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Revisiting Empirical Macroeconomics with Robert Barro (Harvard Economics Professor) · The Capitalism and Freedom in the Twenty-First Century Podcast

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[MUSIC]
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>> Jon Hartley: This is the Capitalism and Freedom the 21st Century podcast,
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an official podcast of the Hoover Institution Economic Policy Working Group
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where we talk about economics, markets and public policy.
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I'm Jon Hartley, your host.
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Today, my guest is Robert Barro, who is an economics professor at Harvard University.
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He's widely regarded as one of the founders of new classical macroeconomics,
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having done incredible path breaking work in the empirics of economic growth,
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Ricardian equivalence and many, many other areas.
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Welcome, Robert.
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>> Robert Barro: Hello, great to be here.
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>> Jon Hartley: Robert, I want to first get into your early life.
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You were born in New York City and you were a physics undergrad at Caltech and
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were a Richard Feynman student in the 1960s and then you transitioned to
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economics, into doing a PhD in economics at Harvard, graduating in 1970.
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What was it that first got you interested in economics?
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>> Robert Barro: Well, I didn't know anything about economics when I
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started as an undergraduate and Caltech didn't offer any economics to speak of.
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They only had a couple of courses.
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My brother was an economist and he gave me some influence and
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I finally took a course in my junior year and
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surprisingly enough it was on Keynesian economics.
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It was straight out of the general theory, but I loved the class when I saw it.
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And I particularly appreciated the combination of technical material
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which I was doing a lot of when I was in physics with applications and
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particularly uses in a policy context.
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So the combination of those two things I think is what especially attracted me.
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>> Jon Hartley: Well, I know your PhD advisor was Grillikas at Harvard and
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you returned to Harvard in its economics department in the 1980s,
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where you've been since.
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I mean,
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how has the department changed since you were there as a graduate student?
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I mean, obviously there were a lot of changes.
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I guess there was perhaps at that time a lot of, when you were a graduate student,
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a lot of sort of old Keynesian economists, Harvard, MIT have sort of historically
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been, I think well known for having folks like Alvin Hansen, who kind of brought
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a lot of Keynes ideas to the United States and obviously University of Chicago,
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Minnesota, other so called freshwater places being, you know,
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having a bit of a different perspective, being, you know, more, more so the home
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of sort of new classical economics, the Chicago School and so forth.
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I mean, how exactly did you know you end up there when you're a graduate student?
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What brought you back as a professor?
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Given that, I think it's fair to say that a lot of your work and
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ideas are somewhat in contrary to that sort of Keynesian tradition at Harvard?
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>> Robert Barro: I think it's fair to say that when I was a graduate student at
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Harvard, it was a low point for
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the faculty in terms of the economics department.
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It just was not a very good department.
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And it had been sort of going downhill for some time.
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And that was more dominant than the question about whether it was Keynesian or
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not Keynesian.
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It really wasn't imparting a good instruction, and
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it was particularly weak in macroeconomics.
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And I was working on hyperinflation and macroeconomics more broadly,
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and I had a very tough time finding a thesis advisor.
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So it ended up being the case that I was in my third year and
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I'd gotten a lot of work done in terms of particularly the German hyperinflation,
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and I had some papers ready.
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But I decided I should try to get a job,
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even though I didn't have a thesis advisor or a thesis.
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And somehow I managed to get a job at Brown University as an assistant
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professor without having a doctorate or even a thesis advisor.
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But that actually was a sensible thing to do.
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It actually worked out.
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But at some point I decided I better finish up and I needed to get an advisor.
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Meanwhile, Harvard had hired some really great professors all at once.
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Ken Arrow, Dale Jorgensen, Marty Feldstein, and Svi Grillikas.
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They were all hired just about the same time toward the end of
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my graduate education.
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So I decided I should get one of these new people to be my advisor,
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even though they might not fit exactly by fields.
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And at some point I had an appointment with Svi Grilikas, and
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I talked to him for half an hour about the work I was doing, and some of it
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was in econometric applications, which fit with his expertise.
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So even though he wasn't a macroeconomist,
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it actually worked out for him to be my advisor and he was great.
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And he told me at some point that his whole career he'd really only had
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two PhD students in macroeconomics, and the other one was Bob Lucas.
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So I thought that was pretty good.
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So I was very happy with Svi as my advisor, and
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I ended up finishing up there.
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>> Jon Hartley: Well, that's terrific.
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And I'm curious,
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where were you when the Rational Expectations revolution was happening?
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Obviously, when I think about the history of macroeconomic thought and
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how it kind of evolved in the late 20th century, you had this thing, which
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was the Rational Expectations revolution, micro foundations and so forth.
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That came out of largely the Midwest, University of Chicago,
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Minnesota and elsewhere in this, really starting the 70s.
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And then over time, it wasn't really until that that caught on and
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I think pretty successful in terms of changing,
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at least influencing research in the sort of the subsequent couple of decades.
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And in part that was a response to, I guess,
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Keynesian models being unable to explain rising inflation and
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output falling during that period of time, the 70s and 80s.
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But, later on, Harvard sort of caught up or
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the new Keynesian sort of tradition kind of emerged where they took
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all the rational expectations micro foundations theory that
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had been developed by Lucas Sargent, Prescott and others, and
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then inserted frictions, nominal rigidities and so forth.
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So folks like Greg Mankiw, Rich Clarida, Jordi Gali,
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Mile Woodford, and so forth, and many others.
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I mean, where were you during that period of time in the rational
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expectations of revolution?
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>> Robert Barro: So in the mid-1970s, I left Brown University.
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I took a position in Chicago.
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Milton Friedman was still there, and I particularly interacted with him and
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with Gary Becker and George Stickler.
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So I worked in that period particularly on Ricardian equivalence,
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which has some relation to rational expectations, of course, and
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I worked a lot on empirical things related to some of Bob Lucas's work.
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But Lucas actually went back to Chicago a little bit later.
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And the second time I was in Chicago is when I particularly interacted with him.
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So it was in that period from the mid-70s through the mid-1980s,
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where part of the time I was in Chicago and
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part of the time I was interacting with Lucas.
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So that's some of that period.
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>> Jon Hartley: So I guess diving into some of your research here and
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talking about Ricardian equivalence, it's this idea that
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temporary tax cuts shouldn't affect consumption, that debt and
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taxes are interchangeable and that you wrote this very famous paper,
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I think the 1970s, this titled are government bonds net wealth?
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And your answer to that is no.
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And the idea is that government bonds are substitutable with taxes and
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it's largely the path of spending that matters and that, you know,
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agents and consumers will smooth, they'll just save more in response to
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something like the government issuing more debt or running in a deficit.
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And so I think it has a lot of implications for deficit spending.
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Governments trying to use deficit spending to juice aggregate demand,
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which is still a very popular policy approach by governments.
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Curious, what gave you this idea to study Ricardian equivalence?
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It was something that David Ricardo,
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it wasn't really something that first David Ricardo, a champion, but
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something that I think had grown dormant for quite some time.
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What led you to studying that as well as other forms of I guess equivalents.
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You've written papers about government debt management,
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I think arguing that government debt management,
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maturity choice doesn't really matter for non contingent debt.
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What led you to this sort of line of thinking?
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Was it those interactions with Lucas or was it something else?
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>> Robert Barro: No, not something with Lucas, which would have been later.
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But Ricardo and equivalence is important as kind of a baseline idea that under
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certain circumstances you get this fairly set of extreme results and
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then it forces you to think in a disciplined way about why should you have
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departures from that and in what direction are the departures going to be?
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And certainly Ricardian equivalence doesn't always hold, but
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that doesn't mean the kind of standard analysis of fiscal deficits are valid and
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things can go even in the opposite direction.
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And I had a second paper in end of the 1970s about tax rate smoothing,
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which was about the function of public debt as a device for
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financing basically temporary government expenditure.
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And from a public finance viewpoint it was important that that method of finance
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was available.
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And in that sense the debt is not irrelevant.
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And it probably underlies why Britain did so well in financing wars over a couple
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of centuries because it provided a very convenient method of financing.
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So certainly you don't have Ricardian equivalence there,
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but it becomes kind of A part of public finance in terms of what's the optimal
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structure of taxation over time.
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And the public debt management is part of that problem.
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I gave a seminar on my Ricardian equivalence paper only once, and Friedman,
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Becker and Stigler were there at the same time,
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which is the only time I've seen the three of them together at a seminar, actually.
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>> Jon Hartley: Wow. >> Robert Barro: That was very exciting.
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And I got some important feedback there and
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then from Gene Fama when I gave the paper in the business school in Chicago.
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And those are the only two times I gave a seminar on that paper which proved
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very influential.
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So I didn't know when I wrote the paper that it had something to do with
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David Ricardo.
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And I didn't call it Ricardian equivalence.
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That came from Jim Buchanan, who wrote a comment on my page paper and
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he said, all this is Ricardian equivalence.
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And then I decided, well, it must be that there was an earlier statement of this,
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before David Ricardo, that you can always go back and find stuff.
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And then I looked into that.
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In fact,
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I couldn't find any sensible thing before Ricardo that had this viewpoint.
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So then I decided Ricardian equivalence was a really good name and
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we should adopt that which subsequently became the case.
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>> Jon Hartley: Well, I'm curious,
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how do you feel about I guess criticism from empirical economists who kind of say,
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well, Ricardian equivalence, it's wrong and they point to maybe some data
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about some micro data maybe that shows that consumers aren't fully smoothing.
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I think if you look at the macro Data, like the 2008 tax rebates in the US or
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the 2020, 2021 stimulus checks in the US,
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it's pretty clear that they're largely being saved.
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So I think at the macro level, there's a lot of smoothing that's going on.
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But I'm curious, I don't think it's necessarily.
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Yeah, it's certainly not full smoothing and perfect smoothing either.
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I mean, I'm curious, is it really just the being an important baseline
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that's important, or do you think that a lot of empirical economists out there.
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Particularly on the maybe applied micro side of things,
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that they're using microdata to estimate NPCs or
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to look at consumer spending responses to fiscal policies,
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do you think that they're missing something?
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>> Robert Barro: Well, I think it's certainly fair that there can
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be departures from complete smoothing and there are good reasons to have certain
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kind of frictions and informational issues that can produce those kinds of effects.
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It's certainly not systematically the case that fiscal deficits produce
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the kinds of Keynesian responses that are often predicted.
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And some of the departures from Ricardian equivalence can go in
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the direction opposite to the one that you would normally expect to find.
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Again, in terms of the tax smoothing, I found it more productive to think
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about that as a positive theory about how the government is managing the debt.
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And in that context, it certainly matters.
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And there's a lot of literature along those lines in terms of the public debt
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as a kind of part of optimal tax problems, which I think is a good way to look at it.
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>> Jon Hartley: So I guess I want to talk just a little bit about government
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spending multipliers, because it's a related issue.
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In 2011, you got into this literature, you published this early Journal
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of Economics paper with Charles Rudlich, since become, I think,
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a very famous paper titled Macroeconomic Effects of Government Purchases and Taxes.
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And you find that government spending multipliers are low and below one.
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And that's consistent with other work that's done by Hoover's very own
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Valerie Ramey.
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And you found that tax multipliers are a bit higher.
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And you're, you're largely using government military purchases,
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military spending for exogenous identification.
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I'm curious, what's your intuition for
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why this is the case that government spending multipliers are so low in the,
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in the macro data and, and that the tax multipliers are actually somewhat higher?
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I know Alberto Alsina found a similar thing looking at fiscal
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consolidations with his co authors, but
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I guess I'm cur because I feel like this is definitely one of the most.
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Hotly debated topics in macroeconomics where it feels like,
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there is progress being made, but it's still a hugely contentious debate.
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We're often the, I think that empirical macro people tend to say one thing,
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whereas the applied micro people, which might look at,
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you know, say tax lotteries or something of that nature,
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using more, more micro level data, find that NPCs are very high and
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that government spending multipliers are much higher than, than one.
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I'm curious what you think about that tension and
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where you think that the truth is in all this.
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>> Robert Barro: Looking at the variations in military spending in the US context
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over a fairly long time period is a very good setting for
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trying to isolate spending multipliers associated with basically
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exogenous movements in the amount of government expenditure.
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You wouldn't do this for many countries during wartime
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because the direct destructive effects of wartime tend to be dominant.
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And typically in wartime you would estimate negative spending
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multipliers associated with military outlays.
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But the US is different in that respect.
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It doesn't have that kind of massive destruction associated,
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particularly with World War II.
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So it was a very good setting, I think, for
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looking to isolate the effect of these exogenous and large spending changes.
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So the multipliers were positive.
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I mean, the right baseline is 0, not 1.
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If the multiplier is 1, it means you're basically getting as much
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output as you're using up, which makes it sound like it's a free thing, I.
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>> Jon Hartley: Guess, if P is included in, in GDP, right?
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You should, some would argue that there's been this big debate
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recently about whether G should be included in GDP or not.
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Howard Lutnick, the Secretary of Commerce has highlighted this, among others.
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But I guess Simon Kuznets famously said that G should be removed from GDP.
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So these people aren't exactly alone.
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But I guess there's this question which is,
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even if there weren't offsetting effects,
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that would make the multiplier less than 1 when you're including G in GDP.
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Yeah, there's a question of- >> Robert Barro: But
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it's not just about terminology.
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If the multiplier including G is one, it means that you can get the G for free.
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It means that your output goes up enough to pay for it.
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And then if you're saying the stuff is worthless, okay, well,
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you still didn't have to pay for it.
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So it's not completely terrible.
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But the right benchmark is a multiplier of zero because that means that in
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order to get the extra spending let's say for military,
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you have to cut back on other spending one for one.
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So I would have looked at that as the benchmark.
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So we found multipliers that were more like a half or something,
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which means that you have to pay for 50% of the extra.
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So it's a multiplier of one and above is kind of completely ridiculous.
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I mean, a multiplier above one means you're not only getting the military
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spending for free, you're getting something extra for coming from nowhere.
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It should be a very surprising result to have multipliers that are above one.
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And you certainly wouldn't find that in normal times or
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in some kind of long run setting.
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I mean, it's not true that countries that have more G have more gdp,
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which would be even enough more GDP to more than pay for
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the G, which would be weird.
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So I think that's just not true.
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But anyway, I think we isolated some effects.
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I mean, the tax changes typically have incentive effects that are important.
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So cutting taxes usually means cutting tax rates and
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providing more incentive to do things like work more and work harder and invest more.
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So it's not surprising that you might find more potent effects
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related to cutting taxes, which typically are not lump sum taxes,
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but something about distorting taxes being reduced, I guess.
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>> Jon Hartley: Any thoughts on, I guess this idea of crowding out and
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that if you get more, more government spending, more control,
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I guess it crowds up competition from the private sector in these areas.
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I guess, maybe one.
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It's often one of the most cited, I think, reasons for
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why government spending multipliers might be fairly low.
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I'm curious what your thoughts are on that kind of crowding argument.
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>> Robert Barro: Yeah, so to have any kind of macro crowding out,
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you need the multipliers to be less than 1.
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If they were negative, that would be even more extreme.
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You'd really have to raise a lot of extra stuff to pay for the spending.
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Yeah, I think it's a reasonable first line approximation that you have substantial
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crowding out of private activity when you have more government activity.
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So some of that is just directly on the expenditure macro side and
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some is more along the lines of what you were indicating in terms of crowding
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out based on the government effectively monopolizing the market or
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regulating things, and that's going to depress private activity.
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So yeah, I think crowding out in both of those senses is important.
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>> Jon Hartley: Hm, well, I want to just talk a little bit about fiscal theory
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of the price level here because it's also somewhat related to
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Ricardian equivalence, and it's one of these, I think,
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similar benchmark kind of results from a pretty simple model.
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Something you've done some work on lately with Francesco Bianchi.
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A terrific monograph has been written recently by Hoover's very own
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John Cochran titled Fiscal Theory at the Price Level on this very topic.
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I'm curious, what led you to recently start studying fiscal theory?
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>> Robert Barro: For me, I was driven at the empirical level, trying to understand
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the surge in inflation associated with the COVID crisis and
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noting that this was a global phenomenon, it wasn't particular to the United States.
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And then I was trying to think about what kind of macro monetary
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analysis would lead you to the result that this kind of expansion,
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which involved a lot of fiscal deficits,
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a lot of transfer payments, why might that be inflationary?
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How would you think about that kind of linkage?
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I think the closer thing to what we ended up doing was the idea
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of fiscal dominance and the kind of analysis that Lucas and
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Stokoe had in the 1980s, and thinking about wartime finance and
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why it was often accompanied by inflation.
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So I think that was probably a more important element rather than the fiscal
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theory of the price level per se, which often involves issues
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that didn't really have anything to do with what Bianchi and I.
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Now, certainly, there's a government budget constraint that's
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central to this analysis, and it has to be viewed in an intertemporal sense, so
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that if you have more spending, you have to pay for it somehow and somewhere.
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But then it also leads you to the idea that it's possible to pay for
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it through the kind of contingent fiscal deficits that Lucas and
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Stokoe highlighted.
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So if you have a massive increase, such as the transfer payments,
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even more under Biden than under the first Trump administration,
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a way to avoid paying for that by cutting other spending.
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Spending or by raising taxes is by having a inflation that's
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surprising from a perspective of a pre crisis period.
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And that basically wipes out a lot of real value of the government bonds
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that are outstanding and it amounts to a very large temporary source
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of revenue which can be something like 10, 15% of the GDP.
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So it's not a minor deal.
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And that's empirically about what happened in the US and also in other places.
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And then people don't like the idea that it might not have been completely crazy
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to pay for the expenditure in substantial part through this surprise inflation.
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I get a lot of grief on that point from people who normally,
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who normally are on my side about things because they just want to think
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of the inflation as being stupid and being dramatically harmful.
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So I think what was harmful is the excessive fiscal expansion,
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particularly under Biden.
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It was unnecessary to have that vast increase in transfer payments, but given
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that you had it, we effectively paid for most of it through the surprise inflation.
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And maybe that part was not so crazy because
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the alternatives would have been also very costly.
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>> Jon Hartley: Yeah, well it's interesting.
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I think maybe some of that consternation comes from, I guess,
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people that are wedded to older, older models.
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And I guess physical theory is something that sort of,
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I guess regained interest in part due to John's monograph.
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And yeah, I think it's interesting because I think there's
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a lot of people at some level the results of physical theory
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are at some level observationally equivalent with other say.
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New Keynesian DSG models and a lot of their kind of key results.
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You could also find that deficit spending causes
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inflation in Old Keynesian ISLM type frameworks as well.
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So I guess as far as I see it the tension kind of arises from
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that observational equivalence.
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Fiscal theory, the price of also puts a big emphasis on expectation
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fiscal expectations and how those are shifting.
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It's very difficult to measure fiscal expectations and
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we don't really have, in my mind, really any good measures of it.
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We do have CBO forecasts, but those are under current law and
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policy and at some level those don't necessarily
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reflect the fact that markets may believe that.
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And people may believe that government spending patterns will actually
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have to change at some point.
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And that as crazy as these CBO forecasts are,
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at some level the true expectation is something different.
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But I'm curious, you spent- >> Robert Barro: Let me answer to
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part of that.
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>> Jon Hartley: You spent a lot of time- >> Robert Barro: In our framework,
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the reason the fiscal expansion leads to inflation works
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through the budget constraint, which is intertemporal.
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So somehow you're effectively getting this revenue by reducing the real public debt.
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And the amount by which you have to reduced to debt is related to how much
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revenue you need, which is partly related to the fiscal outlay.
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And as you say,
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there are other models that might connect fiscal outlay to inflation.
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But we get other implications of this approach that works through the budget
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constraint, which ties in with the fiscal theory of the price level.
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So ask yourself, how much inflation do you need to get a given amount of revenue?
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How does it relate to how much public debt is outstanding to begin with?
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So if you don't have any public debt outstanding,
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you really can't get revenue by reducing the real value of the debt.
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It doesn't work.
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And if you have a tremendous amount of public debt outstanding,
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denominated in nominal terms, then it's relatively easy to get a lot
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of revenue by wiping out the real value of that debt.
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So through that channel we get the prediction that countries
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that started with more debt relative to GDP.
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Let's say in 2019, before the COVID crisis,
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they should have less inflation, and countries that started out with
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little debt should have more inflation, which is counterintuitive.
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You might have thought it would go the other way, but
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we argue empirically that it works very persuasively that we do get that
28:54
result in the data when we look across all the OECD countries.
28:58
So we're looking at 37 countries here, not just the US so
29:02
that's an implication that came specifically from this fiscal
29:06
theory of the price level approach connected with fiscal dominance.
29:11
And another implication of that is about the duration of the debt.
29:15
If the duration of the debt is longer, lower inflation per year will work.
29:22
Whereas if the duration is very short,
29:24
you have to have a lot of inflation in this framework.
29:28
That's another empirical thing we look at which works the things you
29:33
argue that are common to the fiscal theory of the price level approach and
29:38
some other new Keynesian approaches.
29:41
That's to one side.
29:42
But then there are these other implications that came more specifically
29:46
from the framework that we adopted, which turned out to work very well.
29:50
So I think that's an important positive check mark on our side.
29:55
>> Jon Hartley: Fascinating, I guess.
29:58
So I'm just curious what your thinking is in terms of just
30:02
progress in we're talking about sort of business cycles,
30:07
government responses and so forth.
30:10
And sort of these macro, different macro frameworks to think about these things.
30:14
I'm curious, what do you think about sort of the progress
30:19
that you can see in DSG models have made, if any.
30:23
And I'm curious, where do you think the future of
30:27
business cycle research, macro research should be?
30:32
Do you think that we need to sort of deconstruct the three
30:38
equation new Casey DSG model which has is curve,
30:43
Phillips curve has Taylor rules.
30:46
Taylor rules work pretty well empirically.
30:48
But, we know the Phillips curve is there's massive debates about all the inflation
30:53
versus unemployment,
30:55
empirical trade offs which don't seem to have a very clear pattern.
30:58
Some people argue it's now nonlinear, some people say it's flat, but
31:03
it used to be steep.
31:04
And so there's a massive debate over the Phillips curve.
31:08
There's some people now that are trying to look at beverage curves,
31:11
beverage curves which hold up pretty well.
31:13
And some people trying to build some concepts of say,
31:15
full employment around vacancies.
31:17
But I think even that is pretty limited progress.
31:22
I'm curious in your mind, do we need to go back further and
31:27
build from scratch the business cycle models of the future?
31:31
I'm curious what you think the future path of business cycle macro is.
31:38
>> Robert Barro: I think the foundations of New Keynesian macro models are deeply
31:43
flawed.
31:43
I think that that framework represented a major step backwards from
31:49
the disequilibrium macro models that were in play earlier in the 1970s.
31:55
One fundamental problem with the New Keynesian model is it assumes that.
31:59
The output is always demand determined, which only makes sense
32:04
if there's tremendous excess supply of goods all the time.
32:09
If there's excess supply of goods, excess supply of labor, then that can make sense.
32:14
But that's not always the case, of course,
32:16
and sometimes there are important supply constraints.
32:19
But people who use the New Keynesian macro model use the basic demand
32:24
determination of output all the time and it doesn't make sense much of the time.
32:30
So that's one component of that model that's deeply flawed.
32:33
The Phillips curve part of it is also very problematic.
32:37
It tends to predict this very strong correlation between what's going on
32:42
with GDP and what's going on with inflation and that's not in the data.
32:46
So I think a major reconsidering of the New Keynesian macro model, even sticking
32:52
with a disequilibrium framework with sticky prices, even sticking with that.
32:57
I think a redoing of the basic model is really called for and
33:01
I know some people are working on that currently.
33:04
Maybe there'll be some success in that finally,
33:07
which is long overdue because despite all its flaws, the New Keynesian
33:12
macro model has become almost a monopoly provider in this industry.
33:17
And it's really quite ridiculous.
33:20
>> Jon Hartley: Yeah, it's interesting just to think about all the central bank
33:24
researchers I'm sure would be very upset to hear this discussion, but.
33:29
>> Robert Barro: Well, employment's been cutting, being cut back
33:32
a lot at the Federal Reserve bank anyway, I guess so maybe it goes along with that.
33:37
>> Jon Hartley: Yeah, so, yeah, exactly.
33:38
Well, there's been a massive subsidy
33:43
toward DSG modeling in central banks.
33:47
And I think that's where certainly a lot of citations come from today.
33:51
It's interesting you go to most, I think macro, if you talk to or
33:55
just look at the research that's being done
33:58
by macroeconomists in a lot of econ departments.
34:01
There's relatively few that are working on the M +1 iteration of a DSG model.
34:08
There's many, some that are, and some are using DSG models in other frameworks and
34:14
so forth but it's interesting that it's come this far.
34:18
But I really don't think in all central bankers that have come across.
34:22
I don't really think that central bankers necessarily
34:27
make a monetary policy decision or move their dot or move.
34:32
They're thinking around monetary policy just because of some
34:36
New Keynesian output or model output.
34:39
Most central banks are using VARs for forecasting instead.
34:42
But it's an interesting question what,
34:46
what sort of framework they should have and
34:50
maybe it's more just simple thinking around direction.
34:56
Sure, maybe the Phillips curve trade off isn't a very clear one empirically,
35:03
but raising interest rates presumably cools demand and
35:08
that's good enough for them.
35:11
So they'll sort of move in that direction until something breaks perhaps.
35:17
>> Robert Barro: I think the model needs some basic changes and
35:20
even sticking within the context of simple models.
35:24
Whereas in fact, the way the research is going is it's just making
35:28
the New Keynesian models more and more complicated.
35:31
More and more elements of heterogeneity, more and
35:34
more detail in terms of enlarging the model.
35:37
I don't think that's the right channel to be following.
35:42
>> Jon Hartley: Well, I guess I'm curious on more the sticky wages and
35:45
sticky prices side of things and nominal rigidities.
35:49
There's this a famous paper, set of papers from Kirk Mankiw and
35:54
Ricardo Rice on sticky information, which is something that's hard to measure.
35:59
In your mind, do you think that sticky wages and
36:05
sticky prices really matter for
36:08
in the sense that they can explain all.
36:13
They are the main contributor to sources of economic fluctuations
36:18
going back over the centuries is that now your prices are becoming,
36:23
I think, less sticky at some level.
36:25
We have the more we use Amazon those prices are changing.
36:29
Digital prices are often changing all the time.
36:32
We think about Uber prices are dynamic.
36:36
They're shifting around a lot.
36:38
There's been some people who have said we should really sh toward models with
36:42
sticky wages instead.
36:44
Those sorts of contracts are certainly things that are still very sticky.
36:47
But I guess, are you convinced that nominal rigidities like sticky wages or
36:54
sticky prices are really that important for
36:59
determining economic fluctuations?
37:02
>> Robert Barro: Well, my view in the 1970s into the 1980s was that sticky
37:07
prices and wages in nominal terms was not that important in terms
37:11
of thinking about macroeconomic fluctuations.
37:15
And that it was hard to see how it could be such a significant element.
37:19
And that was what led me to stop working in that field around 1980 or
37:25
thereabouts, quite a ways back.
37:28
It also made me much more sympathetic to the Lucas type of approach,
37:32
which had to do with some kind of informational issues.
37:36
But that approach had a similar kind of a problem.
37:39
In that approach, it relied on the fact that people knew about the local
37:44
prices that they saw and were familiar with.
37:47
And they were less familiar with the general macro situation,
37:52
including the general price level.
37:54
But then it wasn't so convincing that the information involved in not knowing what
37:59
the price level was could be very important either.
38:02
So a similar kind of criticism, I think led me and other people to think
38:07
that that couldn't be a critical element in business fluctuations.
38:12
Similar to what you had just said about sticky wages and prices.
38:17
This sort of incomplete information about the general macro situation,
38:21
it's hard to see how that could be so important.
38:24
But then for me, that left me with a void because then
38:28
I eliminated the two main models that were in play.
38:32
And then once the Lucas style model became less convincing to many people,
38:37
they returned to in some sense the Keynesian model.
38:42
Which led to the new Keynesian model becoming so important and that relying on
38:47
particularly sticky prices and then more recently also sticky nominal wages.
38:53
So it's a strange kind of cycle in terms of how the fields and
38:58
their influences have evolved going back to the 1970s.
39:03
>> Jon Hartley: Yeah, it's fascinating.
39:04
I know macro gets a lot of criticism from applied micro people and saying that,
39:09
it's not making real progress and but it's interesting because these are all.
39:15
I think that these are the biggest questions and, and
39:19
I think deserve some, some serious thinking and serious research on.
39:24
>> Robert Barro: Well, that's why economic growth became so
39:26
prominent in the period in the 1990s and into the 2000s.
39:31
And my own work was primarily on economic growth in terms of theory and
39:35
empirical work.
39:38
>> Jon Hartley: Well, I want to get into some of that growth research.
39:41
So,, as you mentioned,
39:43
some of your most cited work is in the empirics of economic growth.
39:48
And many of your papers I think, put together really interesting.
39:52
I think new data sets like your data on consumption disasters or
39:57
really deep recessions or.
39:59
Or depressions across countries,
40:01
you've got another sort of data set on educational attainment across countries,
40:06
what led you to study the empirics of economic growth?
40:09
Did that for you, was that sort of a moment that I guess we were just talking
40:14
about being fed up with kinda the other business cycle macro models.
40:18
But I think Robert Lucas, he had his own sort of, I guess,
40:21
transformation in thinking.
40:23
He had this famous phrase saying once you stop thinking about growth,
40:26
you can't think about anything else.
40:27
And we could talk about these recessions like the Great Recession,
40:33
which is a 5% divot in the GDP growth trend of the US or
40:37
maybe some of your consumption disasters,
40:40
which are generally, I think, bigger across countries.
40:45
But at some level, if you look at just the simple difference in GDP per capita levels
40:51
between say the U.S maybe it's a GDP per capita of around 80,000 versus very
40:57
poor countries that have GDP per capita around, say, 10,000.
41:02
I think China is a bit higher than 10,000 but you just think about or
41:06
many countries in Latin America around the world maybe close to 10,000.
41:09
That's a difference of a factor of 8, 8x.
41:12
And so explaining those differences is just,
41:16
it feels like a much bigger stakes kind of issue.
41:20
There's also, I think, not exactly a great, I think it's still
41:25
very much an open question in terms of what causes economic growth.
41:30
And it's perhaps the most important question in economics was
41:36
that kinda realization that led you to study economic growth?
41:41
>> Robert Barro: So I think Bob has underestimated the cost of business
41:45
fluctuations but I think he was right that economic growth is even more important.
41:51
So I think he was right to think about that topic and
41:54
to contribute to that literature.
41:56
And that's certainly what I also did.
41:58
So part of that was on the theoretical level and particularly thinking about
42:03
technological progress, in line with the work by Paul Romer in particular.
42:09
I've worked a lot on that but I guess my more sort of distinctive
42:14
contribution was in terms of empirical analysis,
42:18
partly of the neoclassical growth model and
42:22
its implications for convergence across countries, and
42:27
partly bringing in some elements of the endogenous growth theory,
42:33
which particularly became prominent in the 1990s.
42:38
But that work has led to an unfortunate kind of circumstance, if you want to
42:43
think about what matters for growth and, and how it depends on policies and
42:48
things like property rights and fertility behavior and education and
42:52
all those, the natural empirical arena to consider there is the cross country
42:57
experiences where you have a lot of variety in terms of different policies and
43:02
institutions being put into place and you have some hope from that of trying to
43:07
isolate what things matter for long run economic growth.
43:11
And that was the work I particularly put my efforts into in
43:15
the 1990s going into the 2000s.
43:19
And for a while there was a tremendous interest in that work and
43:23
it was probably the most cited part of economics overall.
43:27
But then you had this kind of so called credibility revolution in econometrics and
43:32
identification and it was clear that to be using this cross country context
43:37
leads to a lot of issues where you don't get perfect identification.
43:42
There are some legitimate problems that arise in terms of various things
43:47
being endogenous and too many things potentially mattering.
43:52
But then I don't understand how the outcome from that is supposed to be.
43:57
Then you ignore the best data that you have that pertain to these questions.
44:01
What which is this cross country experience,
44:04
you almost never have experiences in terms of macroeconomics and
44:09
growth where you have the kinds of exogenous experiments or
44:13
near experiments that you would want to get clean identification.
44:17
And then I think it's really unfortunate that what can be gleaned from
44:22
the data that are available with the possible identification methods and
44:27
implementations and then ignoring that I think is a great mistake.
44:32
But that's the situation we're in now.
44:35
It's basically you just can't do that kind of work now.
44:37
It's viewed as not legitimate.
44:39
And I think that that's really wrong and unfortunate.
44:43
>> Jon Hartley: Yeah, no, I agree with you.
44:45
It's a shame that cross country growth regressions have
44:49
seemingly kind of disappear or cross country.
44:53
I think work in general forget about just growth accounting and
44:58
things like that seems to have disappeared a little bit, I guess.
45:03
Yeah, it's an interesting question in terms of generalizability and
45:10
there's lots of people who then will say well you should look at some
45:16
very specific natural experiment in a very small corner of the world.
45:23
But you then there's this question.
45:24
>> Robert Barro: It doesn't give you the macro kind of variation that you want.
45:27
>> Jon Hartley: Right, exactly it doesn't.
45:29
The narrower you get or the smaller you get, the easier it is for
45:34
I guess these sorts of small micro effects to be swamped by spillover
45:40
general equilibrium incentive effects that you get sort of at the bigger macro level.
45:47
And so it's, and then hence you have things like external validity,
45:52
violation of suit ven and these sorts of things become a valid criticism.
45:58
But yeah, I'm with you on getting back to cross country regressions,
46:04
I wanna just talk a little bit about some of your big hits on economic growth.
46:11
For example, you wrote a famous paper in the 1980s on democracy and
46:17
growth finding no relationship between democracy and growth.
46:22
Some other economists, like Drone Ajemoglu recently won the Nobel Prize,
46:26
vehemently argued the opposite that democracy causes economic growth.
46:29
And he's using measures like the Freedom House democracy measures, I'm curious,
46:34
where do you stand in this whole debate?
46:36
Jeffrey Sachs I think was a Harvard colleague as well for a while.
46:39
Where do you stand in the whole institutions
46:44
versus culture versus say climate geography,
46:49
which is I guess more where Jeffrey Sachs and
46:53
guns, germs and steel comes in,
46:57
institutions being sort of why nations fail,
47:02
Drone AJ, Moglu Johnson and others.
47:06
I'm curious, where do you stand in that sort of debate between those three
47:10
sort of key explanations?
47:12
You do a lot of work on religion and economics as well.
47:15
Obviously that I'd say would fit into the, I guess culture bucket if you were
47:19
to classify it into those three, three things.
47:22
But where do you stand in terms of, you know, what, what causes growth?
47:29
>> Robert Barro: Well, I think there were some pretty clear robust findings from
47:33
the cross country growth regression literature from work that I did and
47:38
other people did.
47:40
This idea of conditional convergence I think is quite robust, that's the idea
47:45
that if you hold a lot of other things constant that then having a lower starting
47:50
position predicts higher growth and a catch up convergence type of effect.
47:55
But the fact that you have to condition on other things is central to
47:59
getting that result.
48:00
There are more issues about what are the other things.
48:04
But I think some things come out to be fairly clear.
48:08
I think institutional measures are quite predictive of growth.
48:12
Things that look like property rights,
48:15
rule of law have a pretty robust positive connection to economic growth.
48:22
Things involving fertility and population growth seem to be pretty reliably
48:27
negative with respect to per capita GDP growth, which is interesting these
48:32
days when people are worrying a lot about population growth being too low.
48:38
There's some interesting recent work related to climate and
48:42
economic growth over the long term arguing that you have to look at that in
48:46
a global context, which is basically the world.
48:51
And that gets you into the realm of looking at this time series on
48:56
macrovariables being the basically world GDP.
49:00
But a recent paper which has interesting results suggesting
49:06
quite large negative effects from temperature rises on global GDP.
49:13
As you say, some people have looked at religion and
49:16
economic growth as part of the cultural phenomena.
49:22
My wife, Rachel McCleary and I had some interesting findings there.
49:25
I thought we argued that what mattered in terms of religion was something like
49:30
believing relative to belonging.
49:32
So some measures of religious beliefs, but
49:35
kind of contingent on how much participation church attendance there was.
49:40
So we found that stronger beliefs seemed to underlie things like
49:45
Max Weber's work ethic and thereby promote economic growth.
49:50
But just going to church more often didn't seem to have that kind of beneficial
49:54
effect.
49:55
Anyway, if you put it all together, I think there's a lot of interesting
50:00
work cross-country in terms of determinants of economic growth.
50:05
And I think it's a field that needs to be reestablished as being legitimate,
50:11
basically.
50:13
>> Jon Hartley: Well, I know that you also spent a lot of time in sort of
50:16
promoting the idea that human capital matters.
50:18
I think this is maybe a fourth school that I think largely been
50:23
championed by a lot of people, I'd say, in the Chicago School world,
50:28
University of Chicago, who've done a lot of work on education.
50:35
And I guess I'm curious what your thoughts are there.
50:37
It's interesting, there's all these debates recently
50:42
about industrial policy and other questions around that.
50:47
And work by Larry Katz here on training programs for
50:51
sectoral training programs that at least in our CTs seem to work
50:56
well compared to other sorts of job training programs,
51:00
say from the Great Society era that don't work well.
51:04
To me, even though these things are being rebranded as things like industrial
51:09
policy at some level, if you look at like South Korea,
51:12
which some people attribute to being an industrial policy success story,
51:17
it's a place that where its industrial policy is largely human capital Related.
51:22
So at some level, you know, it's a question,
51:24
maybe a lot of these things are just human capital rebrandings.
51:27
But in your mind, is education really central to economic growth?
51:33
>> Robert Barro: So John Wali and
51:34
I put together this major data set which people use a lot.
51:39
So it's just on quantity of schooling.
51:42
It's about years of school attainment at various levels and for
51:46
most countries in the world going back to the 1950 or so, and
51:50
you can go back earlier for some set of countries.
51:54
So that's one of the variables that has a central role in terms of determinants
51:58
of economic growth.
52:00
And we also distinguish education by gender as part of that kind of analysis.
52:07
So the two major data sets I think that I've put together
52:11
until recently were the one with Zhang Wali and
52:15
the other one with Jose Ursua was data that you mentioned before
52:20
in terms of the long term data on macroeconomic disasters.
52:26
More recently I'm putting together this data on very long term attendance at
52:31
religious services, which I think is another kind of data set.
52:35
Not so much of a macro data set, but
52:37
I think that's another one that's going to have a lot of use.
52:42
>> Jon Hartley: Well, it's fascinating and amazing work.
52:44
And I remember, when you were talking about,
52:47
I think a couple decades ago you were interviewed,
52:51
I think about Bono at that time in the 2000s, was a very vocal advocate of aid.
52:58
And I remember you're a bit critical of aid,
53:01
certainly government aid being that useful in terms of spurring economic growth.
53:07
This is, I think, around the time that YouTube is doing its Elevation Tour,
53:11
its I think 2000 album, All The Things You Can't Leave behind.
53:15
And you said it was a great album.
53:16
And I think I agree with you on that.
53:18
But you've been so influential in so many topics in macro and you've advised many,
53:24
many students who've gone on to have incredible academic careers.
53:29
Michael Kramer, Emmy Nakamura, George Marios, Angeletos, Xavier Gabay,
53:33
Xavier Sally Martin, Zvi Herkovitz, many, many others.
53:37
And some of them have gone on to win Nobel Prizes.
53:40
I mean, what in your mind makes good advising for, for PhD students?
53:46
>> Robert Barro: A couple remarks about Bono.
53:49
So Jeff Sachs set it up for me to have lunch with him and Bono.
53:55
So when he invited me to show you how ignorant I was,
53:58
I didn't know anything about Bono.
54:00
So I consulted with my daughter and I said,
54:02
I've been invited to have lunch with this guy who's apparently a rock star.
54:07
And I don't know him what should I do?
54:09
And my daughter said well, of course you have to go, absolutely.
54:14
I was actually very impressed by him.
54:16
He's extremely intelligent and he's extremely quick on picking things up.
54:21
Obviously he doesn't have a background, for example in economics, but he
54:25
was seriously interested in getting ideas related to things he was interested in,
54:30
which particularly about debt relief and foreign aid at the time.
54:34
But he didn't want somebody who was going to just echo his visions on those matters.
54:40
He wanted to get alternative views, probably because he wanted to know how to
54:45
defend against arguments that were against what he really wanted to push.
54:49
But anyway it was a very good discussion.
54:54
I didn't really agree with his basic positions and I don't think that forgiving
54:59
debt is the way to promote economic growth for poor countries.
55:03
And I don't think foreign aid has been successful at all.
55:07
I think if we're cutting back on USAID as we seem to be doing at the moment,
55:11
I think that's a great idea.
55:13
I strongly support that.
55:17
In terms of my PhD students, yes,
55:19
I've had some wonderful PhD students over the years.
55:24
I'm hoping that Emi Nakamura and John Steinson will join us soon at
55:30
Harvard since they have offers now to join the faculty of the Economics department.
55:36
And they were particularly great students of mine.
55:41
Michael Kramer, as whom you mentioned, was of course a wonderful student
55:46
who had two classic articles as part of his PhD thesis.
55:50
At the time he was doing mostly macro growth, but
55:53
he shifted more toward microtype things in terms of developing countries and
55:58
in particular applying experimental designs in those contexts.
56:03
I think that's really what he got the Nobel Prize for.
56:06
But he's still interested in the macro type work as well.
56:11
There's a great variation in terms of how one works with the graduate students.
56:15
You mentioned Xavier Gobex.
56:18
Gobex was a complete self-starter and did everything on his own.
56:22
And then at some point he basically awarded me a prize by asking me to be
56:27
his PhD advisor.
56:29
And I don't think I get much credit for what he has produced, which has been
56:33
very high quality, but I don't think I had that much influence on it.
56:37
So that varies a lot across the students.
56:42
I don't know how to say what it is that makes one successful in terms
56:47
of advising the great students.
56:50
To some extent it's not so different from coming up with ideas for
56:54
one's own research, but I guess also it does involve some different dimensions.
56:59
>> Jon Hartley: It's amazing, you advised a tremendous number of students,
57:05
and I'm sure many of them will listen to this and
57:08
I'm sure will enjoy what's been an amazing conversation.
57:14
Robert, really want to thank you for coming on.
57:16
This has been really great.
57:17
It's been a thrill to have you on and hear your ideas.
57:21
>> Robert Barro: Okay, it's been great for me as well.
57:23
>> Jon Hartley: This is the Capitalism and Freedom, the 21st Century podcast,
57:26
an official podcast of the Hoover Economic Policy Working Group where we talk
57:29
about economics, markets and public policy.
57:32
I'm Jon Hartley, your host.
57:33
Thanks so much for joining us.
57:34
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