Friday, August 12, 2011

"Ricardian Equivalence": You're Seeing It

Never heard of it, either, until I read this article; but Barro's name is certainly familiar.

Well it should be; he's defined the reason behind the Obama Malaise.

...This fancy term — dating back to the 19th century writings of David Ricardo — rejects the notion that people are stupid with respect to the effects of government taxes and spending.  Instead, people and businesses are forward looking and understand that increased government spending and deficits must eventually be paid for by higher taxes. Alarming deficits alert households and businesses to expect higher taxes. They respond by spending less to build their balance sheets to prepare for the day of reckoning....

That theory neatly explains the PCE's stubborn resistance to significant and/or long-lasting increases.  As my pal/demi-antagonist Strupp has said (about a million times), 'there's no demand there.'  He's right, and now we know why:  we KNOW that the axe will fall.  We just don't know when.

What is perfectly obvious--except to the Obama-ites/Keynesian blindlings--is that Keynes' theory ran out of gas when the national debt exploded.


J. Strupp said...

You're late to the party Dadster.

Keynesians (not just your pal Krugman but many others)have addressed Ricardian Equivalence arguments that freshwater economists (including my college econ. professors at U. of Minnesota) have been trying to hammer home for the better part of 3 years now.

Ricardian Equivalence assumes that markets are perfect and that investors, consumers, business owners have perfect information. Behavioral economists like Robert Schiller know all too well how ridiculous of an idea that is (housing bubble anyone?).

Even so, assuming that Ricardian Equivalence does exist, this doesn't mean that ARRA and other TEMPORARY increases to government spending aren't stimulative. RE assumes that consumers will cut spending equal to their expected future tax burden (due to increased gov. spending). But that doesn't work when government spending increases on a TEMPORARY basis. Consumers will not completely offset this gov. spending on a 1 to 1 basis because the spike in spending is not permanent (I know you think it is but most investors do not).

Again, this assumes that RE actually exists and markets are perfect. That ship has sailed on the Chicago Boys (and the Carlson School of Mgmt. boys in Gopherland). You gotta be out of your mind to sign on to the perfect markets theory after watching what happened in fall of 2007.

Dad29 said...

Consumers will not completely offset this gov. spending on a 1 to 1 basis because the spike in spending is not permanent (I know you think it is but most investors do not).

"Most Investors do Not"?

Really? You can prove that, right?

You are correct when you state that most do not have 'correct' information, AND that many will not behave correctly with or without such info.

However, the case at hand is one of R.E. in a "serious fear" mode, and I think the theory holds water very well--in that specific instance, just as it would in an 'serious exuberance' mode.

The tricky part is in the "mild" fear or exuberance (or flat-line) modes, and in the "irrational" high- or low-modes. The former gives no good 'signal,' and the latter is why 'return to the median' works so damned well.

jimspice said...

I would have assumed it would have had something to do with Lucy not being permitted to perform in the show.

The imperfection in the "marketplace of ideas" is the main reason I so disapprove of the concept that money = communication, and that corpporations = people. Yes, society is served best when information is freely dispersed, but not when a select few can afford MORE free dispersion.

Dad29 said...

I'm watching those re-runs, too. A couple are really classic slapstick, broad comedy. Great relief from watching the news.


If you really believe that Large Money is a problem, then asking DC politicians to regulate Large Money is precisely wrong. (Do you SERIOUSLY think.....???) And I remind you that WEA is a "corporation" just as is the NRA.

Would you silence them?

Money is a problem because Government is too pervasive. Money is also a problem due to human nature, which also cannot be 'fixed' with law or regulation; evil can only be pursued after-the-fact, not before.

jimspice said...

D29, you might be amazed to discover what we agree upon.

But not now. I've got clams on the grill for my own personal bacchelor's night.