Asymptosis

Robert J. Barro is Paul M. Warburg Professor of Economics at Harvard University, a senior fellow of the Hoover Institution of Stanford University, and a research associate of the National Bureau of Economic Research. He is the third-ranked economist in the world, according to RePEc.

Dear Professor Barro:

I’m compelled to write after following your writings for many years, in response to your recent article (PDF) in the Wall Street Journal, your interview with Conor Clark on the Atlantic web site, and your published email interchange with Clive Crook on his Atlantic blog.

In 2000 you demonstrated that in OECD and Rich countries, government consumption levels have no significant correlation to long-term growth rates. (PDF)

In their 2003 meta-analysis (PDF), Nijkamp and Poot demonstrated (with multiple references to your works) that in aggregate, dozens of your colleagues who have actually studied this issue support those results–in spades.

In prosperous, developed countries, smaller government does not yield faster growth. As you and your colleagues have demonstrated, that belief is a myth. (The U.S. has been taxing about 28% of GDP for decades–local, state, and federal combined. Europe has been taxing 40%. But growth rates have been the same.)

But you have constantly promulgated that myth–and you continue to do so–in your scholarly and popular writings, and public pronouncements. This is especially concerning because your statements receive widespread attention and credence regarding taxation and spending policies in the U.S.–which is a decidedly rich country.

Facts on the ground:

In your 2000 paper you broke out growth rates for a panel of Rich countries, of OECD countries, and of Poor countries (PDF: table 1.1, page 35). Results:

Correlations: Government consumption versus growth in real GDP per capita
Rich-countries: -.014 (.042)
OECD-countries: .015 (.040)
Poor countries: -.167 (.030)
All countries: -.157 (.022)

For prosperous countries the results are one positive (more government consumption, faster growth), one negative, neither even vaguely significant.

Only the poor-country panel shows significance. So the negative correlation for the overall sample is completely dominated by the poor-country results. (Not surprisingly: The correlation for poor countries is relatively large, and poor countries in the sample–which are weighted equally with rich countries–greatly outnumber the rich countries.)

As far as I can determine, your 2000 findings regarding rich versus poor countries have been completely absent from your other (widely-cited) works in the field.* Your conclusions in those works have been based on your full sample of approximately 100 countries, which is dominated by poor countries.

You consistently state that greater government consumption reduces growth rates, with some iteration of the following graph.

Even in your 2000 paper, you make no mention of your own findings therein, but rather make the following blanket–and importantly misrepresentative–statement (page 12).

Table 1, column 1 indicates that the effect of the government consumption ratio, G/Y [consumption as a percent of GDP –Steve], on growth is significantly negative. The coefficient estimate implies that an increase in G/Y of 10 percentage points would reduce the growth rate on impact by 1.6% per year.

What about columns 3, 4, and 5? Is this statement  true for prosperous countries like the U.S.? And is it wise to make recommendations about U.S. policy based on findings dominated by countries like Thailand and Mozambique?

Can you explain why you have ignored your own findings–seemingly swept them under the rug–and consistently made statements contradicted both by those findings and by the aggregate findings of your colleagues who have–like you–actually studied this issue?

Thanks,

Steve

P.S. (Added 10/24/09): I just went to look at your 1999 paper “Inequality and Growth in a Panel of Countries” (PDF). I notice that in this case you do show results for rich vs poor countries. You conclude that over all the countries surveyed, there’s essentially no correlation, while finding negative correlation for poor countries (more unequal, slower growth) and a smaller positive correlation for richer countries (more unequal, higher growth).

These two graphs stand eloquently alone on the last page of the paper.

These graphs are conspicuously absent from your papers on government size versus growth. Do you only present (and highlight) these results when they support views that–judging by your pronouncements detailed above–you want to agree with?

* I’ve gone back through much of your work, but the key works on this subject are Determinants of Economic Growth (1998), “Recent Developments in Endogenous Growth Theory” (chapter, 2000), Economic Growth in a Cross Section of Countries (2001), and Economic Growth (2003).

Yeah, that’s the one: the one Obama just handed them.

The compromise stimulus plan includes $282 billion in tax cuts over two years.

According to the Wall Street Journal, Bush’s first two years of tax cuts amounted to $174 billion. A second batch in 2004 and 2005 cost $231. And those were thought to be bigger than the tax cuts offered by Reagan, Kennedy or others.

Sure, go ahead and correct for inflation. But still.

A commenter tagged arogersb replied to one of my comments on Bruce Bartlett’s Forbes article (see my previous post), reiterating a familiar canard:

True, the US recovered after WWII. But the reason of that recovery was not debt, it’s that the rest of the world factories were destroyed and had to import from the US.

I’ll spare all of us a thousand-word response:

Forget “centrism.” How about “sensible-ism”?

Bruce Bartlett displays it in spades in his new Forbes article. Just as he did–to some extent–in his book Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy.

Bartlett also wrote Reaganomics: Supply-Side Economics in Action–which is decidedly admiring of that belief system–so you know where he’s coming from.

His article limns an economic history of the Depression, the New Deal, WWII spending, and the ensuing Great Prosperity that’s quite similar to mine. (i.e. “net fiscal stimulus ’32-’39 was actually quite tepid.”)

…John Maynard Keynes and other economists argued that in such circumstances, which economists call a liquidity trap, the federal government had to compensate for the falloff in private spending in the economy by increasing government spending. This was necessary to get the economy moving from a stationary position, at which point money would begin to circulate, Fed policy would again be effective, and prices would start to rise…

…there were those who nevertheless viewed any rise in prices as the first step on the road to German-style hyperinflation. Insanely, they argued that the government had no business compensating for any amount of deflation…

The critics were also totally opposed to deficit spending. As with Republicans today, they said that federal borrowing would simply draw funds out of productive uses in the private sector to be squandered on make-work government jobs, pork barrel projects of dubious value and welfare programs that would sap the dynamism of the American economy.

Apparently, it didn’t occur to these critics that the existence of vast unemployment, closed factories, abandoned farms and extremely low interest rates meant that much of the private sector’s resources were simply idle. Borrowing them by running deficits didn’t reduce private output because there were no alternative uses available.

Furthermore, an expansive fiscal policy was essential to recovery because without it monetary policy was impotent…

I’ve highlighted those passages because Bartlett highlights this point in responding to commenters on his article:

One of the points I have tried to emphasize, but I don’t think is yet clear, is the essential connection between monetary and fiscal policy.

I don’t believe, as many Keynesians do, that fiscal policy is inherently stimulative. In this sense, Barro is right. But he forgets that there are times, like now, when we are in a liquidity trap, when fiscal stimulus is essential to make monetary policy effective. The monetary policy is what provides the real stimulus, but it needs fiscal policy to be operational.

Fiscal policy can make monetary policy work. This viewpoint isn’t getting the discussion it deserves–at least not in those clear terms.

Even the most wild-eyed Keynesians will stipulate that monetary policy (Fed funds rate, money supply) has by far the greatest leverage–it sometimes seems magical. When Volcker eased in the early 80s, the economy started surging back within months. I heard Krugman make exactly that point in a lecture last week.

Supply-side monetarists, on the other hand (think: Tyler Cowen), make no concessions. They think fiscal stimulus–no matter how large–has no effect on anything except government debt. Bartlett is to be admired for bucking that blindered, faith-based intransigence.

Inflation in the early 80s was still high. That’s why Volcker’s move was so powerful, and its effects so immediate. Today, with Fed funds at zero and inflation threatening to go negative, monetary moves are like Superman on kryptonite.

Fiscal stimulus can give the Fed back its mojo. Unfortunately, fiscal policy doesn’t have the leverage that monetary policy does. (Whatever reasonable multiplier you choose.) That–sad to say–is why you need lots of it.

My ex business partner Steve has a new post asking why anybody uses glossy branding ads, when direct marketing is so much more cost-effective, and builds brand at the same time.

I used to wonder the same thing (think: Dell), but I remember hearing a big honcho Pepsi ad manager speak at one of our events, and her saying "you don't build a big brand with direct marketing." And for something like Pepsi, she's absolutely right.

We were pushing high-ticket, carefully considered purchases. Same as Dell. Most purchases aren't like that.

I went to Jonah Lehrer's (How We Decide) book-tour lecture last night at Town Hall in Seattle. He mentioned the studies done mimicking the Pepsi challenge. Give a Pepsi lover a Coke and tell them it's a Pepsi, and they love it. And vice versa. The brand association overrides any true direct experience of the product.

The same is true even with cars and other things that you'd think would be rationally considered purchases. Sadly, they aren't. (Even in politics–look how many people vote for Republicans!)

The rational mind parses information and feeds it back to the emotional system, sort of asking "how do I feel about this?" The emotional system responds with feelings. Firebird good! Camaro bad! It's ultimately The Decider. (Where else can "I want" come from?)

Branding ads try to bypass the front-brain parsing, and aim for a straight conduit into the emotional system.

If you're selling sugar water, or perfume (same thing)–where there is no real rational parsing to do–or overpriced watches that do the same thing as a $20 Timex (so you need people to avoid the parsing and analysis), branding is all you got.

And if you're selling something where the number of choices and choice criteria is large, beyond people's ability or willingness to sort through rationally (not doing the up-front work for the emotional system), branding wins.

Think: Sarah Palin.

Sarah, can you give us your thoughts on the battle between Lincoln and Chief Justice Taney over Lincoln's (and eventually Congress's) suspension of habeus corpus during the Civil War?

The #9 search term on ask.com for the week ending January 29th:

This is pretty funny at first blush. But it’s curious at second.

Google Trends shows searches for this prase nearly tripling  from June to December, 2008.

Do tough economic times make it harder to conceive?

Interestingly, the United Arab Emirates is the #1 source for this search, significantly ahead of the U.S.–even though the U.S. has 75 times the population. A Google News search doesn’t turn up any recent changes in UAE policies that might explain that. Go figger.

Paul Romer, husband and co-author to CEA head Christy Romer, has a suggestion that on the surface makes all kinds of sense.

Short story, government provides seed capital for new private banks that have clean balance sheets, and owns all the shares in those banks. Since they don't have toxic assets lurking, they don't need to hoard their cash, so they can provide the lending necessary for recovery, and give economic breathing room to let legacy banks take their hits.

Over time, private players buy the shares from the government, and the banks become completely private. It seems damned sensible.

The problems, pointed out by some of his commenters:

• You can't just flip a switch to create banks on the massive scale that Romer suggests. There are all those pesky details of thousands of employees, management and information systems, physical locations, etc.

• Cronyism, lobbying, and general corruption and malfeasance: who gets to start these new banks? Who decides?

Commenter BruceCopeland points to a much better option: government investment in solid banks with a proven track record of responsible management–mostly smaller, regional banks. The government could invest in these banks via new or existing share purchases, loans with options, or other well-established and transparent vehicles. Whatever the vehicle, it expands these banks' capital base so they can increase lending under traditional fractional-reserve policies.

As with Romer's proposal, those shares would eventually be sold to private investors, removing the government's ownership share in those banks.

Advantages:

• Less concentration and too-big-to-fail curses. Let a thousand flowers bloom.
• It’s far easier to evaluate an existing track record than to predict who will successfully launch and operate a new bank.
• The whole mechanism of investment is extant, transparent, and immediately available. (Though we should probably hire Warren Buffet to cut the deals for us.)
• Much faster effect. Existing banks can scale up internal operations, or farm out parts to the many existing shops, while retaining the crucial management control–deciding who to lend to at what rates–with more limited and judicious staff increases.
• The expanded lending from these juiced-up banks would provide the economic breathing room to let big legacy banks take their hits.
• It seems that selling government shares back to the public could/would happen more rapidly if those shares are in a company with a proven track record.

Others?

I've always wondered: why do women go in for elaborate clothing, makeup, and all those other things that (along with certain innate characteristics) make them so alluring to us males, while men dress relatively drably? It's not universal, of course, but it's the rule throughout much of the world.

Among pre-agricultural peoples, primates, almost every mammal, and most animals in general, it's almost always males that go in for the elaborate decoration and displays to attract and convince mates.

The evolutionary reasons for males' displays are fairly simple: sperm are cheap and eggs are expensive. So females are more choosy about who gets to inseminate their valuable eggs. And in species where females carry or care for children, their investment is even higher. Now add: female humans–uniquely among primates at least–face an extraordinarily high chance of dying in childbirth.

Women have every reason to be choosy–to pick men who have good genes and/or can be relied on to stick around and take good care of them and their children. And males have every reason to engage in displays and competitions to overcome that choosiness, convincing women to mate with them. And women have reason to encourage that display and competition–so they can choose more effectively.

So why are women the flamboyant displayers (at least regarding physical appearance)?

I have a theory–one that I haven't found articulated despite quite a lot of reading about evolutionary psychology.

But first, the thing that got me thinking about this today:

This is profound. Add the fact that 60% of college students (and graduates) are women, and they're predominating in many graduate and professional programs, and what we're seeing is not just an ameliorization, but an overturning of the social structure that has prevailed for ten thousand years of "civilization." (Taking place over just a century, and primarily over three or four decades.)

Put aside the many related issues. (Women have to work, families need two incomes, etc.) In the competition for success in the modern job market, women are winning. (At least when it comes to getting jobs, still not always getting paid as well.)

So here's my theory: women are innately just plain better at modern society. Now that the discrimination powered by men's direct and indirect physical coercion has been greatly tamed, that superiority is showing itself.

So when women dress up to attract men, they're doing it because there aren't enough good men–men who can thrive in decidedly non-savanna, non-hunter/gatherer conditions–and women have to compete for them.

As the father of two rather spectacular teenage girls (one of whom just got into University of Chicago early admission, despite the damnable gender imbalance in applicants, and despite the most competitive year–largest high-school graduating class ever–before or ensuing), I'm quite fond of this theory. I'd love to hear if it's been discussed elsewhere (undoubtedly in terms far more cogent and knowledgeable than mine).

I heard him on an NPR show last night, and was pulling my hair out with frustration.

I admit that was partly because of comments by Cato’s Chris Edwards, who acts as if Keynesians don’t believe in monetary policy, calling them “childish.” When in fact it’s fundamentalist monetarists (read: supply-siders) who refuse to believe in fiscal policy. At all.

But Tyler: He’s still on with his claims that government deficit spending during WWII (to the tune of 70% of GDP) had nothing to do with ending the Great Depression. His main argument is that life didn’t get any better during the war–people weren’t buying anything. So obviously, all that deficit spending had no effect at all.

People during WWII weren’t spending for obvious reasons, of course — mainly that there was nothing to buy. Everything was rationed, even clothing; huge swaths of industry stopped making consumer products for domestic consumption; 50% of output was going to the military, largely overseas. (And talk about Higgsian regime uncertainty! People didn’t know who was going to win the bloody war.)

Today, spending 70% of GDP would mean $10 trillion in stimulus. Obviously that would have no effect either.

So where did all that money go in WWII? Tyler forgot to mention one little thing:

So…yeah. People didn’t spend the stimulus money in the war years. But as soon as all those war distortions went away…they did.

Tyler studiously ignores the massive scale of fiscal stimulus during the war — as if it were immaterial, and the Great Prosperity would have happened without it. Will he also ignore the spectacular, unprecedented (choose your adjective) amount of personal savings, and their subsequent dissolution?