by Jerry O’Driscoll
In the August 24th Wall Street Journal, Harvard Professor Robert Barro penned a hard-hitting op ed: “Keynesian Economics vs. Regular Economics.” He contrasts the lessons of standard economics with some of the unsubstantiated claims of Keynesian economics. He zeroes in on the idea that transfer payments provide economic stimulus.
Transfer payments in the guise of food stamps, unemployment benefits, and income redistribution generally have been the centerpiece of this administration’s policy to stimulate the economy. Barro quotes Agriculture Secretary Vilsack’s claim that the multiplier effect of food stamps is close to 2.
Trouble is, as Barro notes, “there is zero evidence that deficit-financed transfers raise GDP and employment – not to mention evidence for a multiplier of two.” As regular economics teaches, deficit-financed transfer payments must be paid for by future taxes. Future taxes bear on present plans, and depress spending. Additionally, transfer payments diminish the incentives to work and that depresses GDP.
Barro argues the empirical evidence of the administration’s policies is lacking. He suggests further that the theory behind such efforts to stimulate aggregate demand is also lacking. “Keynes, in his ‘General Theory’ (1936), was not so good at explaining why this worked, and subsequent generations of Keynesian economists (including my own youthful efforts) have not been more successful.”
The real world seldom provides experiments. But the Obama administration has given us one: the extension of unemployment benefits to 99 weeks. Predictably, the fraction of those who are long-term unemployed (more than 26 weeks) has risen from around 26% in the 1982-83recession to around 44% today. Again, transfer payments do not stimulate, but rather depress economic activity through their bad incentives. (Barro does acknowledge there may be justifications for some transfer payments. But that justification is not that they provide stimulus. Quite the contrary.)
Barro concludes that stimulus through transfer payments is either “a divine miracle – where one gets back more than one puts in – or else it’s the macroeconomic equivalent of bloodletting.” He opts for the latter view.
So, let’s stop listening to the aggregate demanders and nix further talk of stimulus through transfer payments. The only sound economic stimulus comes from good incentives and mainly on the supply side. As Hayek and Friedman taught us, demand management is a fool’s game. Short-run expedients come at the expense of long-run economic growth.