John Hartley serves as an interlocutor. “Revisiting empirical macroeconomics with Robert Barro” (Hoover Institution, Capitalism and Freedom Podcast, March 25, 2025, Audio and Transcript available). Below are some of the comments from Baro that caught my eye in particular.
One of the basic questions in economics is about “multipliers.” In other words, how much does an increase in government spending boost the size of the economy? If an increase in government spending does not increase the size of the economy, the multiplier is zero. If we increase the size of the economy one to one, there is one multiplier. Optimists about Movernmetn’s spending may argue that there are multiple multipliers, but pessimists think that may be negative. Barro argues that, at least in most settings, the evidence supports a multiplier between zero and one. Baro says:
Looking at the fluctuations in military spending in the US context over a rather long period of time is a very good environment for trying to isolate spending multipliers that are essentially related to exogenous movements in the amount of government spending. This is not done in many countries during wartime, as direct destructive effects tend to dominate. Typically, during wartime, we estimate negative spending multipliers related to military spending. But the US differs in that respect. There is no massive destruction, particularly related to World War II.
So I think it was a very good environment as we were trying to isolate the effects of these exogenous and large-scale spending changes. Therefore, the multiplier was positive. In other words, a good baseline is 0, not 1. If the multiplier is 1, it basically means you get as much output as you would use. …
So I found a multiplier like half or something. This means you have to pay the extra 50%. So it is one or more multipliers. This means that more than one multiplier means you’re not only getting military spending free, but you’re getting extra to come from anywhere. Having one or more multipliers should be a very surprising result. And you certainly don’t find it in normal times or in some long order.
Inflation reduces the value of existing debt. Therefore, there is a sense that the government used inflation to “pay” the increase in spending when government spending leads to increased inflation and thus reduces the value of existing government debt. This is Baro:
Therefore, if there is a significant increase [in government spending]payments for transfers, and more under Biden than the original Trump administration, and how to avoid paying for it by cutting other spending or raising taxes, is to have inflation that is surprising from a pre-crisis standpoint. And it basically corresponds to a very large temporary revenue stream that could be something like 10, 15% of GDP, wiping away the real value of many of the unresolved government bonds. So it’s not a small deal. And that’s empirically about what happened in the US and elsewhere. …
[P]Eople doesn’t like the idea that paying spending in a substantial portion through this surprising inflation may have been completely unraveled. I usually feel a lot of sadness from people who are by my side, usually by my side, because I just want to consider inflation to be stupid and dramatically harmful. So I think what was harmful was the excessive financial expansion, especially under Biden. There was no need for a significant increase in transfer payments, but given you have it, we paid most of it effectively through inflation. And the alternatives were also very expensive, so maybe that part wasn’t too insane.
Back in the 20th century, it was common to study the causes of economic growth by looking at patterns across countries. However, these studies were necessarily related to correlations and not necessarily causal. Therefore, many economic research is now moving towards looking for some form of design or “nature” experiment. Baro argues that cross-country regression should be viewed as a productive approach due to the wide range of topics of economic growth.
If you want to think about what is important for growth and how it depends on policy, property rights, fertility behavior, education, etc., then there is a cross-country experience where the natural empirical field that it considers everything is a lot of diversity in the sense that you have a variety of policies and institutions in place and you have hope from trying something important for long-term economic growth. And that was a job I worked specifically in the 1990s and the 2000s. And for a while there was a great interest in the work, which was probably the most cited overall part of economics. However, it was clear that this kind of so-called reliability revolution was based on econometrics and identification, and using this cross-country context would lead to many problems that could not be fully identified.
There are some legitimate problems that arise in that many things are endogenous and too many are important. But then I don’t understand what the outcome will be from that. Next, we ignore the best data related to these questions. What is this cross-country experience, you rarely gain experience with macroeconomics and growth doing exogenous experiment types and almost experiments that you want to get a clean identification. And I think it’s really a shame to ignore what you think is a big mistake that can be collected from the data available in possible identification methods and implementations. But that’s the situation we are in now. It’s basically just you can’t do that kind of job right now. It is deemed unjustified. And I think it’s really wrong and unfortunate.
