Barro on the Economy

This weekend, economist Robert Barro had an interesting piece in the NYT entitled “How to Really Save the Economy.”  Although there is nothing particularly new for those who have followed Barro over the years, it is worth a quick read. Drawing on Keynes, Barro calls for a mix of policies that would create the conditions necessary to create the stable expectations and environment that would stimulate investment.

The key proposals:

reforming Social Security and Medicare by increasing ages of eligibility and shifting to an appropriate formula for indexing benefits to inflation; phasing out “tax expenditures” like the deductions for mortgage interest, state and local taxes and employer-provided health care; and lowering the marginal income-tax rates for individuals.

I would add three more: reversing the vast and unwise increase in spending that occurred under Presidents Bush and Obama; introducing a tax on consumer spending, like the value-added tax (or VAT) common in other rich countries; and abolishing federal corporate taxes and estate taxes.

As you might guess, Barro is skeptical that these changes could be implemented in the current political climate (Republicans support a VAT? Democrats support elimination of corporate taxes?). Nonetheless, he makes a strong case for this policy mix the piece is well worth a few minutes of your time.

4 thoughts on “Barro on the Economy

  1. According to classical economics investments would increase when the interest rate decreases. This is not happening. According to the monetarists the money velocity is constant. But the money velocity has dropped and remains low.

    Now Professor Barro proposes a theory that investments are low because of uncertain regulatory and tax outlook. But there were plenty of investments prior to 2008. He should explain how uncertain tax and regulatory outlook caused the housing bubble to burst and how all this is related to VAT and austerity.

    Investments can be boosted by investing into the crumbling infrastructure. All the people hired to do the work will have jobs immediately. How can this possibly not work?

  2. How can this possibly not work?

    Because it relies on public debt to finance? Also, because it just doesn’t happen – “shovel ready jobs” in the first round of “stimulus” “weren’t quite as shovel ready as we thought” the President says now. If you could actually get a bunch of people to work quickly, it might work… but that seems impossible in this age of hyper-regulation and enviro-worship (where it’s SO easy to side-track, delay, and just plain destroy almost any project almost anywhere for some supposed environmental sin).

  3. “Because it relies on public debt to finance?”

    That does not prevent it from working. It is a dirty job but somebody has to do it. The private sector is not doing it so public sector must.

    The money can be borrowed at zero % interest and recovered when the tax base returns back to normal. It is certainly better than the money sitting idle in the banks and unemployed resources sitting idle at home.

  4. Professor Barro’s suggestions are good perhaps for the long-term and for structural reform, but the short term problem is low demand – since consumers are trying to bring down their debts, because their wages are stagnating, and because they are unemployed or fear unemployment, and there is no easy quick fix, though some form of fiscal stimulus – tax relief, government spending, support for local and state governments – and perhaps converting mortgage debt into equity might help. Also, the US needs vast investments in its infrastructure – maybe an infrastructure bank would help – if it is going to regain a competitive edge in this century. In the medium and long term more investment, less consumption, more exports, less imports, is, I think, what is needed in the US, and, generally, in North America. [I’m Canadian]. This means not only an adjustment of government and government balance sheets, but also an adjustment of private expectations and life styles.

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