Getting It Right: Markets and Choices in a Free Society. - book reviews

Business Economics, Oct, 1996 by Kevin L. Kliesen

Robert Barro is a well-known economist who is also known outside the profession as a contributing editor for The Wall Street Journal. In this book, Barro tries to synthesize these two very different roles. Covering an array of topics related to economic growth, monetary policy and public finance, he synthesizes his views of political economy with his and others' empirical research.

For example, the first chapter, written within the confines of endogenous growth theory, discusses economic growth and whether economic progress is enhanced or reduced by increased political freedoms. Discussing the economic prospects for, among other places, Eastern Europe, Africa and Asia, Barro argues that exporting democratic processes such as free and fair elections is not the best way to promote sustainable growth. Rather, countries would be better served by institutionalizing those (endogenous) factors that enhance capitalist economies: establishing clearly defined property rights, enforcing the rule of law, restricting government consumption and putting in place policies that augment the accumulation of human and physical capital. To Barro, less developed countries should follow the road map offered by Seymour Martin Lipset (property tends to inspire democracy), rather than Milton Friedman (more democracy tends to foster economic growth).

Increased political freedoms, Barro asserts, are luxury goods that can best be purchased only by those countries that first enjoy sustainable increases in living standards. Whether through changes in the tax code, increased safety, environmental regulations or labor market distortions, politically powerful interest groups - spawned by increased political freedoms - redistribute resources in a capricious manner that largely benefits the few at the expense of the many. Thus, only rich countries like the United States can afford the presence of these institutions that tend to be a drag on economic progress. The American public has every right to choose this course, Barro's book reminds them that the trip isn't free.

Barro devotes the second chapter to monetary and financial policies, while the third chapter of the book examines fiscal and other macroeconomic policies. Discussions of monetary policy revolve around two well-known themes: the importance of credibility, especially of Federal Reserve chairmen, and the interaction between inflation and economic growth. In the third chapter, Barro exposes his readers to topics ranging from tax reform and the effects of lowering marginal tax rates to the economic rankings of U.S. presidents.

In the realm of fiscal policy, Barro is probably best known for his advocacy of Ricardian equivalence as a way to examine the economic effects of budget deficits. The Ricardian view explicitly rejects the Keynesian notion that is commonly expressed by analysts from Washington to Wall Street, i.e., that increased budget deficits stimulate output and employment in the short run, but that increased aggregate demand and larger government borrowing eventually reduce saving rates, raise real interest rates and lower the quantity of investment. The Ricardian framework, by contrast, puts more emphasis on the economic effects of marginal tax rates and the path of government expenditures. Specifically, it states that taxes and budget deficits have equivalent economic effects because people rationally assume that increased government debt must be paid for at some point with higher future taxes. Thus, because the present value of government debt must equal the present value of future taxes, there is no stimulus to aggregate demand and all of its concomitant effects.

Needless to say, this is an economically controversial proposition. Although Barro admits that the theory has its shortcomings, he nonetheless believes that as a "first-order proposition," the Ricardian equivalence theory accurately depicts the economic effects of budget deficits on real interest rates, investment and the current account balance - none. A "dispassionate" survey of the literature generally supports Barro's claim as to these first order effects.(1)

In the final chapter, Barro discusses the "power of economic reasoning" as it applies to topics as diverse as the health effects of second-hand smoke, school choice, baseball economics, privatization of public services and term limits. Although readers will find some similarity in style with Steve Landsburg's book The Armchair Economist, the value added of this chapter can perhaps be measured in terms of how stark the output of economic research often differs from that bandied about in the popular press.

As an example, Barro cites research that shows that - when driven by differences in cost between public and private schools - the increased use of private schools tends not only to enhance the academic performance of children in public schools, but it also tends to raise the salaries of public school teachers and per-pupil spending. If the competitive model of schooling applies in most places, then perhaps many teachers have been seriously misled by their union. Similarly, Barro takes on the antismoking lobby by citing research that shows how the adverse health effect's from second-hand smoke have been exaggerated. Finally, toward the end of the book, Barro pays tribute to George Stigler and Robert Lucas, two academic economists who loom large in his mind and that of many others.