Shocking Barro: People have been asking for my reaction to Robert Barro’s op-ed…. [H]ere’s the structure of what he says:
- Keynes said that investment is what drives the business cycle
- Investment depends on long-term incentives
So, about #1: yes, Keynes argued that fluctuations in aggregate demand are usually driven by investment. But he also favored expansionary fiscal policy during a slump, because that’s a statement about what usually happens, not what must happen; you don’t have to refill a flat tire through the hole. Is Barro really confused about this, or is he just trying to fast-talk past his readers? And about #2: that’s just wrong, as even a glance at data would tell you…. [Investment is] strongly affected by the business cycle: investment is high when demand is strong and firms see a good reason to expand capacity. So the best thing we could do to spur business investment would be to get a recovery going by whatever means necessary, including fiscal stimulus.
So, back to my shock: I would have expected Barro to offer some kind of argument based on real business cycle theory or whatever he believes about macro these days. Instead, all he offers is word games and nonsequiturs.
Why did he even bother?