Debt Concern Inversely Proportional to Economic Knowledge

Ricardian equivalence is taught in every graduate school in the country. It is also sheer nonsense. Joseph E. Stiglitz, twitter

this is taken from Lars Syll. The words are his not mine.

From Lars Syll in Economics

As yours truly see it, Ricardian equivalence is fallacious mainly because it requires rational expectations. As Kevin Hoover has it in his The New Classical Macroeconomics (Basil Blackwell 1988): Ricardian equivalence is the claim that whether a given path of government expenditure is financed through taxes or debt is unimportant: substituting debt for taxes appears to increase disposable income today. But since the debt must be repaid with interest, a rational taxpayer would save the entire windfall in order to afford the future tax bill, leaving his expenditure unchanged. Ricardian equivalence remains controversial because it depends on assumptions about the public’s foresight and grasp of the fiscal system closely related to the rational-expectations hypothesis and on debatable assumptions about the incidence of taxes and expenditure.

And a rather ironic fact is that Ricardo himself didn’t believe in Ricardian equivalence. In “Essay on the Funding System” (1820) he writes:

But the people who paid the taxes never so estimate them, and therefore do not manage their private affairs accordingly. We are too apt to think that the war is burdensome only in proportion to what we are at the moment called to pay for it in taxes, without reflecting on the probable duration of such taxes. It would be difficult to convince a man possessed of £20,000, or any other sum, that a perpetual payment of £50 per annum was equally burdensome with a single tax of £1000.

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