Tyler Cowen Says: Robert Barro's Argument Is Coherent If He Is Answering a Different Question than Barro Claims to Be Answering
What might be Robert Barro’s argument? — Marginal Revolution: Paul Krugman, Brad DeLong, Justin Wolfers and others are not sure what is Robert Barro’s argument or model in his recent Op-Ed…. Sometimes growth slows down and afterwards it speeds up again…. 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…. That implies [that] lower government spending in most areas of the economy [is a good thing], and it also implies [that] lower taxation of capital [is a good thing]…. That view may not be true… but it’s hardly bizarre or economically illiterate…
The problem is that Barro says at the start of his op-ed that he is interested not in faster long-run growth--not in better economic performance once the economy reattains its full-employment growth path--but rather in speeding the recovery to the long-run growth path:
How to Really Save the Econom: "he economy is growing much more slowly than in a typical recovery, housing prices remain depressed and the stock market has been in a slump — all troubling indicators that another recession may be on the way. Most worrisome is the anemic state of the labor market, underscored by the zero growth in the latest jobs report. The poor results should not surprise us given the macroeconomic policies the government has pursued. 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. Today’s priority has to be austerity, not stimulus…
The question Barro claims to be trying to answer is not: "Never mind the slowness of the recovery, how do we boost the economy's long-run full-employment growth path?" The question Barro claims to be trying to answer is: "How do we speed the recovery of the economy to its long-run full-employment growth path and avoid another recession that will push us further below it?"
And it is the fact that Barro's op-ed makes no coherent sense at all to the question he claims to be addressing that has Justin, Paul, and me puzzled.
So I think Tyler has it completely wrong when he writes:
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.
What we are seeing, instead, is the abandonment by the right of any model of the short-run at all: Milton Friedman would have a view of what to do in the current situation, and it ain't what Barro recommends.
If the right wants to say that they have nothing useful to contribute in the debate over what to do in the short-run--that they have advice for long-run policies only, and that the only thing they have to say about the short-run is that your policies to match aggregate demand to potential output should not undermine what would be good policies for long-run growth--and so are going to be quiet as the rest of us try to figure out how to match aggregate demand to potential output, that would be fine.
But that is not what we are seeing from the right, is it?