Wednesday, February 24, 2010

The incredibly stupid (or dishonest) Robert J. Barro

In the Wall Street Journal, Barro claims that somehow, government spending during a depression crowds out private spending and thus results in a decline in future GDP, and that $1 of government spending results in only 60 cents of GDP growth. But that's utterly ridiculous. Crowding out can occur only if there is a shortage of slack resources in the economy. If there are slack resources in the economy -- an excess of money with a shortage of worthwhile places to invest it due to a collapse in demand, an excess of unemployed people who have a productivity of zero due to a lack of jobs due to a lack in demand -- crowding out cannot occur. We currently have 0% short-term interest rates for Treasuries, demonstrating that there is an excess of money with a shortage of worthwhile places to invest it. We currently have 10% nominal unemployment and 20% combined unemployment/underemployment in our economy, people who want work (or want more work) and cannot find it. Both of these facts add up to no (zero) crowding out caused by government spending in the near term, since for crowding out to occur, government would have to be taking resources from private enterprise rather than taking from a pool of slack resources not currently used or needed by private enterprise.

And let's not forget another factor: The printing press. The printing press adds some interesting variations to this set of equations, especially when the money supply is under severe deflationary pressure because banks are stashing money away in reserves (thereby reducing the fractional reserve multiplier) due to fears of further losses caused by a declining economy, rather than lending that money out. Right now, you can print money and it basically takes one loop through the economy, ends up back in a bank, and ends up right back on the books at the Federal Reserve again, no longer contributing to economic activity and thus no longer affecting prices in the economy (since it has a money velocity of zero once it gets stashed back in the Fed's electronic vaults again). So if we consider monetizing the debt, we can even remove the specter of future interest rate hikes causing slower growth in the future as a downside to increased government spending right now.

In short:

  1. Barro's analysis applies only in an economy with full employment and a shortage of investment capital,
  2. We have neither full employment nor a shortage of investment capital,
  3. We have the ability to monetize a significant portion of the debt such that it does not affect future taxes, and thus
  4. Barro's analysis is not applicable to the current situation.
And then there's Barro's bizarre notion that a construction job building a superhighway for the government somehow adds less to GDP than a construction job building a commercial skyscraper, which is implicit in his notion that $1 of government spending somehow adds less than $1 of value to the economy. This is bizarre. Not only do you have a highway at the end of it, a highway which in all likelihood was built as efficiently as any that could have been built with private money if past experience is the guide, but you've also increased the value of that commercial skyscraper by a tremendous amount, since a commercial skyscraper with no highways going to it is worth, uhm, $0. Even Barros' beloved Saint von Mises never went so far as to ascribe a *negative* (below unity) multiplier to government spending. I cannot find any actual economic data, anywhere, which support such an assertion -- in all of the actual real-life data we have, increased government spending even in wartime resulted in at least a 1.0 multiplier to GDP. Maybe Barro's model says that didn't happen. But if Barro's model disagrees with reality, it is Barro's model, not reality, which is wrong.

-- Badtux the Economics Penguin


  1. The House Minority Leader of the Maryland House of Delegates just made a very similar - and I believe equally as silly - argument today. The Republican Delegates came up with a plan that eliminates 500 state jobs and cuts a lot of spending and claim that such a plan creates job. To wit: "One of the ways we create jobs is get our economy thriving and one of the ways we get our economy thriving is reduce the cost and burden of government spending." I don't see how this follows at all. I could see if he were claiming that cutting TAXES for some class of people MIGHT create jobs but to stipulate that there's a connection between how much the state spends and how many jobs there are? I don't get it...

  2. If Barro is taking the same tack as Cochrane in this Krugman's link, there isn't even a coherent model to argue against.

    I haven't had time to click through, and am to tired to read with comprehension, so I'll have to get at it tomorrow.

    Meanwhile, the basic thing you have to realize about Wingers and Glibertarians is that, contrary to your final statement, if the ideology conflicts with reality, it's
    ALWAYS reality
    that is wrong.

    Which is one more reason why . . .


  3. Jazz: Does "WASF" stand for "We are so fucked"? That's a new acronym to me.

  4. jayinbmore: think about why it is that taxes are not voluntary.


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