Since I wrote about Josh Barro earlier, I thought I would discuss his father Robert Barro now. Later tonight, I plan to write about his mother. (Note: I will not be writing about his mother.) Yesterday, Paul Krugman posted an article on his blog, Real Americans and Real Economics. This is a reference to a public fight that Krugman had with the elder Barro back in 2011, when he wrote an OpEd at The Wall Street Journal, Keynesian Economics vs Regular Economics. It’s a remarkable article. Let me go further: it is a remarkable title.
I’m not an economist, but those who are seem to think that Robert Barro is a very smart guy and a great economist. Krugman dealt with Barro’s claims at the time, Shocking Barro. But what I find amazing is that he’s completely disconnected from the real world. What he is arguing is that Keynesian economics has no theoretical foundation. I understand this, being an old environmental modeler myself. But I found out rather quickly that macro-scale models based on micro-scale phenomena are not necessarily better than a macro-scale model based simply on macro-scale observations. You would think that all economists would understand that having micro-foundations in a model does not necessary make it better, much less correct.
Of course, Barro throws out a lot of data and claims there is no support for demand side solutions to problems. In fact, the subtitle of his article is, “Food stamps and other transfers aren’t necessarily bad ideas, but there’s no evidence they spur growth.” But he is the Ricardian Equivalence guy. His idea is that government spending won’t stimulate the economy. The way this works in his theory is: (1) government spends by borrowing; (2) people see this and assume it means the government will have to increase their taxes later; (3) people spend less to save up for this future tax bill.
There are two problems with this as far as I can see. The first is: really?! You really think that people are that informed and rational? Well, I know Barro does. It’s ridiculous, but I’ll move on. The second problem is that the deficit spending would not be paid back all at once. So if the government spent $10 and planned to pay it back with increased taxes over the following ten years, then the completely knowledgeable and rational taxpayer would cut his spending by $1 that year, not $10. So there would be a $9 stimulative effect. This means that stimulus could be used exactly as we want it to be used: to smooth out the business cycle.
Within hours of Barro’s article appearing, David Glasner wrote a response, Barro on Keynesian Economics vs Regular Economics. He makes the point that Barro had argued that monetary policy can stimulate the economy, so why not government spending:
I think the problem is precisely that Barro is a clever fellow. He can come up with a justification for anything at all. The problem is that he is so ideologically rigid at this point that economics isn’t a tool of discovery; it is a slave of what he wants to believe. So the real micro-foundations of his work are his rigidly held political opinions. Given this, it is no wonder that conservatives think that climate scientists force their data analyses and models to predict global warming—that’s what their economists do.