April 11, 2025 • 57 mins
Jon Hartley and Robert Barro discuss Robert’s career in economics including his long list of famous students, and research on Ricardian equivalence, fiscal theory of the price level, government spending multipliers, business cycles and the legacy of New Keynesian modeling, economic growth, political economy, the interplay between religion and economics, and much more.
Recorded on March 18, 2025.
ABOUT THE SPEAKERS:
Robert J. Barro is a Paul M. Warburg Professor of Economics at Harvard University, a visiting scholar at the American Enterprise Institute, and a research associate of the National Bureau of Economic Research. He has a Ph.D. in economics from Harvard University and a B.S. in physics from Caltech.
Barro is co-editor of Harvard’s Quarterly Journal of Economics and has been President of the Western Economic Association and Vice President of the American Economic Association.
He was a viewpoint columnist for Business Week from 1998 to 2006 and a contributing editor of The Wall Street Journal from 1991 to 1998. He has written extensively on macroeconomics and economic growth.
Recent research involves rare macroeconomic disasters, corporate tax reform, religion & economy, empirical determinants of economic growth, and economic effects of public debt and budget deficits. Recent books include The Wealth of Religions: The Political Economy of Believing and Belonging (with Rachel M. McCleary), Economic Growth (2nd edition, with Xavier Sala-i-Martin), Nothing Is Sacred: Economic Ideas for the New Millennium, Determinants of Economic Growth, and Getting It Right: Markets and Choices in a Free Society.
Jon Hartley is currently a Policy Fellow at the Hoover Institution, an economics PhD Candidate at Stanford University, a Senior Fellow at the Foundation for Research on Equal Opportunity (FREOPP), a Senior Fellow at the Macdonald-Laurier Institute, and an Affiliated Scholar at the Mercatus Center. Jon also is the host of the Capitalism and Freedom in the 21st Century Podcast, an official podcast of the Hoover Institution, a member of the Canadian Group of Economists, and the chair of the Economic Club of Miami.
Jon has previously worked at Goldman Sachs Asset Management as a Fixed Income Portfolio Construction and Risk Management Associate and as a Quantitative Investment Strategies Client Portfolio Management Senior Analyst and in various policy/governmental roles at the World Bank, IMF, Committee on Capital Markets Regulation, U.S. Congress Joint Economic Committee, the Federal Reserve Bank of New York, the Federal Reserve Bank of Chicago, and the Bank of Canada.
Jon has also been a regular economics contributor for National Review Online, Forbes and The Huffington Post and has contributed to The Wall Stree
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
[MUSIC]
>> Jon Hartley (00:09):
This is the Capitalism and Freedom the 21st Century podcast,
an official podcast of the HooverInstitution Economic Policy Working Group
where we talk about economics,markets and public policy.
I'm Jon Hartley, your host.
Today, my guest is Robert Barro, who is aneconomics professor at Harvard University.
He's widely regarded as one of thefounders of new classical macroeconomics,
having done incredible path breakingwork in the empirics of economic growth,
(00:32):
Ricardian equivalence andmany, many other areas.
Welcome, Robert.
>> Robert Barro (00:36):
Hello, great to be here.
>> Jon Hartley (00:39):
Robert, I want to first get into your early life.
You were born in New York City and youwere a physics undergrad at Caltech and
were a Richard Feynman student inthe 1960s and then you transitioned to
economics, into doing a PhD in economicsat Harvard, graduating in 1970.
What was it that first gotyou interested in economics?
>> Robert Barro (01:03):
Well, I didn't know anything about economics when I
started as an undergraduate and Caltechdidn't offer any economics to speak of.
They only had a couple of courses.
My brother was an economist andhe gave me some influence and
I finally took a coursein my junior year and
surprisingly enough it wason Keynesian economics.
(01:27):
It was straight out of the general theory,but I loved the class when I saw it.
And I particularly appreciatedthe combination of technical material
which I was doing a lot of when Iwas in physics with applications and
particularly uses in a policy context.
So the combination of those two things Ithink is what especially attracted me.
>> Jon Hartley (01:53):
Well, I know your PhD advisor was Grillikas at Harvard and
you returned to Harvard in itseconomics department in the 1980s,
where you've been since.
I mean,
how has the department changed sinceyou were there as a graduate student?
(02:13):
I mean,obviously there were a lot of changes.
I guess there was perhaps at that time alot of, when you were a graduate student,
a lot of sort of old Keynesian economists,Harvard, MIT have sort of historically
been, I think well known for having folkslike Alvin Hansen, who kind of brought
a lot of Keynes ideas to the United Statesand obviously University of Chicago,
(02:38):
Minnesota, other socalled freshwater places being, you know,
having a bit of a different perspective,being, you know, more, more so the home
of sort of new classical economics,the Chicago School and so forth.
I mean, how exactly did you know you endup there when you're a graduate student?
(02:58):
What brought you back as a professor?
Given that, I think it's fair tosay that a lot of your work and
ideas are somewhat in contrary to thatsort of Keynesian tradition at Harvard?
>> Robert Barro (03:11):
I think it's fair to say that when I was a graduate student at
Harvard, it was a low point for
the faculty in terms ofthe economics department.
It just was not a very good department.
And it had been sort of going downhill forsome time.
And that was more dominant than thequestion about whether it was Keynesian or
(03:33):
not Keynesian.
It really wasn't impartinga good instruction, and
it was particularlyweak in macroeconomics.
And I was working on hyperinflation andmacroeconomics more broadly,
and I had a very tough timefinding a thesis advisor.
So it ended up being the casethat I was in my third year and
(03:56):
I'd gotten a lot of work done in terms ofparticularly the German hyperinflation,
and I had some papers ready.
But I decided I should try to get a job,
even though I didn't havea thesis advisor or a thesis.
And somehow I managed to get a jobat Brown University as an assistant
professor without having a doctorate oreven a thesis advisor.
(04:21):
But that actually wasa sensible thing to do.
It actually worked out.
But at some point I decided I betterfinish up and I needed to get an advisor.
Meanwhile, Harvard had hired somereally great professors all at once.
Ken Arrow, Dale Jorgensen,Marty Feldstein, and Svi Grillikas.
(04:42):
They were all hired just aboutthe same time toward the end of
my graduate education.
So I decided I should get one ofthese new people to be my advisor,
even though they might notfit exactly by fields.
And at some point I hadan appointment with Svi Grilikas, and
(05:03):
I talked to him for half an hour aboutthe work I was doing, and some of it
was in econometric applications,which fit with his expertise.
So even though he wasn't a macroeconomist,
it actually worked out forhim to be my advisor and he was great.
And he told me at some point that hiswhole career he'd really only had
(05:25):
two PhD students in macroeconomics,and the other one was Bob Lucas.
So I thought that was pretty good.
So I was very happy withSvi as my advisor, and
I ended up finishing up there.
>> Jon Hartley (05:38):
Well, that's terrific.
And I'm curious,
where were you when the RationalExpectations revolution was happening?
Obviously, when I think aboutthe history of macroeconomic thought and
how it kind of evolved in the late 20thcentury, you had this thing, which
was the Rational Expectations revolution,micro foundations and so forth.
(06:02):
That came out of largely the Midwest,University of Chicago,
Minnesota and elsewhere in this,really starting the 70s.
And then over time, it wasn't reallyuntil that that caught on and
I think pretty successfulin terms of changing,
at least influencing research in the sortof the subsequent couple of decades.
(06:28):
And in part that was a response to,I guess,
Keynesian models being unableto explain rising inflation and
output falling during that period of time,the 70s and 80s.
But, later on,Harvard sort of caught up or
the new Keynesian sort of traditionkind of emerged where they took
(06:50):
all the rational expectationsmicro foundations theory that
had been developed by Lucas Sargent,Prescott and others, and
then inserted frictions,nominal rigidities and so forth.
So folks like Greg Mankiw,Rich Clarida, Jordi Gali,
Mile Woodford, and soforth, and many others.
(07:13):
I mean, where were you during thatperiod of time in the rational
expectations of revolution?
>> Robert Barro (07:22):
So in the mid-1970s, I left Brown University.
I took a position in Chicago.
Milton Friedman was still there, andI particularly interacted with him and
with Gary Becker and George Stickler.
So I worked in that periodparticularly on Ricardian equivalence,
(07:43):
which has some relation to rationalexpectations, of course, and
I worked a lot on empirical thingsrelated to some of Bob Lucas's work.
But Lucas actually went backto Chicago a little bit later.
And the second time I was in Chicago iswhen I particularly interacted with him.
So it was in that period fromthe mid-70s through the mid-1980s,
(08:09):
where part of the timeI was in Chicago and
part of the time I wasinteracting with Lucas.
So that's some of that period.
>> Jon Hartley (08:21):
So I guess diving into some of your research here and
talking about Ricardian equivalence,it's this idea that
temporary tax cuts shouldn'taffect consumption, that debt and
taxes are interchangeable andthat you wrote this very famous paper,
(08:41):
I think the 1970s, this titledare government bonds net wealth?
And your answer to that is no.
And the idea is that government bondsare substitutable with taxes and
it's largely the path of spendingthat matters and that, you know,
agents and consumers will smooth,they'll just save more in response to
(09:04):
something like the government issuingmore debt or running in a deficit.
And so I think it has a lot ofimplications for deficit spending.
Governments trying to use deficitspending to juice aggregate demand,
which is still a very popularpolicy approach by governments.
(09:26):
Curious, what gave you this ideato study Ricardian equivalence?
It was something that David Ricardo,
it wasn't really something thatfirst David Ricardo, a champion, but
something that I think had growndormant for quite some time.
What led you to studying that as wellas other forms of I guess equivalents.
(09:47):
You've written papers aboutgovernment debt management,
I think arguing thatgovernment debt management,
maturity choice doesn't really matter fornon contingent debt.
What led you to thissort of line of thinking?
Was it those interactions with Lucas orwas it something else?
>> Robert Barro (10:03):
No, not something with Lucas, which would have been later.
But Ricardo and equivalence is importantas kind of a baseline idea that under
certain circumstances you get thisfairly set of extreme results and
then it forces you to think in adisciplined way about why should you have
departures from that and in whatdirection are the departures going to be?
(10:26):
And certainly Ricardian equivalencedoesn't always hold, but
that doesn't mean the kind of standardanalysis of fiscal deficits are valid and
things can go even inthe opposite direction.
And I had a second paper in end ofthe 1970s about tax rate smoothing,
which was about the functionof public debt as a device for
(10:49):
financing basically temporarygovernment expenditure.
And from a public finance viewpoint itwas important that that method of finance
was available.
And in that sense the debtis not irrelevant.
And it probably underlies why Britain didso well in financing wars over a couple
of centuries because it provideda very convenient method of financing.
(11:15):
So certainly you don't haveRicardian equivalence there,
but it becomes kind of A part of publicfinance in terms of what's the optimal
structure of taxation over time.
And the public debt managementis part of that problem.
I gave a seminar on my Ricardianequivalence paper only once, and Friedman,
(11:36):
Becker andStigler were there at the same time,
which is the only time I've seen the threeof them together at a seminar, actually.
>> Jon Hartley (11:44):
Wow. >> Robert Barro
And I got some importantfeedback there and
then from Gene Fama when I gave the paperin the business school in Chicago.
And those are the only two times I gavea seminar on that paper which proved
very influential.
So I didn't know when I wrote the paperthat it had something to do with
David Ricardo.
(12:05):
And I didn't call itRicardian equivalence.
That came from Jim Buchanan,who wrote a comment on my page paper and
he said,all this is Ricardian equivalence.
And then I decided, well, it must be thatthere was an earlier statement of this,
before David Ricardo, that you canalways go back and find stuff.
(12:25):
And then I looked into that.
In fact,
I couldn't find any sensible thingbefore Ricardo that had this viewpoint.
So then I decided Ricardianequivalence was a really good name and
we should adopt that whichsubsequently became the case.
Well, I'm curious,
how do you feel about I guess criticismfrom empirical economists who kind of say,
(12:48):
well, Ricardian equivalence, it's wrongand they point to maybe some data
about some micro data maybe that showsthat consumers aren't fully smoothing.
I think if you look at the macro Data,like the 2008 tax rebates in the US or
the 2020, 2021 stimulus checks in the US,
(13:09):
it's pretty clear thatthey're largely being saved.
So I think at the macro level, there'sa lot of smoothing that's going on.
But I'm curious,I don't think it's necessarily.
Yeah, it's certainly not full smoothingand perfect smoothing either.
I mean, I'm curious, is it reallyjust the being an important baseline
(13:30):
that's important, or do you think thata lot of empirical economists out there.
Particularly on the maybeapplied micro side of things,
that they're using microdatato estimate NPCs or
to look at consumer spendingresponses to fiscal policies,
do you think that they'remissing something?
>> Robert Barro (13:54):
Well, I think it's certainly fair that there can
be departures from complete smoothing andthere are good reasons to have certain
kind of frictions and informational issuesthat can produce those kinds of effects.
It's certainly not systematicallythe case that fiscal deficits produce
the kinds of Keynesian responsesthat are often predicted.
(14:15):
And some of the departures fromRicardian equivalence can go in
the direction opposite to the one thatyou would normally expect to find.
Again, in terms of the tax smoothing,I found it more productive to think
about that as a positive theory abouthow the government is managing the debt.
(14:36):
And in that context, it certainly matters.
And there's a lot of literature alongthose lines in terms of the public debt
as a kind of part of optimal tax problems,which I think is a good way to look at it.
>> Jon Hartley (14:51):
So I guess I want to talk just a little bit about government
spending multipliers,because it's a related issue.
In 2011, you got into this literature,you published this early Journal
of Economics paper with Charles Rudlich,since become, I think,
a very famous paper titled MacroeconomicEffects of Government Purchases and Taxes.
(15:12):
And you find that government spendingmultipliers are low and below one.
And that's consistent with other workthat's done by Hoover's very own
Valerie Ramey.
And you found that taxmultipliers are a bit higher.
And you're, you're largely usinggovernment military purchases,
military spending forexogenous identification.
(15:35):
I'm curious, what's your intuition for
why this is the case that governmentspending multipliers are so low in the,
in the macro data and, and that the taxmultipliers are actually somewhat higher?
I know Alberto Alsina founda similar thing looking at fiscal
consolidations with his co authors, but
(15:55):
I guess I'm cur because I feel likethis is definitely one of the most.
Hotly debated topics inmacroeconomics where it feels like,
there is progress being made, butit's still a hugely contentious debate.
We're often the, I think that empiricalmacro people tend to say one thing,
(16:15):
whereas the applied micro people,which might look at,
you know, say tax lotteries orsomething of that nature,
using more, more micro level data,find that NPCs are very high and
that government spending multipliersare much higher than, than one.
I'm curious what you thinkabout that tension and
where you think thatthe truth is in all this.
>> Robert Barro (16:39):
Looking at the variations in military spending in the US context
over a fairly long time periodis a very good setting for
trying to isolate spendingmultipliers associated with basically
exogenous movements in the amountof government expenditure.
You wouldn't do this formany countries during wartime
(17:01):
because the direct destructive effectsof wartime tend to be dominant.
And typically in wartime youwould estimate negative spending
multipliers associatedwith military outlays.
But the US is different in that respect.
It doesn't have that kind ofmassive destruction associated,
particularly with World War II.
(17:21):
So it was a very good setting,I think, for
looking to isolate the effect of theseexogenous and large spending changes.
So the multipliers were positive.
I mean, the right baseline is 0, not 1.
If the multiplier is 1,it means you're basically getting as much
(17:41):
output as you're using up, which makesit sound like it's a free thing, I.
>> Jon Hartley (17:47):
Guess, if P is included in, in GDP, right?
You should, some would argue thatthere's been this big debate
recently about whether G shouldbe included in GDP or not.
Howard Lutnick, the Secretary of Commercehas highlighted this, among others.
But I guess Simon Kuznets famously saidthat G should be removed from GDP.
(18:08):
So these people aren't exactly alone.
But I guess there'sthis question which is,
even if there weren't offsetting effects,
that would make the multiplier lessthan 1 when you're including G in GDP.
Yeah, there's a question of->> Robert Barro: But
it's not just about terminology.
If the multiplier including G is one,it means that you can get the G for free.
(18:32):
It means that your outputgoes up enough to pay for it.
And then if you're saying the stuffis worthless, okay, well,
you still didn't have to pay for it.
So it's not completely terrible.
But the right benchmark is a multiplierof zero because that means that in
order to get the extra spendinglet's say for military,
you have to cut back onother spending one for one.
(18:55):
So I would have looked atthat as the benchmark.
So we found multipliers that weremore like a half or something,
which means that you have to pay for50% of the extra.
So it's a multiplier of one andabove is kind of completely ridiculous.
I mean, a multiplier above one meansyou're not only getting the military
spending for free, you're gettingsomething extra for coming from nowhere.
(19:18):
It should be a very surprising resultto have multipliers that are above one.
And you certainly wouldn'tfind that in normal times or
in some kind of long run setting.
I mean, it's not true that countriesthat have more G have more gdp,
which would be even enoughmore GDP to more than pay for
(19:40):
the G, which would be weird.
So I think that's just not true.
But anyway,I think we isolated some effects.
I mean, the tax changes typically haveincentive effects that are important.
So cutting taxes usuallymeans cutting tax rates and
providing more incentive to do things likework more and work harder and invest more.
(20:05):
So it's not surprising that youmight find more potent effects
related to cutting taxes,which typically are not lump sum taxes,
but something about distortingtaxes being reduced, I guess.
Any thoughts on, I guess this idea of crowding out and
that if you get more,more government spending, more control,
(20:27):
I guess it crowds up competition fromthe private sector in these areas.
I guess, maybe one.
It's often one of the most cited,I think, reasons for
why government spendingmultipliers might be fairly low.
I'm curious what your thoughts are onthat kind of crowding argument.
>> Robert Barro (20:47):
Yeah, so to have any kind of macro crowding out,
you need the multipliersto be less than 1.
If they were negative,that would be even more extreme.
You'd really have to raise a lot ofextra stuff to pay for the spending.
Yeah, I think it's a reasonable first lineapproximation that you have substantial
(21:08):
crowding out of private activity whenyou have more government activity.
So some of that is just directlyon the expenditure macro side and
some is more along the lines of what youwere indicating in terms of crowding
out based on the governmenteffectively monopolizing the market or
regulating things, andthat's going to depress private activity.
(21:31):
So yeah, I think crowding out inboth of those senses is important.
>> Jon Hartley (21:37):
Hm, well, I want to just talk a little bit about fiscal theory
of the price level here becauseit's also somewhat related to
Ricardian equivalence, andit's one of these, I think,
similar benchmark kind of resultsfrom a pretty simple model.
Something you've done some workon lately with Francesco Bianchi.
(22:00):
A terrific monograph has been writtenrecently by Hoover's very own
John Cochran titled Fiscal Theory atthe Price Level on this very topic.
I'm curious, what led you to recentlystart studying fiscal theory?
>> Robert Barro (22:16):
For me, I was driven at the empirical level, trying to understand
the surge in inflation associatedwith the COVID crisis and
noting that this was a global phenomenon,it wasn't particular to the United States.
And then I was trying to thinkabout what kind of macro monetary
analysis would lead you to the resultthat this kind of expansion,
(22:39):
which involved a lot of fiscal deficits,
a lot of transfer payments,why might that be inflationary?
How would you think aboutthat kind of linkage?
I think the closer thing to whatwe ended up doing was the idea
of fiscal dominance andthe kind of analysis that Lucas and
(22:59):
Stokoe had in the 1980s, andthinking about wartime finance and
why it was often accompanied by inflation.
So I think that was probably a moreimportant element rather than the fiscal
theory of the price level per se,which often involves issues
that didn't really have anythingto do with what Bianchi and I.
(23:22):
Now, certainly, there's a governmentbudget constraint that's
central to this analysis, and it has tobe viewed in an intertemporal sense, so
that if you have more spending, you haveto pay for it somehow and somewhere.
But then it also leads you to the ideathat it's possible to pay for
it through the kind of contingentfiscal deficits that Lucas and
(23:46):
Stokoe highlighted.
So if you have a massive increase,such as the transfer payments,
even more under Biden than underthe first Trump administration,
a way to avoid paying forthat by cutting other spending.
Spending or by raising taxes isby having a inflation that's
surprising from a perspectiveof a pre crisis period.
(24:09):
And that basically wipes out a lot ofreal value of the government bonds
that are outstanding and it amountsto a very large temporary source
of revenue which can be something like 10,15% of the GDP.
So it's not a minor deal.
And that's empirically about what happenedin the US and also in other places.
(24:31):
And then people don't like the idea thatit might not have been completely crazy
to pay for the expenditure in substantialpart through this surprise inflation.
I get a lot of grief on thatpoint from people who normally,
who normally are on my side aboutthings because they just want to think
(24:51):
of the inflation as being stupid andbeing dramatically harmful.
So I think what was harmful isthe excessive fiscal expansion,
particularly under Biden.
It was unnecessary to have that vastincrease in transfer payments, but given
that you had it, we effectively paid formost of it through the surprise inflation.
(25:12):
And maybe that part was not socrazy because
the alternatives would havebeen also very costly.
>> Jon Hartley (25:21):
Yeah, well it's interesting.
I think maybe some of thatconsternation comes from, I guess,
people that are wedded to older,older models.
And I guess physical theoryis something that sort of,
I guess regained interest inpart due to John's monograph.
And yeah, I think it's interestingbecause I think there's
(25:45):
a lot of people at some levelthe results of physical theory
are at some level observationallyequivalent with other say.
New Keynesian DSG models anda lot of their kind of key results.
You could also find thatdeficit spending causes
inflation in Old Keynesian ISLMtype frameworks as well.
(26:11):
So I guess as far as I see itthe tension kind of arises from
that observational equivalence.
Fiscal theory, the price of alsoputs a big emphasis on expectation
fiscal expectations andhow those are shifting.
It's very difficult to measurefiscal expectations and
we don't really have, in my mind,really any good measures of it.
(26:33):
We do have CBO forecasts, butthose are under current law and
policy andat some level those don't necessarily
reflect the fact thatmarkets may believe that.
And people may believe that governmentspending patterns will actually
(26:54):
have to change at some point.
And that as crazy asthese CBO forecasts are,
at some level the true expectationis something different.
But I'm curious, you spent->> Robert Barro: Let me answer to
part of that.
You spent a lot of time- >> Robert Barro
the reason the fiscal expansionleads to inflation works
(27:18):
through the budget constraint,which is intertemporal.
So somehow you're effectively getting thisrevenue by reducing the real public debt.
And the amount by which you have toreduced to debt is related to how much
revenue you need, which is partlyrelated to the fiscal outlay.
(27:38):
And as you say,
there are other models that mightconnect fiscal outlay to inflation.
But we get other implications of thisapproach that works through the budget
constraint, which ties in withthe fiscal theory of the price level.
So ask yourself, how much inflation do youneed to get a given amount of revenue?
(27:58):
How does it relate to how much publicdebt is outstanding to begin with?
So if you don't have anypublic debt outstanding,
you really can't get revenue byreducing the real value of the debt.
It doesn't work.
And if you have a tremendousamount of public debt outstanding,
denominated in nominal terms,then it's relatively easy to get a lot
(28:21):
of revenue by wiping outthe real value of that debt.
So through that channel we getthe prediction that countries
that started with moredebt relative to GDP.
Let's say in 2019,before the COVID crisis,
they should have less inflation,and countries that started out with
little debt should have more inflation,which is counterintuitive.
(28:46):
You might have thought itwould go the other way, but
we argue empirically that it worksvery persuasively that we do get that
result in the data when we lookacross all the OECD countries.
So we're looking at 37 countries here,not just the US so
that's an implication that camespecifically from this fiscal
(29:06):
theory of the price level approachconnected with fiscal dominance.
And another implication of that isabout the duration of the debt.
If the duration of the debt is longer,lower inflation per year will work.
Whereas if the duration is very short,
you have to have a lot ofinflation in this framework.
(29:28):
That's another empirical thing welook at which works the things you
argue that are common to the fiscaltheory of the price level approach and
some other new Keynesian approaches.
That's to one side.
But then there are these otherimplications that came more specifically
from the framework that we adopted,which turned out to work very well.
(29:50):
So I think that's an importantpositive check mark on our side.
Fascinating, I guess.
So I'm just curious what yourthinking is in terms of just
progress in we're talkingabout sort of business cycles,
government responses and so forth.
(30:10):
And sort of these macro, different macroframeworks to think about these things.
I'm curious, what do you thinkabout sort of the progress
that you can see in DSG models have made,if any.
And I'm curious,where do you think the future of
business cycle research,macro research should be?
(30:32):
Do you think that we need tosort of deconstruct the three
equation new Casey DSGmodel which has is curve,
Phillips curve has Taylor rules.
Taylor rules work pretty well empirically.
But, we know the Phillips curve is there'smassive debates about all the inflation
(30:53):
versus unemployment,
empirical trade offs which don'tseem to have a very clear pattern.
Some people argue it's now nonlinear,some people say it's flat, but
it used to be steep.
And so there's a massive debateover the Phillips curve.
There's some people now thatare trying to look at beverage curves,
beverage curves which hold up pretty well.
And some people trying tobuild some concepts of say,
(31:15):
full employment around vacancies.
But I think even that ispretty limited progress.
I'm curious in your mind,do we need to go back further and
build from scratch the businesscycle models of the future?
I'm curious what you think the futurepath of business cycle macro is.
>> Robert Barro (31:38):
I think the foundations of New Keynesian macro models are deeply
flawed.
I think that that framework representeda major step backwards from
the disequilibrium macro models thatwere in play earlier in the 1970s.
One fundamental problem with the NewKeynesian model is it assumes that.
(31:59):
The output is always demand determined,which only makes sense
if there's tremendous excesssupply of goods all the time.
If there's excess supply of goods, excesssupply of labor, then that can make sense.
But that's not always the case, of course,
and sometimes there are importantsupply constraints.
(32:19):
But people who use the New Keynesianmacro model use the basic demand
determination of output all the time andit doesn't make sense much of the time.
So that's one component of thatmodel that's deeply flawed.
The Phillips curve part ofit is also very problematic.
It tends to predict this very strongcorrelation between what's going on
(32:42):
with GDP and what's going on withinflation and that's not in the data.
So I think a major reconsidering of theNew Keynesian macro model, even sticking
with a disequilibrium framework withsticky prices, even sticking with that.
I think a redoing of the basicmodel is really called for and
I know some people are workingon that currently.
(33:04):
Maybe there'll be somesuccess in that finally,
which is long overdue because despiteall its flaws, the New Keynesian
macro model has become almosta monopoly provider in this industry.
And it's really quite ridiculous.
>> Jon Hartley (33:20):
Yeah, it's interesting just to think about all the central bank
researchers I'm sure would be veryupset to hear this discussion, but.
>> Robert Barro (33:29):
Well, employment's been cutting, being cut back
a lot at the Federal Reserve bank anyway,I guess so maybe it goes along with that.
>> Jon Hartley (33:37):
Yeah, so, yeah, exactly.
Well, there's been a massive subsidy
toward DSG modeling in central banks.
And I think that's where certainlya lot of citations come from today.
It's interesting you go to most,I think macro, if you talk to or
just look at the researchthat's being done
(33:58):
by macroeconomists ina lot of econ departments.
There's relatively few that are workingon the M +1 iteration of a DSG model.
There's many, some that are, and some areusing DSG models in other frameworks and
so forth butit's interesting that it's come this far.
(34:18):
But I really don't think in allcentral bankers that have come across.
I don't really think thatcentral bankers necessarily
make a monetary policy decision ormove their dot or move.
They're thinking around monetarypolicy just because of some
New Keynesian output or model output.
(34:39):
Most central banks are using VARs forforecasting instead.
But it's an interesting question what,
what sort of frameworkthey should have and
maybe it's more just simplethinking around direction.
Sure, maybe the Phillips curve tradeoff isn't a very clear one empirically,
(35:03):
but raising interest ratespresumably cools demand and
that's good enough for them.
So they'll sort of move in that directionuntil something breaks perhaps.
>> Robert Barro (35:17):
I think the model needs some basic changes and
even sticking withinthe context of simple models.
Whereas in fact, the way the researchis going is it's just making
the New Keynesian models more andmore complicated.
More and more elements of heterogeneity,more and
more detail in terms ofenlarging the model.
I don't think that's the rightchannel to be following.
>> Jon Hartley (35:42):
Well, I guess I'm curious on more the sticky wages and
sticky prices side of things andnominal rigidities.
There's this a famous paper,set of papers from Kirk Mankiw and
Ricardo Rice on sticky information,which is something that's hard to measure.
In your mind,do you think that sticky wages and
(36:05):
sticky prices really matter for
in the sense that they can explain all.
They are the main contributor tosources of economic fluctuations
going back over the centuries isthat now your prices are becoming,
I think, less sticky at some level.
(36:25):
We have the more we use Amazonthose prices are changing.
Digital prices are oftenchanging all the time.
We think about Uber prices are dynamic.
They're shifting around a lot.
There's been some people who have saidwe should really sh toward models with
sticky wages instead.
Those sorts of contracts are certainlythings that are still very sticky.
(36:47):
But I guess, are you convinced thatnominal rigidities like sticky wages or
sticky prices are reallythat important for
determining economic fluctuations?
>> Robert Barro (37:02):
Well, my view in the 1970s into the 1980s was that sticky
prices and wages in nominal termswas not that important in terms
of thinking aboutmacroeconomic fluctuations.
And that it was hard to see how itcould be such a significant element.
And that was what led me to stopworking in that field around 1980 or
(37:25):
thereabouts, quite a ways back.
It also made me much more sympatheticto the Lucas type of approach,
which had to do with somekind of informational issues.
But that approach hada similar kind of a problem.
In that approach, it relied on the factthat people knew about the local
prices that they saw andwere familiar with.
(37:47):
And they were less familiar withthe general macro situation,
including the general price level.
But then it wasn't so convincing that theinformation involved in not knowing what
the price level was couldbe very important either.
So a similar kind of criticism,I think led me and other people to think
that that couldn't be a criticalelement in business fluctuations.
(38:12):
Similar to what you had just saidabout sticky wages and prices.
This sort of incomplete informationabout the general macro situation,
it's hard to see how that could be soimportant.
But then for me,that left me with a void because then
I eliminated the two mainmodels that were in play.
And then once the Lucas style modelbecame less convincing to many people,
(38:37):
they returned to in somesense the Keynesian model.
Which led to the new Keynesian modelbecoming so important and that relying on
particularly sticky prices and thenmore recently also sticky nominal wages.
So it's a strange kind of cyclein terms of how the fields and
(38:58):
their influences have evolvedgoing back to the 1970s.
>> Jon Hartley (39:03):
Yeah, it's fascinating.
I know macro gets a lot of criticism fromapplied micro people and saying that,
it's not making real progress and butit's interesting because these are all.
I think that these are the biggestquestions and, and
I think deserve some, some seriousthinking and serious research on.
>> Robert Barro (39:24):
Well, that's why economic growth became so
prominent in the period in the 1990s andinto the 2000s.
And my own work was primarily oneconomic growth in terms of theory and
empirical work.
>> Jon Hartley (39:38):
Well, I want to get into some of that growth research.
So,, as you mentioned,
some of your most cited work is inthe empirics of economic growth.
And many of your papers I think,put together really interesting.
I think new data sets like yourdata on consumption disasters or
really deep recessions or.
(39:59):
Or depressions across countries,
you've got another sort of data set oneducational attainment across countries,
what led you to studythe empirics of economic growth?
Did that for you, was that sort ofa moment that I guess we were just talking
about being fed up with kindathe other business cycle macro models.
But I think Robert Lucas,he had his own sort of, I guess,
(40:21):
transformation in thinking.
He had this famous phrase sayingonce you stop thinking about growth,
you can't think about anything else.
And we could talk about theserecessions like the Great Recession,
which is a 5% divot in the GDPgrowth trend of the US or
maybe some of your consumption disasters,
which are generally, I think,bigger across countries.
(40:45):
But at some level, if you look at just thesimple difference in GDP per capita levels
between say the U.S maybe it's a GDPper capita of around 80,000 versus very
poor countries that have GDPper capita around, say, 10,000.
I think China is a bit higher than10,000 but you just think about or
(41:06):
many countries in Latin America aroundthe world maybe close to 10,000.
That's a difference of a factor of 8, 8x.
And soexplaining those differences is just,
it feels like a much biggerstakes kind of issue.
There's also, I think,not exactly a great, I think it's still
very much an open question in termsof what causes economic growth.
(41:30):
And it's perhaps the most importantquestion in economics was
that kinda realization that ledyou to study economic growth?
>> Robert Barro (41:41):
So I think Bob has underestimated the cost of business
fluctuations but I think he was right thateconomic growth is even more important.
So I think he was right tothink about that topic and
to contribute to that literature.
And that's certainly what I also did.
So part of that was on the theoreticallevel and particularly thinking about
(42:03):
technological progress, in line withthe work by Paul Romer in particular.
I've worked a lot on that butI guess my more sort of distinctive
contribution was in termsof empirical analysis,
partly of the neoclassicalgrowth model and
its implications forconvergence across countries, and
(42:27):
partly bringing in some elementsof the endogenous growth theory,
which particularly becameprominent in the 1990s.
But that work has led to an unfortunatekind of circumstance, if you want to
think about what matters for growth and,and how it depends on policies and
(42:48):
things like property rights andfertility behavior and education and
all those, the natural empirical arenato consider there is the cross country
experiences where you have a lot ofvariety in terms of different policies and
institutions being put into place andyou have some hope from that of trying to
isolate what things matter forlong run economic growth.
(43:11):
And that was the work Iparticularly put my efforts into in
the 1990s going into the 2000s.
And for a while there was a tremendousinterest in that work and
it was probably the most citedpart of economics overall.
But then you had this kind of so calledcredibility revolution in econometrics and
(43:32):
identification and it was clear thatto be using this cross country context
leads to a lot of issues where youdon't get perfect identification.
There are some legitimate problemsthat arise in terms of various things
being endogenous andtoo many things potentially mattering.
But then I don't understand howthe outcome from that is supposed to be.
(43:57):
Then you ignore the best data that youhave that pertain to these questions.
What which is this crosscountry experience,
you almost never have experiencesin terms of macroeconomics and
growth where you have the kindsof exogenous experiments or
near experiments that you wouldwant to get clean identification.
(44:17):
And then I think it's really unfortunatethat what can be gleaned from
the data that are available withthe possible identification methods and
implementations and then ignoringthat I think is a great mistake.
But that's the situation we're in now.
It's basically you just can'tdo that kind of work now.
(44:37):
It's viewed as not legitimate.
And I think that that's really wrong andunfortunate.
>> Jon Hartley (44:43):
Yeah, no, I agree with you.
It's a shame that cross countrygrowth regressions have
seemingly kind of disappear orcross country.
I think work in general forgetabout just growth accounting and
things like that seems to havedisappeared a little bit, I guess.
Yeah, it's an interesting questionin terms of generalizability and
(45:10):
there's lots of people who then willsay well you should look at some
very specific natural experiment ina very small corner of the world.
But you then there's this question.
>> Robert Barro (45:24):
It doesn't give you the macro kind of variation that you want.
>> Jon Hartley (45:27):
Right, exactly it doesn't.
The narrower you get orthe smaller you get, the easier it is for
I guess these sorts of small microeffects to be swamped by spillover
general equilibrium incentive effects thatyou get sort of at the bigger macro level.
(45:47):
And so it's, and then hence youhave things like external validity,
violation of suit ven and these sortsof things become a valid criticism.
But yeah, I'm with you on gettingback to cross country regressions,
I wanna just talk a little bit about someof your big hits on economic growth.
(46:11):
For example, you wrote a famouspaper in the 1980s on democracy and
growth finding no relationshipbetween democracy and growth.
Some other economists, like Drone Ajemoglurecently won the Nobel Prize,
vehemently argued the opposite thatdemocracy causes economic growth.
And he's using measures like the FreedomHouse democracy measures, I'm curious,
(46:34):
where do you stand in this whole debate?
Jeffrey Sachs I think was a Harvardcolleague as well for a while.
Where do you stand inthe whole institutions
versus culture versussay climate geography,
which is I guess morewhere Jeffrey Sachs and
guns, germs and steel comes in,
(46:57):
institutions being sortof why nations fail,
Drone AJ, Moglu Johnson and others.
I'm curious, where do you stand in thatsort of debate between those three
sort of key explanations?
You do a lot of work on religion andeconomics as well.
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.
But where do you stand in terms of,you know, what, what causes growth?
>> Robert Barro (47:29):
Well, I think there were some pretty clear robust findings from
the cross country growth regressionliterature from work that I did and
other people did.
This idea of conditional convergence Ithink is quite robust, that's the idea
that if you hold a lot of other thingsconstant that then having a lower starting
(47:50):
position predicts higher growth anda catch up convergence type of effect.
But the fact that you have to conditionon other things is central to
getting that result.
There are more issues aboutwhat are the other things.
But I think some things comeout to be fairly clear.
I think institutional measuresare quite predictive of growth.
(48:12):
Things that look like property rights,
rule of law have a pretty robustpositive connection to economic growth.
Things involving fertility and populationgrowth seem to be pretty reliably
negative with respect to per capitaGDP growth, which is interesting these
days when people are worrying a lotabout population growth being too low.
(48:38):
There's some interesting recentwork related to climate and
economic growth over the long termarguing that you have to look at that in
a global context,which is basically the world.
And that gets you into the realmof looking at this time series on
macrovariables beingthe basically world GDP.
(49:00):
But a recent paper which hasinteresting results suggesting
quite large negative effects fromtemperature rises on global GDP.
As you say,some people have looked at religion and
economic growth as part ofthe cultural phenomena.
(49:22):
My wife, Rachel McCleary andI had some interesting findings there.
I thought we argued that what matteredin terms of religion was something like
believing relative to belonging.
So some measures of religious beliefs, but
kind of contingent on how muchparticipation church attendance there was.
So we found that stronger beliefsseemed to underlie things like
(49:45):
Max Weber's work ethic andthereby promote economic growth.
But just going to church more often didn'tseem to have that kind of beneficial
effect.
Anyway, if you put it all together,I think there's a lot of interesting
work cross-country in terms ofdeterminants of economic growth.
(50:05):
And I think it's a field that needs tobe reestablished as being legitimate,
basically.
>> Jon Hartley (50:13):
Well, I know that you also spent a lot of time in sort of
promoting the idea thathuman capital matters.
I think this is maybe a fourthschool that I think largely been
championed by a lot of people,I'd say, in the Chicago School world,
University of Chicago,who've done a lot of work on education.
(50:35):
And I guess I'm curious whatyour thoughts are there.
It's interesting,there's all these debates recently
about industrial policy andother questions around that.
And work by Larry Katz hereon training programs for
sectoral training programs thatat least in our CTs seem to work
(50:56):
well compared to other sortsof job training programs,
say from the Great Societyera that don't work well.
To me, even though these things are beingrebranded as things like industrial
policy at some level,if you look at like South Korea,
which some people attribute to beingan industrial policy success story,
(51:17):
it's a place that where its industrialpolicy is largely human capital Related.
So at some level,you know, it's a question,
maybe a lot of these thingsare just human capital rebrandings.
But in your mind, is educationreally central to economic growth?
>> Robert Barro (51:33):
So John Wali and
I put together this major dataset which people use a lot.
So it's just on quantity of schooling.
It's about years of schoolattainment at various levels and for
most countries in the world goingback to the 1950 or so, and
you can go back earlier forsome set of countries.
(51:54):
So that's one of the variables that hasa central role in terms of determinants
of economic growth.
And we also distinguish education bygender as part of that kind of analysis.
So the two major data sets Ithink that I've put together
until recently were the onewith Zhang Wali and
(52:15):
the other one with Jose Ursua wasdata that you mentioned before
in terms of the long term dataon macroeconomic disasters.
More recently I'm putting together thisdata on very long term attendance at
religious services,which I think is another kind of data set.
Not so much of a macro data set, but
(52:37):
I think that's another one that'sgoing to have a lot of use.
>> Jon Hartley (52:42):
Well, it's fascinating and amazing work.
And I remember,when you were talking about,
I think a couple decadesago you were interviewed,
I think about Bono at that time in the2000s, was a very vocal advocate of aid.
And I remember you'rea bit critical of aid,
certainly government aid being that usefulin terms of spurring economic growth.
(53:07):
This is, I think, around the time thatYouTube is doing its Elevation Tour,
its I think 2000 album,All The Things You Can't Leave behind.
And you said it was a great album.
And I think I agree with you on that.
But you've been so influential in so manytopics in macro and you've advised many,
many students who've gone on tohave incredible academic careers.
(53:29):
Michael Kramer, Emmy Nakamura,George Marios, Angeletos, Xavier Gabay,
Xavier Sally Martin,Zvi Herkovitz, many, many others.
And some of them have goneon to win Nobel Prizes.
I mean, what in your mind makes goodadvising for, for PhD students?
>> Robert Barro (53:46):
A couple remarks about Bono.
So Jeff Sachs set it up forme to have lunch with him and Bono.
So when he invited me toshow you how ignorant I was,
I didn't know anything about Bono.
So I consulted with my daughter andI said,
I've been invited to have lunch withthis guy who's apparently a rock star.
(54:07):
And I don't know him what should I do?
And my daughter said well,of course you have to go, absolutely.
I was actually very impressed by him.
He's extremely intelligent andhe's extremely quick on picking things up.
Obviously he doesn't have a background,for example in economics, but he
was seriously interested in getting ideasrelated to things he was interested in,
(54:30):
which particularly about debt relief andforeign aid at the time.
But he didn't want somebody who was goingto just echo his visions on those matters.
He wanted to get alternative views,probably because he wanted to know how to
defend against arguments that wereagainst what he really wanted to push.
But anyway it was a very good discussion.
(54:54):
I didn't really agree with his basicpositions and I don't think that forgiving
debt is the way to promote economicgrowth for poor countries.
And I don't think foreign aidhas been successful at all.
I think if we're cutting back on USAIDas we seem to be doing at the moment,
I think that's a great idea.
I strongly support that.
(55:17):
In terms of my PhD students, yes,
I've had some wonderful PhDstudents over the years.
I'm hoping that Emi Nakamura andJohn Steinson will join us soon at
Harvard since they have offers now to jointhe faculty of the Economics department.
And they were particularlygreat students of mine.
(55:41):
Michael Kramer, as whom you mentioned,was of course a wonderful student
who had two classic articlesas part of his PhD thesis.
At the time he was doingmostly macro growth, but
he shifted more toward microtype thingsin terms of developing countries and
in particular applying experimentaldesigns in those contexts.
(56:03):
I think that's really whathe got the Nobel Prize for.
But he's still interested inthe macro type work as well.
There's a great variation in terms of howone works with the graduate students.
You mentioned Xavier Gobex.
Gobex was a complete self-starter anddid everything on his own.
And then at some point he basicallyawarded me a prize by asking me to be
(56:27):
his PhD advisor.
And I don't think I get much credit forwhat he has produced, which has been
very high quality, but I don't thinkI had that much influence on it.
So that varies a lot across the students.
I don't know how to say what it isthat makes one successful in terms
of advising the great students.
(56:50):
To some extent it's not sodifferent from coming up with ideas for
one's own research, but I guess also itdoes involve some different dimensions.
>> Jon Hartley (56:59):
It's amazing, you advised a tremendous number of students,
and I'm sure many of themwill listen to this and
I'm sure will enjoy what'sbeen an amazing conversation.
Robert, really want to thank you forcoming on.
This has been really great.
It's been a thrill to have you on andhear your ideas.
>> Robert Barro (57:21):
Okay, it's been great for me as well.
>> Jon Hartley (57:23):
This is the Capitalism and Freedom, the 21st Century podcast,
an official podcast of the Hoover EconomicPolicy Working Group where we talk
about economics,markets and public policy.
I'm Jon Hartley, your host.
Thanks so much for joining us.
[MUSIC]
[MUSIC]
>> Jon Hartley (00:09):
This is the Capitalism and Freedom the 21st Century podcast,
an official podcast of the HooverInstitution Economic Policy Working Group
where we talk about economics,markets and public policy.
I'm Jon Hartley, your host.
Today, my guest is Robert Barro, who is aneconomics professor at Harvard University.
He's widely regarded as one of thefounders of new classical macroeconomics,
having done incredible path breakingwork in the empirics of economic growth,
(00:32):
Ricardian equivalence andmany, many other areas.
Welcome, Robert.
>> Robert Barro (00:36):
Hello, great to be here.
>> Jon Hartley (00:39):
Robert, I want to first get into your early life.
You were born in New York City and youwere a physics undergrad at Caltech and
were a Richard Feynman student inthe 1960s and then you transitioned to
economics, into doing a PhD in economicsat Harvard, graduating in 1970.
What was it that first gotyou interested in economics?
>> Robert Barro (01:03):
Well, I didn't know anything about economics when I
started as an undergraduate and Caltechdidn't offer any economics to speak of.
They only had a couple of courses.
My brother was an economist andhe gave me some influence and
I finally took a coursein my junior year and
surprisingly enough it wason Keynesian economics.
(01:27):
It was straight out of the general theory,but I loved the class when I saw it.
And I particularly appreciatedthe combination of technical material
which I was doing a lot of when Iwas in physics with applications and
particularly uses in a policy context.
So the combination of those two things Ithink is what especially attracted me.
>> Jon Hartley (01:53):
Well, I know your PhD advisor was Grillikas at Harvard and
you returned to Harvard in itseconomics department in the 1980s,
where you've been since.
I mean,
how has the department changed sinceyou were there as a graduate student?
(02:13):
I mean,obviously there were a lot of changes.
I guess there was perhaps at that time alot of, when you were a graduate student,
a lot of sort of old Keynesian economists,Harvard, MIT have sort of historically
been, I think well known for having folkslike Alvin Hansen, who kind of brought
a lot of Keynes ideas to the United Statesand obviously University of Chicago,
(02:38):
Minnesota, other socalled freshwater places being, you know,
having a bit of a different perspective,being, you know, more, more so the home
of sort of new classical economics,the Chicago School and so forth.
I mean, how exactly did you know you endup there when you're a graduate student?
(02:58):
What brought you back as a professor?
Given that, I think it's fair tosay that a lot of your work and
ideas are somewhat in contrary to thatsort of Keynesian tradition at Harvard?
>> Robert Barro (03:11):
I think it's fair to say that when I was a graduate student at
Harvard, it was a low point for
the faculty in terms ofthe economics department.
It just was not a very good department.
And it had been sort of going downhill forsome time.
And that was more dominant than thequestion about whether it was Keynesian or
(03:33):
not Keynesian.
It really wasn't impartinga good instruction, and
it was particularlyweak in macroeconomics.
And I was working on hyperinflation andmacroeconomics more broadly,
and I had a very tough timefinding a thesis advisor.
So it ended up being the casethat I was in my third year and
(03:56):
I'd gotten a lot of work done in terms ofparticularly the German hyperinflation,
and I had some papers ready.
But I decided I should try to get a job,
even though I didn't havea thesis advisor or a thesis.
And somehow I managed to get a jobat Brown University as an assistant
professor without having a doctorate oreven a thesis advisor.
(04:21):
But that actually wasa sensible thing to do.
It actually worked out.
But at some point I decided I betterfinish up and I needed to get an advisor.
Meanwhile, Harvard had hired somereally great professors all at once.
Ken Arrow, Dale Jorgensen,Marty Feldstein, and Svi Grillikas.
(04:42):
They were all hired just aboutthe same time toward the end of
my graduate education.
So I decided I should get one ofthese new people to be my advisor,
even though they might notfit exactly by fields.
And at some point I hadan appointment with Svi Grilikas, and
(05:03):
I talked to him for half an hour aboutthe work I was doing, and some of it
was in econometric applications,which fit with his expertise.
So even though he wasn't a macroeconomist,
it actually worked out forhim to be my advisor and he was great.
And he told me at some point that hiswhole career he'd really only had
(05:25):
two PhD students in macroeconomics,and the other one was Bob Lucas.
So I thought that was pretty good.
So I was very happy withSvi as my advisor, and
I ended up finishing up there.
>> Jon Hartley (05:38):
Well, that's terrific.
And I'm curious,
where were you when the RationalExpectations revolution was happening?
Obviously, when I think aboutthe history of macroeconomic thought and
how it kind of evolved in the late 20thcentury, you had this thing, which
was the Rational Expectations revolution,micro foundations and so forth.
(06:02):
That came out of largely the Midwest,University of Chicago,
Minnesota and elsewhere in this,really starting the 70s.
And then over time, it wasn't reallyuntil that that caught on and
I think pretty successfulin terms of changing,
at least influencing research in the sortof the subsequent couple of decades.
(06:28):
And in part that was a response to,I guess,
Keynesian models being unableto explain rising inflation and
output falling during that period of time,the 70s and 80s.
But, later on,Harvard sort of caught up or
the new Keynesian sort of traditionkind of emerged where they took
(06:50):
all the rational expectationsmicro foundations theory that
had been developed by Lucas Sargent,Prescott and others, and
then inserted frictions,nominal rigidities and so forth.
So folks like Greg Mankiw,Rich Clarida, Jordi Gali,
Mile Woodford, and soforth, and many others.
(07:13):
I mean, where were you during thatperiod of time in the rational
expectations of revolution?
>> Robert Barro (07:22):
So in the mid-1970s, I left Brown University.
I took a position in Chicago.
Milton Friedman was still there, andI particularly interacted with him and
with Gary Becker and George Stickler.
So I worked in that periodparticularly on Ricardian equivalence,
(07:43):
which has some relation to rationalexpectations, of course, and
I worked a lot on empirical thingsrelated to some of Bob Lucas's work.
But Lucas actually went backto Chicago a little bit later.
And the second time I was in Chicago iswhen I particularly interacted with him.
So it was in that period fromthe mid-70s through the mid-1980s,
(08:09):
where part of the timeI was in Chicago and
part of the time I wasinteracting with Lucas.
So that's some of that period.
>> Jon Hartley (08:21):
So I guess diving into some of your research here and
talking about Ricardian equivalence,it's this idea that
temporary tax cuts shouldn'taffect consumption, that debt and
taxes are interchangeable andthat you wrote this very famous paper,
(08:41):
I think the 1970s, this titledare government bonds net wealth?
And your answer to that is no.
And the idea is that government bondsare substitutable with taxes and
it's largely the path of spendingthat matters and that, you know,
agents and consumers will smooth,they'll just save more in response to
(09:04):
something like the government issuingmore debt or running in a deficit.
And so I think it has a lot ofimplications for deficit spending.
Governments trying to use deficitspending to juice aggregate demand,
which is still a very popularpolicy approach by governments.
(09:26):
Curious, what gave you this ideato study Ricardian equivalence?
It was something that David Ricardo,
it wasn't really something thatfirst David Ricardo, a champion, but
something that I think had growndormant for quite some time.
What led you to studying that as wellas other forms of I guess equivalents.
(09:47):
You've written papers aboutgovernment debt management,
I think arguing thatgovernment debt management,
maturity choice doesn't really matter fornon contingent debt.
What led you to thissort of line of thinking?
Was it those interactions with Lucas orwas it something else?
>> Robert Barro (10:03):
No, not something with Lucas, which would have been later.
But Ricardo and equivalence is importantas kind of a baseline idea that under
certain circumstances you get thisfairly set of extreme results and
then it forces you to think in adisciplined way about why should you have
departures from that and in whatdirection are the departures going to be?
(10:26):
And certainly Ricardian equivalencedoesn't always hold, but
that doesn't mean the kind of standardanalysis of fiscal deficits are valid and
things can go even inthe opposite direction.
And I had a second paper in end ofthe 1970s about tax rate smoothing,
which was about the functionof public debt as a device for
(10:49):
financing basically temporarygovernment expenditure.
And from a public finance viewpoint itwas important that that method of finance
was available.
And in that sense the debtis not irrelevant.
And it probably underlies why Britain didso well in financing wars over a couple
of centuries because it provideda very convenient method of financing.
(11:15):
So certainly you don't haveRicardian equivalence there,
but it becomes kind of A part of publicfinance in terms of what's the optimal
structure of taxation over time.
And the public debt managementis part of that problem.
I gave a seminar on my Ricardianequivalence paper only once, and Friedman,
(11:36):
Becker andStigler were there at the same time,
which is the only time I've seen the threeof them together at a seminar, actually.
>> Jon Hartley (11:44):
Wow. >> Robert Barro
And I got some importantfeedback there and
then from Gene Fama when I gave the paperin the business school in Chicago.
And those are the only two times I gavea seminar on that paper which proved
very influential.
So I didn't know when I wrote the paperthat it had something to do with
David Ricardo.
(12:05):
And I didn't call itRicardian equivalence.
That came from Jim Buchanan,who wrote a comment on my page paper and
he said,all this is Ricardian equivalence.
And then I decided, well, it must be thatthere was an earlier statement of this,
before David Ricardo, that you canalways go back and find stuff.
(12:25):
And then I looked into that.
In fact,
I couldn't find any sensible thingbefore Ricardo that had this viewpoint.
So then I decided Ricardianequivalence was a really good name and
we should adopt that whichsubsequently became the case.
Well, I'm curious,
how do you feel about I guess criticismfrom empirical economists who kind of say,
(12:48):
well, Ricardian equivalence, it's wrongand they point to maybe some data
about some micro data maybe that showsthat consumers aren't fully smoothing.
I think if you look at the macro Data,like the 2008 tax rebates in the US or
the 2020, 2021 stimulus checks in the US,
(13:09):
it's pretty clear thatthey're largely being saved.
So I think at the macro level, there'sa lot of smoothing that's going on.
But I'm curious,I don't think it's necessarily.
Yeah, it's certainly not full smoothingand perfect smoothing either.
I mean, I'm curious, is it reallyjust the being an important baseline
(13:30):
that's important, or do you think thata lot of empirical economists out there.
Particularly on the maybeapplied micro side of things,
that they're using microdatato estimate NPCs or
to look at consumer spendingresponses to fiscal policies,
do you think that they'remissing something?
>> Robert Barro (13:54):
Well, I think it's certainly fair that there can
be departures from complete smoothing andthere are good reasons to have certain
kind of frictions and informational issuesthat can produce those kinds of effects.
It's certainly not systematicallythe case that fiscal deficits produce
the kinds of Keynesian responsesthat are often predicted.
(14:15):
And some of the departures fromRicardian equivalence can go in
the direction opposite to the one thatyou would normally expect to find.
Again, in terms of the tax smoothing,I found it more productive to think
about that as a positive theory abouthow the government is managing the debt.
(14:36):
And in that context, it certainly matters.
And there's a lot of literature alongthose lines in terms of the public debt
as a kind of part of optimal tax problems,which I think is a good way to look at it.
>> Jon Hartley (14:51):
So I guess I want to talk just a little bit about government
spending multipliers,because it's a related issue.
In 2011, you got into this literature,you published this early Journal
of Economics paper with Charles Rudlich,since become, I think,
a very famous paper titled MacroeconomicEffects of Government Purchases and Taxes.
(15:12):
And you find that government spendingmultipliers are low and below one.
And that's consistent with other workthat's done by Hoover's very own
Valerie Ramey.
And you found that taxmultipliers are a bit higher.
And you're, you're largely usinggovernment military purchases,
military spending forexogenous identification.
(15:35):
I'm curious, what's your intuition for
why this is the case that governmentspending multipliers are so low in the,
in the macro data and, and that the taxmultipliers are actually somewhat higher?
I know Alberto Alsina founda similar thing looking at fiscal
consolidations with his co authors, but
(15:55):
I guess I'm cur because I feel likethis is definitely one of the most.
Hotly debated topics inmacroeconomics where it feels like,
there is progress being made, butit's still a hugely contentious debate.
We're often the, I think that empiricalmacro people tend to say one thing,
(16:15):
whereas the applied micro people,which might look at,
you know, say tax lotteries orsomething of that nature,
using more, more micro level data,find that NPCs are very high and
that government spending multipliersare much higher than, than one.
I'm curious what you thinkabout that tension and
where you think thatthe truth is in all this.
>> Robert Barro (16:39):
Looking at the variations in military spending in the US context
over a fairly long time periodis a very good setting for
trying to isolate spendingmultipliers associated with basically
exogenous movements in the amountof government expenditure.
You wouldn't do this formany countries during wartime
(17:01):
because the direct destructive effectsof wartime tend to be dominant.
And typically in wartime youwould estimate negative spending
multipliers associatedwith military outlays.
But the US is different in that respect.
It doesn't have that kind ofmassive destruction associated,
particularly with World War II.
(17:21):
So it was a very good setting,I think, for
looking to isolate the effect of theseexogenous and large spending changes.
So the multipliers were positive.
I mean, the right baseline is 0, not 1.
If the multiplier is 1,it means you're basically getting as much
(17:41):
output as you're using up, which makesit sound like it's a free thing, I.
>> Jon Hartley (17:47):
Guess, if P is included in, in GDP, right?
You should, some would argue thatthere's been this big debate
recently about whether G shouldbe included in GDP or not.
Howard Lutnick, the Secretary of Commercehas highlighted this, among others.
But I guess Simon Kuznets famously saidthat G should be removed from GDP.
(18:08):
So these people aren't exactly alone.
But I guess there'sthis question which is,
even if there weren't offsetting effects,
that would make the multiplier lessthan 1 when you're including G in GDP.
Yeah, there's a question of->> Robert Barro: But
it's not just about terminology.
If the multiplier including G is one,it means that you can get the G for free.
(18:32):
It means that your outputgoes up enough to pay for it.
And then if you're saying the stuffis worthless, okay, well,
you still didn't have to pay for it.
So it's not completely terrible.
But the right benchmark is a multiplierof zero because that means that in
order to get the extra spendinglet's say for military,
you have to cut back onother spending one for one.
(18:55):
So I would have looked atthat as the benchmark.
So we found multipliers that weremore like a half or something,
which means that you have to pay for50% of the extra.
So it's a multiplier of one andabove is kind of completely ridiculous.
I mean, a multiplier above one meansyou're not only getting the military
spending for free, you're gettingsomething extra for coming from nowhere.
(19:18):
It should be a very surprising resultto have multipliers that are above one.
And you certainly wouldn'tfind that in normal times or
in some kind of long run setting.
I mean, it's not true that countriesthat have more G have more gdp,
which would be even enoughmore GDP to more than pay for
(19:40):
the G, which would be weird.
So I think that's just not true.
But anyway,I think we isolated some effects.
I mean, the tax changes typically haveincentive effects that are important.
So cutting taxes usuallymeans cutting tax rates and
providing more incentive to do things likework more and work harder and invest more.
(20:05):
So it's not surprising that youmight find more potent effects
related to cutting taxes,which typically are not lump sum taxes,
but something about distortingtaxes being reduced, I guess.
Any thoughts on, I guess this idea of crowding out and
that if you get more,more government spending, more control,
(20:27):
I guess it crowds up competition fromthe private sector in these areas.
I guess, maybe one.
It's often one of the most cited,I think, reasons for
why government spendingmultipliers might be fairly low.
I'm curious what your thoughts are onthat kind of crowding argument.
>> Robert Barro (20:47):
Yeah, so to have any kind of macro crowding out,
you need the multipliersto be less than 1.
If they were negative,that would be even more extreme.
You'd really have to raise a lot ofextra stuff to pay for the spending.
Yeah, I think it's a reasonable first lineapproximation that you have substantial
(21:08):
crowding out of private activity whenyou have more government activity.
So some of that is just directlyon the expenditure macro side and
some is more along the lines of what youwere indicating in terms of crowding
out based on the governmenteffectively monopolizing the market or
regulating things, andthat's going to depress private activity.
(21:31):
So yeah, I think crowding out inboth of those senses is important.
>> Jon Hartley (21:37):
Hm, well, I want to just talk a little bit about fiscal theory
of the price level here becauseit's also somewhat related to
Ricardian equivalence, andit's one of these, I think,
similar benchmark kind of resultsfrom a pretty simple model.
Something you've done some workon lately with Francesco Bianchi.
(22:00):
A terrific monograph has been writtenrecently by Hoover's very own
John Cochran titled Fiscal Theory atthe Price Level on this very topic.
I'm curious, what led you to recentlystart studying fiscal theory?
>> Robert Barro (22:16):
For me, I was driven at the empirical level, trying to understand
the surge in inflation associatedwith the COVID crisis and
noting that this was a global phenomenon,it wasn't particular to the United States.
And then I was trying to thinkabout what kind of macro monetary
analysis would lead you to the resultthat this kind of expansion,
(22:39):
which involved a lot of fiscal deficits,
a lot of transfer payments,why might that be inflationary?
How would you think aboutthat kind of linkage?
I think the closer thing to whatwe ended up doing was the idea
of fiscal dominance andthe kind of analysis that Lucas and
(22:59):
Stokoe had in the 1980s, andthinking about wartime finance and
why it was often accompanied by inflation.
So I think that was probably a moreimportant element rather than the fiscal
theory of the price level per se,which often involves issues
that didn't really have anythingto do with what Bianchi and I.
(23:22):
Now, certainly, there's a governmentbudget constraint that's
central to this analysis, and it has tobe viewed in an intertemporal sense, so
that if you have more spending, you haveto pay for it somehow and somewhere.
But then it also leads you to the ideathat it's possible to pay for
it through the kind of contingentfiscal deficits that Lucas and
(23:46):
Stokoe highlighted.
So if you have a massive increase,such as the transfer payments,
even more under Biden than underthe first Trump administration,
a way to avoid paying forthat by cutting other spending.
Spending or by raising taxes isby having a inflation that's
surprising from a perspectiveof a pre crisis period.
(24:09):
And that basically wipes out a lot ofreal value of the government bonds
that are outstanding and it amountsto a very large temporary source
of revenue which can be something like 10,15% of the GDP.
So it's not a minor deal.
And that's empirically about what happenedin the US and also in other places.
(24:31):
And then people don't like the idea thatit might not have been completely crazy
to pay for the expenditure in substantialpart through this surprise inflation.
I get a lot of grief on thatpoint from people who normally,
who normally are on my side aboutthings because they just want to think
(24:51):
of the inflation as being stupid andbeing dramatically harmful.
So I think what was harmful isthe excessive fiscal expansion,
particularly under Biden.
It was unnecessary to have that vastincrease in transfer payments, but given
that you had it, we effectively paid formost of it through the surprise inflation.
(25:12):
And maybe that part was not socrazy because
the alternatives would havebeen also very costly.
>> Jon Hartley (25:21):
Yeah, well it's interesting.
I think maybe some of thatconsternation comes from, I guess,
people that are wedded to older,older models.
And I guess physical theoryis something that sort of,
I guess regained interest inpart due to John's monograph.
And yeah, I think it's interestingbecause I think there's
(25:45):
a lot of people at some levelthe results of physical theory
are at some level observationallyequivalent with other say.
New Keynesian DSG models anda lot of their kind of key results.
You could also find thatdeficit spending causes
inflation in Old Keynesian ISLMtype frameworks as well.
(26:11):
So I guess as far as I see itthe tension kind of arises from
that observational equivalence.
Fiscal theory, the price of alsoputs a big emphasis on expectation
fiscal expectations andhow those are shifting.
It's very difficult to measurefiscal expectations and
we don't really have, in my mind,really any good measures of it.
(26:33):
We do have CBO forecasts, butthose are under current law and
policy andat some level those don't necessarily
reflect the fact thatmarkets may believe that.
And people may believe that governmentspending patterns will actually
(26:54):
have to change at some point.
And that as crazy asthese CBO forecasts are,
at some level the true expectationis something different.
But I'm curious, you spent->> Robert Barro: Let me answer to
part of that.
You spent a lot of time- >> Robert Barro
the reason the fiscal expansionleads to inflation works
(27:18):
through the budget constraint,which is intertemporal.
So somehow you're effectively getting thisrevenue by reducing the real public debt.
And the amount by which you have toreduced to debt is related to how much
revenue you need, which is partlyrelated to the fiscal outlay.
(27:38):
And as you say,
there are other models that mightconnect fiscal outlay to inflation.
But we get other implications of thisapproach that works through the budget
constraint, which ties in withthe fiscal theory of the price level.
So ask yourself, how much inflation do youneed to get a given amount of revenue?
(27:58):
How does it relate to how much publicdebt is outstanding to begin with?
So if you don't have anypublic debt outstanding,
you really can't get revenue byreducing the real value of the debt.
It doesn't work.
And if you have a tremendousamount of public debt outstanding,
denominated in nominal terms,then it's relatively easy to get a lot
(28:21):
of revenue by wiping outthe real value of that debt.
So through that channel we getthe prediction that countries
that started with moredebt relative to GDP.
Let's say in 2019,before the COVID crisis,
they should have less inflation,and countries that started out with
little debt should have more inflation,which is counterintuitive.
(28:46):
You might have thought itwould go the other way, but
we argue empirically that it worksvery persuasively that we do get that
result in the data when we lookacross all the OECD countries.
So we're looking at 37 countries here,not just the US so
that's an implication that camespecifically from this fiscal
(29:06):
theory of the price level approachconnected with fiscal dominance.
And another implication of that isabout the duration of the debt.
If the duration of the debt is longer,lower inflation per year will work.
Whereas if the duration is very short,
you have to have a lot ofinflation in this framework.
(29:28):
That's another empirical thing welook at which works the things you
argue that are common to the fiscaltheory of the price level approach and
some other new Keynesian approaches.
That's to one side.
But then there are these otherimplications that came more specifically
from the framework that we adopted,which turned out to work very well.
(29:50):
So I think that's an importantpositive check mark on our side.
Fascinating, I guess.
So I'm just curious what yourthinking is in terms of just
progress in we're talkingabout sort of business cycles,
government responses and so forth.
(30:10):
And sort of these macro, different macroframeworks to think about these things.
I'm curious, what do you thinkabout sort of the progress
that you can see in DSG models have made,if any.
And I'm curious,where do you think the future of
business cycle research,macro research should be?
(30:32):
Do you think that we need tosort of deconstruct the three
equation new Casey DSGmodel which has is curve,
Phillips curve has Taylor rules.
Taylor rules work pretty well empirically.
But, we know the Phillips curve is there'smassive debates about all the inflation
(30:53):
versus unemployment,
empirical trade offs which don'tseem to have a very clear pattern.
Some people argue it's now nonlinear,some people say it's flat, but
it used to be steep.
And so there's a massive debateover the Phillips curve.
There's some people now thatare trying to look at beverage curves,
beverage curves which hold up pretty well.
And some people trying tobuild some concepts of say,
(31:15):
full employment around vacancies.
But I think even that ispretty limited progress.
I'm curious in your mind,do we need to go back further and
build from scratch the businesscycle models of the future?
I'm curious what you think the futurepath of business cycle macro is.
>> Robert Barro (31:38):
I think the foundations of New Keynesian macro models are deeply
flawed.
I think that that framework representeda major step backwards from
the disequilibrium macro models thatwere in play earlier in the 1970s.
One fundamental problem with the NewKeynesian model is it assumes that.
(31:59):
The output is always demand determined,which only makes sense
if there's tremendous excesssupply of goods all the time.
If there's excess supply of goods, excesssupply of labor, then that can make sense.
But that's not always the case, of course,
and sometimes there are importantsupply constraints.
(32:19):
But people who use the New Keynesianmacro model use the basic demand
determination of output all the time andit doesn't make sense much of the time.
So that's one component of thatmodel that's deeply flawed.
The Phillips curve part ofit is also very problematic.
It tends to predict this very strongcorrelation between what's going on
(32:42):
with GDP and what's going on withinflation and that's not in the data.
So I think a major reconsidering of theNew Keynesian macro model, even sticking
with a disequilibrium framework withsticky prices, even sticking with that.
I think a redoing of the basicmodel is really called for and
I know some people are workingon that currently.
(33:04):
Maybe there'll be somesuccess in that finally,
which is long overdue because despiteall its flaws, the New Keynesian
macro model has become almosta monopoly provider in this industry.
And it's really quite ridiculous.
>> Jon Hartley (33:20):
Yeah, it's interesting just to think about all the central bank
researchers I'm sure would be veryupset to hear this discussion, but.
>> Robert Barro (33:29):
Well, employment's been cutting, being cut back
a lot at the Federal Reserve bank anyway,I guess so maybe it goes along with that.
>> Jon Hartley (33:37):
Yeah, so, yeah, exactly.
Well, there's been a massive subsidy
toward DSG modeling in central banks.
And I think that's where certainlya lot of citations come from today.
It's interesting you go to most,I think macro, if you talk to or
just look at the researchthat's being done
(33:58):
by macroeconomists ina lot of econ departments.
There's relatively few that are workingon the M +1 iteration of a DSG model.
There's many, some that are, and some areusing DSG models in other frameworks and
so forth butit's interesting that it's come this far.
(34:18):
But I really don't think in allcentral bankers that have come across.
I don't really think thatcentral bankers necessarily
make a monetary policy decision ormove their dot or move.
They're thinking around monetarypolicy just because of some
New Keynesian output or model output.
(34:39):
Most central banks are using VARs forforecasting instead.
But it's an interesting question what,
what sort of frameworkthey should have and
maybe it's more just simplethinking around direction.
Sure, maybe the Phillips curve tradeoff isn't a very clear one empirically,
(35:03):
but raising interest ratespresumably cools demand and
that's good enough for them.
So they'll sort of move in that directionuntil something breaks perhaps.
>> Robert Barro (35:17):
I think the model needs some basic changes and
even sticking withinthe context of simple models.
Whereas in fact, the way the researchis going is it's just making
the New Keynesian models more andmore complicated.
More and more elements of heterogeneity,more and
more detail in terms ofenlarging the model.
I don't think that's the rightchannel to be following.
>> Jon Hartley (35:42):
Well, I guess I'm curious on more the sticky wages and
sticky prices side of things andnominal rigidities.
There's this a famous paper,set of papers from Kirk Mankiw and
Ricardo Rice on sticky information,which is something that's hard to measure.
In your mind,do you think that sticky wages and
(36:05):
sticky prices really matter for
in the sense that they can explain all.
They are the main contributor tosources of economic fluctuations
going back over the centuries isthat now your prices are becoming,
I think, less sticky at some level.
(36:25):
We have the more we use Amazonthose prices are changing.
Digital prices are oftenchanging all the time.
We think about Uber prices are dynamic.
They're shifting around a lot.
There's been some people who have saidwe should really sh toward models with
sticky wages instead.
Those sorts of contracts are certainlythings that are still very sticky.
(36:47):
But I guess, are you convinced thatnominal rigidities like sticky wages or
sticky prices are reallythat important for
determining economic fluctuations?
>> Robert Barro (37:02):
Well, my view in the 1970s into the 1980s was that sticky
prices and wages in nominal termswas not that important in terms
of thinking aboutmacroeconomic fluctuations.
And that it was hard to see how itcould be such a significant element.
And that was what led me to stopworking in that field around 1980 or
(37:25):
thereabouts, quite a ways back.
It also made me much more sympatheticto the Lucas type of approach,
which had to do with somekind of informational issues.
But that approach hada similar kind of a problem.
In that approach, it relied on the factthat people knew about the local
prices that they saw andwere familiar with.
(37:47):
And they were less familiar withthe general macro situation,
including the general price level.
But then it wasn't so convincing that theinformation involved in not knowing what
the price level was couldbe very important either.
So a similar kind of criticism,I think led me and other people to think
that that couldn't be a criticalelement in business fluctuations.
(38:12):
Similar to what you had just saidabout sticky wages and prices.
This sort of incomplete informationabout the general macro situation,
it's hard to see how that could be soimportant.
But then for me,that left me with a void because then
I eliminated the two mainmodels that were in play.
And then once the Lucas style modelbecame less convincing to many people,
(38:37):
they returned to in somesense the Keynesian model.
Which led to the new Keynesian modelbecoming so important and that relying on
particularly sticky prices and thenmore recently also sticky nominal wages.
So it's a strange kind of cyclein terms of how the fields and
(38:58):
their influences have evolvedgoing back to the 1970s.
>> Jon Hartley (39:03):
Yeah, it's fascinating.
I know macro gets a lot of criticism fromapplied micro people and saying that,
it's not making real progress and butit's interesting because these are all.
I think that these are the biggestquestions and, and
I think deserve some, some seriousthinking and serious research on.
>> Robert Barro (39:24):
Well, that's why economic growth became so
prominent in the period in the 1990s andinto the 2000s.
And my own work was primarily oneconomic growth in terms of theory and
empirical work.
>> Jon Hartley (39:38):
Well, I want to get into some of that growth research.
So,, as you mentioned,
some of your most cited work is inthe empirics of economic growth.
And many of your papers I think,put together really interesting.
I think new data sets like yourdata on consumption disasters or
really deep recessions or.
(39:59):
Or depressions across countries,
you've got another sort of data set oneducational attainment across countries,
what led you to studythe empirics of economic growth?
Did that for you, was that sort ofa moment that I guess we were just talking
about being fed up with kindathe other business cycle macro models.
But I think Robert Lucas,he had his own sort of, I guess,
(40:21):
transformation in thinking.
He had this famous phrase sayingonce you stop thinking about growth,
you can't think about anything else.
And we could talk about theserecessions like the Great Recession,
which is a 5% divot in the GDPgrowth trend of the US or
maybe some of your consumption disasters,
which are generally, I think,bigger across countries.
(40:45):
But at some level, if you look at just thesimple difference in GDP per capita levels
between say the U.S maybe it's a GDPper capita of around 80,000 versus very
poor countries that have GDPper capita around, say, 10,000.
I think China is a bit higher than10,000 but you just think about or
(41:06):
many countries in Latin America aroundthe world maybe close to 10,000.
That's a difference of a factor of 8, 8x.
And soexplaining those differences is just,
it feels like a much biggerstakes kind of issue.
There's also, I think,not exactly a great, I think it's still
very much an open question in termsof what causes economic growth.
(41:30):
And it's perhaps the most importantquestion in economics was
that kinda realization that ledyou to study economic growth?
>> Robert Barro (41:41):
So I think Bob has underestimated the cost of business
fluctuations but I think he was right thateconomic growth is even more important.
So I think he was right tothink about that topic and
to contribute to that literature.
And that's certainly what I also did.
So part of that was on the theoreticallevel and particularly thinking about
(42:03):
technological progress, in line withthe work by Paul Romer in particular.
I've worked a lot on that butI guess my more sort of distinctive
contribution was in termsof empirical analysis,
partly of the neoclassicalgrowth model and
its implications forconvergence across countries, and
(42:27):
partly bringing in some elementsof the endogenous growth theory,
which particularly becameprominent in the 1990s.
But that work has led to an unfortunatekind of circumstance, if you want to
think about what matters for growth and,and how it depends on policies and
(42:48):
things like property rights andfertility behavior and education and
all those, the natural empirical arenato consider there is the cross country
experiences where you have a lot ofvariety in terms of different policies and
institutions being put into place andyou have some hope from that of trying to
isolate what things matter forlong run economic growth.
(43:11):
And that was the work Iparticularly put my efforts into in
the 1990s going into the 2000s.
And for a while there was a tremendousinterest in that work and
it was probably the most citedpart of economics overall.
But then you had this kind of so calledcredibility revolution in econometrics and
(43:32):
identification and it was clear thatto be using this cross country context
leads to a lot of issues where youdon't get perfect identification.
There are some legitimate problemsthat arise in terms of various things
being endogenous andtoo many things potentially mattering.
But then I don't understand howthe outcome from that is supposed to be.
(43:57):
Then you ignore the best data that youhave that pertain to these questions.
What which is this crosscountry experience,
you almost never have experiencesin terms of macroeconomics and
growth where you have the kindsof exogenous experiments or
near experiments that you wouldwant to get clean identification.
(44:17):
And then I think it's really unfortunatethat what can be gleaned from
the data that are available withthe possible identification methods and
implementations and then ignoringthat I think is a great mistake.
But that's the situation we're in now.
It's basically you just can'tdo that kind of work now.
(44:37):
It's viewed as not legitimate.
And I think that that's really wrong andunfortunate.
>> Jon Hartley (44:43):
Yeah, no, I agree with you.
It's a shame that cross countrygrowth regressions have
seemingly kind of disappear orcross country.
I think work in general forgetabout just growth accounting and
things like that seems to havedisappeared a little bit, I guess.
Yeah, it's an interesting questionin terms of generalizability and
(45:10):
there's lots of people who then willsay well you should look at some
very specific natural experiment ina very small corner of the world.
But you then there's this question.
>> Robert Barro (45:24):
It doesn't give you the macro kind of variation that you want.
>> Jon Hartley (45:27):
Right, exactly it doesn't.
The narrower you get orthe smaller you get, the easier it is for
I guess these sorts of small microeffects to be swamped by spillover
general equilibrium incentive effects thatyou get sort of at the bigger macro level.
(45:47):
And so it's, and then hence youhave things like external validity,
violation of suit ven and these sortsof things become a valid criticism.
But yeah, I'm with you on gettingback to cross country regressions,
I wanna just talk a little bit about someof your big hits on economic growth.
(46:11):
For example, you wrote a famouspaper in the 1980s on democracy and
growth finding no relationshipbetween democracy and growth.
Some other economists, like Drone Ajemoglurecently won the Nobel Prize,
vehemently argued the opposite thatdemocracy causes economic growth.
And he's using measures like the FreedomHouse democracy measures, I'm curious,
(46:34):
where do you stand in this whole debate?
Jeffrey Sachs I think was a Harvardcolleague as well for a while.
Where do you stand inthe whole institutions
versus culture versussay climate geography,
which is I guess morewhere Jeffrey Sachs and
guns, germs and steel comes in,
(46:57):
institutions being sortof why nations fail,
Drone AJ, Moglu Johnson and others.
I'm curious, where do you stand in thatsort of debate between those three
sort of key explanations?
You do a lot of work on religion andeconomics as well.
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.
But where do you stand in terms of,you know, what, what causes growth?
>> Robert Barro (47:29):
Well, I think there were some pretty clear robust findings from
the cross country growth regressionliterature from work that I did and
other people did.
This idea of conditional convergence Ithink is quite robust, that's the idea
that if you hold a lot of other thingsconstant that then having a lower starting
(47:50):
position predicts higher growth anda catch up convergence type of effect.
But the fact that you have to conditionon other things is central to
getting that result.
There are more issues aboutwhat are the other things.
But I think some things comeout to be fairly clear.
I think institutional measuresare quite predictive of growth.
(48:12):
Things that look like property rights,
rule of law have a pretty robustpositive connection to economic growth.
Things involving fertility and populationgrowth seem to be pretty reliably
negative with respect to per capitaGDP growth, which is interesting these
days when people are worrying a lotabout population growth being too low.
(48:38):
There's some interesting recentwork related to climate and
economic growth over the long termarguing that you have to look at that in
a global context,which is basically the world.
And that gets you into the realmof looking at this time series on
macrovariables beingthe basically world GDP.
(49:00):
But a recent paper which hasinteresting results suggesting
quite large negative effects fromtemperature rises on global GDP.
As you say,some people have looked at religion and
economic growth as part ofthe cultural phenomena.
(49:22):
My wife, Rachel McCleary andI had some interesting findings there.
I thought we argued that what matteredin terms of religion was something like
believing relative to belonging.
So some measures of religious beliefs, but
kind of contingent on how muchparticipation church attendance there was.
So we found that stronger beliefsseemed to underlie things like
(49:45):
Max Weber's work ethic andthereby promote economic growth.
But just going to church more often didn'tseem to have that kind of beneficial
effect.
Anyway, if you put it all together,I think there's a lot of interesting
work cross-country in terms ofdeterminants of economic growth.
(50:05):
And I think it's a field that needs tobe reestablished as being legitimate,
basically.
>> Jon Hartley (50:13):
Well, I know that you also spent a lot of time in sort of
promoting the idea thathuman capital matters.
I think this is maybe a fourthschool that I think largely been
championed by a lot of people,I'd say, in the Chicago School world,
University of Chicago,who've done a lot of work on education.
(50:35):
And I guess I'm curious whatyour thoughts are there.
It's interesting,there's all these debates recently
about industrial policy andother questions around that.
And work by Larry Katz hereon training programs for
sectoral training programs thatat least in our CTs seem to work
(50:56):
well compared to other sortsof job training programs,
say from the Great Societyera that don't work well.
To me, even though these things are beingrebranded as things like industrial
policy at some level,if you look at like South Korea,
which some people attribute to beingan industrial policy success story,
(51:17):
it's a place that where its industrialpolicy is largely human capital Related.
So at some level,you know, it's a question,
maybe a lot of these thingsare just human capital rebrandings.
But in your mind, is educationreally central to economic growth?
>> Robert Barro (51:33):
So John Wali and
I put together this major dataset which people use a lot.
So it's just on quantity of schooling.
It's about years of schoolattainment at various levels and for
most countries in the world goingback to the 1950 or so, and
you can go back earlier forsome set of countries.
(51:54):
So that's one of the variables that hasa central role in terms of determinants
of economic growth.
And we also distinguish education bygender as part of that kind of analysis.
So the two major data sets Ithink that I've put together
until recently were the onewith Zhang Wali and
(52:15):
the other one with Jose Ursua wasdata that you mentioned before
in terms of the long term dataon macroeconomic disasters.
More recently I'm putting together thisdata on very long term attendance at
religious services,which I think is another kind of data set.
Not so much of a macro data set, but
(52:37):
I think that's another one that'sgoing to have a lot of use.
>> Jon Hartley (52:42):
Well, it's fascinating and amazing work.
And I remember,when you were talking about,
I think a couple decadesago you were interviewed,
I think about Bono at that time in the2000s, was a very vocal advocate of aid.
And I remember you'rea bit critical of aid,
certainly government aid being that usefulin terms of spurring economic growth.
(53:07):
This is, I think, around the time thatYouTube is doing its Elevation Tour,
its I think 2000 album,All The Things You Can't Leave behind.
And you said it was a great album.
And I think I agree with you on that.
But you've been so influential in so manytopics in macro and you've advised many,
many students who've gone on tohave incredible academic careers.
(53:29):
Michael Kramer, Emmy Nakamura,George Marios, Angeletos, Xavier Gabay,
Xavier Sally Martin,Zvi Herkovitz, many, many others.
And some of them have goneon to win Nobel Prizes.
I mean, what in your mind makes goodadvising for, for PhD students?
>> Robert Barro (53:46):
A couple remarks about Bono.
So Jeff Sachs set it up forme to have lunch with him and Bono.
So when he invited me toshow you how ignorant I was,
I didn't know anything about Bono.
So I consulted with my daughter andI said,
I've been invited to have lunch withthis guy who's apparently a rock star.
(54:07):
And I don't know him what should I do?
And my daughter said well,of course you have to go, absolutely.
I was actually very impressed by him.
He's extremely intelligent andhe's extremely quick on picking things up.
Obviously he doesn't have a background,for example in economics, but he
was seriously interested in getting ideasrelated to things he was interested in,
(54:30):
which particularly about debt relief andforeign aid at the time.
But he didn't want somebody who was goingto just echo his visions on those matters.
He wanted to get alternative views,probably because he wanted to know how to
defend against arguments that wereagainst what he really wanted to push.
But anyway it was a very good discussion.
(54:54):
I didn't really agree with his basicpositions and I don't think that forgiving
debt is the way to promote economicgrowth for poor countries.
And I don't think foreign aidhas been successful at all.
I think if we're cutting back on USAIDas we seem to be doing at the moment,
I think that's a great idea.
I strongly support that.
(55:17):
In terms of my PhD students, yes,
I've had some wonderful PhDstudents over the years.
I'm hoping that Emi Nakamura andJohn Steinson will join us soon at
Harvard since they have offers now to jointhe faculty of the Economics department.
And they were particularlygreat students of mine.
(55:41):
Michael Kramer, as whom you mentioned,was of course a wonderful student
who had two classic articlesas part of his PhD thesis.
At the time he was doingmostly macro growth, but
he shifted more toward microtype thingsin terms of developing countries and
in particular applying experimentaldesigns in those contexts.
(56:03):
I think that's really whathe got the Nobel Prize for.
But he's still interested inthe macro type work as well.
There's a great variation in terms of howone works with the graduate students.
You mentioned Xavier Gobex.
Gobex was a complete self-starter anddid everything on his own.
And then at some point he basicallyawarded me a prize by asking me to be
(56:27):
his PhD advisor.
And I don't think I get much credit forwhat he has produced, which has been
very high quality, but I don't thinkI had that much influence on it.
So that varies a lot across the students.
I don't know how to say what it isthat makes one successful in terms
of advising the great students.
(56:50):
To some extent it's not sodifferent from coming up with ideas for
one's own research, but I guess also itdoes involve some different dimensions.
>> Jon Hartley (56:59):
It's amazing, you advised a tremendous number of students,
and I'm sure many of themwill listen to this and
I'm sure will enjoy what'sbeen an amazing conversation.
Robert, really want to thank you forcoming on.
This has been really great.
It's been a thrill to have you on andhear your ideas.
>> Robert Barro (57:21):
Okay, it's been great for me as well.
>> Jon Hartley (57:23):
This is the Capitalism and Freedom, the 21st Century podcast,
an official podcast of the Hoover EconomicPolicy Working Group where we talk
about economics,markets and public policy.
I'm Jon Hartley, your host.
Thanks so much for joining us.
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