The remarkable thing about Robert Barro—and all the other Lucases and Famas and Boldrins and Cochranes who, back in 2008-2012, said it was logically impossible for expansionary fiscal policy to work—and his question "Where was the market failure that allowed the government to improve things just by borrowing money and giving it to people?" is that the answer had been well-known and on the table since at least 1829. The answer was given by John Stuart Mill The market failure is that the economy is out-of-equiilibrium, in a "general glut", with an excess demand for money and an excess supply of pretty much every currently-produced good and services.
Normally the existence of excess supplies and excess demands in an economy is a good thing: The entrepreneurial profits imbalances create set in motion the migration of resources to higher-value uses. But private-sector entities cannot migrate labor and capital into the business of creating money, for money is liquid trust and can only be created by institutions that are trusted to be, well, good for the money. So the solution is not to move resources out of creating currently-produced goods and services but to move demand into buying currently-produced goods and services. And—as long as it is good for the money—the government's borrowing-and-spending or printing-and-dropping works just fine:
Comment of the Day: JEC: Keynesian Economics vs. Regular Economics: "'Unlike the trade-off in regular economics, that extra $1 billion is the ultimate free lunch. 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?' The funny thing here is that Barro imagines this to be a killer rhetorical question, when it is in fact a crucial and open research question (and one that Keynesian macroeconomists have done far too little to answer, in my opinion). What makes it a research question rather than a damning rhetorical one is the empirical fact that, under certain circumstances, multipliers greater than one are well-documented. (In fairness, better documented today than in 2011)...
...Arguments like Barro's (and this one is typical of the New Classicals) remind me of the folks who insist that jet propulsion can't work in outer space because there is "nothing to push against." Rockets can't possibly work; that's just common sense! Their plaintive cries of "How can this be?" should be read literally—as confessions of ignorance. The trouble starts when they infer from their ignorance that the phenomenon they fail to understand cannot, perforce, exist at all. Which is, more or less literally, the position of the New Classicals and RBC theorists on the Great Depression: can't happen; didn't happen...
#commentoftheday #economicsgonewrong