Nation of Beancounters

In which we answer a question even Paul Krugman couldn’t (mildly wonkish language)

Posted in Uncategorized by Navin Kumar on September 15, 2011

Bit late to the game, but here is what Paul Krugman has to say on Robert Barro’s [big name in economics] op-ed column at the NYT.

People have been asking for my reaction to Robert Barro’s op-ed, so I finally went and read it. And I have to say that I’m shocked by the laziness – he’s not even trying to present a coherent argument.

I mean, here’s the structure of what he says:

1. Keynes said that investment is what drives the business cycle

2. Investment depends on long-term incentives

3. ???

4. Austerity!

Since he’s so puzzled, (and to be fair, a lot of people are, since he isn’t using any particular macro economic model we’re familiar with) I or  I thought I’d lay out an answer to the question: what is Barro’s model?

1. Aggregate demand is a function of investment.

2. Investment is a function of the long term health of an economy.

3. Long term health is a function of how fiscally responsible the government is (if it isn’t and raises the probability of default in the long term, who would invest?)

4. Fiscal responsibility is a function of the tax mix (efficient taxes better) and reforming/cutting unsustainable welfare projects and clear, transparent signals about the rules of the game.

5. Austerity! and VAT! and abolishing the silly but politically popular corporate tax!

Now you might not agree with him about the investment and all – even I don’t – but some of the micro stuff he says is sound. You’d think that someone who’s smart enough to spot how economies of scale can cause undesirable lock-ins would spot that. *sigh*

Bonus: Mankiw chides Krugman and Cowen offers another answer.

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