The Four Economists’ Big Letter

Everyone following the Democratic presidential primary race almost certainly heard about the Big Letter. Four former heads of the Council of Economic Advisers (CEA) under Democratic presidents signed an open letter condemning an analysis of Bernie Sanders’ platform by University of Massachusetts economist Gerald Friedman.

The letter asserted that Friedman’s analysis made “extreme claims that cannot be supported by the economic evidence.” It went on to urge respect for the “party’s best traditions of evidence-based policy making” and warned against undermining “our reputation as the party of responsible arithmetic.”

This letter really rubbed me the wrong way.

While I support the Sanders’ campaign, I am actually sympathetic to the four CEA chairs’ criticisms of theFriedman analysis. I don’t think there is a plausible story that goes along with his growth projections. He is projecting productivity growth that is considerably faster than any period for which we have data. He also projects huge increases in labor force participation, even when many parts of the Sanders’ agenda will make it easier not to work, such as free college, more generous Social Security benefits and universal Medicare.

However, much I may agree on the substance, it is hard to take the tone of a letter from four prominent economists speaking from the mountain of authority. The problem is that this mountain has shrunk a great deal in the last two decades.

The most obvious cause of shrinkage was the failure to recognize the housing bubble and to foresee thefinancial crisis and recession that would follow its collapse. None of these four former CEA chars was among the tiny group of economists that did try to warn of the impending disaster. The country has paid an enormous price for this failure of the economics profession.

It continues to pay a price to this day. Employment in February 2016 is more than 4 million lower than what had been projected for this year before the collapse of the housing bubble. Millions more who would like full-time employment are only able to find part-time jobs.

The weak labor market led to a large shift in income from wages to profits, leading to a drop in wages of close to 6 percent. If that doesn’t sound like a big deal, imagine an increase in the payroll tax of 6 percentage points. Workers are effectively seeing a tax increase of this size, not to support Social Security or Medicare, but to increase their bosses’ profits.

And of course, millions of people lost their homes. Furthermore, there is a growing body of research showing that children will suffer from the economic insecurity of their parents.

But it is not just the housing bubble where the experts got things seriously wrong. Back in the 1990s, virtually all the leading economists (including those in the Clinton administration) argued that the unemployment rate could not get much below 6 percent without triggering spiraling inflation.

Fortunately, then Federal Reserve Board Chair Alan Greenspan did not accept this view. He allowed the unemployment rate to fall to 4 percent as a year-round average in 2000. This allowed millions of people to get jobs who would not otherwise have the opportunity. We saw the only period of sustained wage growth since the early 1970s. And the beneficiaries were disproportionately among the least advantaged: less-educated people and people of color.

The experts were also seriously wrong on the trade agreements of the last quarter century, starting with the North American Free Trade Agreement (NAFTA). They argued that these trade deals would boost jobs and growth. In fact, they substantially reduced demand for less-educated workers, causing unemployment and putting downward pressure on the wages of large segments of the country’s workforce.

On these hugely important issues, the leading economists were very wrong. Insofar as their advice guided policy, it had disastrous consequences.

This is why it is more than a bit annoying to hear these four distinguished economists telling the world that we should listen to them because they are experts. I respect all four of these people as economists, but I want to hear their argument, not their credentials.

How about just giving the evidence? It might not be as dramatic, but it could have considerably more impact.