Dumping on Robert Barro
Matt Yglesias has a very good post on Robert Barro's latest. Brad DeLong seems to agree with Matt. Paul Krugman uses the word "boneheaded" to describe the Barro piece.
This exchange is a good micro-cosm of how the stimulus debate has proceeded. A highly respected anti-stimulus economist puts up some anti-stimulus evidence in a highly imperfect test (in Barro's defense, he did cover more than just WWII). The anti-stimulus economist is attacked by pro-stimulus economists. But the pro-stimulus proponents are focused on attack. They are not putting up comparable empirical evidence of their own for the efficacy of fiscal policy and there is a reason for that, namely that the evidence isn't really there.
I fully admit that I don't trust the oft-cited evidence that tax cuts are 4x better stimulus than government spending boosts; I think the result is a mirage from underspecified models. Overall we simply don't know how well the proposed stimulus will work — if at all (is aggregate demand always the relevant war?). It's a kind of Hail Mary pass, an enduring belief in aggregate demand macroeconomics at the theoretical level, even in light of broken banks, sectoral shifts, and nasty, failing expectations, all mixed in with hard to spend well, slow to come on line, monies. Yes it could work but our agnosticism should be strong rather than just perfunctory.
Writing polemics against market-oriented economists, no matter what the failings of such economists (and I am one of them, and I have failings), doesn't get us out of that box.
I'll say it again to the pro-stimulus forces: a stimulus is going to happen, so I'd love to be cheered up by your evidence. Put it on the table.
I also am confused by Krugman's view of the relevance of WWII. On his blog, at the end of a discussion of how the historical example of WWII doesn't much apply, he writes:
I can’t quite imagine the mindset that leads someone to forget all
this, and think that you can use World War II to estimate the
multiplier that might prevail in an underemployed, rationing-free
economy.
And he is upset at Barro for thinking that the WWII experience does apply. Fair enough, but a) the War didn't start at full employment, and b) is it possible that Barro received this impression from reading Krugman himself? In Rolling Stone last week Krugman wrote:
It
took the giant public works project known as World War II – a
project that finally silenced the penny pinchers – to bring
the Depression to an end.
The lesson from FDR's limited success on the employment front,
then, is that you have to be really bold in your job-creation
plans. Basically, businesses and consumers are cutting way back on
spending, leaving the economy with a huge shortfall in demand,
which will lead to a huge fall in employment – unless you
stop it. To stop it, however, you have to spend enough to fill the
hole left by the private sector's retrenchment.
If you read both Krugman passages closely, there is not actually a literal contradiction. But still, a fundamental decision has to be made on whether to run away from the WWII evidence or not. I say the WWII evidence does not apply and so I am closer to Krugman as he writes on his blog.
Either way you cut it, there aren't any boneheads in the room.