Government Spending Is No Free Lunch

Barro, Robert J. "Government Spending Is No Free Lunch." Wall Street Journal. January 22, 2009.


What’s the flaw? The theory (a simple Keynesian macroeconomic model) implicitly assumes that the government is better than the private market at marshaling idle resources to produce useful stuff. Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system.

John Maynard Keynes thought that the problem lay with wages and prices that were stuck at excessive levels. But this problem could be readily fixed by expansionary monetary policy, enough of which will mean that wages and prices do not have to fall. So, something deeper must be involved – but economists have not come up with explanations, such as incomplete information, for multipliers above one.

Wall Street Journal