Suddenly it’s everywhere. Justin Yifu Lin (the chief economist at the World Bank), Tyler Cowen, Paul Krugman, Nick Rowe, our own PGL: hot debate about how Ricardian equivalence applies to the current economic situation. There’s just one minor problem: Ricardian equivalence is an absurd idea, with not a shred of evidence or logic to support it.
Behind the imposing moniker dreamed up by Robert Barro, RE simply says that government debt must eventually be paid down to zero. If the government borrows $1B this year, it must run a surplus of $1B some time in the future. If spending is constant, this means taxes have to go up.
I pointed out the vacuity of this idea in a previous post, so I won’t repeat myself. The question of the day is, why should anyone give RE more than a moment’s attention? In particular, why would smart economists with state-of-the-art training be debating the fine points of what RE would mean if it were true?
The only answer I can give is that the theory can be decked out with lots of math (overlapping generations ratex models of the behavioral response to knowledge of future taxes), enhancing the reputations of all involved. The fact that RE simply assumes a nonexistent and impossible state of affairs plays no role.
That, in a nutshell, is what’s wrong with economics.