Some economists seem to argue that expansionary fiscal policy is both completely ineffective and will place the burden of debt on our children. Yes I am arguing with a straw man (it is time for the two minutes Chait). Straw economist argues two things.
First there is Ricardian equivalence so temporary tax cuts do not stimulate aggregate demand. Second temporary tax cuts are a very bad thing because they burden our children with debt. Straw economist contradicts himself (as straw economists always do).
The argument for Ricardian equivalence is that there is no meaningful family budgetar distinction between ourselves, our children, and our great great grandchildren. The original argument is that temporary tax cuts do not increase the actual wealth of currently living consumers because we will have to pay back the debt given the government’s intertemporal budget constraint. The counter argument is that we won’t live for ever so future generations will have to pay it back (hence the burden on our children). The counter counter argument due to Robert Barro is that we give money to our children when we die and, if we were rational, would increase that amount by exactly the burden due to the debt, so we spend and save as if we were imortal .
Some real live economists make this argument. It is an argument that tax cuts will not affect nominal aggregate demand. It is quite separate from the argument that increased nominal aggregate demand will just cause higher prices not higher real output (no one makes this argument openly any more because it is so obvious that huge recent shifts in nominal aggregate demand have caused tiny shifts in inflation). It is also quite separate from the question of whether a temporary increase in government spending will cause higher aggregate demand. Assuming Ricardian equivalence, it will unless highways are a perfect substitute for beer.
Note that according to the argument, the federal debt will not be a burden on our children as we will cancel it by giving them more money when we die. Yet straw economist (and a tag team of real economists and real politicians) argue both that fiscal stimulus based on temporary tax cuts is ineffective and that it will burden our children.
The title of the Barro’s Ricardian equivalence paper is “Are Government Bonds Net Wealth ?”. The point is that, if the answer is no, then they are neither positive net wealth nor negative net wealth. Somehow a set of people seem to have managed to convince each other that, in effect, they are 0 net wealth and also net poverty.
I don’t believe in Ricardian equivalence at all (even for debt retired in the lifetime of current consumers so burdening later generations doesn’t come into it). I think that people who own Treasury bonds count them as wealth and that when making consumtion savings decisions, people ignore their share of paying the debt. In contrast, when discussing public policy, people ignore the fact that the y Treasury’s debt is someone’s asset. They may believe (incorrectly) that the debt is mostly foreign owned. They may believe (correctly) that it is mostly owned by rich people and that non rich people will bear most of the burden of paying it back. In any case the division betwen our thought as citizens and as as consumer is schizophrenic.
Mark Thoma please don’t click this link