A twofer. First up, Noahopinion:
Y'all know I cannot resist wading into a good macro throwdown.
This week's econ-blogosphere mayhem started when Paul Krugman wrote a post about the idea of Ricardian Equivalence (the idea that the timing of taxes doesn't matter), and why it doesn't imply that fiscal stimulus can't work. As an example of someone who does think that Ricardian Equivalence makes stimulus a non-starter, Krugman cited some remarks by uber-macroeconomist Robert Lucas:
But, if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder — the guys who work on the bridge — then it’s just a wash. It has no first-starter effect. You apply a multiplier to the bridge builders, then you’ve got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn’t going to help, we know that.Krugman's argument: Ricardian Equivalence says that the timing of taxes can't matter for the economy, not that the level of government spending can't matter.
Mark Thoma concurred: Ricardian Equivalence does not say that stimulus can't work, and Ricardian Equivalence is wrong anyway. But if it were right, it would only be an argument against tax-rebate stimulus, not against government-expenditure stimulus.
Then Krugman came under fire from David Andolfatto, who says that Lucas's statement was obviously not talking about Ricardian equivalence, and, hence, Krugman must not understand what Ricardian Equivalence is. Steve Williamson takes a somewhat less harsh line, saying that Krugman must not understand what Lucas was trying to say.
Krugman fired back, as did Andolfatto and Williamson. Much fun was had by all....MORE
And from New Monetarist Economics:
Ricardian Equivalance Heat
Here's the latest word from Paul Krugman on Ricardian equivalence. First Lucas doesn't understand it. Now, not only does David Andolfatto not understand it, he can't read either. What's the world coming to? Who taught that idiot Andolfatto anyway? Send him back to Surrey for reading lessons. Maybe he should consider going back to drywalling.
Here's what Krugman says:I accused Lucas of not understanding Ricardian equivalence. Here’s Lucas’s argument:What's Lucas saying? There's a bridge, it's funded by increasing taxes. Lucas says it doesn't make any difference that the government does this. He also says the answer doesn't change if the taxes that pay for the bridge are current taxes or future taxes. The last part of that is Ricardian equivalence....MORE
But, if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder — the guys who work on the bridge — then it’s just a wash. It has no first-starter effect. There’s no reason to expect any stimulation. And, in some sense, there’s nothing to apply a multiplier to. (Laughs.) You apply a multiplier to the bridge builders, then you’ve got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn’t going to help, we know that.
That’s saying that the spending response to expected future taxes leads to a fall in consumption that exactly offsets the expansionary fiscal policy. If that’s not a Ricardian equivalence argument, what is it?
