Monday, September 12, 2011

The Robert Barro Controversy

Robert Barro (Harvard University) recently wrote an op-ed for the New York Times titled "How to Really Save the Economy."  In it he describes the U.S. economy as anemic and calls for austerity to fix the problem.  Not that fiscal austerity will create economic growth, but that a more fiscally stable government would promote investment.  He writes, "What drives investment?  Stable expectations of a sound economic environment, including the long-run path of tax rates, regulations and so on."

Robert Barro (photo: Luis Rodas)

For some time now, I've wanted to write an article attempting to address the question, 'Why isn't the U.S. a good place to invest anymore?'  Many of our banks and corporations have lots of cash, but they do not believe that they will get a good return on their investment right now.  How do we fix that problem?

Keynesians would argue that government should simply make up the difference in aggregate demand to return the economy to the edge of the production possibilities frontier.  I've never liked that argument very much as I think the production possibilities frontier to be a bit of an economists' fantasy.  I think Barro's analysis of the problem in terms of tax and regulatory environment are good takes on the investment situation.  I don't know that I agree with his solutions (Federal VAT tax in lieu of Federal corporate and inheritance taxes), but I've seen much worse in recent months and years.

Paul Krugman (Princeton University) called Barro's work lazy!  Tyler Cowen (George Mason University) wrote that a negative approach to the Solow model might be what Barro is writing about.  I think Cowen's referring to a negative approach to the Solow residual.  I think the exogenous growth model (Solow model) actually defines tax policy as only affecting short term growth, whereas Barro was writing about short and long term growth (I think).

Greg Mankiw (Harvard University) on Paul Krugman's response.

Because Krugman's column was so dismissive and smug, it really got under my skin.  Most of the comments were even worse.  One individual wrote "Perhaps he cannot make a coherent argument."  He's one of the most frequently cited economists today!  This is ridiculous!  I added this comment at his site:

"Robert Barro was writing in The New York Times, not the American Economic Review. He was writing for an audience that doesn't necessarily understand all of the nuances of academic economics, but still desires to be part of a serious discussion of our future from that point of view.

You, more than most, should be able to recognize that his column falls well within the scope of his previous works. He has been writing about the effect that government spending has on the economy and the monetary system since the 1970's. He sits alongside Ben Bernanke, Thomas Sargent, Frederic Mischkin, Allan Meltzer, John Taylor, and a handful of others as an eminent monetary economics scholar.

You show Dr. Barro extreme disrespect in this article. He may have been writing for the lay person, but you should have been able to tie his column to his previous work because of your background in the field."

Krugman also recently authored another, even more controversial, column on the anniversary of 9/11.


  1. the statement you make is correct. Barro was writing an OpEd, not a factual argument in an Economics journal. I think Krugman is being to critical.

    In reality, I believe this is a bunch of shouting over nothing. And the comments on Krugman's blog are really hostile.

    I haven't put too much thought on which way I lean in this argument, due to my lack of time to put into reading and looking at the numbers. Guess I don't have much more to add at this time. Maybe I can get around to reading fully into this to provide something more substantial.

    Pat Welch via linkedin

  2. I mostly agree with Dr Krugman, saying that no matter what happens with sales firms are going to increase investment if they foresee solid and stable budgets in the near future doesn't make any sense. Why are you going to increase capacity if you are not able to sell what you currently manufacture? Firms think more about future budgets than their sales and balance sheets when making a decision?

    Jose Antonio Poncela via linkedin