Economist Robert Barro speaks: Lacking a real multiplier effect, ‘stimulus’ bill is ‘garbage’

An earlier post on Harvard economist Robert Barro has been incredibly popular this week. The hits are coming in by the hundreds.

Apparently, students and policy makers are looking up the “multiplier effect,” and Barro happens to be the expert.

Democratic economic advisers like Paul Krugman and Larry Summers have tried to rebut Barro, but their lame defense of aimless spending has convinced no one. And now, in The Atlantic, Barro speaks.

Both sides bad. Asked about the balance of tax cuts and spending in the $820 billion “stimulus” bill, he says:

“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.”

Better option. Barro advises that wisely targeted tax cuts, or tax credits, would have a much higher multiplier effect on the economy because, unlike spending, which simply hands people more income, a targeted tax cut both adds income and encourages people to work, produce and invest more.

“[W]hen 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 [of spending].

“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 [Keynesian] multiplier thing, than the income thing [from spending alone].”

Best option. He says the best option would have been to stick to solving the crisis in the financial system and housing market.

“Summers brought [economist Jeremy Stein] in to advise particularly on the financial and housing issues, the design of the new regulations structure. That was an excellent appointment. That's the stuff that's really going to count. Not this spending thing.

“I mean, Democrats were waiting with all these ridiculous projects, and now they've got an excuse to bring it through politically.”

High stakes. If Barro is right, we’re about to borrow and spend nearly $1 trillion dollars and get nothing but debt. I hope he’s at least half wrong.

Frank Warner

See also: March 4, 2009: Professor Barro: 20% odds of a depression.

See also: Germans know that debt can kill an economy.

Comments

[Neo]

So much for the brainiest president, the guy who said his best talent was getting people in a room and getting them to talk.
Did they run out of suitable rooms in DC ?

And they said there would be an end of waste, fraud and abuse.
This attempt for a "stimulus" gives us all three.

[CJW]

Isn't it time for Obama to give another uplifting speech?