Re economics professor Robert Barro’s oped in the NYT this AM: yuk, double yuk…yuk squared and yuk factorial.
Essentially, what we have here is a visit to the NYT from the deeply misguided editorial pages of the Wall St. Journal, where Barro is a frequent contributor.
The assertions are all wrong and the politics are too. Start with the assertions.
“Today’s priority has to be austerity, not stimulus…” I keep hearing this argument that somehow immediate cutting, slashing, and burning will generate growth and jobs, by how? Usually, it’s “confidence” and “certainty.”
Obviously, such psychological states of mind matter a lot in an economy, but at a time like this, they simply can’t matter as much as customers. And at 16% underemployment, with very low borrowing rates, high savings rates, and excess factory capacity, people and investors simply won’t engage in much economic activity.
The private sector won’t improve on its own in the near term, and Barro’s austerity prescription will only drag out that near term. It’s very much analogous to medieval medicine—bleeding the patient to make them better. See the UK case, where growth has slowed to about zero, but also see our own case, where the premature fading of stimulus measures has clearly been associated with slower growth to the point where job growth was zero last month.
Barro and others ignore the very different economics that prevail in recession, an area where Keynes’ insights still dominate (well…they should!). Barro asserts that business investment will lead the recovery and that such investment is driven by:
“[s]table expectations of a sound economic environment, including the long-run path of tax rates, regulations and so on. And employment is akin to investment in that hiring decisions take into account the long-run economic climate.”
Again, this conflates the near term with the long term, recovery with recession. Right now, firms face historically low capital costs and they’re sitting on lots of cash reserves. What’s missing, as Keynes pointed out, is demand. Right now, investment and jobs would follow stronger domestic consumption, not the other way around.
Globalization amplifies these dynamics. American firms can sell into emerging markets, where demand is strong and growing. They can invest, and have been doing so—fixed business investment contributed 1% to last quarter’s real GDP growth, which was…1%–and they’ve been highly profitable along the way. But their investments and profitability are demonstrably not creating jobs here.
Barro solutions include a consumption tax—which he oddly argues is something liberals hate (that’s certainly not been my experience—liberal tax reformers typically like a progressive VAT)—and getting rid of the corporate tax.
More on these later if I have time to get back to them…one thing I can tell you for sure though: they’re not on the table and they won’t be on the table for a while, and when they are it will take a very long time to adjudicate them.
What is on the table is a robust jobs plan that could actually help put some money in people’s pockets, fix some schools and some productive infrastructure, and get some folks back on the job. If we can make those things happen, and perhaps get some monetary stimulus behind them as well, business investment is likely to follow.