Saturday, February 6, 2021

Summers and Ricardo

I share some of Summers' concerns about the magnitude of Biden's proposed stimulus.  The comparison to the January 2009 situation is marred by the fact that we are not now in a Demand-deficient Keynesian-style recession as we were then. What's holding back output now is clearly pandemic-induced supply constraints. 

On the other hand, if the Ricardian Equivalence theorem holds, perhaps some non-negligible portion of the transfer component of the stimulus will be saved. (Even borrowing-constrained individuals will save some of a big-enough transfer.) 


 

7 comments:

  1. https://en.wikipedia.org/wiki/Ricardian_equivalence

    The Ricardian equivalence proposition is an economic hypothesis holding that consumers are forward looking and so internalize the government's budget constraint when making their consumption decisions. This leads to the result that, for a given pattern of government spending, the method of financing that spending does not affect agents' consumption decisions, and thus, it does not change aggregate demand. Thus, this theorem is used as an argument against tax cuts and spending increases aimed to boost aggregate demand.

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  2. Curiously enough, some critics of the proposal are complaining about exactly this, that the way it is structured will lead to a large portion of it simply being saved, no stimulus at all.

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  3. Let's say that consumers are not borrowing constrained so temporary changes in net taxes do not impact consumption. That does not mean fiscal policy will not change aggregate demand if there is some large one-time boost to government purchases as in the war on corona virus.

    Now Summers is stull confused as he frets over the need to government purchases for longer-term fiscal projects. Here Ricardian Equivalence might tell us that these projects will induce a fall in consumption whether immediately taxed or financed by deferred taxation. Of course infrastructure investment would tend to raise economic growth.

    Basic point still holds - there are various types of fiscal stimulus and even a Ricardian needs to be careful how to model out the aggregate demand effects.

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  4. a bit off topic but interesting article on efficiency in a pandemic context....

    https://www.washingtonpost.com/outlook/2021/02/05/pandemic-food-resilience/

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  5. what has happened to Peter Navarro...it is getting worse with him claiming Barr was part of deep state coup against trump! see fox news interview:

    https://twitter.com/i/status/1358444331732852737

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  6. Anonymous: Agreed. Both PGL and I made your point about government spending on G+S vs. tax-cuts/transfer payments back in 2009, when Cochrane and Lucas were saying that the RET implies that neither tax cuts nor government spending increases Aggregate Demand, so that the ARA would be useless. When G increases, C falls but not by as much, so AD increases, even in a Ricardian world. The Wikipedia author does not understand this point.

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  7. Everything I know about economics I learned from Bill Mitchell. This essay of his us germane. http://bilbo.economicoutlook.net/blog/?p=8252

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