Althouse: Harvard econprof Robert J. Barro looks for evidence that Keynesian economics work.

August 24, 2011

Harvard econprof Robert J. Barro looks for evidence that Keynesian economics work.

"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."

31 comments:

traditionalguy said...: The Keynes miracle was to create the confidence that the economic activity was back again because some money was flowing again.

That requires a brain dead population to work. Because if the population sees clearly, then they see that real economic work has not begun again around them...yes it does stimulate real activity in China where WalMart gets its trinkets from.

Trouble is that risk capital never could be fooled easily and now consumers cannot be fooled either.

We need a new policy to out produce China. Start with oil and coal production and replace ethanol with gasoline so that abundant food production cuts food prices. Put a tariff on Chinese imports and dare China to stop us.; 8/24/11, 9:44 AM
chickelit said...: I'm not sure I get the "bloodletting" analogy. Seems to me more like saline infusion. Pump up the volume.; 8/24/11, 9:46 AM
Curious George said...: If it wasn't for the Arab Spring and the Japanese Tsunami he wouldn't have to look any farther than the last two and half years.; 8/24/11, 9:57 AM
Carol_Herman said...: When everybody's lost everything. And, there's no middle class. All the pockets are empty. Kenyes can begin taking measurements.

Oh, Europe's in worse trouble than us!

That's why obama just "waits." And, Merkel keeps applying wallpaper to the tears and splits between those borderless European "places."

Now, we know why men have been ejaculating against wallpaper. And, why the Sofitel rooms float in it. Like glazed doughnuts.

Meanwhile, Libya looks pretty much like itself. Just in case you thought street rubble would make it look somewhat "after."

The miracle is if we'll clear up this economic mess in under a decade. (Took a decade to launch.); 8/24/11, 10:05 AM
Anonymous said...: Say you go to the bar with five friends.

If Keynesian economics works as claimed, all you'd need to do is start buying beers for each other and eventually you'll all end up with far more beer than if you had each purchased your own.

Sounds simple enough.

(In fact, it strikes me that we would have probably been far better off if Obama, Pelosi, and Reid had purchased $800B worth of beer for the country.)

(And I say this as a non-drinking Mormon.); 8/24/11, 10:08 AM
bagoh20 said...: The Keynesian method still relies on market forces to eventually get inspired by being fooled into it. A better method is to skip the expensive capital sucking middle man and just inspire the market by simply setting it free. If a Keynesian stimulus fails, what are you left with? A stagnated fat and lazy market, waiting for the next handout that now cannot be funded.

So you either get smart or go into further recessionary correction that restarts the market at great cost. It ends up the same eventually with the free market rescuing us. It just depends on if the government wants to try all the homeopathy cures first before getting the surgery. New age can be expensive.; 8/24/11, 10:11 AM
bagoh20 said...: "Say you go to the bar with five friends.""

A more accurate scenario would be if 3 guys took money from the other two to buy the beer. So, soon the 3 freeloaders quit their jobs since they get free beer anyway, and then the two buyers stop showing up. Party is over.; 8/24/11, 10:17 AM
edutcher said...: Interesting that, the last time the Keynesian miracle was viewed as having worked, Isoroku Yamamoto and six carriers were required to do a fly-by of Oahu.; 8/24/11, 10:17 AM
MayBee said...: chickenlittle:I'm not sure I get the "bloodletting" analogy.

It's quackery.; 8/24/11, 10:25 AM
Martin L. Shoemaker said...: Let me see if I understand that 1.84 multiplier the Ag department trotted out again last week. (You would then after all the laughs Pelosi got for that number, they would be ashamed to still cite it.)

X takes $1 from A and gives it to B. But all transactions have inefficiency, government transactions especially. Let me generously assume the government is 80% efficient. (Stop laughing! I'm trying to keep the numbers simple.) So actually, X takes $1.25from A, and gives $1 to B. X pockets $0.25.

B gives $1 to C; but C is an evil millionaire (i.e., a small business owner making $200,000 a year). So C's total tax runs around 40%. C keeps $0.60, and X pockets $0.40. (Well, OK, X splits that with other levels of government: Y and Z. But let's keep it simple, and lump them all together as X.)

And now C gives A $1.84 out of that $0.60. How is that possible? It's Magic Money, I tell you! Maaaaaagic Moneyyyyyyyyy! Since A is also an evil millionaire taxed at 40%, A gets to keep $1.10 of that, and X pockets $0.74.

For those keeping track... X has now accumulated a whopping $1.39 by taking $1.25 from A and giving $1 to B. This is how we can eliminate our deficit, friends: with Magic Money, I tell you! Maaaaaagic Moneyyyyyyyyy!

Oh, by the way, Mr. A... You don't get to keep all of that $1.10. We're going to take $1.25 of it, so we can give another $1 to Mr. B.

It's Magic Money, I tell you! Maaaaaagic Moneyyyyyyyyy!; 8/24/11, 10:51 AM
Tim said...: Keynesian Economics = Ponzi Economics = Cannibalizing the Future with Debt.

It never worked.

It didn't work in the 30's.

It didn't work after the war - hell, even the idiot, evil Soviets had annual economic growth averaging 5+% in the 50's and early 60's because they, like us, were the only nations with any meaningful industrial plant after the war.

And it sure as hell didn't work under LBJ's "Guns and Butter" programs, or Nixon's price controls, or Ford's "WIN," or the awful stagflation of the Carter years.

Why the hell would anyone anywhere think it would work now?

Except for the grifters, of course. It works for them.; 8/24/11, 10:51 AM
bagoh20 said...: Is bloodletting an effective cure of anything? I mean, besides mother-in-law irritation syndrome.; 8/24/11, 10:53 AM
Scott M said...: Is bloodletting an effective cure of anything?

A surplus of blood. It's only a treatment, as recognized by the AMA, if it's used on obese vampires or lawyers.; 8/24/11, 10:56 AM
Wince said...: It's only when you count the votes coming out the other end that it all makes sense.; 8/24/11, 11:09 AM
Original Mike said...: Keynesian economics is nothing more than an excuse for liberal politicians to do what they want to do anyway; tax producers and hand out goodies to the less well off who then return the politicians to office. It doesn't take a brain surgeon to figure this out.; 8/24/11, 11:09 AM
J said...: were the Smurfhousers interested in facts instead of spewing horsecrap and TP hype they'd note that the GDPs under LBJ and JFK admins. were substantially greater (5.0 +) than GOP admins, with Bush II about the lowest with 1.7.--also with higher taxes on wealthy, healthy entitlement programs and interventionist policies (ie, the K-word). So, you're wrong.; 8/24/11, 11:26 AM
William said...: The subatomic world works in very different ways than the Newtonian one. I guess the argument is that Keynesian macroeconomics works differently than the way in which households balance their budgets. I find this extremely counterintuitive and wish there were moer proof than Krugman's word for it......Many historians consider Keynes the author of the most pernicious book of all time. His Economic Consequences of the War was a big best seller in Germany and was accepted as the gospel truth. It portrayed Germany as the victim of the peace treaty in Paris. It really magnified the resentments of Germans and paved the way for the rise of Hitler.; 8/24/11, 11:58 AM
X said...: From the governments point of view it works. for every borrowed dollar they pump into the economy they get some amount back in taxes every time the dollar is transacted, theoretically multiple times in a year, unless they gave it to GE.; 8/24/11, 12:04 PM
Anonymous said...: J cites the facts that the engine was revving on the straightaway and the air-conditioner was correspondingly pumping really cold air into the cabin, to try to prove that the alternator was producing enough electricity on its own to run the car, and that a perpetual motion machine is, in fact, a possibility despite the second law of thermodynamics.; 8/24/11, 12:28 PM
Richard Dolan said...: chickenlittle:I'm not sure I get the "bloodletting" analogy.

Maybee: It's quackery.

Yes, quackery with the understanding that it's harmful (like bloodletting). Barro's point is not that Gov't spending has no stimulus effect -- by studying the effects of military spending in the early years of WW2 and other wars, he's calculated that, with respect to short term demand, the multiplier for Gov't deficit spending is in the .4 to .6 range ($100 of added Gov't spending will result in an increase in GDP of about $40-$60 over what it would have been without the Gov't spending).

But Gov't spending has a displacement effect (reducing spending in the private sector), and also must eventually be paid for, either directly by raising taxes or indirectly by generating inflation (basically a tax on accumulated wealth). That 'no free lunch' reality of having to pay (eventually) for deficit spending also has a multiplier effect, which (naturally) is a negative in its impact on growth. Christine Roemer (remember her) has published extensively on the negative multiplier effect of tax increases. Using her work, Barro estimates that the negative multiplier for tax increases is about 1.1 or so (a tax increase of $100 reduces the next year's GDP by about $110 or so from what it would have been without the tax increase).

If you work out all the math, the net result is that Gov't deficit spending can have a smallish impact on increasing short term demand and GDP, but is probably negative in its impact on aggregate demand and GDP if viewed on a (slightly) longer term.

Those were the reasons Barro was quite critical in his assessment of Team O's stimulus the first time around, and is no fan of the proposals to double down on that idea now.; 8/24/11, 12:37 PM
Original Mike said...: Extraordinary claims ("every dollar of [food stamps] generates $1.84 in the economy") require extraordinary evidence.; 8/24/11, 12:58 PM
Eric said...: Keynesian economics work where they're designed to work - in Washington. They give politicians an excuse to do what they already want to do, which is spend money without raising taxes.; 8/24/11, 1:25 PM
Lance said...: they'd note that the GDPs under LBJ and JFK admins. were substantially greater (5.0 +) than GOP admins, with Bush II about the lowest with 1.7

So GDP in the 60's was "5.0 +", and in 2001-2009 it was "1.7". Yeah, that makes sense. Really obvious once you put it that way. Really.; 8/24/11, 1:31 PM
Bruce Hayden said...: I have long found these assertions for positive Keynesian multipliers to be quite humorous. Before the Stimulus bill, I remember the Dems getting into a bidding contest, with Speaker Pelosi appearing to win with her assertion of a 4 or 5 to 1 multiplier.

Of course, it was pure hogwash, ignoring the displacement effect, and that governments, and esp. our national government, are notoriously bad at spending money efficiently.

Of course, they got what they really wanted - a justification for shipping hundreds of billions of dollars to their constituents, on the grounds that whatever they spent would be multiplied so greatly in GDP growth. So, they might as well break the bank.

I also though think that some saner heads in the Democratic party knew that this was all hype, but knew that the money, once shipped to the constituents, would not be recovered. And, they managed to crank up the base line for government spending by 4-5% of GDP, and rolling that back is going to be very hard.

I also think that some of those saner heads knew that they would likely lose the House in 2010, the Senate in 2012, and maybe even the Presidency as a result. But there was so much money to loot, that this was considered collateral damage.

Now that I have used the word "loot" now, it make sense - To summarize, the purpose of using these inflated Keynesian multipliers was to provide a justification for the Democrats to loot the treasury and economy.; 8/24/11, 2:15 PM
bagoh20 said...: So what have we been doing? Is it working?; 8/24/11, 2:41 PM
ricpic said...: We need an alien invasion...and fast!

--The Wisdom of Paul Krugman

The "reasoning" being that preparing to fight said alien invasion would be stimulative. I kid you not.; 8/24/11, 3:50 PM
Wikitorix said...: Is bloodletting an effective cure of anything?

Hematochromaosis; 8/24/11, 4:07 PM
Craig Howard said...: The Keynesian method still relies on market forces to eventually get inspired by being fooled into it.

Yes! As Ludwig Von Mises put it, "In old fashioned language, Keynes proposed cheating the workers."; 8/24/11, 6:03 PM
test said...: Bloodletting: a practice completely devoid of the supposed benefits which actually harmed the patient to boot. Despite its universal uselessness it managed to remain the primary treatment for hundreds of years primarily because doctors otherwise had to admit no treatment options were available.; 8/25/11, 8:36 AM
Avnatanel said...: "Is bloodletting an effective cure of anything? I mean, besides mother-in-law irritation syndrome."

It fuels the Keynesian perpetual motion machine.; 9/13/11, 1:39 AM
Kevin O'Neill said...: I've read a lot of rhetoric in the preceding comments, but very little that makes sense. There seems to be little understanding of what a multiplier is - much less whether a particular policy has a higher or lower multiplier.

If the government issues $x dollars to the poorest citizens and $y dollars to the richest citizens, if x=y, then which has a higher multiplier?

It's pretty obvious that the poor, by the very circumstance of being poor, will spend all $x dollars. The wealthier citizens, not needing to spend every dollar they have, will likely see their $y dollars allocated in several different ways - some of them to savings.

From there it's pretty obvious which group of dollars will have a higher velocity and a larger multiplier. This isn't necessarily rocket science. you'd think a bright elementary school student could grasp it.; 12/25/11, 7:49 AM