PROFILES:
Robert Barro's Greatest Hits

By Robert J. Barro and Prakash Loungani

A pioneer of macroeconomics who is still covering new ground. By Prakash Loungani.

Most scholarly articles fall without making a sound in the academic forest. Not ones by Robert J. Barro. A recent list of the 146 most influential articles in economics since 1970 has Barro sitting atop the charts with six hits—an honor he shares with only two others (Eugene Fama and Joseph Stiglitz). It would have been difficult to predict this outcome from the title of Barro’s first publication in 1970: “The Crystal Structure of a Dimeric Cobalt Compound Containing a Chloro Bridge.”

What happened? “Blame it on Richard Feynman,” says Barro, who had been headed for a career in the physical sciences at Caltech. “Feynman was a great inspiration, but what he taught was often way above my head. It made me realize I wouldn’t be close to the top in those fields.” Instead Barro turned to economics, motivated by the possibility of using his “technical and math background to address social problems” and by the example of an older brother who had majored in economics.

Barro’s career as a macroeconomist has been notable for two other turns. The first occurred during the 1970s, when he turned his back on the Keynesian macroeconomics he had learned as a graduate student at Harvard and became one of the ringleaders of the Chicago School–led revolution that supplanted it. Keynes had popularized the idea that government policies could smooth out ups and downs in income, also known as business cycles. During the 1970s, scholars and policymakers reconsidered a government’s ability to do so. Four of Barro’s six hits, along with a textbook he wrote on macroeconomics, were part of the body of work that turned the tide of academic opinion in favor of a more modest role for government.

The second turn in Barro’s career occurred in the 1980s, when the field of macroeconomics itself made a course correction. From about the mid- 1940s until the mid-1980s, the field, by and large, focused on understanding what caused the temporary fluctuations in income associated with business cycles. During these decades, questions about what propelled incomes upward, albeit at different rates in different decades, or why there were such large differences in incomes across countries, had not been center stage. But—spurred again by theoretical advances coming out of the University of Chicago—macroeconomists turned to these questions from the mid-1980s onward. Barro caught the tide early and wrote two hit papers that “jump-started the empirical exploration” of the answers, according to IMF chief economist Simon Johnson, himself a notable contributor to the study of economic growth.

BUILD IT AND THEY WILL COME

The idea behind Barro’s first hit paper on economic growth—a 1991 article in the quarterly Journal of Economics—was breathtakingly simple. He assembled a data set of incomes since 1960 for nearly one hundred countries. He also collated data on a long list of variables that, according to theorists, influence growth in incomes. The list included school enrollment rates (a proxy for what economists call “human capital”), private investment, and the size and nature of government activities. It also included measures of the economic system in place, government-induced distortions of markets, and political instability.

Barro examined the statistical associations between income growth and that list of variables. He found that “poor countries tend to catch up with rich countries if the poor countries have high human capital . . . but not otherwise.” He also found that investments by governments did little to trigger growth and that other government spending actually detracted from growth. Political instability and market distortions tended to lower growth.

There is a simple fact about a data set and scholars: build it and they will come. That is what happened with the data set that Barro built—it attracted macroeconomists to the study of economic growth. Indeed, the long list of possible determinants that he had put together became known as “Barro variables” in the literature that his 1991 article spawned. Some of the conclusions of his paper have held up better than others. But, says Johnson, what Barro did was essential to empirically ground literature that might otherwise have gone off into the theoretical stratosphere.

In fact, Barro’s work on growth has been so influential that younger macroeconomists, those now in their 30s, are more likely to identify him with his 1990s work than with his earlier work on business cycles.

CATCH ME IF YOU CAN

The main result of Barro’s other hit paper on economic growth—a 1992 article in the Journal of Political Economy, coauthored with Xavier Sala-i- Martin—has stood the test of time so well, in fact, that his Harvard colleague Larry Summers has dubbed it the “iron law of convergence.” As with Barro’s 1991 article, the idea was simple and involved bringing in new data: the trick this time was to use data for regions within a country. The advantage of this was that many of the Barro variables could plausibly be assumed to be the same for all regions within a country—the economic system or measures of political instability, for instance.

Four of Barro’s six most-cited articles, along with a textbook he wrote on macroeconomics, were part of the body of work that turned the tide of academic opinion in favor of a more modest role for government.

Not having to worry about the measurement of these variables offered a cleaner way to focus on one particular question: do initially poor regions catch up with richer regions? For states in the United States, the answer was yes. In the aftermath of the American Civil War, the Southern states were generally poorer than other states. But Barro and Sala-i-Martin showed that, in the 100 or so years following 1880, the initially poor states grew faster than the rich states. There was catch-up—or, in the jargon of economists, convergence—although the rate at which the poor states caught up to the rich was not particularly fast, only about 2–3 percent a year.

This estimate led Barro to caution, in the pages of the Wall Street Journal in 1991, against hoping that incomes in East Germany would quickly catch up with those in West Germany after the unification of the country. “The forces of convergence are powerful eventually,” he wrote, “but anything approaching parity between the east and the west of Germany is unimaginable in the short run.” In the event, after an initial spurt, East German productivity levels have stagnated at about 75 percent of the level in the West despite massive attempts by the government to speed up the process.

FOR RICHER OR POORER

In scholarly articles and in columns in the Wall Street Journal and Business Week, Barro has continued to explore the question of why some countries are rich and others poor. To Barro, the evidence shows that poor countries can raise their incomes by maintaining secure property rights, promoting the rule of law, fostering free domestic markets, and opening up to international trade. Macroeconomic stability helps, as do investments in education, health, and some types of infrastructure.

What does not help are policies that Barro refers to as “soft”—promotion of democracy, education directed specifically at women, and environmental protection; elimination of income inequality; and promotion of civic organizations and social capital. As Barro noted in his 2002 book of essays, Nothing Is Sacred, his views are not shared by all: “The 1998 Nobel Prize in economics to my colleague Amartya Sen was viewed by some commentators as an endorsement of the softer road to development,” he wrote.

But although he acknowledges that “for many people, these soft issues represent goals that are inherently desirable,” Barro sticks to his guns, noting that his claim is rooted in his detailed studies of whether these soft factors do indeed further income growth.

Barro and his wife, Rachel McCleary, a Hoover research fellow who specializes in the political economy of religion, have found that countries in which people have a strong belief in heaven and hell also have higher economic growth—a finding consistent with sociologist Max Weber’s thesis that character traits, such as the work ethic, can influence economic improvement. Once the impact of religious beliefs on economic growth is accounted for, however, attendance at formal religious services lowers growth. So attendance matters to the extent that it influences beliefs, but beyond that it uses up time and resources that detract from growth.

Given the tenor of Barro’s work on growth, it’s no surprise that he believes, as he stated in his 1996 collection of essays, Getting It Right, that governments should perform only “a limited range of functions” to promote it. He writes that he used to be a liberal during his undergraduate years at Caltech: “For any social problem that came up, I had no doubt that the cure involved government intervention.” But now he feels quite the opposite; he describes his present philosophy as “libertarian (or classical liberal) rather than conservative or Republican.”

In keeping with libertarian views, Barro thinks that the key function of government is “to define and protect property rights.” Other activities for government could consist of “ensuring (but not producing) a baseline level of education, providing a minimal welfare net, and participating in a narrow range of infrastructure investments, such as highways and airports.” Expanding government control of the economy beyond these functions is detrimental to growth, he says.

Barro sees the experience of China—his association with a Chinese university now takes him to the country frequently—as bearing out these views. The country’s experience under communism, he says, is a “testament to how badly governments can mess things up” when they try to exercise influence over all aspects of the economy. But now, he adds, he is struck by the “very capitalistic and pro-business” attitudes of government officials and of many of the people he encounters. “One of the universities there even has a statue of Adam Smith on campus. There would be mass protests at Harvard if we tried to do that,” he jokes.

Barro’s libertarian beliefs perhaps also explain in part why, unlike many other famous macroeconomists, he has not been a prominent policy adviser to the U.S. or other governments. It’s difficult to “be popular with governments” when advocating that many of their functions ought to fade away, he says. In any event, he has not been very influential in his rare forays into giving advice to governments, as he candidly admitted in Nothing Is Sacred. In one essay in that book, he describes being whisked to Moscow from his Cape Cod vacation in the summer of 1998; his advice to the Russian government that it set up a currency board was not taken. Nor was the South Korean government receptive to his advice to adopt the dollar as its currency and to abandon its resistance to foreign ownership of the country’s banks.

NO “MONEY FOR NOTHING”

Barro’s reputation as a pre-eminent macroeconomist would have been secure even without his 1990s papers on economic growth. In the 1970s and early 1980s, he had already made a splash with papers that argued that governments should take a laissez-faire approach to smoothing out fluctuations in income.

Barro’s work was part of the so-called rational expectations revolution that supplanted the dominant Keynesian view of the time that governments should use macroeconomic policies actively to tame the business cycle. During the 1960s, belief in government’s ability to do so was at an all-time high, bolstered by what appeared to be a stable statistical relationship known as the Phillips curve. The experience of the 1960s suggested that the government could put people in jobs (reduce the unemployment rate) simply by printing more money (raising the inflation rate). In the jargon of economists, the Phillips curve seemed to imply that monetary policy could have real effects.

To Barro, the evidence shows that poor countries can raise their incomes by maintaining secure property rights, promoting the rule of law, fostering free domestic markets, and opening up to international trade.

To conservative economists such as Milton Friedman, the Phillips curve made no sense: it seemed to suggest that a government could achieve something real—create jobs—by doing something that was fairly costless, printing money. It was as though one could make people taller by measuring them with a ruler marked in centimeters rather than inches. Friedman was ridiculed for his views at the time, but, according to Barro, “even before I left Harvard in the summer of 1968, I recognized that the attacks on Milton were empty and a sign of envy.”

Inspired by the work of Friedman and by that of Robert Lucas—also of the University of Chicago—Barro wrote a paper, which appeared in the American Economic Review in 1977, presenting evidence that activist monetary policy reduced U.S. unemployment only when central banks succeeded in surprising people about the amount of inflation they were going to generate. He followed this up with two other papers, written with David Gordon, a graduate of Chicago now at Clemson University. The first paper showed that when people realize that central banks may be out to surprise them, society ends up at a bad equilibrium: inflation is excessive but unemployment is no lower than it would otherwise be. The second paper described a way out of this bad equilibrium. If the central bank could commit to a rule governing its behavior, the inflation rate would be less excessive than if it could not commit. The central bank would still have an incentive to try to generate surprise inflation, but this incentive would be tempered by its ensuing loss of credibility.

As for the future, there is no doubt that Barro intends to keep on trying. He once wrote: “I have never really understood the big attraction of going out while still on top,” à la Joe DiMaggio.

The papers by Barro and Gordon have been part of a movement that has changed how central banks behave. Modern central banks are more likely to follow rules that keep them from generating excessive inflation so as to guard their credibility as inflation fighters. And many—far from trying to surprise people about their inflation goals—are now likely to have either an explicit or an implicit inflation target.

THE HITS KEEP COMING

Boston University’s Robert King, a former colleague of Barro’s, calls him “the most influential applied macroeconomist of his generation” and notes that this influence stems not from a single contribution but from the fact that “in virtually every major area of the field you have to contend with a paper by Barro.”

In recent years, Barro has been working on a possible resolution to a long-standing puzzle in macroeconomics and finance, the so-called equity premium puzzle—a reference to the fact that stocks have historically earned a much larger return than government bonds. Of course, stocks being riskier than bonds accounts for some of this difference in returns. But the difference is so high that it suggests a degree of risk aversion on the part of investors that economists regard as implausible. Barro argues, however, that rare disasters, such as the Great Depression or 9/11, even though they are low-probability events, can keep investor demand for safe assets such as government bonds high relative to that for stocks.

Whether or not that work joins his other papers on the hit parade, Barro intends to keep on trying. In Nothing Is Sacred, he wrote: “I have never really understood the big attraction of going out while still on top,” and he wondered why New York Yankees hitter Joe DiMaggio retired in 1951 and why “the Beatles and Simon and Garfunkel disbanded while at their best. The main consequence was that the public missed out on many years of fine, even if not the greatest, performance.” Barro’s many fans will take delight in his implicit promise that, at least in his case, the hits will keep on coming.

A version of this essay appeared in F&D (Finance & Development), a quarterly magazine of the International Monetary Fund, in September 2007.

Robert J. Barro is a senior fellow at the Hoover Institution and the Paul M. Warburg Professor of Economics at Harvard University.

Barro's expertise is in the areas of macroeconomics, economic growth, and monetary theory. He is currently researching the interplay between religion and political economy.