Barro v. Reich on the U.S. economy: a disappointing debate

Gwen Ifill hosts a discussion between Robert Barro and Robert Reich, which began with a discussion of real GDP and the labor market. Barro opens with:

The economy has been doing quite well of late, particularly the GDP growth has been over 4 percent since early in 2003. Investments grown strongly, productivity has grown strongly. The labor market was lagging for some period, but of late the labor market has also been doing well in terms of job growth and in terms of reductions in the unemployment rate.

Reich comes back with:

Well, although Professor Barro, Gwen, is correct about overall economic growth, the fact of the matter is that with regard to jobs and wages, and also health care, these are things that obviously matter most to average families, the economy has performed very poorly. And the poor performance has continued.

Reich continues as one would hope on the labor front and Barro tries to counter what Reich said. But I have to object to the premise that 4.5% growth over the three-year period from mid-2000 to mid-2003 followed by 4.7% growth over the following year is “doing quite well”.

The discussion moved on to deficits and the tax cuts. Barro starts off with:

I think the tax cutting program of 2003 was very successful, much more than the previous program in 2001. The important thing about the 2003 program is that it moved forward the reductions in marginal income tax rates and it also cut some of the tax rates on income from capital, particularly in terms of dividends, capital gains. Thereby I think the 2003 program was very much in favor of incentives, incentives for work, productivity, investment.

Reich counters with noting that structural deficits have risen substantially but he never relates this realization to crowding-out of investment. Barro gets to then claim he’s now a Keynesian.

ROBERT BARRO: Let me say first, I have some agreement with respect to the 2001 tax cut, but probably for different reasons. I don’t think it was a very good program. I think it was basically giving money to people in a Keynesian way, it had a phased in schedule of reduced marginal rates…

GWEN IFILL: Excuse me. For those of us who are not economists, what do you mean “in a Keynesian way?”

ROBERT BARRO: It was basically giving money to people in hope they would spend it on consumption and raise demand.

The 2003 tax cut is much more about incentives, incentives for investment, incentives for productivity improvement, incentives for work, and that’s why I think the 2003 program was much more successful.

GWEN IFILL: Okay. What about the deficit?

Yes, Ifill is giving Reich another opening. So what does he do? Notes that spending has increased – to which Barro agrees:

The difference between now and the late ’80s and the ’90s is when there was a deficit, it provided a lot of fiscal restraint, holding down spending levels. It doesn’t yet seem to be working that way today, that’s the thing that troubles me.

I would hope higher spending troubles Professor Barro but why could not either economist note that increases in government spending along with tax-induced increases in consumption will crowd-out investment and lower long-term growth?