Barro the great

A profile of Robert Barro, (in the latest edition of F&D;

Barro's attack on the foundations of Keynesian monetary policy, which was carried out with a group of other prominent macroeconomists, was preceded by an attack on Keynesian fiscal policy and it was carried out single-handedly. The Keynesian view on fiscal policy, again, was one of activism: governmentts should use budget deficits to smooth out fluctuations in private income. When the private economy stalls, governments should attempt to boost private spending by running larger budget deficits, financing these deficits by borrowing rather than by raising taxes.

In a 1974 paper in the Journal of Political Economy, Barro made the case that the choice of financing, whether through borrowing or taxing, did not matter. If the government borrowed to run deficits, people would realize that it would have to raise taxes in the future to pay back what it had borrowed. They would therefore simply raise their savings today to be able to pay back those future taxes. The government's attempts to boost private spending through its own borrowing would thus be nullified. But what if those future taxes were essentially passed on to future generations? Would people today then not feel richer as a result of government borrowing? Not, Barro argued in his paper, if today's generation cared not only about their own spending but about how their children would have to spend. If they cared about their children, they would simply save more to leave them the extra money to pay for the future taxes. Once again, the government's ability to get today's generation to spend more by running budget deficits would be nullified.

The reaction to Barro's argument was one of disbelief. As a 1990 "Schools Brief" in The Economist put it: "The idea of the infinitely forward-looking, altruistic parent seems crazy. At first, even economists struggled not to laugh." But over time, Barro's model became standard, so that even its critics were forced to use it as the starting point for their own models. The Economist concluded that, as a result of the influence of Barro's work, "few expect as much from the active use of fiscal policy as they used to."

The hits keep coming?

Boston University's Robert King, a former colleague of Barro, calls him "the most influential applied macroeconomist of his generation," but tells F&D that this influence stems not from a single contribution but from the fact that "in virtually every major area of the field you have to contend with a paper by Barro."

In recent years, Barro has been working on a possible resolution to a long-standing puzzle in macroeconomics and finance, the so-called equity premium puzzle—a reference to the fact that stocks have historically earned a much larger return than government bonds. Of course, that stocks are riskier than bonds accounts for some of this difference in returns. But the difference is so high that it suggests a degree of risk aversion on the part of investors that economists regard as implausible. Barro argues, however, that rare disasters, such the Great Depression or 9/11, even though they are low-probability events, can keep investor demand for safe assets such as government bonds high relative to that for stocks.

Whether or not this work joins his other papers on the hit parade, there is no doubt that Barro intends to keep on trying. In a 1999 essay in Nothing Is Sacred, he wrote: "I have never really understood the big attraction of going out while still on top," and he wondered why New York Yankees hitter Joe DiMaggio retired in 1951 and why "the Beatles and Simon and Garfunkel disbanded while at their best. The main consequence was that the public missed out on many years of fine, even if not the greatest, performance." Barro's many fans will take delight in his implicit promise that, in his case at least, the hits will keep on coming.