Further thoughts on Robert Barro

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.


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87 Responses to “Further thoughts on Robert Barro”

  1. Gravatar of Geoff Geoff
    21. January 2014 at 17:12

    “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.””

    Real shocks cause demand shocks.

    Neither consumers nor investors capriciously reduce their spending for no reason. They have very good reasons, and those reasons are by the nature of the case, not nominal reasons. They are real reasons.

    Money is a medium of exchange. If you see something wrong happening with money, you are really seeing something wrong happening with what money is exchanged for.

    It’s not the plunge in NGDP that caused the recession, it’s the recession that caused the plunge in NGDP.

  2. Gravatar of Geoff Geoff
    21. January 2014 at 17:22

    The real shock that caused the demand shock 2007-2009 was the significantly distorted capital structure of the economy, which of course aggregate conceptualizing theories such as MM fail to take notice of. In MM, it’s AD/AS, and NGDP/RGDP.

    In MM, capital structural analysis is hasty, often crude and hand-wavey. Important facts are misconstrued as something other than capital structure distortions.

    The problem in macroeconomics is, of course, aggregated thinking and conceptualizing. Always has been. Always will be. Dark age of macroeconomics should instead be called dark age of economics.

    Economics should not be split between micro and macro. This was perhaps one of the most, if not the most, destructive mistakes in the entire history of economic thought.

  3. Gravatar of TravisV TravisV
    21. January 2014 at 17:54

    Is there anything wrong with Christopher Mahoney’s reasoning here???

    “Look Out! The Fed Is Doing Something Strange”

    “money growth has declined sharply during 4Q13, and is now running below 5%–the slowest rate of money growth since the crash itself.

    What is going on? Why has the Fed been tightening for two years, and why has the it allowed inflation to undershoot the target by such a wide margin?

    Here is what the FOMC says on the subject: “To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.” (Minutes, 18 Dec. 2014)

    In other words, the Fed denies that it has been tightening. Someone should buy the Fed a subscription to its own database: it could be quite eye-opening. In seriousness, the Fed must be aware of what I have just observed. But why won’t the FOMC publicly address the issue? Shouldn’t the “most transparent Fed in history” explain to Congress and the people why it is tightening when it says it is not?

    Investment Conclusion:

    Whether the Fed knows it or not, money growth is dangerously low and falling. No one is minding the store at the Eccles Building. This means that we are in for a negative growth surprise for 4Q13, and for the stock market. In this case, bad news is bad news.”

    http://capitalismandfredom.blogspot.com/2014/01/look-out-fed-is-doing-something-strange.html

  4. Gravatar of JoeMac JoeMac
    21. January 2014 at 18:08

    Scott,

    Why is it necessary to think of AD in terms of NGDP, why not think of it in terms of “Nominal Spending” or MV, the left hand side of the equation of exchange. Why the fixation on its right side, PY?

  5. Gravatar of ssumner ssumner
    21. January 2014 at 19:24

    Travis, I’m skeptical that the money supply tells us much about monetary policy, beyond what we already know from market indicators.

    JoeMac, The two are identical, so either is fine.

  6. Gravatar of John Becker John Becker
    21. January 2014 at 21:50

    Let’s be fair here, it’s not like Krugman makes it sounds like economic efficiency, private property rights, or incentives matter in his New York Times work. Barro is probably willing to concede that nominal shocks matter in the short-run but would disagree with Krugman about the extent and what kind of response they merit. I’ve never seen any economist pay less attention to incentive issues than Paul Krugman.

    I challenge anyone here to find a post where Krugman comes out against greater government control of the economy or even makes a case for a public policy based on the type of incentives-based thinking that drives what Barro calls “regular economics.”

    My question for Scott is, if you had to choose between a policy response based solely on incentives and economic efficiency or a policy response based solely on boosting aggregate demand through fiscal measures like extended UI, extended food stamps, infrastructure spending, and increasing other transfer payments, which would you pick? If you had to choose between responding to the crisis in 2008 by cutting corporate income and capital gains taxes versus simply increasing government spending across the board, which would you pick?

  7. Gravatar of John Becker John Becker
    21. January 2014 at 21:51

    Sorry, Krugman did make such arguments on occasion before Barack Obama took office. I mean since Obama has been in office.

  8. Gravatar of John Becker John Becker
    21. January 2014 at 21:59

    I’d put myself in the group who think that the “real problem is real” and that nominal shocks are symptoms of real issues. I do reject the Keynes/Friedman approach to economics on the basis that Friedman copied Keynes way of looking at the economy and abandoned the methodological individualism that characterized classical economics.

    “Nominal” shocks can indeed have long and lasting effects on unemployment but that is only because they are symptoms of deeper underlying problems. Stable nominal growth is a result of a healthy economy not a cause. The Keynes/Friedman approach is akin to saying that fevers cause illness and that you can cure the illness by treating the fever.

  9. Gravatar of Saturos Saturos
    21. January 2014 at 22:29

    Attention: Nick Rowe’s latest post is nothing short of genius: http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/01/is-the-macroeconomic-importance-of-finance-an-artefact-of-monetary-policy.html

  10. Gravatar of Fed Up Fed Up
    21. January 2014 at 23:51

    TravisV, CM says “I am an adherent of the school of Market Monetarism.”

    And, “Watch M2 growth.”

    I thought the MM’s say money = Medium Of Account (MOA) = monetary base (currency plus central bank reserves although I’m trying to convince people money = MOA = currency plus demand deposits.

  11. Gravatar of Erik Trygger Erik Trygger
    22. January 2014 at 00:19

    Great Post! I especially like:

    “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.)”

    This is one of the main reasons I am intrigued by market monetarism. I also tend to think it is very strange that Friedman appears to have been “forgotten”.

  12. Gravatar of Saturos Saturos
    22. January 2014 at 02:02

    Completely off topic: I wonder how this affects Evan Soltas…
    http://talkingpointsmemo.com/livewire/ezra-klein-washington-post

  13. Gravatar of Kevin Donoghue Kevin Donoghue
    22. January 2014 at 02:24

    “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.”

    I think that’s exactly what Krugman is saying when he writes:

    If you read Barro’s piece, what you see is a blithe dismissal of the whole notion that economies can ever suffer from am inadequate level of “aggregate demand” — the scare quotes are his, not mine, meant to suggest that this is a silly, bizarre notion, in conflict with “regular economics.”

    Tyler Cowen is simply missing the point when he says “that is not a good characterization of Barro’s views” — of course it doesn’t represent Barro’s views as presented in his scholarly work. But it really does appear that Barro wants WSJ readers to adopt that simplistic, scoffing attitude.

  14. Gravatar of Benjamin Cole Benjamin Cole
    22. January 2014 at 02:35

    What happened to Barro after 2007? or John Taylor? Or Fredric MIshkin or any number of economists who told Japan to go to QE hot and heavy/ taylor gushed that Japan’s QE was a success.

    But American economics is politics in drag.

    It is right-wing PC to talk about zero inflation, even deflation, and that only supply-side fixes will work, usually tax cuts for the rich and limiting unemployment compensation.

    The libs are no better, calling for more (usually wasteful) federal spending, when QE has carried the ball in 2013, and probably needs to be beefed up.

    Am I simplifying? Name one prominent right-wing economist who has embraced Market Monetarism.

  15. Gravatar of Mike Sax Mike Sax
    22. January 2014 at 05:18

    Whether he understands AD-I’m not clear that he does-in this 1995 paper he doesn’t seem to have much use for it here either. He clearly gets that Keynesians think it’s important but it’s not clear if he agrees or thinks it’s some strange idiosyncrasy of them.

    I don’t know that he is much of a fan of IS-LM in the paper either. What he’s saying is that Keynesians have no sound basis to have AS in their models no matter how they size it.

  16. Gravatar of ssumner ssumner
    22. January 2014 at 06:38

    John, You are mixing up issues in just the way I described in the post. It’s not supply side versus fiscal. Fiscal doesn’t move AD. It’s supply side vs. demand side. I certainly agree with your point that Krugman focuses much too much on the demand-side.

    Saturos, That title sounds promising.

    Thanks Erik.

    Kevin, Yes, that was my impression too. I understand that Tyler Cowen doesn’t like the way Krugman dismisses prominent conservative economists, I don’t either. But on the specifics of this set of posts I think the criticism of Barro was somewhat warranted, even as I still think his academic work is excellent.

    Mike, He understands AS/AD better than you would understand it if you spent your entire life studying the model. Barro’s point is that there are multiple versions of AS/AD, and that he doesn’t much like any of them. He’s a possible Nobel Prize winner, who has done lots of research on AS/AD. It’s crazy for you to even suggest he doesn’t understand this simple model.

  17. Gravatar of Vivian Darkbloom Vivian Darkbloom
    22. January 2014 at 06:41

    “My question for Scott is, if you had to choose between a policy response based solely on incentives and economic efficiency or a policy response based solely on boosting aggregate demand through fiscal measures like extended UI, extended food stamps, infrastructure spending, and increasing other transfer payments, which would you pick? If you had to choose between responding to the crisis in 2008 by cutting corporate income and capital gains taxes versus simply increasing government spending across the board, which would you pick?”

    That seems like a silly choice. Why should one have to choose one or the other? Why not both? If the issue is that one side believes that the lack of AD is the cause of unemployment and the lack of AD can be resolved by fiscal stimulus and the other side believes that incentives matter, perhaps more than the stimulus, why not adopt a policy that addresses both? (I’m sure Scott would like a third option, so why not put that on the table, too?).

    Abandon the drive to extend UI and deliver the same amount of stimulus through a policy that does not distort incentives. A policy that delivers fiscal stimulus through reducing marginal tax rates would do just that. For example, the threshold for each existing tax bracket could be increased by $X, the specific amount designed to give everyone a proportional tax cut and to deliver the amount of fiscal stimulus deemed appropriate (or achieve this by a proportional rate reduction). As far as straight economics are concerned, this should make Barro and Krugman both happy (Barro particularly has written that the fiscal multiplier is higher for tax cuts than direct transfers or non-defense spending).

    So, why wouldn’t Krugman jump at the idea? Interest rates are low, per Krugman the debt and deficit are not currently an issue and AD is the problem. I suspect that he just doesn’t like the distributional effects which is clearly the unstated issue all along and not a theoretical economic debate over AD which strikes me as a smokescreen in the EUI debate.

  18. Gravatar of Vaidas Urba Vaidas Urba
    22. January 2014 at 06:51

    “I’ve found that almost all economists seem to have suddenly abandoned what they believed in 2007″
    Here is what they believed ten years ago: http://marginalrevolution.com/marginalrevolution/2004/01/why_your_cell_p.html

  19. Gravatar of TravisV TravisV
    22. January 2014 at 07:14

    Benjamin Cole,

    I REALLY wish you had a blog!

  20. Gravatar of Mike Sax Mike Sax
    22. January 2014 at 07:26

    Off topic Yglesias has a good piece on the unemployment rate-he seems to agree with you that it’s a misleading indicator.

    http://www.slate.com/articles/business/moneybox/2014/01/janet_yellen_should_ignore_unemployment_rate_focus_on_inflation_and_keep.html

    Though I don’t think he agrees with you that about what the story is behind the drop in those seeking jobs.

  21. Gravatar of Mike Sax Mike Sax
    22. January 2014 at 07:29

    Well Scott I can only base it on what I see in that paper. I can’t really tell if he gets AD or not from that piece. Now Cowen said you can tell from it so I don’t know what he’s looking at.

    Judging by the paper-which is all we’re talking about here-I don’t see what makes him so knowleddable about AD.

  22. Gravatar of Mike Sax Mike Sax
    22. January 2014 at 07:31

    Or even what it is that he knows about AD that I don’t.

  23. Gravatar of Mike Sax Mike Sax
    22. January 2014 at 07:33

    The fact that someone won a nobel prize doesn’t prove they can’t be dead wrong. I mean they gave Hayek a nobel prize once which shows that politics is involved there too.

  24. Gravatar of TravisV TravisV
    22. January 2014 at 07:54

    Prof. Sumner,

    Could you please praise Larry Summers for saying this to Ryan Avent:

    “Mr Summers wrote to point this out to me and elaborated on his comments. In fact, Mr Summers reckons that while fiscal policy is the first best means to address stagnation, using higher inflation to reduce real interest rates and boost private demand is a clear second best, preferable to the status quo (and certainly to doing nothing at all).”

    http://www.economist.com/blogs/freeexchange/2014/01/secular-stagnation-1

  25. Gravatar of Brian Donohue Brian Donohue
    22. January 2014 at 08:08

    Another great post! Excellent comments too. The link to Nick Rowe was great.

  26. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. January 2014 at 08:16

    How about we take what Barro wrote, in context;

    ‘Agriculture Secretary Tom Vilsack said recently that food stamps were an “economic stimulus” and that “every dollar of benefits generates $1.84 in the economy in terms of economic activity.” Many observers may see how this idea—that one can magically get back more than one puts in—conflicts with what I will call “regular economics.” What few know is that there is no meaningful theoretical or empirical support for the Keynesian position.’

    That’s all Barro is attacking.

  27. Gravatar of Mike Sax Mike Sax
    22. January 2014 at 08:23

    Right and in his attack he’s dead wrong. There’s no magic. What he calls regular economics is really just ‘regular economics previous to 1935′- you know back before the General Theory and the birth of Macroeconomics.

    What he really means by ‘regular economics’ is Microeconomics.

  28. Gravatar of mpowell mpowell
    22. January 2014 at 08:28

    You bring this up Scott, but it is really worth emphasizing. This was a fairly long article by Barro for the WSJ. What he wrote about 15 years prior is no defense against critcism. Cowen is way off base there. The WSJ is not an academic paper. It is consumed by a large audience. And an opinion piece there is essentially a political advocacy piece. It needs to be reasonable self-contained, at least within the political discourse of the moment. That certainly doesn’t include your decades previous writings unless, possibly, you are a major historical figure, which could only apply to maybe 2 or 3 people alive at any time.

    So it is perfectly reasonable to point out that Barro completely ignores demand side issues in his article. That is poor, criticism worthy, political advocacy, imop.

  29. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. January 2014 at 08:28

    ‘In a long opinion piece Barro could have….’

    But it wasn’t a long piece, it’s 784 words. Can anyone find anything that he actually wrote that is factually wrong? Logically flawed?

    Is he wrong about this;

    ‘Theorizing aside, Keynesian policy conclusions, such as the wisdom of additional stimulus geared to money transfers, should come down to empirical evidence. And there is zero evidence that deficit-financed transfers raise GDP and employment—not to mention evidence for a multiplier of two.’

  30. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. January 2014 at 08:31

    ‘Right and in his attack he’s dead wrong.’

    Specifically, where?

  31. Gravatar of John Becker John Becker
    22. January 2014 at 08:43

    Scott,

    The Krugman-Roberts-Murphy-Henderson-Sumner brouhaha has become so convoluted at this point it’s hard to keep track of everything. Sorry for missing this quote in your passage, “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.”

    To me this situation looked like Krugman being obtuse after calling people idiots for pointing out the supply side disincentives of UI. For an illustration of this debate see

    http://consultingbyrpm.com/blog/2014/01/i-was-less-than-clear-on-my-problem-with-krugmans-unemployment-insurance-post.html

    Anyway, I’ll be careful to read your full post more carefully before commenting next time.

  32. Gravatar of John Becker John Becker
    22. January 2014 at 08:46

    Russ Roberts describes the real issue here.

    “Krugman is the most prominent economist in America. He does a great disservice to economic literacy when he neglects to mention the potential offset from the incentive effects of unemployment insurance. Economics is about tradeoffs. We may disagree about the magnitudes of different effects. But to pretend that unemployment is something akin to a free lunch because the unemployed will spend their benefits and create jobs via an increase in aggregate demand is, well, not good economics.”

    http://cafehayek.com/2014/01/paul-krugman-is-not-a-hypocrite.html

  33. Gravatar of Doug M Doug M
    22. January 2014 at 09:12

    “The AS/AD model only makes sense if you assume the AD curve is nominal GDP.”

    You may be correct, but you are an outlier in this point of view. Actually, I can’t say that you are an outlier. This point of view doesn’t fit with what is taught in school.

    NGDP — output is the X axis… it is the point of intersection of the AD and the AS curves. But if AD (as something separate that drives GDP) is some abstraction that cannot be measured or parameterized or modeled, then what use is it?

  34. Gravatar of Mike Sax Mike Sax
    22. January 2014 at 09:55

    That food stamps and other transfer programs work by magic. Also what he calls regular economics is really just microeconomics.

  35. Gravatar of Vivian Darkbloom Vivian Darkbloom
    22. January 2014 at 09:56

    “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.”

    Barro wrote this in a September 2011 NYT Op-Ed:

    “I agree that the recession warranted fiscal deficits in 2008-2010, but the vast increase in the public debt since 2007 and the uncertainty regarding the country’s long-run fiscal path mean that we no longer have the luxury of combatting the weak economy with more deficits”

    http://scholar.harvard.edu/files/barro/files/nytimes_howtoreallysave_11_0910.pdf

    That does not sound to me like someone who believes that “demand shocks don’t matter”. If they did not, why would he have written what he did above about the appropriateness of fiscal deficits from 2008 to 2010? To be sure, I’m certain that if Barro had had is way the allocation of spending and tax cuts that produced those deficits would have been different. But, again, one has to read these short pieces in the economic contexts in which they are written. It appears to me that in 2011– and even more so in today’s environment– Barro believes that additional fiscal deficits and especially extended UI are counterproductive. That does not mean he believes they are always so and that “demand shocks” don’t matter.

  36. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. January 2014 at 10:00

    Doug M.
    “NGDP — output is the X axis…”

    That’s incorrect. Read any Econ 102 textbook or Chapter 3 of the General Theory. *Real* output (RGDP) is on the horizontal axis. The price level is on the vertical axis. In the dynamic version the rate of change in *real* output is on the horizontal axis and the rate of inflation is on the vertical axis. For example here’s what you will find in “Modern Principles: Macroeconomics” by Tyler Cowen and Alex Tabarrok:

    http://1.bp.blogspot.com/_JqNx8yXnFE8/SxlWoq_PI8I/AAAAAAAABCg/7y9VXIleCrs/s1600-h/Tabarrok-Cowen+ADAS.JPG

    Note that the rate of change in the AD curve is equal to the sum of the inflation rate and the rate of change in RGDP, and so is precisely equal to the rate of change in NGDP.

    The most common complaint about the AD-AS Model is that it’s too simple…except that very few people seem to actually understand it.

  37. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. January 2014 at 10:06

    ‘That food stamps and other transfer programs work by magic.’

    How do they actually work to increase aggregate demand? And what is your evidence for your belief?

    ‘Also what he calls regular economics is really just microeconomics.’

    Please expand on what Barro gets wrong on microeconomics.

  38. Gravatar of Mike Sax Mike Sax
    22. January 2014 at 10:12

    MY point is that he’s claiming that what he believes is ‘regular economics’ and what Keynesians believe is ‘magic’ when in fact he doesnt believe in economics post-1935 at all.

    The way food stamps and other tranfer programs is pretty straightforward. Sumner said it’s ‘crazy’ to think that Barro coulldn’t understand such a simple model. Am I to understand that you can’t understand it?

    If you put money in people’s pockets that are unemployed, undermployed, short of cash, they will have more to spend on consumption goods and this will raise AD.

  39. Gravatar of Mike Sax Mike Sax
    22. January 2014 at 10:14

    Another Keynesian way to increase AD is to have the govt. itself spend on goods and services. If this is the first you’ve heard of this I got to say I’m surprised.

  40. Gravatar of TravisV TravisV
    22. January 2014 at 10:16

    Geithner and Summers truly have contempt for the Efficient Markets Hypothesis, don’t they?

    “S&P Says That Tim Geithner Called To Threaten Them After They Downgraded The US In 2011″

    http://www.businessinsider.com/geithner-threat-after-sp-downgrade-2014-1

  41. Gravatar of gofx gofx
    22. January 2014 at 10:25

    @Mike Sax “If you put money in people’s pockets…”. From where does THAT money come?

  42. Gravatar of Vivian Darkbloom Vivian Darkbloom
    22. January 2014 at 10:29

    “If you put money in people’s pockets that are un-employed, under-employed, short of cash, they will have more to spend on consumption goods and this will raise AD.”

    It will also increase the deficit and the debt. This does not have to be repaid and has no effect, currently or in the future, on taxes, interest rates and AD? And, it has no effect on the incentives of those unemployed and under-employed to seek employment or additional employment?

    How does all this net out? If there is no netting required, it is indeed “magic”. Does it matter to you at all what the level of debt and deficit and unemployment is at the time these transfers are being handed out? Or does this positive fiscal multiplier apply at all times and indefinitely? If so, why don’t we give checks to everyone? Why should it matter that one is un-employed or under-employed for the positive consequences you claim to have their effect? Give me some–I’m “short of cash” and I promise, I’ll spend it (on consumption goods—even at Walmart). The only thing you need to do is authorize a Treasury check payable to “Vivian Darkbloom”. Make it a big one. I want to create a lot of jobs.

  43. Gravatar of Doug M Doug M
    22. January 2014 at 10:37

    Mark A. Sadowski,

    Actually that chart in your link has the change in RGDP on the x-axis, and the change in prices on the y-axis. That would the the first derivatives of prices and output.

    I’ll concede that most models use real output and the price level.

    and just a bit of nitpicky… the way it is drawn, prices and output at right angles to one another, the change in AD would be “pythagorean” = ((dGDP/dT)^2 + (dP/dT)^2)^1/2

  44. Gravatar of Brian Donohue Brian Donohue
    22. January 2014 at 10:40

    Vivian (1st comment),

    Precisely! Context, people.

    http://www.usdebtclock.org/

  45. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. January 2014 at 10:42

    I see that others have beaten me to explaining the Broken Window Fallacy to Herr Sax. Also I can’t help but notice that he didn’t offer any evidence to demonstrate that his theory worked as he believed.

    It didn’t work in 2009 as promised by the Obama Administration (i.e. to keep the unemployment rate under 8%). Just as it didn’t work under Herbert Hoover (hope you appreciate the bi-partisanship, Mike) when he massively increased govt. spending in the early 1930s.

    Does Mike know of an episode when it did?

  46. Gravatar of Mike Sax Mike Sax
    22. January 2014 at 10:43

    Gofx, there are 3 different places to get the money.

    1. Fed printing.

    2. the Govt. increases its public debt-ie buys bonds

    3. The Govt raises taxes.

  47. Gravatar of Ryan Vann Ryan Vann
    22. January 2014 at 10:54

    Doug M
    22. January 2014 at 09:12

    “The AS/AD model only makes sense if you assume the AD curve is nominal GDP.”

    You may be correct, but you are an outlier in this point of view. Actually, I can’t say that you are an outlier. This point of view doesn’t fit with what is taught in school.

    —Huh, I’m long removed from my days as a neophyte in the mystical practice of Economics, but my recollection of AD is that it is indeed NGDP. The addition of an AS curve and a price level are thrown in to make an intersection that is called RGDP/real output.

  48. Gravatar of gofx gofx
    22. January 2014 at 10:59

    Thanks, Mike. But items #2 and #3 involve getting THAT money from someone else, so how is AD supposed to go up? Your item #1 is monetary policy, Scott’s approach.

  49. Gravatar of Mike Sax Mike Sax
    22. January 2014 at 11:22

    It can go up any number of ways. In WWII we had huge fiscal stimulus-though not the ideal kind-and AD went through the roof. We had public debt after the war of over the magic Rogoff 90% mark and we didn’t become Greece but paid it back through economic growth.

    That’s always a possibility with 2-that we pay back creditors later via higher economic growth.

  50. Gravatar of Mike Sax Mike Sax
    22. January 2014 at 11:23

    Even Scott’s argument is not that fiscal stimulus couldn’t work but that supposedly the Fed will always offset it 100%.

  51. Gravatar of Michael Byrnes Michael Byrnes
    22. January 2014 at 11:35

    Mike Sax wrote:

    “Even Scott’s argument is not that fiscal stimulus couldn’t work but that supposedly the Fed will always offset it 100%.”

    Scott’s argument is that if the Fed judges monetary policy to be too tight, the Fed will loosen policy. If the Fed judges monetary policy to be too loose, the Fed will tighten policy. Regardless of what happens on the fiscal side.

  52. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. January 2014 at 11:36

    Doug M.
    “Actually that chart in your link has the change in RGDP on the x-axis, and the change in prices on the y-axis. That would the the first derivatives of prices and output.”

    That’s what I said, right? Let’s check:

    Me:
    “In the dynamic version the rate of change in *real* output is on the horizontal axis and the rate of inflation is on the vertical axis.”

    How is what you said different from what I said?

  53. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. January 2014 at 11:43

    Doug M.<
    "and just a bit of nitpicky… the way it is drawn, prices and output at right angles to one another,…"

    Are you implying that it's unusual to draw coordinate axes at right angles to each other?!?

  54. Gravatar of Mike Sax Mike Sax
    22. January 2014 at 12:19

    Michael Byrnes you’re not familiar with Scott’s arguments about monetary offset and that the fiscal multiplier is zero? The reason it’ zero is: 100% monetary offset.

  55. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. January 2014 at 13:05

    ‘In WWII we had huge fiscal stimulus-though not the ideal kind-and AD went through the roof.’

    Did it, really? We sell a lot of cars, build a lot of new housing during WWII?

    ‘We had public debt after the war of over the magic Rogoff 90% mark and we didn’t become Greece but paid it back through economic growth.’

    Growth that came after the biggest decrease in govt spending in our history. How does that help your argument, Mike?

  56. Gravatar of One Last Post on Russ Roberts and Me Commenting on Krugman vs. Barro One Last Post on Russ Roberts and Me Commenting on Krugman vs. Barro
    22. January 2014 at 13:31

    […] Last thing: The only defender of Krugman of whom I am remotely sympathetic in all of this is Scott Sumner (here and here). […]

  57. Gravatar of Mike Sax Mike Sax
    22. January 2014 at 14:02

    Patrick is your abtuseness helping your argument? There are obviously other things to spend on besides cars and new houses like armaments.

    I guess denying reality is all that will help your argument. Do you deny we had public debt over 90% at the end of WWII?

  58. Gravatar of Mike Sax Mike Sax
    22. January 2014 at 14:03

    Obviously we had demobolization after the war but that didn’t bring down our debt level over nigt

  59. Gravatar of Mike Freimuth Mike Freimuth
    22. January 2014 at 14:47

    Scott,

    Slightly off topic: If I understand this MM thing correctly, monetary policy works through changing monetary aggregates (HPE->rising prices->rising NGDP+sticky prices->rising RGDP) and not through changing interest rates. If I understand this right, it means that the Fed doesn’t even have to do “QE” (buying longer term securities and MBS) at the lower bound, it could just keep doing normal OMO at near zero rates (so long as there were still short term gov. securities to buy) and eventually this would push up inflation and NGDP and interest rates. Is this right? If so do you think there is any benefit to doing QE or is it just the result of a fixation on interest rates as the mechanism by which monetary policy “works”?

  60. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. January 2014 at 15:27

    ‘There are obviously other things to spend on besides cars and new houses like armaments.’

    But your argument was; ‘If you put money in people’s pockets that are unemployed, undermployed, short of cash, they will have more to spend on consumption goods and this will raise AD.’

    In case you’re short in the ‘abtuseness’ department, armaments aren’t consumer goods.

    ‘Obviously we had demobolization after the war but that didn’t bring down our debt level over nigt’

    We didn’t create the growth to pay down the debt by the government putting money in people’s pockets either. Unless you think slashing govt spending from over 40% of GDP to 15%, almost overnight, does that.

  61. Gravatar of Negation of Ideology Negation of Ideology
    22. January 2014 at 15:33

    Mike Sax -

    Michael Byrnes is correct. The Fed is reacting to economic conditions. If those conditions change, then the Fed reacts (or offsets). It makes no difference if it’s a surge in private car purchases, beanie babies, or tanks. Or are you arguing that the Fed will allow more inflation if it is caused by an increase in spending on tanks than if it is caused by an increase in spending on beanie babies? And if that’s the case shouldn’t they announce that? “We will target 2% inflation if private spending increases, but 3% if government spending increases.” Then we can openly debate whether that is the proper role of the central bank. I say it’s not.

  62. Gravatar of ssumner ssumner
    22. January 2014 at 17:47

    Vaidas, Interesting post.

    Doug, No, RGDP is the X axis.

    John Becker, I agree with Russ Roberts that Krugman should mention the disincentive effects of UI.

    Vivian, You said (quoting Barro);

    “I agree that the recession warranted fiscal deficits in 2008-2010, but the vast increase in the public debt since 2007 and the uncertainty regarding the country’s long-run fiscal path mean that we no longer have the luxury of combatting the weak economy with more deficits”

    http://scholar.harvard.edu/files/barro/files/nytimes_howtoreallysave_11_0910.pdf

    That does not sound to me like someone who believes that “demand shocks don’t matter”.”

    It does if you understand that Barro has published papers showing that deficits are optimal in a depressed economy for reasons having nothing to do with demand stimulus.

    Mike Freimuth, Too much there for a quick response, but the short answer is that a higher NGDP target, level targeting is far more effective than any form of QE or OMO.

    Patrick (and everyone.) You might be right, and I’d like to believe you are right. But here’s the bottom line for me. Barro’s a world famous macroeconomist who writes frequently on current events. Surely if he believes demand matters in the way that Krugman and I and most other macroeconomists think it matters, he must have some writing in the past 5 years advocating more monetary stimulus. And I very much doubt he does, because I think he would claim that more demand would not have created jobs when unemployment was high. I hope I’m wrong, and it’s very possible I am wrong. It shouldn’t be hard to find out whether he’s ever advocated policies to raise inflation/NGDP or some other demand indicator.

  63. Gravatar of Mike Sax Mike Sax
    22. January 2014 at 17:50

    “In case you’re short in the ‘abtuseness’ department, armaments aren’t consumer goods”

    I’d also mentioned that the government itself can increase AD via its own purchases.

    As Negation of Ideology says it doesn’t matter whether it’s spending on beanie babies or tanks. So you’re quibbling here is a complete red herring.

    Again the fact that we demobilized after the war doesn’t mean that we didn’t have a huge fiscal stimulus during the war. You’re mixing too different arguments.

    1. It wasn’t fiscal stimulus because of what was purchased-armaments rather than cars.

    2. It wasn’t fiscal stimulus because we demoblizied after the war.

    If you want to claim that govt spending didn’t explode during WWII you’ll need a different argument than either of these two.

  64. Gravatar of Mike Sax Mike Sax
    22. January 2014 at 17:53

    “It makes no difference if it’s a surge in private car purchases, beanie babies, or tanks. Or are you arguing that the Fed will allow more inflation if it is caused by an increase in spending on tanks than if it is caused by an increase in spending on beanie babies?”

    Negation I got no idea where you’re getting this argument from but it’s not from anything I wrote. Its actually Patrick that thinks it matters whether it’s tanks, cars, or beanie babies.

    You claim Michael Byrnes is right-fine. What exactly was it that I got wrong that he”s allegedly correcting?

  65. Gravatar of Mike Sax Mike Sax
    22. January 2014 at 18:11

    “We didn’t create the growth to pay down the debt by the government putting money in people’s pockets either. Unless you think slashing govt spending from over 40% of GDP to 15%, almost overnight, does that.”

    The reason for this overnight cutback was demobolization Patrick. I mean you do know that right? This is how fiscal stimulus works. While the private sector is weak the govt. picks up the slack. After the war the private sector was ready to buy the new homes and cars you want to talk about. Ie, the private sector was back.

    However, to name demobolization autsterity misses the point. You always demobolize after a big war. It’s not a fiscal question.

  66. Gravatar of dtoh dtoh
    22. January 2014 at 18:14

    Scott,
    Regarding number 2). The problem has been exacerbated because the vast majority of OMP over the last 6 years has just resulted in increased ER. OMP have no effect* if they simply increase reserves. This is an important distinction and the MM school has failed to emphasize this, which is why there is so much skepticism.

    (*If the market expects ER to decline in the future other than through OMS, then it can still have an expectational effect, but the Fed has done nothing to suggest this will happen. In fact all their comments on this issue talk mostly about OMS or increasing the IOR.)

  67. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. January 2014 at 18:51

    ‘The reason for this overnight cutback was demobolization Patrick. I mean you do know that right?’

    Since I’m the guy who pointed it out to you, why do you have to ask?

    ‘This is how fiscal stimulus works.’

    It works when the government quits spending…hey! that was what Barro said.

    ‘While the private sector is weak the govt. picks up the slack. After the war the private sector was ready to buy the new homes and cars you want to talk about. Ie, the private sector was back.’

    Without government putting money back into their pockets?

    Funny that Paul Samuelson and other neo-Keynesians of the day didn’t think it did. They were predicting that the economy would fall back into depression when govt. cut spending.

  68. Gravatar of The Austrian School (and Rothbardians in Particular): The Only Consistent Anti-Interventionists The Austrian School (and Rothbardians in Particular): The Only Consistent Anti-Interventionists
    22. January 2014 at 21:20

    […] In the blogosphere’s discussion to the Krugman-Barro flap–which soon enough engulfed Russ Roberts and me–Scott Sumner has (partially) defended Krugman. Sumner too is frustrated with modern conservatives who reject Obama’s fiscal “stimulus” packages, yet do so with rhetoric that would also throw out the need for Fed monetary stimulus. I agree entirely with Scott when he writes: […]

  69. Gravatar of Rien Huizer Rien Huizer
    22. January 2014 at 23:53

    Scott,

    Interesting that the term “market failure” features in this post. Completely agree that sticky whatevers are instances of market failure. One of the conditions present around the onset of the last corruption (aka recession) was a massive market failure in finance, the inability of the market to overcome large information asymmetries in certain parts of the securities markets (opaque results of securitizations). That market failure may have been accommodated by gaps in financial services regulation (regulation is never perfect). I would guess that absent regulatory gaps (in the presence of otherwise extensive and burdensome regulation) budget constraints in certain sectors of the economy (marginal residential housing for instance) could have softened considerably, inevitably leading to a reversal, the return of budget constraints causing high default levels among borrowers and impairment of the securities issued, a situation probably not having arisen in the presence of regulation equally effective as in other sectors of the markets.

    Maybe market failure partially contibutable to regulatory failure on the part of ia the regulatory- Fed( and followed by inadequate monetary- Fed response (of course a tightening was the wrong reply, an error similar to the unexpected failure of Lehman) contributed to the correction and did not merely (approximately) coincide?

  70. Gravatar of Rien Huizer Rien Huizer
    22. January 2014 at 23:59

    Spelling assistant unpleasantly active: “corruption” should have been “correction”.. And budget constraints could have NOT softened absent regulatory gaps..

  71. Gravatar of ssumner ssumner
    23. January 2014 at 05:38

    dtoh, I don’t see how you can argue that MMs have ignored the issue of ERs. We’ve consistently argued that temporary currency injections are not effective. We’ve also discussed IOR, indeed we were among the first to address that problem.

    Go back to my post of March 2009 when QE1 was first announced. I said it would help a little but no where near enough. And that was correct, wasn’t it?

    Rien, Yes, there were also market failures in finance, but 90% of the recession was bad monetary policy.

  72. Gravatar of J Mann J Mann
    23. January 2014 at 06:12

    Here’s my 3 cents on Barro-Krugman

    1) The point of Barro’s article is that he doesn’t see a theoretical or empirical foundation to support the Obama administration’s confidence in a multiplier greater than one from transfer payments. Barro barely even talks about unemployment insurance.

    2) Instead of saying “the theoretical foundation is X,” the empirical evidence is Y,” Krugman says “Barro doesn’t believe in aggregate demand” and we’re off to the races.

    3) Is aggregate demand the theoretical foundation by which we conclude there was a multiplier of 1.84 for increases in food stamp payments in 2011? I don’t know – it’s never safe to assume Krugman is saying something he doesn’t explicitly spell out.

    4) I don’t know how to link to comments on Marginal Revolution, but commenter Paul seems to have the clue that would probably solve the narrow question of what Barro thinks about aggregate demand. Barro and Grossman wrote a chapter on AD theory in their book Money, Employment, and Inflation. If I had access to it, I would look there first.

    http://marginalrevolution.com/marginalrevolution/2014/01/robert-j-barro-on-aggregate-demand.html#comments

  73. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    23. January 2014 at 10:38

    ‘Barro’s a world famous macroeconomist who writes frequently on current events. Surely if he believes demand matters in the way that Krugman and I and most other macroeconomists think it matters, he must have some writing in the past 5 years advocating more monetary stimulus.’

    Well, in 2009 he did; http://online.wsj.com/news/articles/SB123258618204604599

    ‘What’s the flaw? The theory (a simple Keynesian macroeconomic model) implicitly assumes that the government is better than the private market at marshaling idle resources to produce useful stuff. Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system.

    ‘John Maynard Keynes thought that the problem lay with wages and prices that were stuck at excessive levels. But this problem could be readily fixed by expansionary monetary policy, enough of which will mean that wages and prices do not have to fall.’

  74. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    23. January 2014 at 10:44

    A little better known in the above linked Barro WSJ article is what he had to say about WWII’s effect on the economy;

    ‘I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8 (430/540). The other way to put this is that the war lowered components of GDP aside from military purchases. The main declines were in private investment, nonmilitary parts of government purchases, and net exports — personal consumer expenditure changed little. Wartime production siphoned off resources from other economic uses — there was a dampener, rather than a multiplier.

    ‘We can consider similarly three other U.S. wartime experiences — World War I, the Korean War, and the Vietnam War — although the magnitudes of the added defense expenditures were much smaller in comparison to GDP. Combining the evidence with that of World War II (which gets a lot of the weight because the added government spending is so large in that case) yields an overall estimate of the multiplier of 0.8 — the same value as before. (These estimates were published last year in my book, “Macroeconomics, a Modern Approach.”)’

    And, he thought the prospects worse for the peacetime expansion in govt. spending proposed by Obama then were worse;

    ‘There are reasons to believe that the war-based multiplier of 0.8 substantially overstates the multiplier that applies to peacetime government purchases. For one thing, people would expect the added wartime outlays to be partly temporary (so that consumer demand would not fall a lot). Second, the use of the military draft in wartime has a direct, coercive effect on total employment. Finally, the U.S. economy was already growing rapidly after 1933 (aside from the 1938 recession), and it is probably unfair to ascribe all of the rapid GDP growth from 1941 to 1945 to the added military outlays. In any event, when I attempted to estimate directly the multiplier associated with peacetime government purchases, I got a number insignificantly different from zero.’

  75. Gravatar of Tom M. Tom M.
    23. January 2014 at 14:07

    Geez the ignorance of the likes of Patrick Sullivan and right wingers in general is breathtaking!

    You guys still don’t understand how the WWII boom worked? Really?

    The government engaged in massive stimulus and employed basically everyone. This gave basically everyone an income which they used after the war to buy things like homes and cars and education which allowed the government to properly demobilize. My 7th grader understands this stuff.

  76. Gravatar of Tom M. Tom M.
    23. January 2014 at 14:26

    While I’m ranting, how useful is monetary policy really? We know that Walmart spends 7.6 billion of their profits merely to buy back shares. If that money was paid to their workers instead, they could ensure that every worker made at LEAST 25k a year. Won’t surprise me in the least to see a 1789 or 1917 here in what was once the greatest country on earth.

  77. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    23. January 2014 at 17:40

    ‘The government engaged in massive stimulus and employed basically everyone. This gave basically everyone an income which they used after the war to buy things like homes and cars and education which allowed the government to properly demobilize.’

    So what did the government use to buy all those bombs?

  78. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    23. January 2014 at 17:46

    ‘If that money was paid to their workers instead, they could ensure that every worker made at LEAST 25k a year.’

    You think that would motivate potential investors to buy Wal-Mart stock?

  79. Gravatar of Major_Freedom Major_Freedom
    23. January 2014 at 18:01

    “The government engaged in massive stimulus and employed basically everyone. This gave basically everyone an income which they used after the war to buy things like homes and cars and education which allowed the government to properly demobilize. My 7th grader understands this stuff.”

    You mean the smaller supply of homes, cars and education, due to the fact that scarce resources were tied up in government activity rather than private activity?

    You’re putting the cart before the horse. Spending money on consumption doesn’t grow the economy. Saving and investing real resources grows the economy.

    The WW2 “boom” was a myth. Living standards during the war were actually lower than they were during the Great Depression.

  80. Gravatar of Tom M. Tom M.
    23. January 2014 at 19:30

    ‘If that money was paid to their workers instead, they could ensure that every worker made at LEAST 25k a year.’

    You think that would motivate potential investors to buy Wal-Mart stock?

    Exactly. This country is run by plutocrats more interested in enriching the Walton family(and other potential “investors”) then by seeing to it that everyone has a decent job. It won’t end well for us.

  81. Gravatar of Tom M. Tom M.
    23. January 2014 at 19:40

    MF,

    Really, the discredited Say’s law? Investing real resources doesn’t occur unless firms believe there will be demand for their products. A man with no income has no “demand”.

    I used to think like you. I’d laugh at those idiot liberals that think demand drives the economy. I’d even lionize the wealthy miser who forgoes consumption so as to make his savings available for investment. Then I woke up and realized that those savings don’t go to increasing the productive capacity of the economy. They go to things like share buybacks.

  82. Gravatar of Major_Freedom Major_Freedom
    23. January 2014 at 20:06

    Tom M.,

    “Really, the discredited Say’s law?”

    Discredited by who? Keynes? He bungled Say’s Law.

    “Investing real resources doesn’t occur unless firms believe there will be demand for their products. A man with no income has no “demand”.”

    At the individual firm level, yes. But in the aggregate, consumer demand is driven by individuals competing for finite supply of goods constrained to what is capable of being produced on the basis of prior saving and investment.

    If consumption spending rose to 100% of all spending, and saving and investment spending collapsed to 0% of all spending, then while you might have all the “stimulating” consumer spending there can be, production would be no greater than basic trinkets and items found in ancient tribal societies.

    Say’s Law isn’t refuted by the occurrences of relative production of a particular good expanding without finding a profitable demand. When this occurs, Say’s Law would hold “When there is partial over-production of particular good, and corresponding underproduction of other goods, then supply as such may not have a demand as such.”

    Say’s Law applies to the situation of no partial over or under production.

    More accurately stated, Say’s Law just means that what is demanded in the aggregate, is what is supplied in the aggregate.

    “I used to think like you. I’d laugh at those idiot liberals that think demand drives the economy. I’d even lionize the wealthy miser who forgoes consumption so as to make his savings available for investment. Then I woke up and realized that those savings don’t go to increasing the productive capacity of the economy. They go to things like share buybacks.”

    And where does the money then go after that? You used to think like me? I doubt it, because you’re violating one of the most important lessons of economics: Don’t limit your thinking to only the immediate and don’t limit your thinking to only the directly affected parties.

    You didn’t wake up. You went from being half asleep (like us all, because we’re not omniscient), to being deeper asleep (since you’re limiting your thinking, purposefully it seems).

  83. Gravatar of Tom M. Tom M.
    23. January 2014 at 20:29

    MF,

    I don’t find your argument in favor of Say’s law persuasive. Maybe it’s just me. And who in the hell would argue that consumption spending should rise to 100%? That doesn’t even make sense to me.

    I would like to address the one question in your post. “Where does the money go after that?”

    There is plenty of wealth that the plutocrats can still extract from us. After all, we don’t all yet live in the tenement buildings of NYC in the 1920′s or the slums of current day capitalist Honduras. I suspect that a lot of the money will go to republican politicians to pursue policies that will make that day closer, though.

  84. Gravatar of Full Employment Hawk Full Employment Hawk
    23. January 2014 at 21:50

    “Tyler suggests we ought to be able to find out what Barro thinks by looking at his 40 year track record of published work.”

    That does not work at all because Barro has changed his position on the effects of aggregate demand shock 180 degrees between the book he co-authored with Grossman in 1976 and the 2011 article. Earlier papers are likely to be intermediate steps in the thought process of moving from what he thought in 1976 and what he thinks in the 2011 article, and therefore cannot be used to amplify what he says here. What he says in this article therefore have to stand on their own. He now holds that fluctuations in output are exclusively caused from the supply side and demand shocks affecting output would be divine miracles or asserting that they affect output is the equivalent of bloodletting.

  85. Gravatar of Full Employment Hawk Full Employment Hawk
    23. January 2014 at 22:33

    “Where was the market failure that allowed th government to improve things by borrowing money and giving it to people. Keynes in his “General Theory” (1936) was not so good in explaining how this worked…”

    One can, of course disagree with the theory Keynes presented on many different grounds, but Keynes’ model very clearly explained why it worked. Translating what Keynes asserted into Warlrasian terminology, with wages being inflexible downward a decrease in aggregate demand (real aggregate demand because he worked in terms of wage units) would reduce the sales of firms who would reduce production and hire fewer workers, creating an excess supply of labor. As a result, transactions in the labor market took place and were finalized at a price (the wage rate) at which the labor market did not clear. The result of these non-market-clearing transactions in the labor maket spilled over in the product market by further reducing aggregate demand. An increase in government expenditures financed by borrowing would increase aggregate demand. This would cause firms to sell more and therefore produce more by hiring the excess supply of labor. The reduction (or even elimination) of the non-market-clearing transactions in he labor market would also spill over into the product market by further increasing aggregate demand. Since the interest rate is determined by the supply and demand for money, and not by borrowing and lending, the borrowing of the government would not affect the interest rate.
    Since velocity was not fixed, but, rather was directly related to the interest rate, the money supply would be able to support these changes in transactions. In Keynes’ model the central bank did not offset the changes in output with offsetting monetary policy. This was in part because it chose not to do so, and in part because it could not do so to the degree needed to move the economy all the way to full employment.

  86. Gravatar of ssumner ssumner
    24. January 2014 at 06:49

    J Mann, Keep in mind that Barro and Grossman is the “youthful” work that Barro no longer accepts.

    Patrick, That 2009 WSJ article strongly supports my claim. He says that “Keynes” believed sticky wages and prices were the problem, and if true that would support the argument for monetary stimulus. But at the end where he describes his own policy preferences, he doesn’t even mention monetary stimulus. Where is the evidence that Barro thinks wages and prices are sticky?

    No question that Barro thought the multiplier for gov output was more than zero.

  87. Gravatar of Full Employment Hawk Full Employment Hawk
    24. January 2014 at 17:25

    “The WW2 “boom” was a myth. Living standards during the war were actually lower than they were during the Great Depression.”

    WW2 was a production boom. Obviously it was not a consumption boom because when a country is in an all out war of national survival, which WW2 was, but none of the subsequent wars were, there is a massive diversion of production from producing consumer goods to producing weapons. While WW2 expenditures stimulated production, that was not the reason it was fought. And it was not fought to increase consumption. It was fought to defeat very dangerous enemies one of which had attacked the United States and the other (Germany) had declared war on it. The stimulus to production was merely a by product of fighting the war and not the purpose of fighting it.

    “You mean the smaller supply of homes, cars and education, due to the fact that scarce resources were tied up in government activity rather than private activity?” That is what happens when a country fights an all out war of survival. Production for civilian purposes is scaled back to concentrate on producing weapons. After the war there was a boom in producing the products for civilian purposes that had been neglected and the war bonds people had bought during the war and similar savings gave people the means to buy this increased output.

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