The Economics of Bernie Sanders

Many people on both sides of the aisle label Senator Bernie Sander’s policies as “nice.” However, conservatives and even some liberals will counter with “nice but not possible” or “nice in theory but destructive in practice.” Most Americans can agree that the deck is stacked against them. We in the middle and lower classes have seen wages grow slowly for years while CEO pay has grown exponentially. We have seen tax cuts primarily for the super rich. We have seen the cost of higher education rise drastically. We have seen the cost of health care do the same. All of this adds up to the largest gap in wealth and income inequality in almost 100 years. Clearly something is terribly wrong here, and that problem is strangling our economy. We cannot truly thrive as a nation unless all socioeconomic classes are succeeding. The rich companies cannot remain rich if there are no other consumer classes to provide that success. All of us are necessary to creating a healthy and stable economy.

Although many politicians and citizens agree on these concerns, vastly different prescriptions have been offered as means to resolve these systemic problems. Some liberals will call Republicans servants to the wealthy while conservatives will accuse Democrats of waging class warfare. This label throwing actually stifles any productive conversation that could potentially discover the correct methods that will counteract the recent inequality in our economy. Senator Sanders is one of those liberals who has been marked with such labels, but would his policies actually wage class warfare? Would they stabilize the economy or wreck the engine of opportunity entirely? His specific proposals are essential to analyze in order for us to effectively determine the effect of his beliefs.

Senator Sanders has decried that American workers are being taken advantage of by corporate executives. This is indeed shown in wage growth trends. As noted earlier, middle-class wages have indeed grown stagnantly compared to CEO pay over the past few decades.

Screen Shot 2016-02-24 at 12.27.39 AM

As I noted in The American Dream: Reality or Just…A Dream?, “As the graph shows, CEOs used to make $42 for every $1 earned by the average workers in 1980. Now, that ratio is $373 for every $1. We see that the most drastic changes came between 1980-1994 (100x more), 1994-2000 (383x more), 2001-2004 (150x more), and 2009-2011 (approximately 90x more).” Therefore, over the past thirty or so years, CEOs have been making drastically more than their workers. This has resulted in a very quick increase in income inequality between the lower classes and the richest class.

Screen Shot 2016-02-24 at 12.02.39 AM

This is especially problematic in that even while workers have been increased productivity over the past few decades, they are not reaping the rewards of such.

Screen Shot 2016-02-23 at 11.42.43 PM

Additionally, even while there has been an economic recovery over the past few years, the economic gains have gone more so to the top 1% of income earners than the entire bottom 99%.


Therefore, we see where all the gains are going. The richest few are profiting off the hard work of American workers. They are keeping wages low while taking home higher pay than ever. This is in addition to corporate and individual taxes falling over the past thirty years in disproportionate favor of the rich. The top 1% has actually seen their tax burden decrease by three times as much as the bottom 20% has in those past three decades.

Therefore, we can agree that the problem is real. The wealthiest few have been reaping all the benefits over the past thirty years while the average American gains little. Some companies actually pay their workers so little that those workers are actually forced onto food stamps and other government assistance programs. Therefore, taxpayers must pay at least $6.2 billion in higher taxes in order to pay for these companies’ practices. We are forced to go further into debt in order to finance the lavish salaries of executives. This is by definition corporate welfare. It seems as though we are paying to help the poor through these government programs, but in reality we are paying to allow rich corporations to continue stripping their workers of deserved pay and benefits.

Not only are powerful corporations and wealth individuals receiving most of the new wealth in the economy, they are also using their immense financial power to influence the government into passing policies that cement that power. This is done via constant lobbying of Congress and also unlimited, undisclosed campaign financing. Rather than being used to stimulate the economy through consumption, $388 million has already been spent on funding the 2016 presidential candidates. Even more worrisome is the fact that almost 50% of this money has come from under just 400 families in the United States. The 2010 Supreme Court decision in Citizens United v. The Federal Election Commission established that not only can campaign contributions be unlimited as long as they funnel through political action committees, the money never has to be disclosed. Therefore, the American people now lack the transparency needed to hold donors accountable and ensure that elected officials are not legislating corruptly according to the desires of their donors. Campaign donations have now at least doubled since elections before the decision, which means that wealthy donors and businesses hold even more power over explicitly or implicitly influencing elected officials to follow their will.

This change in the law has led Princeton University to discover through data that the United States is an oligarchy. “Multivariate analysis indicates that economic elites and organised groups representing business interests have substantial independent impacts on US government policy, while average citizens and mass-based interest groups have little or no independent influence.” Not only are the wealthy influencing politicians, they are ensuring that fiscal policy favors them over the middle class.

We have diagnosed the problem, but are the proposed solutions by Senator Sanders ones that will reverse this terrible trend of income inequality and loss of democratic power?  I will cite the specific ideas that Senator Sanders has listed on his website in order to directly analyze his views.

“As president, Sen. Sanders will stop corporations from shifting their profits and jobs overseas to avoid paying U.S. income taxes. “

First, Sanders wishes to end corporate inversions. This practice occurs when a U.S.-based company attains a smaller foreign company so that the U.S. one can switch its headquarters address to one in that foreign nation; this allows for the company to become a foreign entity and, therefore, avoid paying U.S. corporate taxes. Many corporations find this practice tantalizing since the U.S. corporate tax rate is 35% and, for instance, Ireland has a rate of 12.5%. However, this is a misleading statistic. Although the statutory rates are such, loopholes and deductions make the effective rates much lower for countries like the U.S. When compared to 189 countries of the world, the U.S. ranks 15th at 27.1% and also lower than the average of most of our European peers. Therefore, the U.S. still does have a higher tax rate than Ireland, but it is certainly not the highest taxer in the world as some claim.

Interestingly, both Senator Sanders and Donald Trump support ending corporate inversions. Additionally, President Obama recently announced executive actions to limit the practice and help return an estimated $40 billion in lost taxes. The argument for ending such a tax-evading method is that it both encourages a race to the bottom for 0% tax rates and is also unfair to the American worker who cannot pick the tax rate he or she pays. The nation can use that tax money to reduce the government deficit and debt as well. Additionally, the practice is actually anti-capitalistic in that the creation of monopolies discourages competition and the drive for lower prices and higher quality products.

“He will create a progressive estate tax on the top 0.3 percent of Americans who inherit more than $3.5 million.”

The estate tax applies to less than one million American citizens and has been in place since 1918. While controversial, the tax has historically existed in order to prevent a nobility class within the U.S. It tries to prevent such by taxing at various rates the very few richest households in the country. However, there are exemptions on the tax so that inheritance can go to a spouse or a charity. Sander’s would change current policy from taxing estates of only over $5 million to including any over $3.5 million. Currently, the tax raises $19 billion per year in revenue, which seems significant but is actually just 0.6% of all tax revenue. However, any revenue that could combat the nation’s debt is worth examining. Now, the jury on the effectiveness of the tax is hotly contested. Republicans often argue that it is a “death tax” which prohibits families from passing money onto their children. Additionally, some institutions argue that it stifles investment and, therefore, job creation. However, the results are unclear as it seems ambiguous whether such inherited money within just a few families would actually be spent on consumption and investment. As I have argued previously, wealthier individuals have a lower propensity to consume. Therefore, that tax revenue may be better spent on funding education or other government initiatives, which could stimulate the economy via middle-class consumption.

“He will also enact a tax on Wall Street speculators who caused millions of Americans to lose their jobs, homes, and life savings.”

The financial sector is extremely complex and difficult to comprehend; however, this tax would apply to speculation and the trading of stocks and bonds. NPR reports that the tax could raise anywhere from $34 to $340 billion every year, and the range is so wide because no one can accurately predict whether traders could find a way to bypass the tax through innovative tactics. As for the economic impact of the tax, it would indeed raise taxes off the backs of large financial corporations, which were bailed out after the 2008 economic collapse. The tax could also discourage computerized trading, which allows big firms to make much more money quickly at a disadvantage to smaller firms that work with average Americans. Conversely, the tax could also negatively affect Americans’ pension and stock plans since they would also pay the tax on trades. In response, “Warren Gunnels, policy director for the Sanders campaign, argued that if Wall Street firms pass on the cost to investors, tax credits would be available to help low- and moderate-income people defray the cost.” Thus, the economic effects and revenue potential of such a tax are uncertain, which raises concern since this is how Sanders finances his free public college plan (discussed later).

“Increasing the federal minimum wage from $7.25 to $15 an hour by 2020. In the year 2015, no one who works 40 hours a week should be living in poverty.”

As I discuss in Why Raise the Wage?, Americans deserve a wage hike. At the very least it should be tied to inflation so that it does not lose value as time passes. Additionally, American families cannot survive on an annual income of just $15,080, which is essentially poverty. Of course, we wish that families would not be working minimum-wage jobs so that they could be making more money, but that is sadly not the reality in which we find ourselves. Also, it seems that the only way we can stop that trend is through empowering those workers via higher wages, which will allow them to afford more economic opportunities like an education. Additionally, raising the wage can stimulate the economy through providing the lower and middle class with extra money to spend on consumption increasing consumer demand and incentivizing businesses to hire more employees. Workers are more satisfied when they have a higher wage, which lowers turnover and training costs and also increases worker productivity increasing revenues. Additionally, job creation leaves fewer unemployed workers in the market increasing the scarcity of workers, which in turn creates an upward pressure on wages. Therefore, raising the wage seems like the correct path to take.

However, we must be careful in how we approach it. Too quickly an increase can shock businesses and cause them to lose money and possibly close. Too high an increase will cause costs to rise and possibly cause prices on products to rise for consumers. Now, no one knows the precisely correct wage in order to minimize the negative effects and maximize the positive. However, in my article I argue that a federal wage–that would allow workers in the state with the lowest cost of living (Arkansas) to afford a two-bedroom apartment without spending more than 30% of their income–should be set at $12 per hour. This seems like a reasonable marker for establishing a minimum wage. We wish to set a wage that will provide Americans with enough money to pay for necessities while still being able to put money toward career-advancing opportunities. This is further possible when we work to reduce the cost of healthcare and energy, which consume much of families’ budgets.

Now, Senator Sanders supports a $15 wage, which could have more uncertain impacts. Being a student of economics, I fully realize that an economy–especially one so large as the U.S.–is very tough to predict. There are infinitely many variables all having correlated effects on one another. Economists do understand large theories and methods that hurt or help an economy, but specifically determining a perfect minimum wage is exceedingly difficult. Such a wage increase could empower workers and simulate consumption as I just argued, or it could raise business costs too high and in turn hurt the American consumer through inflation. Additionally, too high of a wage hike could attract higher skilled workers that would otherwise work non-minimum-wage jobs, thus, leaving lower-skilled workers without jobs. If we wish to achieve $15 per hour, it must occur gradually so that consumer demand can match the increase in costs. Additionally, the argument for such a wage is sound in states like New York and California which have much higher costs of living and, therefore, require a much higher wage of over $20 in order for Americans to afford a two-bedroom apartment without spending more than 30% of their income. If these wage hikes affect primarily the big businesses, it may help reduce some of the extreme income inequality in this country. If we can raise wages without causing prices to rise through inflation, we can put more money into consumers’ pockets increasing demand which will increase revenues. If done correctly, this policy can be an economic stimulator.

Additionally, Sanders is also promoting an end to the culture of greed in Big Business. Of course, there is a human and capitalistic incentive to make as much money as possible, but we need to encourage CEOs that their businesses will be truly most productive when their employees are paid well and treated with dignity. Admittedly, this requires a cultural shift rather than policy change. Perhaps to do so through policy this requires legislation on limiting what percentage of profits can go toward executive pay, or as I argue in The American Dream: Reality or Just…A Dream?, we can raise businesses’ tax rates while providing tax credits for businesses that reinvest profits into workers’ wages and benefits. That way businesses can pay the same in their effective tax rate yet be incentivized to transfer money from executives to workers. Through these types of policies, we can be pro-business while being pro-worker.

“Putting at least 13 million Americans to work by investing $1 trillion over five years towards rebuilding our crumbling roads, bridges, railways, airports, public transit systems, ports, dams, wastewater plants, and other infrastructure needs.”

According to the American Society of Civil Engineers, the United States is in dire need of infrastructure investment. The following is the nation’s report card in each structural area.

Screen Shot 2016-04-15 at 1.28.02 AM.png

The U.S. gets only one single grade in the A or B range, and that is a B- in “Solid Waste.” These are certainly not statistics of which to be proud. Admittedly, they may be a little biased as the ASCE has a direct interest in promoting U.S. investment in infrastructure. Nevertheless, most people and experts agree that this is indeed a serious issue that needs to be resolved. Sanders calls for $1 trillion while the ASCE calls for $3.2 trillion. This investment could revitalize our economy through providing both consumers and businesses with more reliable and faster modes of transportation. Additionally, as Sanders states, the investment would create millions of jobs that would put more Americans back to work putting money in their pockets to further stimulate the economy through consumption. Now, $1 trillion is a hefty price tag. However, Sanders proposes paying for it through closing tax loopholes that allow U.S. companies to hide money in foreign countries like the Cayman Islands. One study found that the hidden money amounts to $2.1 trillion–certainly enough to finance Sanders’ plan. Businesses should not be allowed to cheat the system in ways that the American worker cannot.

“Reversing trade policies like NAFTA, CAFTA, and PNTR with China that have driven down wages and caused the loss of millions of jobs. If corporate America wants us to buy their products they need to manufacture those products in this country, not in China or other low-wage countries.”

Trade is an area where strangely Donald Trump and Bernie Sanders agree. They both argue that free trade agreements have caused destruction to the American economy through lost manufacturing jobs. Now, trade is complex as we wish to pay workers a livable wage, yet we also desire the lowest prices for our products. Now if we follow the same logic that we do for raising the U.S. minimum wage, we should argue that raising workers’ wages in foreign countries will not raise prices but instead lead to greater consumer demand. However, the difference here is that the goods produced are not typically sold in the markets where they are produced. Those foreign workers will not typically be buying expensive athletic shoes and clothing, for instance. Therefore, those increased wages will not return to the company in the form of increased revenue, and those companies do not then have an incentive to increase wages.

Now, trade deals lie much within the law of comparative advantage. If a foreign country can produce a good more efficiently than my own country, then that country should produce that good over mine. Since American workers generally have more skill training and education than other foreign countries’ workers, it makes more sense to an economy not to use those skills on a production line that could be done by foreign workers who can work just as efficiently. Those American workers can be using their skills and education in more advanced professions. If American companies were to employ American workers for jobs that do not require as much skill, those companies would have to pay those workers much more than they would typically since those workers are being paid not to use their full skills and education. That is why when American companies do perhaps return production to the U.S., the assembly line is heavily automated so that skilled American workers do not have to be employed at a higher cost. Therefore, comparative advantage states that workers who do not have such skills and education should be doing the less-skill-required work and that the skilled workers should be doing the more-skill-required work.

Now, this does not mean that foreign workers should be paid next to nothing for their work. They should be given humane working conditions and wages that meet their own country’s cost of living. This way foreign workers can actually have a chance at economic success rather than be used as essentially slave labor. This humane method is indeed possible and still efficient for a business since the costs will still be lower than employing American workers. Additionally, foreign workers will then have higher workplace satisfaction and will be more productive as a result. There is indeed much room for progress here. For example, in Cambodia a textile worker makes the equivalent of $1,200 per year–far less than an American worker would make. These workers deserve higher wages for their work for wealthy American businesses.

Upon analyzing the theories of trade, it becomes clear that trade is indeed necessary in order to ensure that all people do the work best suited for their skills. However, this does not mean that anyone should be exploited for their work. Free trade seems to work best for the world but only when workers are treated humanely. Therefore, it seems that both Sanders and Trump are too fixated on Americans losing manufacturing jobs when in reality those workers have probably now turned to more advanced service-industry jobs. Instead American consumers can afford inexpensive goods through free trade while workers do the jobs best suited for them. If Americans lack the skills needed for the new jobs, then the government should be investing in job training programs.

Even if we demand that businesses raise wages for foreign workers, they can still be raised while not becoming as costly as employing American workers would. Admittedly, prices may rise on the foreign-produced goods, yet maybe with higher wages those foreign workers could then afford to use their wages on those same produced goods increasing revenues for the American businesses; this could prevent those goods’ prices from rising in the end. Employing those foreign workers will also increase worker scarcity in those countries causing upward pressure on wages there.

Furthermore, when goods are cheaper, more Americans can afford those goods which leads to greater consumer demand hopefully leading to more job creation in the U.S., such as in the service-based industry. Additionally, perhaps the service-based jobs into which those American workers transition deliver higher incomes than the former manufacturing jobs did. Therefore, American workers could possibly handle the possible price increase on the foreign-produced goods, and is that not the price of conducting moral business in the world? Perhaps goods should not be so cheap from the fact that the only reason they are is because they were made through exploitative means.

Based on this understanding, it seems that Trump and Sanders are fighting the wrong battle. It is not that we should be fighting the loss of manufacturing jobs in the U.S. Many economists agree that U.S. manufacturing employment is never going to return to the way that it was in past decades due to the law of comparative advantage and the inexpensiveness of automation. Even if automation becomes less expensive than employing foreign workers, at least that investment into technology will go toward another business as consumer demand, and someone must make the machines themselves and maintenance them. Therefore, it is not as though automation would simply erase all jobs forever.

The U.S. needs to instead be demanding that free trade only be conducted when foreign workers are paid and treated humanely. This seems to be what President Obama aims to achieve in his signature trade deal, the Trans-Pacific Partnership. Sanders and Trump oppose this deal since it does not return manufacturing jobs to the U.S. yet simply fights for higher working conditions around the world. There may be other corrupt agreements within the deal, yet the TPP seems like the correct route to go since it is becoming clearer that the prior hope of keeping manufacturing in the U.S. cannot be achieved anymore.

Additionally, Trump especially mentions the large trade deficits between the U.S. and other nations as a problem that must be fixed in order to return growth to the nation. The trade deficit or surpluses are established by the balance between the total value of goods exported minus imported. Thus, the U.S. has a trade deficit since it imports more goods than exports. U.S. News reports, “Between 2001 and 2013, the U.S. goods trade deficit with China increased by $240.1 billion.” Therefore, the U.S. is importing far more goods from China than exporting to it. This is true of U.S. trade overall on the global scale.

Screen Shot 2016-04-16 at 9.19.12 PM.png

Trump argues that these growing deficits are dragging down the economy, yet do they really matter to U.S. growth? Many economists argue that the deficits do not impact growth. For example, an economist from the CATO Institute argues:

“The commentators’ flawed critique suffers from an overly narrow view of trade. A trade deficit doesn’t mean those dollars flowing abroad just disappear. They quickly return to the United States. If they are not used to buy our goods and services to export, they are used to buy American assets — Treasury bills, corporate stock and bonds, real estate and bank deposits.

In this way, America’s trade deficit is always and almost exactly offset by a foreign investment surplus. The net surplus of foreign investment into the U.S. each year keeps long-term interest rates down, prevents the crowding out of private investment by government borrowing and promotes job creation through direct investment in U.S. factories and businesses.”

Therefore, maybe arguing about trade deficits is for nought, and the same economist additionally points to history to ground this claim in evidence. “Since 1980, real U.S. GDP has grown at an annualized rate of 3.6 percent during those periods of rising trade deficits, compared to a sluggish 1.0 percent during periods of shrinking deficits. So much for trade deficits being a drag on growth.” Perhaps trade deficits are actually good for the U.S. economy then. It seems that both Sanders and Trump lack a well-rounded view of how free trade benefits all parties. However, our focus must be on treating workers justly around the world.

Creating 1 million jobs for disadvantaged young Americans by investing $5.5 billion in a youth jobs program. Today, the youth unemployment rate is off the charts. We have got to end this tragedy by making sure teenagers and young adults have the jobs they need to move up the economic ladder.”

Investing in the nation’s youth seems like a successful plan. Providing job training, education, and other programs will prepare the nation’s youth for fruitful careers. This is especially important since many jobs are indeed available, yet qualified people do not exist to fill those openings. Now, a crucial part of this plan is how it would be financed. Sanders argues that closing what is known as the carried interest loophole will more than fund this program. Carried interest is what an investor is paid for his or her investment into a company for it to be successful; the payment is essentially a fee for the investment. Now, of course many investors make large sums of money from this sort of endeavor, yet it is taxed as a capital gain (a profit on investment) rather than as income. This makes the difference between a tax rate of 15% and 35%, respectively. The effective income tax rate is around 27%, but regardless this variance results in much lower tax revenue for the government, which is especially significant since the extremely rich heavily rely on this type of income.


The counter to this argument is that investment is what fuels the economy. While this is true, the government lacking such large amounts of tax revenue from the wealthiest citizens means that it must turn to poorer citizens or debt in order to pay the bills. It is also simply unfair that a nurse or teacher pays a tax rate 25% or higher on 100% of his or her income while an investor on Wall Street pays a tax rate of just 15% on 50% of his or her income. Investment is just as important as keeping money in average Americans’ pockets so that they can continue consuming and driving the economy.

“Fighting for pay equity by signing the Paycheck Fairness Act into law. It is an outrage that women earn just 78 cents for every dollar a man earns.”

Gender pay inequality is an extremely complex issue, which is explained well by author John Green. The 21-23% difference in annual earnings largely results from multiple factors. These factors include legitimate gender discrimination, female independent choice to work in lower-paying or unpaid fields, and also societal pressures like traditional gender stereotypes that influence women into certain industries that do not yield as high of income. The second of those three may not seem like a societal problem, yet the other two are indeed problems and should be fixed. Our culture needs to accept women as equally capable in male-dominated fields and additionally not pressure them into roles merely based on gender norms. This can indeed close the pay gap to a certain extent, and legislation can help in empowering women to have the legal power to sue employers they suspect of sexually discriminating. Economically speaking, closing this gender pay gap will grant women their deserved purchasing power, which can then be spent on consumption fueling the economy.

“Making tuition free at public colleges and universities throughout America. Everyone in this country who studies hard should be able to go to college regardless of income.”

As I argue in Higher Ed, Higher Cost: Solving the Education Crisis, a college degree is becoming almost a necessity for economic success in the modern economy. With the exception of trade professions, most careers require at least an associate’s or bachelor’s degree. Now, if the economy requires this level of education of our next generation of workers, then we should ensure that it is available to all Americans regardless of income. If we do not, then we will allow for a poverty trap forever keeping poor children poor even into adulthood since they would not be able to access the education they need in order to economically succeed. This is why Sanders plan to make public college tuition free makes sound economic sense just as the nation did with public grade school long ago.

Now, it is of course reasonable to ask how this is financed and what the economic effects of this financing would be. As discussed previously, Sanders plans to tax Wall Street speculation with a revenue goal of $300 billion per year, yet some economists argue that the revenue could be as low as $30 billion per year due to the financial sectors’ known savviness as circumventing taxes. For Sanders’ college plan, he only needs $75 billion per year to finance it. Therefore, if he could ensure that the revenue would be at least that, then the program will be financially supported. Furthermore, with the use of tax credits as mentioned previously, the tax could hopefully be targeted to precisely apply to just wealthy investors rather than average Americans’ retirement funds. This method may indeed hinder investment into companies, yet the largest corporations and banks already made exorbitant profits and could realistically afford a small tax, which allows for the education of the next generation. This plan could additionally help balance out the extreme income inequality that has arisen over the past three decades.

“Expanding Social Security by lifting the cap on taxable income above $250,000. At a time when the senior poverty rate is going up, we have got to make sure that every American can retire with dignity and respect.”

Social Security has a few challenges currently and in the near future. The program was instituted by FDR to ensure that the nation’s elderly would not be in such extreme poverty. Before the program, over 35% of seniors were under the federal poverty line. As of 2000, just 10% of seniors are under that line, and this seems to have a direct correlation to the existence Social Security.


Today the program pays an average annual income of about $14,000, which is just over the federal poverty level. Of course, some will argue that Americans should be saving throughout their lives so that the taxpayer does not have to support them, yet the fact of the matter is that an economy that exploits workers does not allow for lavish saving. Frankly most Americans do not or cannot save enough for retirement. U.S. News reports, “Only a fortunate minority of Americans have significant sources of retirement income other than Social Security. Social Security made up 50 percent or more of the retirement income of 66 percent of Americans age 65 and older in 2009, up from 64 percent in 2008. And more than a third of retirees (35 percent) receive 90 percent or more of their income as a monthly payment from the Social Security Administration.” Therefore, if we believe that no one (minimum-wage worker or senior citizen) should be living on just over the poverty line, then it is right to increase Social Security benefits.

However, this is not an easy task. The Baby Boomer generation is currently nearing or entering retirement, which is troublesome since it is the most populous generation in the U.S. Notice how the age distribution of the country has changed from 1950 (left) compared to 2016 (right).

Since Social Security payments are funded by current workers’ payroll taxes, there may soon not be enough revenue keep the program solvent, and this could occur as early as 2020. Seniors could then expect full benefit payments until 2035 before cuts would have to be made. This is problematic since many believe that benefits should increase not decrease.

Some posit that the program can be fixed by transforming the program into individual accounts where each beneficiary cashes out on their own money just like a savings account. This could very well work; the transition would just be challenging which makes it a politically unpopular idea. Additionally, some say that contributors should have the option to invest a portion of their payroll taxes in an investment fund which rides the stock market. This could potentially yield higher returns, but this could also nearly wipe out workers’ savings if retirement comes amidst a recession.

Regardless of these interesting ideas, Sanders’ one proposal is to lift the cap on the maximum amount of income that could be taxed for Social Security. The current cap is $118,500–which means that any income above that level will not be taxed for Social Security. Sanders proposes raising that cap to $250,000 which would mean that wealthier people would be paying more into the fund. Sanders argues that those wealthier Americans should pay the same percentage of their income into the fund as poorer Americans do (the rate is not graduated–rather 12.4% for all income levels). It is important to note that while the program is not means tested–wherein as income levels increase, benefits payments decrease to zero–the increase in benefits for every dollar contributed decreases as income increases. In that way Social Security is a welfare program in that poorer Americans get higher benefits payments for every dollar contributed compared to wealthier Americans. This brings up the debate over whether we wish to create a progressive system where the wealthy pay more to benefit the poor, and it seems that largely our tax systems, at least ideally, are based on this premise. If we accept that premise, then we can accept Sanders’ proposal which would increase Social Security’s solvency to 2065. Unfortunately, to ensure that the program stays solvent for 75 years, more reform must be taken such as raising payroll taxes for all workers by at least 2.7%. Therefore, it seems as though Sanders’ plan would fix some of Social Security’s problems for a few decades, yet more drastic reform must be taken to keep the program alive for longer.

“Guaranteeing healthcare as a right of citizenship by enacting a Medicare for all single-payer healthcare system. It’s time for the U.S. to join every major industrialized country on earth and provide universal healthcare to all.”

The U.S. heath care system has been at a loss for decades. The country spends more money (as % of GDP) on care and obtains worse results.


Clearly the U.S. is doing something wrong here; it is never good to get less bang for your buck. In the nation of capitalism, we Americans are surely not receiving competitive prices for higher quality care. Conversely, the countries with socialist health care systems–for example Canada and the United Kingdom–spend less on health care yet have higher life expectancy, lower infant mortality, fewer chronic health conditions, and lower obesity rates. Something about socialist systems is clearly working more efficiently than the U.S. system.

As I discuss in Obamacare: Separating Fact from Fear, the new U.S. health care law did much to improve the existing system. Americans are now guaranteed more protections in the market, such as price increases only when justified, no annual caps on coverage, no denials of pre-existing conditions, and the ability for children to stay on their parents’ plans until 26 years old. These are all wonderful guarantees that will protect the American people; however, they come at a price. Covering all pre-existing conditions and not annually capping coverage means that insurance companies will have to cover more care. In order to fund these very necessary guarantees, an individual mandate to purchase insurance is critical. The goal is to bring more young, healthy people into the insurance system so that their payments will cover the new care of the sicker Americans. This works in the same way as life insurance, wherein monthly payments can be just $20 but policies can give out payments of $300,000 or far more. This financially works as people all want the security of life insurance, yet most people will not perish for a long time. This broadening of the insured base lowers costs for everyone.

Additionally, mandating health care coverage also aims to improve the nation’s health overall, which should have a long-term downward effect on insurance price increases. Therefore, this new legislation seems to make progressive strides toward fixing our nation’s health care problems. Health care spending is increasing at the slowest rate ever; therefore, this seems to be progress.

Nevertheless, the United States still spends far too much on health care relative to our peer nations. This is due to the fact that the Affordable Care Act (ACA/Obamacare) did not reinvent the heath care system yet made improvements to an already-fractured system. When Americans purchase insurance as individuals, they lack any bargaining power against the insurance companies to fight for lower premiums. This is why many Americans try to work for big corporations who bundle employees together enabling their bargaining power. Perhaps the best possible end of this method is to increase the size of the bargaining pool of Americans to the entire nation so that insurance companies must compete with each other for the ability to insure all 320 million people. This would in theory dramatically drive down costs as it has in our peer nations. President Obama attempted to included a hybrid of the ACA and this “single-payer” option in his reform. This would have been known as the public option, which would have created a government entity that could bargain for lower premiums for Americans. This, however, was defeated in the Senate after passing the House due to monied interests lobbying elected officials due to fear that their profits would be minimized.

Sanders seeks to push reform all the way. He calls his single-payer plan “Medicare for All” since Medicare is already government insurance yet only for the elderly. Admittedly, President Obama’s hybrid plan could not pass, so how could this? That is why Sanders is calling for a political revolution where candidates are elected only if they shrug off the powers of corporate lobbyists and donors. This may indeed be possible, and the proposed plan could dramatically lower health care spending in the U.S.

Regarding the economics of financing this legislation, Sanders proposes “a 6.2 percent income-based health care premium paid by employers, a 2.2 percent income-based premium paid by households, progressive income tax rates, taxing capital gains and dividends the same as income from work, limiting tax deductions for the rich, adjusting the estate tax, and savings from health tax expenditures.” Essentially this translates to raising taxes on all Americans. However, he argues that the tax increase could be around half of what Americans typically pay for insurance currently. Thus, Americans would actually save money. There are definitely legitimate criticisms to a single payer system, yet there are just as many concerns if not more about the present system, and the U.S. is still not receiving impressive results for all its spending.

“Requiring employers to provide at least 12 weeks of paid family and medical leave; two weeks of paid vacation; and 7 days of paid sick days. Real family values are about making sure that parents have the time they need to bond with their babies and take care of their children and relatives when they get ill.”

There is an economic and social impact to not providing paid leave for American workers. If workers cannot take paid time off work to raise their families, we will have a society of children who have had less parental supervision and care in their lives. This could absolutely lead to generations of adults who lack compassion, morals, or other family values. Furthermore, those parents feel less satisfied while working and then are not as productive.

Additionally, when workers cannot take paid sick leave, they are actually endangering their workplaces with their illnesses and are not able to work as efficiently. Furthermore, when people feel overworked, under-rested, and mistreated, they are not satisfied with their workplace and are then less productive. This can have negative effects on society and the economy.

The truly depressing fact of the matter is this graphic.

Gillibrand_New Economy_panels-01.png

When there are 196 countries in the world and 178 of them guarantee paid family leave, how can we live with ourselves knowing that we are one of those 18 countries? It is truly despicable that the richest nation in the world cannot legislate this crucial right into law. We have been sold a lie that we cannot afford these necessary benefits.

Research finds that in California, where such policies have been enacted, over 90% of employers reported no difference in profitability. Additionally, “a body of research finds that these practices can benefit employers by improving their ability to recruit and retain talent, lowering costly worker turnover and minimizing loss of firm-specific skills and human capital, as well as boosting morale and worker productivity… A survey of 251 employers conducted after Connecticut implemented a paid sick leave program found that employees did not abuse the policy by taking unnecessary sick days. About two-thirds of employers reported no increase in cost (47 percent) or an increase of less than 2 percent (19 percent) and the report’s authors conclude that there is no business case for opposing paid sick days. Another study examining the implementation of San Francisco’s paid sick leave law in 2007 found no evidence of a negative effect on the economy. Unlike surrounding areas that did not have a paid sick leave law, San Francisco saw an increase in total employment after the implementation of the law. The number of businesses also grew more rapidly in San Francisco than in surrounding areas in the same time period.”

In order to finance federal workers, Sanders proposes a $1.61 flat tax per week for every worker. This small tax increase could grant the power for the nation to afford benefits that are so crucial to creating a happy, productive, and healthy society. This surely seems like the correct path to take as it could hopefully gave a positive effect on reducing income inequality via placing more money in workers’ pockets and higher productivity for businesses.

“Enacting a universal childcare and prekindergarten program. Every psychologist understands that the most formative years for a human being is from the ages 0-3. We have got to make sure every family in America has the opportunity to send their kids to a high quality childcare and pre-K program.”

An economic reason to invest in such early childhood education seems intuitive and similar to the argument for paid family leave. Children need parental presence, guidance, and care to succeed in life and to grow into thoughtful and productive adults. Most of the experiences that set this groundwork occur in early childhood. Therefore, investment in this area seems like a economic necessity. Admittedly, Sanders does not seem to explicitly detail on his website how he would finance such a proposal. Hopefully that plan will become available so that it can be analyzed for its economic effects.

“Making it easier for workers to join unions by fighting for the Employee Free Choice Act. One of the most significant reasons for the 40-year decline in the middle class is that the rights of workers to collectively bargain for better wages and benefits have been severely undermined.”

As I argue in The American Dream: Reality or Just…A Dream?, there seems to be a pretty striking correlation between decreasing union rates and simultaneous decreases in workers’ wages.

Screen Shot 2016-02-24 at 12.14.35 AM

Screen Shot 2016-02-23 at 11.42.43 PM

It seems as though as union membership began to decline throughout the 1960’s, 1970’s, and thereafter, hourly compensation began to essentially flatline. All the while, the top 10% of income earners began to make drastically more. This intuitively causes a clear effect on income inequality shown in the next graph via the GINI coefficient, wherein 0.00 is complete equality and 1.00 is complete inequality where one person owns 100% of all the wealth.

Screen Shot 2016-02-23 at 5.49.19 PM

“Breaking up huge financial institutions so that they are no longer too big to fail. Seven years ago, the taxpayers of this country bailed out Wall Street because they were too big to fail. Yet, 3 out of the 4 largest financial institutions are 80 percent bigger today than before we bailed them out. Sen. Sanders has introduced legislation to break these banks up. As president, he will fight to sign this legislation into law.”

Sanders wishes to both blame the largest banks for the 2008 financial crisis and also make them pay for it via breaking them up into smaller banks. He essentially argues that their large size enabled them to wreck the entire financial industry and also to force the American taxpayer to save them when it all fell apart. Sanders, therefore, proposes somehow breaking up banks that are deemed too big to fail. However, the logistics and reasoning of this plan seem complicated.

Politico reports that bigness in the banking industry did not itself actually allow for the entire financial industry to unravel in 2008. Instead, it was a lack of regulation and a lucrative desire for high earnings on what were thought to be trusted bets–mortgages. I explain in Recession & Recovery: How America Bounced Back exactly how the problem developed. The ability to make enormous returns on mortgage securities did not lead one giant bank to endanger the entire industry. Instead everyone from small commercial banks to large investment banks to individual investors had a hand in this dangerous endeavor. Therefore, it is not the size of the banks to blame but rather how overexposed every actor was to the looming problem.

Now, one part about the banks’ size that does bring about a danger is the combination of commercial and investment banking. The repeal of a New-Deal-era bill known as Glass-Steagall in the 1990’s allowed for commercial banks–which hold Americans’ checking and savings accounts–to also operate as investment banks–which use money to bet on stocks, bonds, and other assets. This combination then allowed for the possibility that if a risky bet led to the demise of a bank, it could not only bring about investment losses but also losses in peoples’ personal checking and savings accounts. The repeal of this law did not create the financial crisis but instead exacerbated it. In this way, Sanders is right in arguing that risk-taking banks should not be allowed to endanger people’s personal money.

Even if investment banks existed alone, the market could have still been at risk of collapse in 2008. The lack of regulation on how much money a bank had to hold in its vaults at any given time allowed for them to make too many risky bets without enough money to cover any potential losses. The percentage of money that is required to hold in vaults is known as the reserve ratio. Unfortunately, that rate was far too low at the time of the collapse leading many banks to go bankrupt having far too many losses without enough money to cover them. In this way, it was not the size of the banks but the regulation of banks that created such an immense crisis. Now that rate is higher, and the Federal Reserve actually pays interest on money held above the set rate in order to incentivize holding more money.

Additionally, large banks were actually credited in helping stabilize the market after the collapse. After the government via the Federal Reserve purchased some of the defaulted assets from the big banks through the Troubled Asset Relief Program (TARP), the bigger banks were able to accumulate the smaller banks that were in bankruptcy as well. This freed up other troubled assets beginning the process of stabilizing the market and allowing for credit to flow once again. Thus, the size of the banks seemed to actually help in this scenario.

Overall, the idea of simply breaking up the banks seems off point. The government should be focusing on regulating the banks and their practices instead in order to reduce risk and vulnerability to the market. These banks were definitely at fault for causing the financial crisis of 2008. They lent far too freely expecting that prices on homes would continue to rise without a drastic uptick in defaults. Everyone in the system was making far too much money to notice that their practices would lead to a bubble burst worse than anything in the past seventy years. Therefore, government’s role must be to ensure that such greed and lack of foresight does not prevail once again.


Sanders’ proposals to address income inequality seem to be in the right place. The disparity between the rich and the poor along with such stagnant wage growth seems to justify the grandiose plans that Sanders wishes to enact. In some areas, his ideas seem a bit too simplistic without enough foresight of how the economy could be affected overall. Overall, his proposals would effectively address some of the core problems the American people are facing. Mostly they would empower the American worker and, therefore, fuel economic growth for all income levels. A country cannot succeed for long unless all citizens have the ability to work hard and also get ahead. We need to ensure that opportunity is available to all Americans. cropped-new-logo.jpeg


One thought on “The Economics of Bernie Sanders

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s