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Thursday, March 25, 2010

Barro knows fiscal policy. This is not so good.

I was at a Conference on the Great Depression last March at the Council on Foreign Relations (for all you right-wing nut jobs out there, no, we did not discuss the Kennedy assassination). Jonathan Alter (top left)from Newsweek gave a speech and indicated that anything the government spends money on, anything at all, was economically stimulating. Really, he said it. Ed Prescott got up and proclaimed "all this financial business is much ado about nothing". Glad he did not win the Nobel Prize for that statement.

Anyway, one of the highlights of the Conference was Ellen McGrattan (top right)from the Minneapolis Fed. She said she used a fiscal multiplier of zero in the empirical analysis she conducted. An outraged old Keynesian in the audience shouted out "where did you get that number from?" She gave a one word answer ... "Science". It was a truly beautiful moment. After reading Barro's piece above it seems zero is a little low.

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