Barro, the euro and credibility

Robert Barro, the cheerleader of dollarization and common currencies, has finally come out of the closet. No, not in that way; he just came out against the euro in his Wall Street Journal column (subscription required). He says:

"The euro was a noble experiment, but it has failed. Instead of wasting more money on expanding the system's scope and developing ever larger rescue funds, it would be better for the EU and others to think about how best to revert to a system of individual currencies."

The interesting thing is that he wants to discard the euro for all the wrong reasons. In his view, the problem is fiscal, and what the new national currencies would allow is for 'credible' fiscal adjustments. Again, in his own words:

"Worries about values of government bonds are rational because it is unclear whether—even with assistance from the center—Italy and other weak members will be able and willing to meet their long-term euro obligations. A new (or restored) system of national currencies would be more credible, because Italy should be able and willing to meet its obligations denominated in new liras."

Forget that the ECB can actually buy bonds (Italian and others), and reduce the burden of interest payments, allowing for more expansionary fiscal policy, which is what you need in a recession.

Robert Barro vs. Jamie Galbraith

Jamie Galbraith goes head to head with Robert Barro, in the enemy's territory (Bloomberg). Several important points raised by Jamie. Beware of the delirium about the post-1980s being the start of two decades of prosperity. In fact, medium income stagnated after that, and growth has been based on a series of unsustainable bubbles.

Robert Barro does not believe in evolution

Okay, in all fairness he does not believe in expansionary fiscal expansions. But it is the same. All the evidence supports the functioning of the simple Keynesian multiplier. One might disagree about its size, but not its existence. Barro says that we are in:

"the third year of a grand experiment by the Obama administration to revive the economy through enormous borrowing and spending by the government."

You would expect that at least when referring to the data he would be accurate, but evidence has nothing to do with how he understands the economy (remember this is the guy of Ricardian Equivalence, i.e. if the government increases spending, people raise their savings proportionally to pay the future anticipated taxes with no effect on output).

The graph below shows percent changes in total government spending and revenues since 2006.

As it can be seen, spending (in red) increased in 2008, as a result of the recession, but has been falling ever since. The deficits are caused, not by an experiment in Big Government as he suggests, but because revenues fell.  And yes the recovery, even a mild one, led to a significant increase in revenue last year. In 2010 revenues increased by 7% from previous year, while spending did it by only 0.7%. That's why in the first year of Obama's own budget, in 2010 (2009 he inherited from Bush), the size of the deficit actually fell (a bad thing, by the way, in the middle of a recession). So to avoid a double dip recession we need to do the opposite of what Barro says.

PS: Krugman also criticizes Barro here.