Friday, September 18, 2009

Piling On

A fool writes:
"Paul's Keynesian economics requires that people make logically inconsistent plans to consume more, invest more, and pay more taxes with the same income... In economics, stimulus spending ran aground on Robert Barro's Ricardian equivalence theorem. This theorem says that debt-financed spending can't have any effect because people, seeing the higher future taxes that must pay off the debt, will simply save more." -- John H. Cochrane, "How did Paul Krugman get it so Wrong?"
On the other hand:
"Ricardian equivalence was another property of rational expectations monetarism. It was tested, in effect, by the Bush administration, which swung the federal budget into large deficit. The increase in the deficit was not compensated by increased private saving. Instead, American households decreased their savings to basically nothing. This violation of Ricardian equivalence suggests that the transversality condition imposed in intertemporal general equilibrium models has no empirical counterpart. Without such a condition consistency of all decisions is no longer guaranteed in intertemporal models. But bubbles and crashes are admitted." -- Axel Leijonhufvud (2009) "Out of the corridor: Keynes and the crisis", Cambridge Journal of Ecnomics, V. 33: pp. 741-757

1 comment:

Nick Chira said...

Ricardian equivalence effects could have easily been overwhelmed during the Bush era by expectations of future income.