Robert Barro is a highly influential economist and has written extensively about macroeconomics. He is the Paul M. Warburg Professor of Economics at Harvard University, a senior fellow at Stanford University and co-editor of the Quarterly Journal of Economic. Barro shares a free market view of the current economic climate during an in-depth conversation with Filthy Lucre.
You’ve been an economist for quite a while. What are the most interesting economic developments you’ve witnessed during your career? What has surprised you?
In macroeconomics, the most exciting developments I have seen involve rational expectations in the 1970s and economic growth — theory and empirics — in the late 1980s and 1990s. The Keynesian theory that dominates monetary policy is uninspiring and is actually inferior to the Keynesian work of the early 1970s. Ricardian Equivalence says that the method for financing government spending — particularly the choice between taxing and borrowing — has only a second-order economic impact. I think this proposition is mostly correct. Most economists now start from this proposition and then make clear how their particular specifications lead to a departure from Ricardian Equivalence. One general point is that the choice between taxing now versus taxing later (corresponding to borrowing today) does matter somewhat and has led to the tax-smoothing viewpoint. This idea — that it is better to have smooth tax rates rather than sharply varying ones — is essentially an application of public-finance theory to macroeconomics. It leads to the empirically reasonable conclusion that deficit finance should be high when spending is temporarily high, notably in wartime, and during recessions, when real GDP is temporarily low.
In a time of tribal politics, you have ruffled feathers on both sides. What’s your take on the economic policies of this administration? What are they getting right or wrong, in your opinion?
The administration gets credit for a number of good economic policies. The tax reform of 2017 was particularly good in terms of long-run structure of corporate taxation. The reform was also favorable in terms of cuts in marginal income-tax rates for most persons. Unlike the 1986 changes under Reagan, the reductions in income-tax rates for 2018 applied nearly uniformly across the income distribution. The administration has also usefully cut back regulations related particularly to energy, the environment and financial institutions. These changes are likely to spur productivity, but we need more data to quantify the macroeconomic effects.
A common complaint from the left is every republican administration in recent history gives us another form of trickle-down economics. Is that a fair criticism?
Trickle-down economics seems to be a term used to deride any policy that is aimed at incentives. Incentives — the supply side — is what mostly matters. Cuts in marginal income-tax rates and reductions in regulations are examples. It is not true for 2018 that the reductions in income-tax rates applied especially to the rich. One tax bracket for which no cut in rates applied was that for income from $500,000 to $1,000,000. The other one was for less than $10,000, for which people do not actually pay income taxes.
Clinton was the last to balance the budget. The deficit rises most during Republican administrations. Are Republicans still the party of fiscal conservatism?
I am concerned that the fiscal deficits of Obama have not been curtailed under Trump. The core problem is not the tax cuts but rather the failure to constrain government spending. We need a Simpson-Bowles type approach that focuses on restraining the expansion of entitlement spending.
Does the rise of popularity in Democratic Socialism alarm you as an economist? What does Bernie Sanders have right, and where do you think he’s mistaken?
We do not need the new term “Democratic Socialism” because we already had the equivalent, “Communism.” Bernie Sanders does not have much right. The growth of these leftist ideas seems to be mostly a split in the Democratic Party, rather than an overall movement of political thinking toward the left. I do not think that Democrats can be successful nationally with this extreme leftist appeal.
If it were within your power, would you reinstate Glass-Steagall?
Glass-Steagall does not fit with the structure of 21st century financial markets. It is best to focus on core financial regulations, especially capital requirements for financial institutions. It would be good for the U.S. government to get out of the business of subsidizing and regulating the market for residential mortgages. This involvement — working especially through Fannie Mae and Freddie Mac and promoting the excessive extension of mortgage credit to unqualified borrowers — was one of the core ingredients of the 2008 financial crisis.
What’s your take on cryptocurrency? Do you own any? Do you see bitcoin or ethereum becoming part of our financial future?
I do not understand cryptocurrencies such as bitcoin. There seems to be almost no intrinsic value and there is also little barrier for competition from new entrants. Given these characteristics, it appears to be a classic bubble; the prediction is that these valuations will ultimately go to zero. Of course, I also think that this bubble characterization applies to Amazon, which makes most of its money from its cloud storage business and not much from its more visible retail presence.
You and Dr. Rachel McClearly, your wife and another brilliant economist, have a new book, “Religion and Economy.” This is one of your core areas of expertise. What will the book cover, and what about this specific area maintains your interest?
My wife, Rachel McCleary, is a philosopher and political theorist and also has a background in theology. Our skills are great complements and have led to our book, “The Wealth of Religions — the Political Economy of Believing and Belonging,” which is forthcoming from Princeton University Press. We have explored the global implications of religion for economic growth and in reverse, the consequences of economic development for religiosity. Among other things, we discuss saint-making as a device for the Catholic Church to compete against Protestant Evangelicals, the creation of a Buddhist state religion in Tibet in a violent context in the 1600s, and the negative legal/regulatory aspects of Islam for long-run economic development. Religion is a major social force, and it has been a great pleasure to explore this topic and to work regularly with my wife.
Visit press.princeton.edu to stay up to date on the book’s release.