Tags: Harvard | Barro | Stimulus | Spending

Harvard’s Barro: More Fed Stimulus Would Fail

Thursday, 10 May 2012 12:30 PM

Harvard economist Robert Barro says that larger fiscal deficits just won't work.

"Curiously, this plea for more fiscal expansion fails to offer any proof that Organization for Economic Cooperation and Development (OECD) countries that chose more budget stimulus have performed better than those that opted for more austerity," Barro writes in The Wall Street Journal.

"Similarly, in the American context, no evidence is offered that past U.S. budget deficits (averaging 9 percent of GDP between 2009 and 2011) helped to promote the economic recovery."

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

Barro points out that Germany and Sweden each moved toward rough budget balance between 2009 and 2011 while sustaining comparatively strong growth — the average growth rate per year of real GDP for 2010 and 2011 was 3.6 percent for Germany and 4.9 percent for Sweden.

"If austerity is so terrible, how come these two countries have done so well?" he asks.

The OECD countries most clearly in or near renewed recession — Greece, Portugal, Italy, Spain and perhaps Ireland and the Netherlands — are among those with relatively large fiscal deficits, Barro points out.

“The median of fiscal deficits for these six countries for 2010 and 2011 was 7.9 percent of GDP. Of course, part of this pattern reflects a positive effect of weak economic growth on deficits, rather than the reverse,” he says.

“But there is nothing in the overall OECD data since 2009 that supports the Keynesian view that fiscal expansion has promoted economic growth.”

Barro says that the large fiscal deficits had a moderately positive effect on U.S. GDP growth in 2009, but this effect faded quickly and most likely became negative for 2011 and 2012.

“Every time heightened fiscal deficits fail to produce desirable outcomes, the policy advice is to choose still larger deficits,” says Barro.

“If, as I believe to be true, fiscal deficits have only a short-run expansionary impact on growth and then become negative, the results from following this policy advice are persistently low economic growth and an exploding ratio of public debt to GDP.”

The Belfast Telegraph reports that German Chancellor Angela Merkel continues to emphatically reject calls to abandon austerity measures.

"Growth through structural reform is important and necessary — growth through debt would throw us back to the beginning of the crisis," Merkel says.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

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