Barro on the Great Depression
Here’s a pretty interesting interview with Robert Barro on the Great Depression (HT2MR). He actually makes a distinction that you don’t normally see (and which I didn’t get into in my book). Normally the issue is, “Do we print more money or run higher deficits?” But here is a more nuanced take:
[Browser]: So what is the thrust of [Bernanke’s book on the Great Depression] and why is it important?
[Robert Barro]: It’s focusing on the Great Depression as a credit explosion, not so much the money supply, which Friedman and Schwartz had emphasized, but a somewhat related phenomenon, which is credit availability. That had been imploding from 1929 through to the trough, early in 1933. So it’s really focusing on the credit aspects and trying to measure that, particularly by looking at patterns in interest rates.
Today, for example, if you look at the spread between lower quality bonds – like B-rated corporate bonds, say – and compare those to treasury yields, that’s a good indicator of the extent of stress in the credit markets. And actually the recent period is going back to the kinds of spreads that you saw in the early 1930’s. Well, perhaps not quite as much, but certainly reminiscent of that. So he’s focused on that as a measure of the extent of the credit stress, and on the other side he focused on how what turned things around was when the credit problems were being eased.
This was my favorite part of the interview:
B: And yet neo-Keynesians—which include White House economics adviser Christina Romer–often cite the [Keynesian multiplier] as being 1.5, and you say in your article that the Obama administration is using 1.5 as a basis for its fiscal stimulus policies. How do they come up with that then?
RB: Oh they pulled that out of the air. I have the advantage of having at least a little bit of empirical evidence, as I said, it’s based particularly on military purchases. So even though that evidence is not that great, it’s infinitely better than the alternatives, which are no evidence.
From my limited forays into this area, I think Barro is being completely fair. Tyler Cowen has been asking his readers for one actual historical case of Keynesian pump priming pulling an economy out of recession, and in the comments I think the only case people pointed to was World War II.
Well, Barro’s WSJ article specifically focused on WWII, and he found that the data don’t support a multiplier above 1. (I.e. government deficit spending at that time didn’t seem to boost GDP more than the spending itself.)
In response, did the Keynesians challenge his numbers (which I couldn’t reproduce, by the way, just to warn you)? No, Paul Krugman said we have always been at war with World War II as an example of pump priming. Apparently it was a right-wing strawman that Barro was relying on, and no Keynesian had ever said World War II military spending was an example of stimulus working. (Really, read Krugman’s reaction. I’m not making this up.)
