Barro vs. Krugman on World War II
UPDATE below
All right, I’ve been letting the tabs accumulate on my browser, so I’d better blog this and knock them down to a reasonable number. As many of you probably know, Robert Barro published an article in the WSJ saying that back-of-the-envelope calculations show that the multiplier on World War II military spending is 0.8, not the 1.5 figure Team Obama is using for its rosy predictions.
Before turning to Krugman, let me note two things about Barro’s piece:
(A) He is using military spending during World War II because that avoids a simultaneity problem. (I hope I’m using the right econometric term; it’s late and I’m going to wing it.) If you just tried to run a regression of government spending against real GDP, that wouldn’t be a fair test of the Keynesian ideas, because they only implement stimulus during recessions. (Actually that not true of course, but go with me on this one.) It would be like doing a regression of police spending versus violent crime, and concluding that cities who hire more cops get more murders. (Actually, that’s probably true, but again, go with me on this.) So anyway, since World War II didn’t have a direct connection to the Depression (or did it?), Barro is focusing on that episode as a truly “exogenous” shock to government spending, and then trying to assess its impact on real GDP.
(B) I’m pretty sure Barro is using a funky definition of multiplier; what he calls a multiplier of 0, I’m pretty sure in undergrad macro is a multiplier of 1. Now I don’t know if he and Team Obama are using PhD-level Keynesianism, in which they have a different starting point, but if not–i.e. if Team Obama’s figures are using the same scale that I taught in undergrad macro–then that means Barro’s results show Team Obama is understating the stimulus multiplier (!).
OK, Paul Krugman comes along to respond to Barro’s piece. Krugman, bonehead that he is, fails to realize my point (B) which would have allowed him to say, “Barro you dolt, you just proved government spending raises GDP!”
So instead of doing that, Krugman panics because the single episode where it kinda looks like government spending pulled the economy out of recession, now collapses according to Barro’s (mis)calculation.
So what does Krugman do? He says that Barro is a bonehead for thinking World War II was ever supposed to be an example of fiscal stimulus boosting real GDP. (!!!!) I am not making that up. Tyler Cowen busts Krugman on this absurd response, and note Tyler also makes the point about Barro’s change of scale, though he doesn’t make the point I do, that Barro’s adjustment flips the conclusion.
Now, the thing that finally pushed me over the edge to blog this, is Krugman’s latest blog. Krugman reminds us of Barro the Bonehead:
You see, Robert Barro made much of the fact that private spending actually went down during World War II — which he took as evidence of “crowding out”. But what types of private spending fell, and why?
So how does Krugman deal with this allegation that government military spending crowded out private spending? He says:
The answer is that (1) There were draconian building restrictions in effect — in fact, the end of those restrictions helped set off the postwar housing boom, and (2) new cars weren’t being produced, because the factories were making tanks instead (and if you did manage to acquire a car somehow, gasoline was rationed).
Why anyone thinks that private spending during those years is a model for what will happen as a result of fiscal stimulus now is beyond me.
Everyone got that? Krugman is mystified that Barro thought military spending would crowd out private spending, when what really happened is that military spending crowded out private spending.
Final thing before I leave in a huff: If you bend over backwards you can come up with an explanation for Krugman’s responses. Maybe he means, if Barro ran the numbers in 1941,* he would have gotten a bigger multiplier, since the 1940 unemployment rate was higher than the 1943 unemployment rate. And maybe he means in his subsequent post, that the government’s rationing was dumb, and the public could have spent more and bought houses and new cars, without affecting the military purchases.
But I am done giving him the benefit of the doubt. I don’t think he means those things, I think he is putting on a show, and in his flippant haste decided that “we stimulus proponents have always been at war with the claim that World War II boosted the economy.”
* I tried doing it myself, but I got huge multipliers–like 4 through 6–for some of the earlier years, and I got big numbers for 1943 and 1944 too. So since I didn’t replicate Barro’s 0.8, I can’t say what his technique would have yielded for earlier years.
UPDATE: OK I calmed down; I realized Jesus would want me to always give Krugman the benefit of the doubt. I think I “get” what is going on now:
==> I think what’s happening is that the multiplier in undergrad macro is a gross figure; it is saying, “If the government had $100 billion from heaven to spend, how much would GDP end up rising?” But then if the government has to get that money from borrowing or taxing, you have to contrast the effects of the government spending with the possible reductions in GDP from the way you raised the money. And so Barro (I think) is right, that Team Obama (and Krugman) is saying that ON NET, if they borrow and spend $800 billion, then real GDP will rise by $1.2 trillion. So if Barro did his math right, then yes, he is getting a multiplier much lower than Team Obama’s apparent figure.
==> Regarding Krugman being mystified about the “crowding account”: OK, even though it’s tough, we have to remember that Krugman has now convinced himself that World War II was not an example of fiscal stimulus creating jobs. So he is saying, “Sure, no kidding if we are at full employment, then the government spending more to create tanks will force consumers to spend less on cars. But we’re not at full employment right now, so what the heck is Barro talking about? If the government spends more on bridges, that won’t cause anyone in the private sector to spend less, since the bridge construction will just draw on idle resources.”
The problem here is that Barro was trying to compare the Depression condition with the World War II condition, and trying to gauge how much military spending could have been responsible for the transition. I.e. Barro was not looking at a full-employment peacetime economy, and then showing that government military spending caused significant crowding out. (In fairness to Krugman, Barro was very cryptic about what he actually did to come up with his 0.8 figure, so I can understand if Krugman misunderstood what Barro was doing.)
==> Last point, we should just drop this by saying, “Thank you Professor Krugman for clarifying that World War II was not an example of job creation through deficit spending. The next time someone brings it up as a great case where fiscal stimulus ‘worked,’ we will refer him to your blog post.”
