(1)Stimulus Spending Robert Barro Stimulus Spending Keeps Failing Robert Barro May Stimulus Spending Robert Barro Larger fiscal deficits • The weak economic recovery in the U.S

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Stimulus Spending Robert Barro

Stimulus Spending Keeps Failing

Robert Barro

May 9, 2012

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Larger fiscal deficits

• The weak economic recovery in the U.S. and the even weaker performance in much of Europe have renewed calls for ending budget austerity and returning to larger fiscal deficits.

• This plea for more fiscal expansion fails to offer any proof that OECD countries that chose more budget stimulus have performed better than those that opted for more

austerity.

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Germany and Sweden

• Two interesting European cases are Germany and Sweden, each of which moved toward rough budget balance between 2009 and 2011 while sustaining comparatively strong growth

• If austerity (財政緊縮) is so terrible, how come these two countries have done so well?

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Greece and Portugal

• The median of fiscal deficits for these six OECD countries for 2010 and 2011 was 7.9%

of GDP.

• Of course, part of this pattern reflects a positive effect of weak economic growth on deficits, rather than the reverse.

• But there is nothing in the OECD data since 2009 that supports the Keynesian view that fiscal expansion has promoted economic growth.

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Japan

• Every time heightened fiscal deficits fail to produce desirable outcomes, the policy advice is to choose still larger deficits.

• If, as I believe to be true, fiscal deficits have only a short-run expansionary impact on growth and then become negative, the results from following this policy advice are persistently low economic growth and an exploding ratio of public debt to GDP.

• Japan over the past two decades.

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Lack of evidence

• Despite the lack of evidence, it is remarkable how much allegiance the Keynesian

approach receives from policy makers and economists.

• I think it’s because the Keynesian model addresses important macroeconomic policy issues and is pedagogically beautiful, no doubt reflecting the genius of Keynes.

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Great Recession

• Keynes worshipers’ faith in this model has actually been strengthened by theGreat Recessionand the associated financial crisis.

• Yet the empirical support for all this is astonishingly thin.

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Looking forward

• Looking forward, there is a lot to say on economic grounds for strengthening fiscal austerity in OECD countries.

• From a political perspective, however, the movement toward austerity may be difficult to sustain in some countries, notably in France and Greece where leftists and other anti-austerity groups just won elections.

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On the plus side

• The differing policies will provide better data to analyze the economic consequences of austerity.