Monday, March 15, 2010

Ricardian Equivalence

As those in AP and IB courses on macroeconomics approach the chapters on fiscal policy and influencing aggregate supply and aggregate demand, I want to draw your attention to a couple of posts that you may find helpful. (And who knows, many of you may already be at this point and searching for additional information.)

Likewise, more traditional economics classes will probably transition soon into the macro portion of the course. And when discussing fiscal policy, the stimulus package may be invoked as an example of how government policy may influence aggregate supply and aggregate demand.
The first link is from the always informative Becker-Posner blog. Gary Becker lays out a pretty good explanation of the current stimulus plan and why, in his analysis, it does not meet the criteria for a good Keynesian stimulus. He discusses crowding-out and policy delays, and makes his case for a flawed attempt to kick-start the economy.

Richard Posner presents another viewpoint. Now, this is no counterargument. Posner does concede problems with the package and admit that it could be improved, but he is not ready to throw the package "under the bus."

But what was most interesting, in my opinion, was his invocation of the Barro-Ricardian equivalence. Indeed, it was this discussion on the Wealth of Nations blog about Ricardian equivalence that drew me to the Becker-Posner exchange in the first place. So a HT is in order.

My class had discussed Ricardian equivalence not very long ago and will do so again in the near future. I will be using information from all of these posts to help clarify the concept for my students.

I look forward to your comments.


Lord said...

For Ricardian Equivalence to hold, fiscal policy must be exogeneous and that can only occur if it is unexpected; if it is expected then such policy actions will have already been anticipated and incorporated into actions. After more than a half century of Keynesian stimulus, the idea fiscal stimulus can be unexpected is incredulous. Rather, lack of stimulus would be unexpected forcing people to modify their behavior accordingly if they are capable of doing so, which they may not be able to if they are credit constrained.

Tim Schilling said...

I agree with you. And to that extent, it might seem silly to discuss Ricardian equivalence. However, I know it's covered in Mankiw's text, and it may be covered elsewhere.

Those of you with more AP or IB experience than I have might want to chime in. Is Richardian equivalence something that might show up on the exam?

TheTeetor said...

Something Lord said caught my eye.
"if it is expected then such policy actions will have already been anticipated and incorporated into actions"
This unexpectedness, must it be a product of the government? Is there now a need for the government to withhold more information from the public to help and inspire the population? Government is founded upon the people, in my mind as a guardian. I'll compare the government to a parent and a child.
If your parent told you they were going to make you learn how to swim by tossing you in the lake, would you do it? Neither do they tell you that they will be there to save you should anything go wrong. In the end, they throw you in and you learn how to swim and they never needed to help you, even if you did flounder at first.
So it should be with the public and government spending. If the government wants an effect on the economy they first have to make the public stand on their own starting with the cut off of the stimulus packages they have been feeding us.