Thursday, March 26, 2009

Found this interesting comment posted on a blog

This person seems to have it right!

Is the core question, "Can government spending change the rate of economic expansion/contraction?"

If government spending leads to economic expansion and new businesses that otherwise would not exist, then the future tax burden does not entirely fall on the existing businesses. Existing businesses may even pay less taxes in the future because of the contributions of new businesses. Clinton tax rates alone did not produce a surplus. The emergence of new businesses that paid taxes after an economic expansion balanced the budget.

This is another way that Ricardian Equivalence can fail to hold.

Of course, it matters HOW the money is spent. If it money spent on the palaces of Versailles, subsidizing unaffordable McMansions or shoddy construction in the Iraq Rat Hole, then contribution to long term expansion will be minimal. If however, it is invested on things like research and development that led to the internet, improving the health and education of the workforce and eliminating structural barriers to economic progress then the economy can expand. Those who argue for Ricardian Equivalence assume that government is unable to spend money in any way that expands the economy. They can only justify this position by ignoring history that inconveniently contradicts their ideology.

Good ending line!

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