Here’s an early indication of where Robert Barro is going in the 2011 article Paul Krugman criticized:
The overall prediction from regular economics is that an expansion of transfers, such as food stamps, decreases employment and, hence, gross domestic product (GDP). In regular economics, the central ideas involve incentives as the drivers of economic activity. Additional transfers to people with earnings below designated levels motivate less work effort by reducing the reward from working.
So that suggests that “regular economics” is based on incentives, like “supply-side” economics, or new classical, or RBC, or whatever. So then I keep reading, waiting for the “to be sure, demand shocks also matter.” But I never find it. Nor do I find any clear statements to the effect that demand shocks don’t matter. But what I do find over and over again is the sort of rhetoric used by economists who think that demand shocks don’t matter.
In fairness to Barro, the Keynesians are partly to blame here. He’s wrong about AS/AD in my view, but he’s right that aggregate demand is an unfortunate term. The AS/AD model only makes sense if you assume the AD curve is nominal GDP. It has nothing to do with “demand.” I don’t doubt that Barro would accept the notion that certain types of government expenditures would boost measured GDP (albeit without boosting welfare), so it would be possible to find something Barro wrote that suggests “demand matters.” But in my view the two key issues here are whether fiscal stimulus in the form of tax cuts or transfers boosts NGDP, and the completely separate question of whether nominal shocks impact RGDP.
These two issues are often confused. The first is about monetary offset, or crowding out, or Ricardian equivalence. The second is about sticky wages and prices. In a long opinion piece Barro could have separated the two vastly different concepts with a single sentence, or even a phrase within a sentence, and yet he doesn’t do so. So I can’t tell whether Krugman is right, but the way it’s written left me with the exact same impression as Krugman, as far as whether Barro thinks nominal shocks matter.
Tyler Cowen quoted from a 1995 paper where Barro was critical of the AS/AD model, but certainly understood the basic concept of aggregate demand.
If you read the paper, you will see three things. First, Barro is fully aware of “AD-like” phenomena and does not reject that notion. Second, Barro seems to prefer the IS-LM model to AS-AD, albeit with some caveats about possible false predictions of IS-LM and also noting in footnote two that he prefers his own presentation in his 1993 text.
I’m not sure what “AD-like phenomena” means to Tyler, but I interpret it as nominal shocks. Obviously Barro understands the concept of nominal shocks or monetary shocks or whatever you want to call them. The question is whether he thinks they have important real effects.
Consider this ambiguous remark from the 2011 article:
How can it be right? Where was the market failure that allowed the government to improve things just by borrowing money and giving it to people? Keynes, in his “General Theory” (1936), was not so good at explaining why this worked, and subsequent generations of Keynesian economists (including my own youthful efforts) have not been more successful.
Now consider the following from Barro’s 1995 AS/AD paper:
Barro and Grossman [1971; 1976, Ch. 2] showed that the IS-LM model is a useful representation when nominal prices and wages are sticky at excessive levels . . .
His “youthful efforts” that he now seems to reject include the 1971 and 1976 papers with Grossman, don’t they? The ones that argued IS/LM was useful when prices were sticky.
For people who believe AD is important, the “market failure” is easy to find–sticky wages and prices. And I recall that that assumption is included in Barro and Grossman’s work. But Barro now says that effort no longer seems successful.
Here’s how Barro ends the 2011 piece:
There are two ways to view Keynesian stimulus through transfer programs. It’s either a divine miracle—where one gets back more than one puts in—or else it’s the macroeconomic equivalent of bloodletting. Obviously, I lean toward the latter position, but I am still hoping for more empirical evidence.
That’s a disappointing conclusion. Not because he’s wrong, but rather because if he’s right it’s written in a misleading way. For instance, suppose Barro thought boosting NGDP through money creation could create jobs, but not via deficit spending (because of Ricardian equivalence/monetary offset/crowding out, etc.) In that case he’d be correct, but I’d argue the conclusion is very misleading. It’s written to appeal to right wing readers of the WSJ who also would consider the notion that printing money could create jobs to be a “divine miracle.” Now it’s possible Barro is just throwing red meat to the WSJ readers, and that his actual views are far more nuanced and sensible. But then he ought to be prodded until he clearly spells ought what those nuanced views actually are.
When I wrote my previous post I was defending Krugman against the charge that he was unfair to Barro on the unemployment insurance issue. Now Tyler Cowen criticizes Krugman for assuming that Barro doesn’t think AD matters. If I was in Krugman’s shoes I would have been more careful, as I don’t know that Krugman expressed Barro’s views correctly. Tyler might be right. But I will say that my reading of the article suggests that Barro was trying to give his readers the impression that incentive effects determine employment, not demand-side effects. Maybe he thinks both do. My hunch is that he thinks sudden nominal shocks have a modest effect at certain times, but explain essentially none of the current unemployment rate. In that case Krugman’s charge was a bit too extreme, but not far off. I suppose I sympathized with Krugman a bit because I found the Barro article to be so frustratingly vague.
Let’s get away from the specifics here and look at the picture more broadly. Here’s what I see over and over again:
1. Conservative economists who are contemptuous of “Keynesian economics” in general and fiscal stimulus in particular. Fine, so am I.
2. Conservative economists who have much less to say about monetary stimulus, but seem quite skeptical.
3. A blurring of the distinction between policy not boosting NGDP, and NGDP failing to boost RGDP (radically different ideas.)
4. If conservatives really believe “the real problem is real” then they shouldn’t be contemptuous of “Keynesian economics,” they should be contemptuous of “the entire Keynesian/Milton Friedman strand of economics.” After all, Friedman also thought nominal shocks had long lasting effects on unemployment. But they never add Friedman’s name.
5. If conservatives want to discriminate between Keynesian fiscal views and Friedman’s monetarist views, then they ought to advocate monetary stimulus after they dismiss fiscal stimulus as bloodletting. But they never seem to do that. (In other words they should become market monetarists.)
6. In general, when a group of people shy away from an issue, it makes me think they aren’t entirely confident that their views hold up to empirical scrutiny. Maybe that’s why Barro is so forceful on fiscal (when he has studies to back him up) but silent on whether more nominal spending would help right now (where the empirical evidence for rejecting monetary stimulus is far weaker in my view.)
Tyler suggests we ought to be able to find out what Barro thinks by looking at his 40 year track record of published work. I’m a big fan of his work; I once used his textbook for a grad class in macro. I’ve read the 1995 article. He’s brilliant. But I’ve found that almost all economists seem to have suddenly abandoned what they believed in 2007, and adopted a radically new economic model in 2009. New Keynesians became old Keynesians. Monetarists became Austrians. How do I know Barro is any different from the others? Recall that the standard view in 2007 was that the Fed drove nominal spending and that the zero bound was not a barrier to monetary stimulus. This was mainstream economics in 2007. And now it’s been abandoned for no apparent reason other than that if it were true it would imply the economics profession caused the Great Recession of 2008-09.