Truly Stupid Economists

Wow. Sometimes economists can be breathtakingly dumb. More often than not they seem to be the economists who allow ideology to creep too deeply into their ‘analysis’. Here’s today’s buffoon: Robert J. Barro: Government Spending Is No Free Lunch – WSJ.com

Now this is remarkably stupid.

First a short primer: the argument is about the size of something called the ‘multiplier’. This is an easy concept to grasp. When the government spends money it doesn’t simply generate a 1 for 1 increase in spending, it generates a larger amount because the original spending then becomes someone else’s income part of which they spend and so on. In other words the original amount of government cash ends up stimulating a total increase in consumption that is much larger. It ripples through the economy. Or in economics speak it is ‘multiplied’.

Part of the debate now going on in Washington is the extent of the stimulus package necessary to get the economy rolling. Essential to getting the size right is understanding the multiplier effect. For example a $1 trillion plan will incease economic activity by $1.5 trillion if the multiplier is 1.5; but only by $1.1 trillion if the multiplier is 1.1.

The Obama team is using 1.5. Actually they are more sophisticated than that and are using a variety of multipliers depending on the kind of spending. In their plan the multiplier for tax cuts is very low [less than 1 because some tax cuts will not be spent at all], while that for construction is much higher. So the 1.5 they are using is an average.

Now comes along this stupid commentary from Barro in today’s Wall Street Journal. He estimates the multiplier to be nearer to 1.0. His sample is the stimulus during World War ll. This is what we call, technically, extremely stupid.

During World War ll consumer goods were being rationed. Millions of people were away at war so unemployment was non-existent. So of course the multiplier was low: there was nothing to spend money on! There could be no multiplier. Duh.

By picking that period for his analysis Barro is letting his ideological slip to show. He is adamantly opposed to government rescue plans anyway, so he tries to undermine the argument for a bail out by appearing to contribute to the technical discussions about the multiplier. What he actually trying to do is persuade people that government spending will be ineffective as a stimulus and will only end up inflating our already bloated debt. This is the last resort of the right wingers who a] brought us that bloated debt by advocating the fiscal lunacy of the Bush years; and b] who are terrified that Keynesian economics might be correct after all.

But it’s one thing to be a forceful advocate of monetarist and free market orthodoxy, and completely another to make a fool of yourself while doing so.

Just for the record: Keynes was right. The orthodox economists who have tried to eliminate his thoughts from the theoretical basis of modern economics have a lot to answer for right now. This is their mess just as much as it is that of the incompetent bankers and right wing politicians who used free market economics theory for their own ends.

Robert Barro should be ashamed of his foolishness.

Note:

Paul Krugman was responsible for highlighting Barro’s article.