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The Mises Review

Edited and written by David Gordon, senior fellow of the Mises Institute and author of four books and thousands of essays.


Getting It Right: Markets and Choices

Robert Barro

1 1997
Volume 3, Number 1


In Defense of Secession

Spring 1997

GETTING IT RIGHT: MARKETS AND CHOICES
Robert J. Barro
MIT Press, 1996, xv + 191 pgs.

If one passage in Robert Barro's excellent book attracts notice in the wrong quarters, he is liable to find himself in serious trouble. Our author, a free-market supporter in the inhospitable climate of Harvard, has previously given evidence of a penchant for nonconformity. But now he goes one step farther: he challenges one of the most entrenched taboos of the American Establishment.

As Barro points out, the United States has tended to react with suspicion toward secessionist movements: "if the U.S. government had supported the right of secession in some other parts of the world, such as the Soviet Union, then it would have indirectly challenged the basic premise of the Civil War. Why was it desirable for Soviet republics to have the right to secession and undesirable for U.S. states to have the same rights" (p. 27)? Surely Barro knows that the sanctity of the Union cause is a given. How can he dare to challenge it? Against the conventional wisdom, Barro adduces some simple facts. "The U.S. Civil War, by far the most costly conflict ever for the United States..., caused over 600,000 military fatalities and an unknown number of civilian deaths, and it severely damaged the southern economy. Per capita income went from about 80 percent of the northern level before the war...to about 40 percent after the war.... It took more than a century after the war's end in 1865 for southern per capita income to reattain 80 percent of the northern level.... Instead of being the greatest of American presidents, as many people believe, Abraham Lincoln may instead have presided over the largest error in American history" (pp. 26 27).

One can easily conjecture how defenders of Father Abraham will respond. Was not the cost of the war justified to free the slaves? To this, Barro has an effective rejoinder. "Everyone would have been better off if the elimination of slavery had been accomplished by buying off the slaveowners as the British did with the West Indian slaves during the 1830s instead of fighting the war" (p. 28).

And if this suggestion is dismissed as unrealistic, our author is still not defeated. If the North had accepted Southern secession, what would have become of slavery? Other nations in the Western hemisphere, most notably Brazil, abolished slavery without war: why would matters have been any different in an independent Confederacy? The spirit of the times was against indefinite continuance of the "peculiar institution."

Barro's aim extends beyond making a historical point, however important. He maintains that economic considerations do not mandate large nations: the much-vaunted efficiency advantages of vast national size are spurious. "There is no relation between the growth or level of per capita income and the size of a country, measured by population or area. Small countries, even of populations as little as a million, can perform well economically, as long as they remain open to international trade" (p. 28).

Secession by no means stands alone among the political issues that Barro's economic analysis illuminates. He finds economic benefits in having a "relatively homogeneous population within a given state" (p. 30). Diverse ethnic groups pent up in a single state will tend to devote resources toward securing state patronage. The temptation to benefit at the expense of a rival race often proves too much to overcome, with great losses to economic efficiency. (Barro's argument, incidentally, was anticipated by Ludwig von Mises in Nation, State, and Economy.)

Given Barro's contention, it is surprising that he opposes "curbs on immigration" (p. iv); but even if he is unwilling to accept the implications of his own analysis, others will readily see where the argument leads.

I have so far emphasized Barro on political issues, since his remarks are here especially compelling; but he covers many other topics in this wide-ranging collection. The author, a leading member of the "rational expectations" school, has little use for Keynesian economics. According to Keynes, an "increase in aggregate demand due to the government's higher expenditure supposedly leads to so much utilization of underemployed labor and capital that output expands by more than the rise in government spending that is, by a multiple greater than one. Thus, if the economy is operating at less than 'full employment,' then government programs are even better than a free lunch" (pp. 110 11).

This famous hypothesis, Barro points out, cannot cope with a most inconvenient fact. Not a single instance of the so-called demand multiplier has been shown to exist. Contrary to the claims of many historians, the vast spending by the American government during World War II did not rescue us from the depression: "the data show that output expanded during World War II by less than the increase in military purchases.... No multiplier showed up in the United States during World War II, and none has been observed in other times and places" (p. 111).

I fear that I have so far disappointed my readers. I have had hardly a word of criticism of the book. A favorable notice of a non-Austrian economist in The Mises Review? Unthinkable! At best I can give only partial satisfaction. Some points in the volume indeed stand open to objection; but the book nevertheless is outstanding.

But, enough of praise: let's get on with what we have all been waiting for. Barro is most famous among economists for his defense of "Ricardian equivalence." Against claims that a budget deficit crowds out investment, our author demurs. Faced with a budget deficit, taxpayers will realize that taxes must eventually be raised to pay the bills.

This being so, they will, if rational, set aside money to pay for the tax increases they anticipate. What counts is not only current taxes, but the present value of future taxes. "[E]ach person subtracts his or her share of this present value [of taxes] from the present value of income to determine a net wealth position, which then determines desired consumption" (p. 93). Since anticipated future taxes affect consumer spending in the present, "taxes and budget deficits have equivalent effects on the economy" (p. 94).

The objections to Ricardian equivalence are many and various, a fact of which our author shows himself well aware. For one thing, people cannot be sure what the government will do in the future. "Eventually" the bills must be paid; but eventually may be a long time, and perhaps taxpayers will not wish fully to take account now of a bill that may be indefinitely deferred. In the extreme case, it will not be they who pay, but a future generation of whom they know nothing. And (a point Barro does not here mention) a deficit can hardly always be equivalent in economic impact to taxes. Otherwise, a deficit might always be substituted for a tax; and no tax bill would ever fall due.

The case against Ricardian equivalence seems to me strong, but the point here is not principally an assessment of this hypothesis. Rather, the issue I wish to address is the way in which Barro confronts the objections to his view. He does not, surprisingly, respond by an endeavor to refute the counter arguments. Instead, he readily admits that "some of the objections to Ricardian equivalence are formally valid" (p. 94).

If so, why does he not abandon the thesis? Because "the quantitative implications of these points are unclear...the Ricardian view that budget deficits are unimportant may serve as a theoretically respectable first-order proposition" (p. 94). Put crudely, Barro is saying that it does not matter whether his hypothesis is false. All that counts is that it generate predictions that do not depart very much from the data.

For Barro, the pursuit of statistical significance is a categorical imperative. In contrast to Mises, for whom historical evidence can only illustrate economic theorems established by deduction, Barro directly derives supposed economic laws from statistical correlations. Thus, he endorses a supposed "iron law of convergence" that about two percent of the gap between a rich and poor country disappears each year. An Austrian would inquire of Barro why we should take this supposed "law" as more than a summary of past facts. Why need the law hold in future?

In another area, Barro seems also vulnerable to objection. Readers will, I trust, not be unduly surprised that this area is another departure from the Austrian approach. Barro's contention, if in my view mistaken, is characteristically ingenious. The wages of professional athletes in major sports, it seems, are "too high." What matters to fans in sports performance is not the absolute level of skill but how a performer does in comparison with his rivals. "The relative performance feature means that each team has too much incentive to hire the best athlete and each athlete has too much incentive to raise his or her level of performance...each time a player gets more skillful, he or she effectively reduces the skill of the other players" (p. 154).

The technical details of Barro's argument do not for our present purposes matter. Rather, what is of interest is the implicit standard Barro uses to condemn athletic salaries as "too high." It is the familiar model of completely efficient resource use, in which all "externalities" have been subjected to correction. But why should this model be taken as an ethical ideal by which to assess market performance? With their insistence on full awareness of presuppositions, Austrians know better than to assume without argument that this criterion should be accepted.

But, much as it goes against the grain, I shall not end on a negative note, because Barro does not deserve it. His fine book abounds in insights. The author's commendable skepticism about the economic benefits of democracy and his keen dissection of the "endangered species" regulations are especially compelling.

I have space for only one sample. "Most puzzling is the determination of the level of spending on a species once it has been listed [as endangered].... The key matter appears to be whether the animal has charismatic qualities.... Basically, people like bald eagles, and that is why they get so much attention" (p. 153).


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