Barro on Fiscal Multipliers and Krugman

Robert Barro, a noted Growth Economist had written an article in WSJ on the fiscal multipliers. His main idea is that tax cuts are better than government spending and a fiscal stimulus should focus on the former. The government spending works but only in war times.

Why tax-cuts are more stimulative?

I don’t think it is really confusing at all, because when you cut taxes there are two different effects. One is that you cut tax rates, and therefore give people incentives to do things like work and produce more and pay more — maybe, depending on what kind of taxes. And then you also maybe give people more income. This income effect is the one that’s related to this Keynesian multiplier argument, where it’s usually argued that government spending should have a bigger effect. So that’s the income effect. But the tax-rate effect, inducing people to do things like work and produce more and invest more, is a whole separate effect, and that could easily be much bigger than the multiplier thing, than the income thing.  

He is also working on a study that tries to differentiate between the two effects in each of the fiscal stimulus used in crisis times.

He also says the current package is garbage :

This is probably the worst bill that has been put forward since the 1930s. I don’t know what to say. I mean it’s wasting a tremendous amount of money. It has some simplistic theory that I don’t think will work, so I don’t think the expenditure stuff is going to have the intended effect. I don’t think it will expand the economy. And the tax cutting isn’t really geared toward incentives. It’s not really geared to lowering tax rates; it’s more along the lines of throwing money at people. On both sides I think it’s garbage. So in terms of balance between the two it doesn’t really matter that much

He does not like the Obama team either

Well, presumably Larry Summers is not an idiot.

[laughs] That is another conversation. I have known him for 25 years, and I have opinions about that.

Well, presumably Christina Romer is not an idiot if you’re…

They’ve brought in some reasonable people in terms of economic advisors. I don’t know what impact they’re having, and I suppose they have different views on Keynesian macroeconomics than I have. But I’m giving you my opinion about it.

I think Geithner is a good appointment. I think he’s going to focus on what really matters, which is the financial system and the housing market. That’s where they should be putting their efforts. That’s where the problems came from.

He also takes on Krugman:

Do you read Paul Krugman’s blog?

Just when he writes nasty individual comments that people forward.

Oh, well he wrote a series of posts saying he thought the World War II spending evidence was not good, for a variety of reasons, but I guess…

He said elsewhere that it was good and that it was what got us out of the depression. He just says whatever is convenient for his political argument. He doesn’t behave like an economist. And the guy has never done any work in Keynesian macroeconomics, which I actually did. He has never even done any work on that. His work is in trade stuff. He did excellent work, but it has nothing to do with what he’s writing about.

I’m not in a position to…

No, of course not.

I’m not in a position to know things like the degree to which Paul Krugman counts as a relevant expert on new Keynesian economics.

He hasn’t done any work on that. Greg Mankiw has worked in that area. 

Economists always disagree and this is a disagreement between one of the best we have. 

Anyways, the idea behind the post was not to point the fights but to point out the difference between two types of fiscal multipliers. Moreover, it is useful to think about them in terms of the 2 effects in work – incentive effect and income effect. Any fiscal stimulus plan should try and do both – change incentives for people to come forward and spend/invest and provide incomes so that people can do the first.

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9 Responses to “Barro on Fiscal Multipliers and Krugman”

  1. What’s Buzzing? » Blog Archive » Barro on Fiscal Multipliers and Krugman « Mostly Economics Says:

    […] But I’m giving you my opinion about it. I think Geithner is a good appointment. I think he’s going to focus on what really matters, which is the financial system and the housing market. That’s where they should be putting their efforts. …Continue Reading… […]

  2. Tirath Says:

    Nice post – thanks

  3. Tirath Says:

    The thing about finance is that there is never a straight road.
    Tax cuts in a largely tax paying society would burden fiscal management would it not?

  4. Jason Says:

    Tax cuts for incentive purposes has been the mantra for economic policy for both the Bush II and Reagan administrations. That’s the idea behind the promise embodied in the Laffer curve. Recent economic history has showed that promise to be a chimera. Incentive effects are, if anything, highly overblown.

  5. Fiscal Multiplier Debate « Mostly Economics Says:

    […] Multiplier Debate By Amol Agrawal I had earlier pointed to an excellent interview of Robert Barroon Fiscal Multipliers and Paul Krugman. In a new interview he says the same things – fiscal […]

  6. Josh Parrish Says:

    Interesting interview excerpts from Barro. Where is the original? The WSJ piece isn’t the source.

    Thanks for the post.

  7. Josh Parrish Says:

    Answered my own question a la Google.

    Original is here:
    http://business.theatlantic.com/2009/0/an_interview_with_robert_barro.php

  8. Josh Parrish Says:

    Fixed post:

    Answered my own question a la Google.

    Original is here:
    http://business.theatlantic.com/2009/02/an_interview_with_robert_barro.php

  9. First quarterly report of impact of Obama fiscal stilmulus « Mostly Economics Says:

    […] Q2 2009 and 2.7 in Q3 2009. Table 7 has estimates from other agencies aas well. I am wondering what Robert Barro and Robert Lucas have to say on […]

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