformation of the energy sector.  I will also consider the fact, confirmed repeatedly in history, that nationalizing industries will reduce their productivity.  Overall productivity will also decline somewhat as the economy is reregulated (including perhaps a $15 minimum wage and regulating employee-management relations) enough to be put on the pre-2016 regulatory growth path.  A Federal jobs guarantee or a student loan bailout would also not be pretty, but I have not yet quantified it.

I assume that what is currently household spending on public college tuition and on daycare (1.75 percent of aggregate consumption) will become “free” and that these resources will see their utilization increase by the same percentage as healthcare.  Under the assumption that a Sanders administration would provide Federal assistance to nonrich households that are burdened by the high energy prices that come with the Green New Deal, I also expand the Federal budget for that purpose by another two percent of baseline consumption.

Even if without any productivity loss or increased utilization in healthcare, college, and daycare, this means that the Sanders agenda would be expanding the Federal budget by 13.25 percent of baseline consumption.  Including 19 percent additional utilization of these “free” goods and services, tax rates on labor income must increase by 23.5 percentage points (it would be more but the Sanders agenda does expand the tax base by eliminating the exclusion for employer-sponsored health insurance).  GDP falls by 16 percent (this does not yet consider productivity losses -- that comes below).

The simple, correct, but perennially forgotten, idea is that it matters when we spend other people's money on other people.  Nationalizing an industry's revenue is NOT merely a matter of relabeling the dollars that people spend on that industry.  Moving the revenue over to the public purse removes all individual incentive to economize on the amount of spending and to ensure that the spending goes to the highest value activities.  The data matches the theory very well on this.

Considering Sanders’ Agenda More Fully: Productivity

The Sanders agenda puts the economy so close to the top of its Laffer curve that there is no additional revenue to finance the additional inputs into healthcare, college, and daycare that would be needed if those industries suffered any productivity loss.  If their productivity fell by 25 percent, which is optimistic as nationalizations go (see Chapter 8 of the 2019 ERP), then the output of those industries would have to be cut by 25 percent.  To be clear, the result would be less healthcare, less college, and less daycare.

The Sanders agenda will reregulate the economy.  I optimistically (i.e., charitably to the Sanders agenda) project the regulation to be a return to the pre-2016 regulatory trend plus cutting energy productivity in half.  CEA estimated that the pre-2016 trend was to reduce productivity by 0.16 percent per year (see Chapter 3 of the 2020 ERP), which would be 1.3 percent by 2024.  I also assume that a President Sanders would undo President Trump’s deregulatory agenda and his corporate tax cut and thereby reduce productivity by another 3.3 percent.  Taking energy as 3 percent of the economy, the climate change part of the Sanders agenda would (again, optimistically) reduce productivity by 3 percent.  Adding these to the productivity losses in the nationalized industries, that is 10.9 percent less productivity.

Overall, real GDP and consumption would fall 24 percent.  Employment and hours would fall 16 percent combined.  Real wages would fall 11 percent before taxes.  After-tax real wages would fall 51 percent.

This is akin to the Great Depression of the 1930s, except that the Great Depression was eventually followed by a recovery whereas the Sanders agenda (I assume) does not involve eventually putting policies back to the way President Trump had them.  Therefore the stock market would fall at least what it did in 1929, which was almost 50 percent.

Don’t Take Sanders Literally

As an academic exercise, I have taken Sanders literally.  That is not a good forecast of what his policies would be.  If nothing else, his promises are so damaging that the rest of our political system would water them down.  Indeed, Sanders surrogates such as AOC have been saying as much to assure (sic) nervous voters.

None of this denies that Sanders, whose candidacy I have followed for five years, is compelling.  Marxism itself is powerfully irresistible, surviving over a century in the marketplace for ideas.  But it's more than that.  Outside the Washington bubble, there is a demand for disruption rooted in real substance.  Not as much as in 2016, but still there.  People also understandably admire how Sanders' episodes of honesty are so frequent by the standards of conventional politicians.  My favorite example is his 2016 economics white paper, which openly acknowledges the existence of serious people with the opposite view (see especially footnotes 21 and 36), which is exactly the view I express above.

[Appendix on climate effects:

My GDP estimates do not include any climate damage.  M4A is a big part of the Sanders agenda, and has nothing to do with environment.  As shown in Chapter 4 of the 2020 ERP, banning fracking, which is part of the Sanders agenda, makes climate change worse.   To the extent that worse climate means less GDP for the U.S. (climate change is mostly a world GDP effect rather than U.S. GDP?), that would add to the GDP impact I calculated.  On the other hand, other parts of the Sanders agenda might help with climate change.  Also, whaat's above looks at economic impacts in a 5-10 year time frame, whereas effects through climate change will take decades.]

1 comment:

Tim Favero said...

Casey, this is a great article. I have also subscribed for your emails. Thanks, Tim