What might be Robert Barro’s argument?

by on September 12, 2011 at 11:19 am in Economics | Permalink

Paul Krugman, Brad DeLong, Justin Wolfers and others are not sure what is Robert Barro’s argument or model in his recent Op-Ed.  I am puzzled by these responses, because, while I do not pretend to speak for Barro, I see at least one simple answer to these puzzlements.

Consider the following model.  Sometimes growth slows down and afterwards it speeds up again.  Temporary losses tend to be undone in future periods.  For one thing the Solow model implies catch-up growth, furthermore cyclical losses may exhibit mean-reversion.  There is in the meantime some depreciation of labor skills, from unemployment, but long-run output and welfare really does for the most part depend on the forces which govern economic growth.  (Increases in the variance of consumption are not enough to overturn that emphasis.)  That implies lower government spending in most areas of the economy, and it also implies lower taxation of capital, as supported by many empirical papers on growth including some by Barro himself.

That view may not be true (in my TGS book you will find some dissent from it but from another direction), but it’s hardly bizarre or economically illiterate.  If some writers aren’t totally explicit, it could be they don’t have enough words and feel that a large enough part of their audience takes the emphasis on growth and its preconditions for granted.

We are once again witnessing the renaissance of old Keynesian economics as a theory of the long run not just the short run.  The “New Old Keynesians” are of course entitled to their opinions, but given their minority status, it is strange when they find others difficult to comprehend.

1 Tom September 12, 2011 at 11:29 am

DId you ever consider the Keynsians might be in minority status because all the money business leaders have invested in endowing economics chairs over the last three decades? The money won’t keep flowing if you criticize them. Just look a the Koch brothers activities.

2 Mike September 12, 2011 at 1:19 pm

Has anyone invented a facsimile of Godwin’s Law for mentioning the Koch Brothers?
If not, I lay claim to “Mike’s Law”.

Mike’s Law differs from Godwin’s Law in that the probability of invoking the Koch Brothers is highest in the opening comments of any thread started by a Libertarian or relating to labor unions. The probability actually diminishes as the thread grows longer because if they haven’t posted about the Kochs in the first few comments, they’re probably reading HuffPo or Daily Kos today.

3 Bill September 12, 2011 at 2:33 pm

As Mike says, Don’t look behind the screen.

4 Mike September 13, 2011 at 12:06 am

I saw one of the Koch Brothers funded Nova on PBS. Are they trying to take over public television too?

They are the current Emmanuel and Ezekial Goldsteins for the left.

5 deron September 12, 2011 at 11:39 am

“given their minority status”

Why is that a given? Seems like there are plenty of Keynesian’s and a lot of storm and fury from the anti-Keynesian’s.

6 Pragmaticon September 12, 2011 at 12:20 pm

It’s a given because it’s true. The split in economics is lets say, 60-30 New Keynesian to Freshwater/Neoclassical/RBC. The remaining 10% or so makes up various heterodox groups, Post-Keynesians, Austrians, Marxists, Tyler’s “New Old Keynesians” and all that. New Old Keynesianism has largely been (like most other heterodox groups, really) a blogger/op-ed phenomenon, and insofar as those bloggers/op-ed writers are economists they are rarely MACROeconomists. Krugman is a trade theorist. DeLong is a historian. Quiggin is a decision theorist.

The only prominent macroeconomist I can really think of that you could probably jam into that box is Eggertson.

7 Dan in Euroland September 12, 2011 at 12:42 pm

Eggertsson seems to be a pretty standard New Keynesian. Why would label him “New Old Keynesian”?

8 Ned September 12, 2011 at 1:09 pm

It seems like the labels of macroeconomics are less important than the analysis. I would agree that we need to think about issues of long-term growth. And yet, that does not preclude some short-term stimulus. Keynesians and non-Keynesians might both be right and have something useful to contribute to policy formulation. The best economists are able to choose the models that best suits the problem at hand and are willing to change their views when confronted with new data. Economics is not a popularity contest…or it should not be at least right now when there’s real work to be done.

9 Andrew' September 12, 2011 at 1:17 pm

This makes a lot of sense. I’ll stop expecting Krugman to be able to articulate his assertions.

10 Mike September 12, 2011 at 1:23 pm

To really piss Krugman off, you have to dismiss his argument as ‘incoherent’ and say nothing more. That’s the tack he and DeLong usually take on their Ship of Fools.

11 Andrew' September 12, 2011 at 1:44 pm

I’m being serious. Whenever I read him on Keynesian Macro it has always felt like a confidence game.

12 deron September 12, 2011 at 1:24 pm

You might be right, but it has the smell of, “60% of all statistics are made up on the spot.” As does the comment regarding blogger/op-ed’s made on a blog in regards to an op-ed piece.

The original post, creates a distinction, New Old Keynesians then calls it a given that they’re a minority, that seems pretty weasely. Are New Old Keynesians really such a huge distinction from Keynesians, or does the definition create a useful foil for a blog? It seems a neat trick to create distinctions in order to dismiss them.

Keynes may come and go as a fashion, but the dialogue with Keynes never seems to stop, that doesn’t strike me as a strong basis to suggest that Keynesian positions are marginal. Particularly in reference to a column where the author felt the need to cite Keynes as an authority.

13 Andrew' September 13, 2011 at 7:50 am

It seems like perennial Keynesian means command-and-control Socialism, and thus we don’t need the term Keyneisianism to describe that. I know he made some nods that way, but he developed his theory when actual Socialism and Fascism were rising. Thus, to me, Keynesianism by definition must be something less than perennial.

It seems that Krugman et. al. take issue with the conclusion that now is the time for austerity. Tyler is correct. We are half a decade after the peak of the housing bubble and a full decade since we haven’t been told that we need stimulus. Barro doesn’t seem to be writing to people who think the time for austerity is never

14 Ricardo September 13, 2011 at 11:55 am

DeLong and Krugman have both published papers in the field of macro. Pigeonholing Krugman as a “trade theorist” and DeLong as a “historian” is odd in light of DeLong and Summers (1992) or the fact that Krugman published a paper on the liquidity trap in Japan and has co-authored standard textbooks on both macroeconomics and international macro.

15 Andrew' September 13, 2011 at 3:32 pm

Portfolio theory?

16 Theodore September 12, 2011 at 11:40 am

That addresses what Wolfers wrote, but not really what Krugman (and hence DeLong) did….

17 Andrew' September 12, 2011 at 12:24 pm

Krugman’s argument is that Barro said that investment doesn’t follow the business cycle. I don’t think that’s what Barro said.

18 Downpuppy September 12, 2011 at 1:25 pm

Krugman’s main argument is that Barro jumps straight to his conclusion with no bridge (and without The Hulk’s leaping ability):

People have been asking for my reaction to Robert Barro’s op-ed…. [H]ere’s the structure of what he says:

1.Keynes said that investment is what drives the business cycle
2.Investment depends on long-term incentives
3.???
4.Austerity!

and reading not just Barro, but the post and comments here, yes, Barro’s contention that the way to increase employment is to lay people off is totally unsupported by logic or evidence.

19 Andrew' September 12, 2011 at 1:46 pm

This is Barro’s argument, quoting”:
“I agree that the recession warranted fiscal deficits in 2008-10, but the vast increase of public debt since 2007 and the uncertainty about the country’s long-run fiscal path mean that we no longer have the luxury of combating the weak economy with more deficits.”

Krugman never makes a counter argument. And by never I don’t just mean in this case. I guess because Barro’s argument does not jibe with Krugman Keynesianism that means Barro didn’t make an argument.

20 Nemi September 12, 2011 at 2:21 pm

Wow. What a brilliant argument. Let me try to be equally smart.

I agree that the recession did not warranted fiscal deficits in 2008-10, but the vast increase in unemployment since 2007 and the uncertainty about the country’s long-run fiscal path mean that we no longer have the luxury of combating the weak economy with more inaction.

21 Downpuppy September 12, 2011 at 2:27 pm

With 10 year treasury rates at 2%, Barro is ranting at the tide, not laying out a logical argument.

22 Cliff September 12, 2011 at 3:01 pm

Nemi, the problem is your argument makes no sense because there were (enormous) fiscal deficits.

23 Andrew' September 12, 2011 at 4:30 pm

Nemi,

It’s pretty simple. Can we ever bump up against a fiscal limit? Have we?

24 Hepionkeppi September 12, 2011 at 4:46 pm

Enormous by what scale? Housing bubble wiped out 6 trillion in wealth. Deficits so far have been quite small compared to that. I would call them tiny.

25 Maurice de Sully September 12, 2011 at 1:50 pm

Barro’s contention that the way to increase employment is to lay people off is totally unsupported by logic or evidence.

Unless, of course, you’re interested in long-term, legitimate sustainable growth. In which case terminating workers who provide poor value in exchange for their wages affords governments and private investors alike the opportunity to re-focus those funds toward more productive endeavors.

To be sure, if your interest is to paper over long-term structural economic problems for short-term political advantage, then maintaining unproductive workers (particularly those who are statutorily obligated to donate to the Democratic Party) at their current wages is a really good idea. But given the demographic time bomb that is ticking down in the US, that seems like a grossly immoral thing to do. Someday we are going to need all that money the Democrats are throwing around trying to buy the next election, it will be a shame if we don’t have it.

26 Theodore September 12, 2011 at 2:54 pm

“What drives investment? Stable expectations of a sound economic environment, including the long-run path of tax rates, regulations and so on.” I don’t see the business cycle in there. I guess it could possibly be somewhere in the “stable expectations of a sound economic environment” bit, but it isn’t made explicit, and would seem rather un-Barro-like. If anything, Barro’s argument implies that the business cycle follows investment, which in turn follows some shift in long-term incentives. What that would have been in December 2007 is hard to pin down.

Krugman’s argument is that the business cycle is a major driver of investment, and hence an end to the downbeat part of the cycle in the short run is a major contributor to getting investment going again. He does devote one line to questioning the completeness of Barro’s model (“???”), and in response to that Tyler’s post may be justified.

27 Andrew' September 12, 2011 at 4:34 pm

I’ve made the point elsewhere. How is “lack of demand” not a subset of “uncertainty”?

Anyway, Barro writes “as John Maynard Keynes understood in his 1936 masterwork, “The General Theory of Employment, Interest and Money” (the first economics book I read), the main driver of business cycles is investment.”

In response, Krugman says “No!” investment is cyclical!

Ummm….

28 Hepionkeppi September 12, 2011 at 5:02 pm

There is always uncertainty, how come there is not always lack of demand?

29 Andrew' September 13, 2011 at 8:21 am

Because uncertainty is additive or compounding. I think of it as I would think about propagating errors through a calculation. Also, I don’t think in terms of lack of demand, I try to think of why there might be lack of demand.

Deficits “Enormous by what scale? Housing bubble wiped out 6 trillion in wealth. Deficits so far have been quite small compared to that. I would call them tiny.”

Can you compare a stock to a flow? The wealth effect on spending is not 1:1 of course. But again, you are coming straight from the Keynesian view. It’s not a criticism, but I’d compare the scale of the deficits to the returns and the ability to pay.

30 Ricardo September 13, 2011 at 12:03 pm

Ability to pay!? Bloomberg is reporting 30-year Treasuries yield 3.31% right now. Back of the envelope, if inflation is 2% on average, the U.S. only needs 1.3% of real GDP growth to easily pay back the debt that is being added right now.

31 Andrew' September 13, 2011 at 3:34 pm

Yes, the principle it has to be repaid, quite possibly at higher interest rates.

Thought experiment – I give you “free money” (0% interest) and a time machine and you have to buy a house in Las Vegas in 2005, and you can’t take a real estate guide from today and have to buy a $250k+ house.

32 Right Wing-nut September 12, 2011 at 12:00 pm

“The “New Old Keynesians” are of course entitled to their opinions, but given their minority status, it is strange when they find others difficult to comprehend”
Hey–they’re Keynesians. They obviously find SOMETHING hard to understand…

33 dirk September 12, 2011 at 12:03 pm

It’s been asked here by others, and now I want to know what exactly is meant by “depreciation of labor skills”? It’s a euphemism, right? Because an adult doesn’t lose “labor skills” over a couple years. Sure, technology changes fast and maybe you aren’t up to date on the latest software in your field, but those who are employed have to constantly catch up to the newest technology also and an unemployed person hasn’t lost his capacity to learn, has he?

I think what is meant by “depreciation of labor skills” is that unemployed men tend to become alcoholics and tend to lose their business contacts, rendering them much less employable. But let’s call it what it is. It has nothing to do with losing work skills. Or do we forget how to ride bikes also?

34 dirk September 12, 2011 at 12:10 pm

Unemployed men are also more likely to find themselves on the pointy side of a divorce, which also feeds alcohol use, loss of community, etc. But again, it ain’t “depreciation of labor skills”. It’s more along the lines of “their spirits are broken and they no longer give a shit”.

35 Mike September 12, 2011 at 1:42 pm

Are all work skills like “riding a bike” Dirk?

I teach Microsoft Word and Excel to students every quarter, but I teach Access only once every year and a half or so. Each time, I have to refresh my memory about how to use Access.

I used to program every day in SAS, but after 6 months of not using it, Im not sure if I could write a simple query much less run a probit regression.

I just aces an exam on option pricing, but i don’t think I could do it today without consulting my textbook.

I was nearly fluent in two foreign languages just a couple of years ago, and now I have trouble remembering basic vocabulary.

I was out of the net for 15 months in Iraq and by the time I got back, I had lost contact with almost all of my prior references.

Lots of job skills are perishable when not performed every day. Business contacts evaporate quickly too. And it’s not like precious hammer swingers will be swinging hammers in their new jobs.

After six months of unemployment, waking up and getting dressed on time has to be relearned. That’s not even including a potential new employer’s PERCEPTION of what has happened to your job skills. The person most recently in work always looks better on paper, all else nearly equal.

36 Andrew' September 13, 2011 at 4:00 pm

Mike,

While your points are true I wonder if they are relevant. When I get a new job I fully expect that I will not use one single skill that I’m using in my current job and it will be the same industry. This was the same situation as for my last job.

37 sp6r=underrated September 13, 2011 at 8:27 pm

Andrew,

I agree with you that you rarely preform the same tasks in a different job but the general work skills that are used in professional jobs in a given industry are fairly constant. Those skills erode during unemployment.

38 sp6r=underrated September 13, 2011 at 8:24 pm

Mike

Great post especially about the signalling problem the long-term unemployed face. The decline in labor skills from unemployment is a fact.

39 sundry verman September 12, 2011 at 12:07 pm

Very well said. Keynesians would, in a world where thoughts and dialog gravitated more towards honesty (a strange world indeed), not forget to mention that it was intended to be short term, while running surpluses in times of plenty.

40 Andrew' September 12, 2011 at 12:09 pm

What is Wolfer’s argument? DeLong copies Krugman. What is Krugman’s argument? Krugman accuses Barro of word games and non-sequiturs. Yet all I hear is about how demand spurs demand. People produce when others are producing. Babysitters work when they are getting haircuts so that barbers need babysitters. Fine, but if that’s all there is, then why are there periods when it isn’t, and no it can’t be because those are periods when the government is spending less. What changed? What underlies the negative mood? Oh yeah, it doesn’t matter, that’s thinking about the hangover.

41 FYI September 12, 2011 at 12:36 pm

Exactly. The one answer they seem to have to your question is “well, you need to make government grow even more” which of course can’t pass the falsifiability test (there is always ‘more’).

At the end of the day this is again Krugman (and his fans) trying to use his perceived status to shut people up.

42 Andrew' September 12, 2011 at 1:00 pm

Their answer seems to be “we don’t have time for understanding underlying causes you heartless bastard.”

My answer would be that failure makes you question everything (evidenced by this burst of debating basic economic theories) so in this environment even if you are mostly wrong, you will be on net right to defend the most recent status quo. Then my followup question would be, we thought we had it bad for the last decade, how do we know we still don’t have it REALLY bad?

43 kent September 12, 2011 at 1:07 pm

If you don’t know Krugman’s argument, you’re not paying attention. I’m not even vaguely an economist and I know this.

http://krugman.blogs.nytimes.com/2009/10/19/americas-chinese-disease-not-quite-what-you-think/

“Right now, we’re in a situation in which conventional monetary policy is hard up against the zero lower bound; rules of thumb that track past Fed behavior suggest that the short-term interest rate should be -5% or lower.”

Interest rates are too high and so we’re having a recession, just like other recessions; but unlike other recessions we can’t lower interest rates to where they need to be to get things going again.

How we got here? Mostly the massive housing bubble and the resulting financial system meltdown, which resulted in too many people wanting to hold risk-free assets, and too many households with too much debt, all trying to reduce their debts at once.

DeLong, Thoma, Krugman, and Baker all have blogs that are updated on a very regular basis. You may not agree with them but it’s weird to pretend that they haven’t explained their take on the situation.

44 Andrew' September 12, 2011 at 1:51 pm

That’s not it. When asked why the stimulus didn’t work his answer is because it was never tried. When asked why it can’t be tried he seems to answer ‘because noone listens to me.’

But when someone like Barro basically says that at some point it can’t be short-termism and even if it is we can’t afford a stimulus the size Krugman wants he dodges.

Krugman recently published (with co-author) a paper outlining debt. He is what I call a robust thinker.

45 Andrew' September 12, 2011 at 2:07 pm

Monetary policy is ineffective, and he thus says we are in a liquidity trap and therefore we need Krugman Keynesianism. There are plenty of non-Keynesian non-Krugmans who have concluded that interest rate policy would be ineffective. That doesn’t mean you have to join his recommendation because of a process of elimination involving one option.

I’ve got a better one for you, read this one:
Pay particular attention to the last line with respect to this paragraph:
“By the Panic of 1907, Fisher had concluded that most extreme fluctuations in economic activity resulted from monetary disturbances. He had identified too much money as the source of inflationary booms, too little as the source of deflationary depressions.”

Now read the last line of his post. If you don’t get the joke, you haven’t been paying attention.

46 Anonsters September 12, 2011 at 4:07 pm

When asked why the stimulus didn’t work his answer is because it was never tried.

He said repeatedly that the stimulus was too small. He was saying that even before the GDP numbers got revised way down and showed the economy was much worse in 2008-2010 than we had previously thought. So it’s not like he’s post-hoc hand-waving.

And he, DeLong, Thoma et al. have also repeatedly addressed the short-term v. long-term tradeoff.

Maybe if you temporarily removed your anti-Keynesian glasses and tried some basic reading comprehension, you wouldn’t be so puzzled. You may strongly disagree with them, and obviously you do. Fine. But that’s something different, isn’t it?

47 Mike September 12, 2011 at 1:55 pm

And if you’ve read John Taylor lately he disputes these “rules of thumb” I.e. Taylor Rules as indicating a -5% or -6% interest rate target. The Keynesians who come up with these “rules” aren’t applying the same parameters Taylor used, but their own.

Krugman, Thoma, DeLong, and Baker are the leading cadre of misinformation and histrionic personality disorders, claiming that all would be well if they were calling the shots. None of them ever had the stones to either run a business or run for political office.

Google “Krugman” and “stupid” and count how many posts he’s made insulting the intelligence of others. The others in that list do almost as much.

48 Joe Mazzilli September 12, 2011 at 10:27 pm

After reading some of these threads, Mike, I see that you and those of your ilk fail to consider that Krugman’s earlier predictions (going back to late 2008) about our economic trajectory have been spot-on. His arguments are sound and easy to follow, especially when he debunks the ideas of the “bond vigilantes, confidence fairies and fresh water economists.” That said, while Baker rarely goes into Krugman’s erudite analysis, his terse wit often cuts to the bone, as in today’s observation that, “As it is, we are sitting around watching our national leaders debate why the water that they heated to 160 degrees is not boiling.”

49 Mike September 12, 2011 at 11:14 pm

After “spot on” and “erudite”, all you needed was “meme” for the leftist elitist trifecta, Joe.

But your predictable usage of “ilk” and “debunk” wins you the consolation prizes of a 1980 Subaru station wagon and a bottle of Pinot Noir.

If you had said “shredded his argument” instead of “debunk”, you would have also received a gift certificate to Trader Joes.

Krugman was predicting recession every year for the eight years up to the recession. Even a broken clock is right twice a day.

Did you consider that at the same time Krugman was saying the stimulus would fail was because it was too small, me and my “ilk” were predicting its failure because it was wasteful spending that would have a multiplier near zero? So my team’s batting average is looking pretty good. I’ve got John Taylor batting cleanup. I’ll go head to head with your losers any day.

50 Roger September 12, 2011 at 10:53 pm

Just for fun, I tried a few Google search terms. Surprisingly, someone is almost three times more likely to get called stupid on this blog then Krugman’s.
site:krugman.blogs.nytimes.com stupid — 611
site:delong.typepad.com stupid — 1370
site:marginalrevolution.com stupid — 1530

51 Mike September 13, 2011 at 12:03 am

XXXXXX.

Just for fun, try a more advanced Google search like intitle:stupid.

Krugman and DeLong use the term to describe specific people, parties, and policies. They are berating people.

MR uses the term more often than Krugman, and less often than BDL in the title, but NEVER berating individuals. In fact, several titles say things or people are NOT stupid. Several uses on MR come with question marks.

Using the intext: advanced search, MR and BDL use the word stupid roughly equally, and Krugman about one-third as often, but again, context means everything. Read HOW they use the word.

And, of course, your search only returns absolute usage, not usage relative to the total number of posts. Kruggles posts once per day? I think MR posts quite a bit more frequently and long before Krugman. MR began in 2003. Krugman began in 2005. BDL goes back to 1986, but his early posts were far more sparse and far less political (i.e. more civil and academic).

Also, try synonyms for “stupid.” “Idiot” returns 3100 results for PK, 685 for MR, and 1730 for BDL. Again, a quick perusal shows MR using it for self-deprecation, in the negative, quoting other people, or in other benign ways.

Next try intext:incompetent and intext:dumb.

I will match Google searches with you any day. I will match the civility and humility of Alex and Tyler vs. Paul and Brad any day.

52 Ricardo September 13, 2011 at 9:19 am

This treats the Taylor rule as some kind of divine prophecy that can only be modified or interpreted by John Taylor himself.

Instead, what has happened is that Keynesians (like Glenn Rudebusch) estimate the parameters of the Taylor rule using historical data updated through the 2000s while John Taylor seems to insist on clinging to his original equation even though it does not track Fed monetary policy over the past 20 years.

53 Corporate Serf September 13, 2011 at 10:54 am

It’s actually even weirder. I once saw DeLong shut McArdle up regarding present valueing of social security obligations by asking her to get the 40 year treasury rates and use that to discount an obligation 40 years out. As he said, “pretty basic stuff”. McArdle, being somehow in awe of letters after the name, could not come back with anything snappy (Of course, she might have, and got her comment deleted, as has happened to other people on DeLong’s blog).

You would imagine they would at least know the day-to-day mechanics of what instruments are even available for trading in the debt market, they seem to have strategic forgetfulness in the middle of a political argument.

54 Maurice de Sully September 12, 2011 at 1:57 pm

Interest rates are too high and so we’re having a recession, just like other recessions; but unlike other recessions we can’t lower interest rates to where they need to be to get things going again.

Except we haven’t been in recession for nearly two years. I think Krugman’s economic “work” for the NYT can be a bit odd, but I doubt he’s missed such a basic thing. Unless, of course, he were deliberately trying to mislead in that area so as to advance policies that are sensible during recession but make no sense in the 2009-2010 context.

Would such a gentle and loving soul as Paul Krugman do such a thing?

55 Andrew' September 12, 2011 at 2:44 pm

Kent,

You are doing the same thing Krugman does. I am aware of Krugmans liquidity trap thesis. No I don’t fully understand it, but I do think that if his response is “well you haven’t done your part in the division of labor in an argument” that doesn’t convince me.

56 Ricardo September 13, 2011 at 9:04 am

Generally after a recession, you have a period called a recovery. The problem is that the U.S. cannot honestly be said to be in a recover phase. Unemployment has remained stuck at around 9% and the output gap remains large.

So what word would you prefer we use to describe the U.S. economy? A Non-recovery recovery? A second Great Depression (NBER says the Great Depression-era recession ended in March of 1933 right about when FDR was sworn in)?

57 MikeDC September 12, 2011 at 5:06 pm

Having re-read that, I still don’t know what Krugman’s argument is, even though I am an economist. A couple points of confusion for me:

1. The zero bound is meaningless. If the Fed wants to create more money, it can create more money, and can certainly create more money than the Chinese can or would buy. If Krugman stopped here and said the solution to the tight money problem is for the Fed to generate more money in line with historical trend and future projections, I’d understand. As it is, he doesn’t stop there.

2. Krugman was/is simultaneously arguing for a massive debt-borrowed fiscal expansion (which will certainly require the Chinese to buy lots of newly issued US debt) while calling for the Chinese to sell it’s existing stock of US IOUs and buy Euros and Yen. China’s motive for this is… what exactly?

58 Paul Papanek September 12, 2011 at 8:06 pm

The zero lower bound means that the IS-LM curve is underwater. You can try to move along the curve by printing money or some other monetary policy intervention, but PY won’t budge.

How is this hard to understand?

Furthermore, this is precisely what the neo-Keynsians have been predicting for 10 years, and it is precisely what has happened. Shouldn’t making correct predictions count?

59 MikeDC September 12, 2011 at 9:05 pm

You’re asking what about the IS-LM curve is hard to understand? 🙂

60 Ricardo September 13, 2011 at 8:57 am

The answer to #1 can be found in Krugman’s paper on Japan here. Simply put, the only way the Fed can stimulate the economy at the zero bound is to print enough money to increase inflation expectations. Without changing inflation expectations, monetary policy has no effect because the Fed is simply swapping one type of highly liquid 0% interest asset (cash) with another (t-bills). Krugman’s complaint about monetary policy is not that it is completely impotent in theory, rather that in practice the Fed has not done enough to change inflation expectations.

As for China, its net holdings of long-term Treasuries appear to have increased by about $350 billion from 2009Q2 to 2010Q2 while the deficit was over $1 trillion (data here). They are a major purchaser of Treasuries but hardly the only one out there. For the moment, the demand for U.S. Treasuries appears to be extremely interest-elastic.

61 MikeDC September 13, 2011 at 3:53 pm

I’d put it even more succinctly, the Fed hasn’t even hit it’s own inflation targets in practice, so perhaps it can’t credibly raise inflation expectations. Still, it’s a stretch to pull that from what Krugman said… I think it’s confusing at best. Similarly with China, where sure, the Chinese are only a major purchaser, but even operating across the longer-term yield curve they’re still heavily influencing the market and would be operating at cross purposes.

It just seems to me that he’s straining hard to find a solution that might fit his political preferences. I will say his post today is a much better discussion, and one of the most genuinely useful Krugman articles I’ve read in a long time. He discusses the same problems, but I think it’s a lot clearer, more sensible explication.

62 William September 12, 2011 at 12:27 pm

Barro writes:

“as John Maynard Keynes understood in his 1936 masterwork, ‘The General Theory of Employment, Interest and Money’ (the first economics book I read)”

Could the General Theory really be the first economics book a person reads?

63 Mike September 12, 2011 at 2:09 pm

I’m not old enough to know the answer, but I don’t think there were too many textbooks available when these older economists went to school. Professors probably lectured from their own notes and papers. It’s highly likely that the General Theory was not only one of the few books available but also the most highly regarded in its time, followed perhaps only by the Wealth of Nations.

Barro started his education with a BS in Physics, and took up Economics in grad school at Harvard, graduating in 1970. He might not have read any Econ books until he started grad school. If I were a Physics major entering grad school in economics in 1966, I probably would have spent the summer reading Keynes.

64 Paul September 12, 2011 at 2:42 pm

I don’t see what’s so important about what book someone first read. Isn’t it more important the last book they read (or wrote). Our thinking evolves over time (hopefully) and who cares how someone started out? It’s the diversity of approaches that makes a discipline strong. We all have our own style as people and economists.

65 Anonsters September 12, 2011 at 4:13 pm

Substantively, it’s wholly irrelevant. So it’s either as narcissistic self-flattery or (more likely in my view) simply a standard rhetorical ploy: “The first book on economics I ever read was Keynes himself. Now I’m a Harvard economist writing op-ed pieces. Look how far I’ve come. Why can’t the Keynesians get past Keynes, too?”

66 Mike September 13, 2011 at 12:20 am

You might very well be right about self-flattery, but that doesn’t mean it wasn’t the first economics book he read. It also doesn’t mean he didn’t follow a learned path of discovery away from Keynesianism just like many other people went in the opposite direction (or a different direction).

67 Yog Sotthoth September 12, 2011 at 2:17 pm

I was also trying to piece together a back-story of Barro’s life that would lead to his first economics book being the GT. Maybe the experience of being completely confused by a difficult book that he lacked the context to understand helped steer him to a more classical viewpoint.

Anyway, I liked the article and his proposals seem logical. Make some good long run decisions about the budget and tax code and businesses will feel more confident committing to long term investment decisions. The VAT tax and entitlement reforms would take money out of consumers’ pockets, so it might not work. But perhaps there’s enough Ricardian equivalence at work that the effect on consumers wouldn’t be too severe and the “business confidence” effect would dominate. If I were dictator I’d tell Barro to go ahead and give it a shot.

68 Yog Sotthoth September 12, 2011 at 2:19 pm

Re: Mike – Samuelson textbooks had been around since the forties, and were widely used, so there were more accessible ways for Barro to get Keynesianism. He probably read the GT in high school on his own or something.

69 Mike September 13, 2011 at 12:30 am

Barro was a physics major as an undergrad at CalTech. Unless they made him take a principles course as an undergrad, he probably didn’t read Samuelson’s principles text. Besides, I don’t consider a textbook a “book” in the fashion Barro describes it.

Samuelson’s 1948 economics textbook was/is a principles text. You wouldn’t be reading that in the Harvard Ph.D. program in 1966 unless you were teaching undergrads with it.

Now, Barro might have read Samuelson’s “Foundations of Economic Analysis” (1947). Since Samuelson’s Harvard dissertation leveraged his knowledge of thermodynamics, this would have been right up Barro’s alley.

70 Corporate Serf September 13, 2011 at 11:04 am

People do read books other than what your school forces you to read. I read Landau Lifschitz (sp?) even though I was never a physics major

71 Lord September 12, 2011 at 12:59 pm

The fact that you wrote this post evidences the shortcomings of the article.

72 Paul September 12, 2011 at 2:15 pm

I thought this was an excellent post with helpful links today’s debate (though I have to admit the comments (like Lord’s) leave me a ‘bit’ puzzled.

73 Michael' September 12, 2011 at 2:41 pm

Lord,
The post was motivated by the misunderstandings of the critics. The shortcomings therefore lie with them.

74 Lord September 12, 2011 at 4:43 pm

People who write op-eds that others have to explain, probably shouldn’t be writing op-eds.

75 Kirb September 12, 2011 at 1:09 pm

So, he says the Estate tax should be abolished, then provides absolutely no reasoning for it whatsoever. Who edited this?

76 Yancey Ward September 12, 2011 at 5:20 pm

With a VAT, you no longer actually need an estate tax.

77 Bill September 12, 2011 at 7:01 pm

Most of the people that I know who are subject to ineritance tax are spoiled kids unable to run the parents business.

78 Corporate Serf September 13, 2011 at 11:06 am

Perhaps you have a large sampling bias in your set of acquaintances? Or, are you saying that there are no unspoiled kids who are able to run their parent’s business(es)? Or perhaps, those that do exist are not subject to estate tax on their parents’ estate?

79 Bill September 13, 2011 at 6:03 pm

Just what I’ve observed. And, there are kids who take over the parents business and do just fine. And, others do not.

80 NAME REDACTED September 12, 2011 at 1:45 pm

‘The “New Old Keynesians” are of course entitled to their opinions, but given their minority status, it is strange when they find others difficult to comprehend.’

This is normal for some Keynesians. It helps them ignore others when its convenient.

81 ThoamasH September 12, 2011 at 2:28 pm

Krugman, and Wolfers read Barro as positively favoring austerity. I remain in doubt about what his view on short term policy is. Would the “jobs bill” be pernicious or only marginally helpful?

82 Bill September 12, 2011 at 2:39 pm

Barro’s in a box.

He can’t get what he wants–cuts in corporate taxes–because of the deficit agreement.

So, he has to find the revenue somewhere else–SSec, medicare or VAT–in order to cut corporate taxation. Once you realize what his objective is, then it is not so hard to understand the logic of his argument.

But, he’s missing one thing: there ain’t no demand for additional investment. Spurring investment when there is capacity utilization at around 70% and there is no response to low interest rates is silly.

83 Andrew' September 12, 2011 at 4:46 pm

Or, he sincerely believes taxing consumption makes sense. Aside from the corporations part, many centrists (and maybe progressives) believe this.

Krugman “Keynes argued that fluctuations in aggregate demand are usually driven by investment. But he also favored expansionary fiscal policy during a slump, because that’s a statement about what usually happens, not what must happen; you don’t have to refill a flat tire through the hole. Is Barro really confused about this, or is he just trying to fast-talk past his readers?”

You do have to patch the hole no matter where you refill it. This stuff is giving me a headache.

People sit at 70% utilization because they can’t be profitable producing more at lower prices. Barro is talking about patching the hole.

84 Bill September 12, 2011 at 5:14 pm

Oh, please Andrew, you’re argiomg taxing consumption makes sense when you are in a recession? Step back and look at what you said.

And, your interpretation of Keynes is wrong as well. Keynes said that there was overinvestment prior to a recession, not underinvestment, and that businesses would not rationally invest, and therefore government should step in. You have a misreading of Keynes and a misquoting of Krugman who simply said “fluctuations in aggregate demand are usually driven by investment.” Yeah, overinvestment leads to the recession. Dah.

Your final point about increasing utilization from 70% by cutting taxes is incomprehensible as well. Consider: With 9% unemployment, and 70% unused capacity, AND interest rates at 3%–what have you seen in terms of consumer responsiveness to lower prices? The only thing I’ve seen of late is an uptick in the purchase of luxury goods. People who are unemployed are shopping at the Dollar Store for necessities.

85 Bill September 12, 2011 at 5:27 pm

Andrew, if you are saying that you want consumption taxes, I am for them for persons making over $450k, as their marginal dollar goes to savings and not consumption.

86 Andrew' September 13, 2011 at 3:43 pm

I was talking about Barro and Barro is talking about the long run. And I DON’T want a consumption tax for two very simple reasons. 1 is it is a reduction in transparency and 2 which I think is incredibly important is that I think it will increase the size of corporations at the expense of individuals and small firms.

87 Andrew' September 13, 2011 at 3:51 pm

Btw, I don’t think any of your characterizations of what I’ve said are accurate.

88 Bill September 13, 2011 at 6:02 pm

Andrew,
1. Anyone can read what you wrote, so don’t worry about characterizations.
2. Barro’s article was on what we should do now to turn the economy around, not what we should do later.

89 pgl September 12, 2011 at 2:54 pm

“We are once again witnessing the renaissance of old Keynesian economics as a theory of the long run not just the short run.” No – we Keynesians are not saying lower national savings promotes long-term growth at all. What we are saying is that we are far from full employment right now. And this is how Barro framed his oped – as Brad Delong has already noted.

90 o. nate September 12, 2011 at 3:13 pm

If you read Barro’s whole article, he is mainly focused on long-term reforms. I personally think his long-term reform ideas are not bad, and I come from the more liberal end of the political spectrum. However, I think where he draws Krugman’s ire is when he says that the time for austerity is now. This particular statement is backed up by his assertion that what’s holding back business investment today is uncertainty about future government action. He thinks the “spend now/save later” approach won’t work, since business will hold off investing until they can see exactly how the “save later” phase will take shape. Instead, Barro argues, we have to “save now”, so that business will have confidence about exactly what the “save” phase will look like. In contrast, Krugman thinks that what’s holding back business investment is simply the depressed economy, and that if government spends freely now to boost the economy, business won’t worry too much about the future “save later” phase, and they’ll go ahead and invest anyway. On that particular disagreement, I think Krugman has the better argument.

91 Bernard Yomtov September 12, 2011 at 3:16 pm

“What drives investment? Stable expectations of a sound economic environment, including the long-run path of tax rates, regulations and so on.”

When I read the Op-ed I stopped at this statement. Forget arguing about Keynesianism and all those other things. How can someone write about “what drives investment” and never mention the prospect of revenue. Companies invest – they expand their factories, open new stores, etc. when they think there’s money to be made, when they see more customers. For Barro to fail to even mention that in answering the question he poses is strange indeed.

92 Andrew' September 12, 2011 at 5:26 pm

What is NOT included in the language “Stable expectations of a sound economic environment”?

Seriously, even the business cycle and demand can be included in that. In the previous paragraph (as I state above) he says outright that investment drives the business cycle.

Anyway, slight clarification, for individual firms isn’t it rather about profits rather than revenue? That is important because slight tweaks in costs can have big effects on profits in percentage terms when the baseline is zero or losses.

93 Bernard Yomtov September 12, 2011 at 9:26 pm

Well, it can be, I guess. But it seems like a stretch to me. A pretty long stretch. I think he’s parroting the whole nonsensical “regulatory and tax uncertainty” talking point.

I could be wrong, but the whole issue of aggregate demand is fairly important in these discussions. I’d expect Barro to acknowlege that explicitly, at a minimum. From the point of view of a businessman, which I’ve been for many years, the overriding question about expansion is, “Am I going to be able to sell the extra stuff I make?”

Whether I pay X% or Y% in tax on the profits might matter in a small way, but demand – read “customers” – is really the principal issue. So I guess I don’t buy the notion that Barro meant to include demand in his formulation.

94 twente September 13, 2011 at 2:27 pm

So what is the policy recommendation here? There is nothing to do but wait? What if the economy already had minimal government intervention via taxes or regulations? What would be the recommendation then? Just wait?That is all Economics has to offer?

95 Andrew' September 13, 2011 at 3:43 pm

That’s just Barro being Barro.

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