Could Bernie Sanders Heal Our Economy?

Does Bernie Sanders’s economic program amount to pie-in-the-sky nonsense? The short answer is no. All of his major proposals are grounded in solid economic reasoning and evidence.

But that hasn’t stopped a major swath of leading liberal economists and commentators to insist otherwise. Paul Krugman has led these attacks from his New York Times perch, charging repeatedly that Sanders makes “outlandish economic claims,” embraces “deep voodoo” economics, is “not ready for prime time,” and so forth. A recent Washington Post article by columnist Steven Pearlstein cites several other liberal economists criticizing Sanders’s support for Scandinavian-style social democratic policies, concluding that his program “promises all the good parts of the Scandinavian model without any of the bad parts.”

Sanders’s economic agenda certainly represents a dramatic departure from what has come out of mainstream Democratic Party circles for a generation, to say nothing, of course, of the Republicans. The key elements of Sanders’s program include a “Medicare-for-all” single-payer healthcare system; an increase in the federal minimum wage from $7.25 to $15 an hour; free tuition at public colleges and universities, to be financed by taxing Wall Street transactions; opposition to trade agreements like the North American Free Trade Agreement (NAFTA) that have weakened the wage-bargaining power of US workers; large-scale public investments to build a clean-energy economy and rebuild the crumbling US infrastructure; and strong Wall Street regulations to promote productive investments and job creation over casino capitalism.

By contrast, the Democratic Party under Bill Clinton embraced an only moderately less aggressive pro-business agenda than the Republicans. Clintonomics featured Wall Street deregulation, NAFTA, and only tepid support for policies benefitting working people and the poor. This is how, over the full eight years of the Clinton presidency, average wages ended up being 2 percent lower than the average under Ronald Reagan and George H.W. Bush and nearly 10 percent less than under Jimmy Carter’s “years of malaise.”

Barack Obama’s presidency has certainly delivered important economic policy accomplishments, despite relentless Republican opposition. These include preventing a 1930s-level Depression after the 2008-09 Wall Street crash, steadily bringing unemployment down in the aftermath of the Great Recession, greatly expanding healthcare insurance coverage through the Affordable Care Act, and promoting clean energy investments. Nevertheless, inequality has continued to rise under Obama; 33 million people still did not have health insurance at the end of 2014; greenhouse-gas emissions causing climate change have not significantly fallen; and average wages for non-supervisory workers remain below their 1973 level, despite average productivity having more than doubled over the past 40 years. Overall economic growth since Obama took office has also been weaker than any comparable period since the Great Depression.

Given these results under the last two Democratic administrations, it should not be surprising that the Sanders program — aiming to break emphatically with the neoliberal framework that has dominated economic policy since Reagan — has caught fire among large segments of Democratic and independent voters. Nevertheless, might it still be true, as the critics insist, that the Sanders program is based on flimsy foundations and wishful thinking?

To address these charges seriously, we first need to draw a clear distinction between what might be realistic in political terms versus economic terms. These are separate matters, though the critics consistently confuse them in one big jumble. Presumably, if, as a longshot, Sanders moves into a position to advance his economic program through having won the presidency, that alone will have dramatically recast the country’s political dynamic. Yet the more basic question would still remain as to whether the Sanders program is economically feasible even under such highly favorable political circumstances. Let’s see how some of his key proposals stand up to this test.

Medicare for All

Sanders’s critics regularly ridicule his proposal for universal healthcare coverage under a single-payer Medicare-for-all system. For example, two leading liberal healthcare analysts, Paul Starr at Princeton and Kenneth Thorpe at Emory University, have harshly criticized the specific proposal developed by my University of Massachusetts Amherst colleague Gerald Friedman on which the Sanders campaign has drawn. Starr, Thorpe, and other critics may well have some legitimate concerns with respect to the specific proposal drafted by Friedman. This is normal whenever specialists debate the specifics of large, complex policy measures.

But the critics are missing the big picture, which is simple: The United States economy currently spends 17.1 percent of GDP on healthcare, while the UK, Australia, Canada, Germany, Japan, and France spend between 9.1 and 11.7 percent, respectively. All of these countries perform better than the United States, according to standard public-health measures such as average life expectancy. Within the context of the current US economy, the difference between spending 10 versus 17 percent of GDP on healthcare amounts to $1.3 trillion. That $1.3 trillion mark-up in US healthcare spending flows mainly into the coffers of big insurance and pharmaceutical companies. Do Sanders’s critics truly believe that it is impossible to devise a system whose administrative features roughly approximate those in Germany, Japan, the UK, France, Australia, or Canada? They have not advanced any serious arguments to support such a claim. Indeed, many of Sanders’s critics themselves have been proponents of single-payer prior to Sanders’s having incorporated it into his platform.

A $15 Minimum Wage

The Sanders proposal to more than double the current federal minimum wage from $7.25 to $15 an hour by 2020 comes directly out of the grassroots Fight for $15 movement that has spread throughout the country in recent years, especially among fast-food workers. These workers know first hand that depending on jobs that pay $7.25 an hour or anything close to that means a life of hardship. My co-worker at the Political Economy Research Institute, Jeannette Wicks-Lim, recently estimated that raising the federal minimum to $15 an hour would deliver raises for about 65 million workers, roughly 44 percent of the US workforce. The largest beneficiaries would include African Americans, Latinos, and workers from lower-income families.

But opponents claim that this proposal would produce major negative unintended consequences. Most significantly, the critics argue that a $15 minimum wage would mean fewer employment opportunities for low-wage workers, because businesses will be less willing to hire workers at the increased wage level. But the weight of evidence from the extensive professional literature has, for decades, consistently found that no significant effects on employment opportunities result when the minimum wage rises in reasonable increments. This is because the increases in overall business costs resulting from minimum wage hikes are, for the most part, modest.

It is true that raising the federal minimum to $15 an hour by 2020 would entail an increase that is substantially higher than the typical pattern. Nevertheless, businesses will be able to absorb most of the cost increases through modestly raising their prices as well as through cost savings, since worker turnover and absenteeism will fall when job conditions improve. A recent study by Wicks-Lim and myself found that, even fast-food restaurants, which employ a disproportionate share of minimum wage workers, are likely to see their overall business costs rise by only about 3.4 percent per year during a four-year phase-in for a $15 minimum wage. This means, for example, that McDonalds could cover fully half of the cost increase by raising the price of a Big Mac, on average, by about 15 cents per year for four years — from $4.90 to $5.50.

McDonalds could cover half of the cost of a $15 wage by raising the price of a Big Mac from $4.90 to $5.50.

The economy overall will also benefit from the gains in equality tied to the minimum-wage increase. Greater equality means working people have more spending power, which in turn supports greater overall demand in the economy. Greater equality also means less money is available to flow into the types of hyper-speculative financial practices that led to the 2008-09 Wall Street crash.

Taxing Wall Street Trading

The Sanders program includes the Inclusive Prosperity Act, a bill that was originally introduced into Congress in 2012 by Representative Keith Ellison of Minnesota, a leading figure in the Congressional Progressive Caucus (disclosure: I worked with Ellison’s staff in drafting this bill). This bill is, effectively, a sales tax on all financial market trades in the United States — that is, all stock, bond, and derivative (including options, futures, and swap) trades. It would be the equivalent of sales taxes that Americans have long paid every time they buy an automobile, shirt, baseball glove, airline ticket, or pack of chewing gum, eat at a restaurant, or have their hair cut.

The tax rates supported by Sanders includes 0.5 percent on all stock trades, 0.1 percent on all bond trades, and 0.005 percent on the underlying values of derivative trades, such as the value of a stock in a stock-option asset. These tax rates amount to $5 on the trading of a $1,000 stock; $1 on the trading of a $1,000 bond; and 5 cents through trading, for example, a stock option in which the value of the underlying stock itself is worth $1,000. By contrast, the average US consumer currently pays an average of 8.4 percent in overall sales taxes.

This Wall Street tax can be used to address two distinct but equally important concerns. First, it discourages financial market speculation because it raises the costs — and thus reduces the profit opportunities — for speculators. But assuming the tax rate is not set high enough to shut down trading altogether, the tax can also be a large new source of government revenues.

In a recent study that I co-authored with James Heintz and Thomas Herndon, we estimated that the Inclusive Prosperity Act could generate around $300 billion per year in new federal tax revenues (amounting to 1.7 percent of US GDP). This is after allowing that Wall Street trading would decline by an implausibly large 50 percent due to the tax. The Sanders campaign has estimated the cost of his free-college-tuition program at $75 billion per year. The $300 billion per year from the Wall Street tax could therefore cover this college-tuition program in full four times over. The Wall Street tax revenues could then provide something like another $225 billion to finance, for example, public investments in clean energy and infrastructure. Channeling this amount of money out of Wall Street and into education, clean energy, and infrastructure investments would, in turn, generate millions of middle-class jobs for educators as well as manufacturing and construction workers, as well as related support industries, rather than a relatively small number of high-paying Wall Street jobs.

$300 billion per year from a Wall Street tax could cover free college tuition four times over.

Contrary to our findings, a recent study by Leonard Burman and co-authors at the Tax Policy Center (a collaboration between the Brookings Institution and Urban Institute) asserts that a Sanders-type financial transaction tax could provide, as a maximum, no more than about $60 billion in annual revenues as of 2017. But their conclusion depends on the assumption that financial market trading would fall by between 80 to 90 percent after the tax is enacted, a claim which is not supported by the weight of evidence, including the evidence they themselves cite. Rather, as my co-authors and I show, our revenue estimate at $300 billion per year corresponds with the experiences of other countries that currently operate with this type of tax, including the UK, France, Italy, Hong Kong, and Taiwan.

Overall Economic Growth

Liberal critics of Sanders, led by Krugman as well as four former Chairs of the Council of Economic Advisers under both Clinton and Obama, became especially incensed over a paper by my colleague Gerald Friedman that estimated the impact of Sanders’s overall program on jobs and economic growth. Friedman concluded that it could raise the average annual US growth rate to 5.3 percent over a 10-year period after Sanders assumed office. This contrasts dramatically with the average growth rate of 3.3 percent between 1950 and 2015, and the much weaker recent average growth performances of 1.4 percent under Obama and 2.1 percent under George W. Bush. In fact, these critics were correct that Friedman’s specific growth estimate was overly optimistic. But here again, the critics have missed the forest for the trees.

OverallOverall, the Sanders program is capable of raising living standards and reducing insecurity for working people and the poor, expanding higher educational opportunities, and reversing the decades-long trend toward rising inequality. It could bring Wall Street’s dominance under control and help prevent a repeat of the financial crisis. It will also strongly support investments in education, clean energy, and public infrastructure, generating millions of good jobs in the process.

None of Sanders’s liberal critics have shown how, overall, these developments would be harmful to economic growth. In fact, there are several channels through which they support growth. A single-payer healthcare system would relieve businesses of having to cover health insurance costs for their employees. Higher average wages and greater overall equality will put more money in the pockets of most US consumers, enabling them to buy more from US businesses. Investments in education and infrastructure will raise US productivity and global competitiveness over the long term, as well as expand job opportunities in the short term. Large-scale investments to build a clean-energy economy, finally, is the only way in which any level of economic growth can be made compatible with stabilizing the climate.

It is true that the overall share of GDP going to corporate profits and the rich will decline, and this will likely counteract to some degree the positive factors encouraging private investment and growth under Sanders. But even The Economist recently concluded that corporate profits in the United States are excessive, so much as to be damaging the economy’s overall performance. The entirely feasible challenge today is therefore to produce higher growth rates through creating more jobs, getting more money in people’s pockets, widening educational opportunities, and raising productivity rather than allowing the country to slip further into economic oligarchy.

In short, if something like a Sanders program is enacted in the United States, the critical point will not be whether GDP grows, on average, at 3 percent, 4 percent or 5.3 percent. A Sanders economy will be fully capable of growing at healthy rates. But more than just growing, a Sanders economy will also deliver standards of well-being for the overwhelming majority of Americans, as well as the environment, in ways that we have not experienced for generations.