Wednesday, December 28, 2011

Thoma on Barro on Ricardian Equivalence

For those following the neoliberal notion of Ricardian equivalence as interpreted by Barro.

Those with even a rudimentary knowledge of MMT will recognize that Barro's notion of RE cannot be applicable in the current environment even if it is correct as it states it.
Barro: The Ricardian proposition is about the consequences of paying for a given amount of public expenditure in different ways.
Specifically, does it matter—or does it matter a lot—whether the government pays for its spending with current taxes or with current borrowing, which entails higher future taxes?
So, a central part of the proposition is that the amount of public expenditure—today and tomorrow—is being held constant. It's never part of Ricardian equivalence that the level of government expenditure doesn't matter. As [University of Chicago economist] Milton Friedman put it, the costs or benefits of government outlays depend on the amount and nature of what the government spends—there is no free lunch about paying for that spending. So whether you pay for it now or later is secondary.
As a first-order proposition, it is right that it matters little whether you pay for government spending with taxes today or taxes tomorrow...
Read it at Economist''s View
by Mark Thoma

Someone please tell the poor man that taxes don't fund federal spending under the existing monetary system in which the federal government is the monopoly provider of a non-convertible floating rate currency. Better yet, send him a copy of Warren Mosler's The 7 Deadly Innocent Frauds of Economic Policy.


wh10 said...

Am I wrong in thinking that a very simple analysis of annual deficit/surpluses shows we never have paid for past debt with future taxes, rather that the vast majority of the time we're running deficits?

wh10 said...

(and that thus disproving the RE proposition?

Tom Hickey said...

Gee, wh10, that would involve checking the facts. Who would think of doing that when building models is so fascinating?

Anonymous said...
"Barro: National savings rates are not constant over time in the United States, and they are not the same across countries. A lot of variables influence national saving rates. However, economists have not demonstrated empirically for the U.S. or across countries that there is a regular relation between fiscal deficits or the size of the public debt and the level of the national saving rate. The idea that fiscal deficits drive down national saving is often claimed, but it is mainly proof by repetition. No one has actually shown convincingly that the U.S. national saving rate relates in a systematic way to the size of the fiscal deficit or the stock of public debt, both measured in relation to GDP."

Barro is totally lost and needs to learn some macro identities.

Warren Mosler said...

also, if, for example, you cut taxes and nothing happens, it means there was no reason for the tax in the first place.