You may notice that I rarely comment on current affairs. Mainly, this is because mainstream debate appears to be regressing rather than moving forward, the result being that it is behind where it was in 1829, and whilst many far more respected people with far larger platforms than me have been winning the argument for a long time, progress is not being made.
To start, we have the supposedly most intelligent economists in the world seriously debating Ricardian Equivalence. This is the proposition that people will respond to government spending increases by scaling back their own spending in anticipation of future taxes (mention this to someone who isn’t interested in economics and prepare to be looked at very strangely indeed). Let’s first note what Ricardo said about his own theory:
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.
Is it any surprises that there is absolutely zero empirical evidence for this effect? Then why is everybody talking about it?
Another meme about deficits/stimulus is defining stimulus as the deficit. Really, this is quite simple and was summed up well by a commenter on MR:
“A slightly more respectable argument is that the current deficit is slightly smaller than in 2010 (when it was 10.1% of GDP.) But that shouldn’t cause a recession.”
This would be a NET CHANGE that is CONTRACTIONARY. Going from a 10% deficit to an 8% deficit is easing off from the accelerator, so to speak. If you ease off on the accelerator while going up a hill… well you slow down.
Looking at net deficits tells us very little about the level of demand being created relative to what it was before the recession and to what would be needed to close the output gap.
As a final note on stimulus, the Obama stimulus is not a major point for anti-Keynesians, as it was largely offset by state and local contractions, too small anyway and pretty poorly constructed. Having vampire squid banks that absorb much of the proceeds of growth surely doesn’t help, either. All in all, not a shining example in the history of fiscal expansion.
Now, none of what I’ve said is new or original – in fact, it’s incredibly old and has been repeated ad nauseum. But this doesn’t stop everyone from everyday economists to ‘nobel’ prize winners trotting out the same tired lines about the money having to come from somewhere (never mind that applying similar logic an increase in private spending cannot increase employment either), how the New Deal failed (>10% growth is an obvious example of failure) and so forth.
But when your opponents are prepared to believe absolutely anything – from NDGP targeting to Austrian economics to Ricardian equivalence – just so that they can deny a positive role for the state, these things don’t seem to matter.