A Leading Conservative Economist Has a Plan For Fixing The Economy

This article by Robert Barro provides a conservative approach to fixing the economy. Barro teaches at Harvard and he is a Senior Fellow at the conservative Hoover Institute. He starts out by arguing that fiscal stimulus and monetary policy have not worked. The economy has not recovered from this recession like it has from most recessions in the past. In fact, most of our recoveries from recession have been V shaped and this recovery is L shaped. The problem with Barro's comparison is that recoveries from balance sheet recessions, and associated problems in the banking system, are typically L shaped like this recovery. Barro knows this but he chose to ignore it because he wants to argue that our economic problem is not caused by inadequate demand. He takes the conservative position that the slow recovery is the result of inadequate supply. Business is not investing and increasing supply because it lacks confidence in the Obama administration's approach to tax policy and government regulation. It does not occur to him that the lack of demand would affect investment decisions. Moreover, he ignores the fact that spending on new home construction is included under business investment in our national income accounting. Business investment on equipment and software has returned to pre-crisis levels. Spending on new home construction is at a historic bottom.

In any case, Barro provides a typical list of changes that are supposed to stimulate confidence in the future. In other words, he believes in the "confidence fairy". All we need to do is to cut business taxes, and reduce spending on Social Security and Medicare, and business investment will skyrocket and end the recession. He supposes that this will happen without increasing consumer demand. The bottom line in Barro's remedy is that government will be even more conservative than it was in the Bush administration. He believes that is a good thing. It will be good for his reputation among conservatives who refuse to look at demand side analyses of the slow recovery, but tax policy and government spending are not the causes of the slow recoveries in western economies. Until we address the problem of flat or declining growth in household income, we won't see an economic recovery like those we have seen in the past.