During the presidential primary, candidates have rightly focused on various economic issues. They have discussed the current state of the economy and have laid out their plans for the future.
But are these plans economically feasible? That is an issue which is separate from political feasibility. Are these plans based on solid economic foundation? Are their claims based on economic realities?
These are important questions to ask since in our president we are going to elect the leader of the world’s largest economy. His or her vision is important for us to evaluate. Given the space constraint, I will focus on a few issues.
The economic discussions on the GOP side are particularly disappointing.
Republicans
Take, for instance, U.S. Sen. Ted Cruz’s claim that “Obamacare” is the single biggest job killer. He cites that as one of the reasons he wants to repeal the Affordable Care Act passed in March 2010. The fact is since its passage, payroll employment in the U.S. went up by nearly 14 million and part-time employment also fell.
Donald Trump claims the current official unemployment rate of 5 percent is false. The “real” unemployment rate could be as high as 42 percent, he says. His claim is also baseless. Even the broadest measure of underutilization of labor — known as U-6, a measure that includes all individuals who are marginally attached to the labor force — is currently 9.8 percent.
Recently, Mr. Trump discussed a plan to eliminate all federal debt by 2025. Setting aside the fact that elimination of all federal debt does not make any sense for the working of monetary policy, even the simple arithmetic of this debt reduction plan reveals it is impossible to achieve. By 2025, the gross debt will be about $28 trillion. To reduce it to zero without affecting social security, which Mr. Trump does not plan to change, will require slashing nearly all federal government spending, including national defense, homeland security, etc. to zero or achieving a 16 percent annual growth rate. Our annual growth rate is currently around 2 percent. We need to remember that at the top of his debt reduction plan Mr. Trump plans to provide a substantial across-the-board tax cut.
The Democrats, to their credit, have raised a lot of serious economic issues which they have tried to analyze thoughtfully.
Minimum wage
Consider the issue of raising federal minimum wage, which has been at its current level of $7.25 an hour since 2009. Rather surprisingly it has become one of the most important issues in the Democratic Party primary.
Individuals earning the federal minimum wage and families that depend on minimum wage jobs live below the poverty line. An increase in the federal minimum wage is long overdue. Research shows that a moderate increase in the minimum wage has very little, if any at all, negative impact on employment. It also helps families to get out of poverty.
It is not just a fairness issue. It is also good economics because it reduces the need for public assistance to low-wage earners. But the question is, what should be the level of the federal minimum wage?
While both Hillary Clinton and Bernie Sanders support raising the minimum wage they differ vastly on the amount of the raise. Mrs. Clinton, by and large, supports a $12 an hour federal minimum wage and also supports the local initiatives — such as the recent decisions of California and New York of raising the state level minimum wage to $15 over the next few years. The $12 minimum wage by 2020 will set the minimum wage at around 50 percent of the median wage — the wage about half of the workers earn. This will return minimum wage to the same level in relation to wage distribution — not in terms of purchasing power — where it stood in 1968, the year when the minimum wage level peaked.
Mr. Sanders, on the other hand, wants to raise the federal minimum wage to $15. Economist Alan Krueger, Ph.D., one of the nation’s foremost authorities on minimum wage, thinks raising minimum wage to $12 over the next several years should not have any meaningful net negative effect on employment and the economy and will be beneficial to millions of workers. But a federal minimum wage of $15 may well be counterproductive and may have considerable deleterious effects on employment. This does not, however, suggest high-wage states and cities cannot establish a $15 minimum wage.
Seattle is a prime example for that.
Recent legislation from New York and California also emphasize the importance of local conditions in going over and above the federal minimum wage. But at a federal level, an across-the-board $15 minimum wage over the next few years is by and large untenable. Consider Lackawanna and Luzerne counties. Currently, the median wages are little more than $18. Even if they increase over the next five years, a $15 minimum wage will represent about 75 percent of the median wage and will likely cause substantial negative effects on local employment.
Spending plans
Both Mr. Sanders and Mrs. Clinton have put forward ambitious and largely desirable spending plans. Most of Mrs. Clinton’s initiatives seem to be paid off through tax increases on the richest income earners and some unspecified tax savings through closing of tax loopholes. Her plans are estimated to increase federal spending by 2 percent over the next 10 years, compared with Mr. Cruz’s 6 percent increase and Mr. Trump’s 3 percent increase (without including his debt elimination plan).
Mr. Sanders’ plan is, however, way more expensive. According to the nonpartisan Tax Policy Center, after the costs for free college tuition, infrastructure development and free health care costs are factored in, Mr. Sanders’ plan will increase federal spending by $20-$30 trillion over the next 10 years — a 40-60 percent increase in federal spending. Although Mr. Sanders plans to raise revenue through taxes on the richest and high-income earners, a Wall Street speculation tax and some tax on the middle class to partially pay for the move toward single-payer health care system and free health care, his proposals will significantly increase the budget deficit.
But will Mr. Sanders’ plans work? Will it create more jobs, create more income and reduce income inequality?
Mr. Sanders’ campaign often points to the calculations of Gerald Friedman, Ph.D., a University of Massachusetts professor, which demonstrate that Mr. Sanders’ plan will indeed succeed and achieve the goals it is aspiring. Dr. Friedman claims that under Mr. Sanders’ policies the economy will grow at a sustained rate of 5.3 percent over the next 10 years and will create 300,000 new jobs per month.
Some leading economists have doubts. Christina Romer, Ph.D., and David Romer, Ph.D., of the University of California, Berkeley, have recently argued that this is virtually impossible given that the U.S. is a mature economy and we are currently operating at or near full employment. Unemployment may fall even more from the current rate of 5 percent, but there is very little evidence the economy has significant slack that can make a sustained annual growth of more than 5 percent even remotely possible.
Only once in the modern era have we experienced such a growth spurt — when we were recovering from the Great Depression and the unemployment rate was 25 percent, not 5 percent. A key ingredient of a very high economic growth is the growth of productive capacity. Currently, our normal productive capacity is growing at the rate of around 2 percent. Mr. Sanders’ policies are not likely to increase it substantially to make the rosy growth projections a reality. Moreover, the tremendous increase in government spending may have the potential to be inflationary, which most likely will prompt the Fed to raise interest rates and consequently thwart growth.
If the economic policies are not realistic or are not based on proper economic foundation, no matter how laudable the goals are, they do not boost confidence in the candidates who are supposed to steer the world’s largest economy.
SATYAJIT GHOSH, Ph.D., is a professor of economics and finance at the University of Scranton.