Tuesday, January 29, 2008

Does Steven Landsburg Believe in Ricardian Equivalence or Not?

The LA Times featured a debate between Jason Furman and Steven Landburg where Jason opened up with a nice discussion of how Lord Keynes might have viewed the current prospect of a US recession and the possible policy reactions. Steven began his reply with suggesting that most people don’t know who Lord Keynes was and then decided to dismiss much of what we economists teach in macroeconomics with what seemed to be a contradictory counterview. Steven starts with:

First, when the government mails you a check, it's essentially making you a loan. That's because they're sending you money that they'll have to recapture with higher taxes in the future.

Hmm – sounds like Robert Barro espousing his Ricardian Equivalence proposition that any change in taxes not accompanied by a permanent change in government spending will be seen as only transitional. As such, the tax cut will be 100% saved and not increase consumption at all. Of course, transitional increases in government consumption could raise aggregate demand even in a Ricardian Equivalence world. Ah, but then that’s what some Democrats have proposed to do.

But then Steven sums up with this:

In sum, you (along with the president and the majority of Congress) are asking us to:

shower people with loans to encourage reckless spending;

somehow expect that the loan recipients will feel both richer and not richer at the same time (so that they'll spend more without working less), and;

do all this in the name of delaying the sometimes painful adjustments that are going to have to get made a year down the line in any event.

I object.

What was his objection? That people don’t behave in the way the Barro-Ricardo model of consumption predicts? That somehow the idle production from the types of recessions that Keynes wrote about is a better use of resources than the consumption from induced by tax cuts? Or is Steven saying such recessions do not occur in the first place? After all, he sees the problem not as an insufficiency of aggregate demand but as the need to let “unhealthy industries” adjust.


Robert D Feinman said...

He seems to have forgotten that, unlike the rest of us and even local governments, the Fed can print money.

This never gets paid back. OK, almost never, Clinton did oversee a slight decline in the size of the cumulative deficit.

Inflation is the mechanism that all governments, who are overspending, ultimately turn to. It doesn't require any big battles in congress and the hidden tax on wage earners is spread over a long period through rising prices.

Has there been any discussion of where the money for the stimulus package is coming from? The most one hears is some vague mention of increasing the deficit. But this only happens if the Treasury sells extra bonds, and it's not clear that is what what will happen.

It would appear that the Fed is already printing gobs of money and throwing it (secretly) at banks in trouble.

The Vietnam war was financed (after the fact) by inflation and so will the current wars. To do otherwise would require sacrifice on the part of the American public. The last person who used that word went back to growing peanuts shortly thereafter.

rosserjb@jmu.edu said...

I have been wondering for some time why Steven Lansdburg gets so much attention. He is not worth it.

Presumably the indsutry that needs to adjust is housing. Great.


Robert D Feinman said...

It's like hitting a piñata, it's pointless, but lots of fun...

Shane Taylor said...

Robert Feinman wrote:

It's like hitting a piñata, it's pointless, but lots of fun...

But only as long as those lining up for a swing outnumber the piñatas.