Debate among economists in the blogosphere has petered out a bit over the past couple of weeks, but there was still an interesting blog war with GMU economist Tyler Cowen versus U.C. Berkeley economist Brad Delong (Tyler is against fiscal stimulus, Brad is for). Tyler is one of my personal favs, while Brad is too quick to jump into ad-hom to make reading his blog worthwhile, but the debate is thoughtful and civil throughout. This is Brad’s final post on the debate, and it is a good one I might add. 3 would be my biggest concern, and Brad’s point about not seeing long term treasury rates rise yet is somewhat premature. We haven’t had to clear 1 trillion dollars of them yet, so we’ll see if the world’s appetite for treasury bills is really as insatiable as the left believes it is.
Noted leftist Paul Krugman decided to chime in with Brad a couple of weeks ago. He makes the argument that Ricardian equivalence is to blame for the misunderstanding about the stimulus. The post is clear and thoughtful, and he makes a theoretically good point. You can read the article and understand exactly what Ricardian equivalence is.
If you find reading Krugman nauseating (as I often do), than I’ll explain it very quickly for you. Ricardian equivalence in modern economics refers to the rational expectation of taxpayers that their taxes will rise in the future from present government consumption. This says that if the government passes 800 billion in new spending than taxpayers will lower there spending by 800 billion in anticipation of the future tax increase. This is even if government doesn’t pass any kind of taxes or give any indication for doing so. Taxpayers just expect their taxes to go up in the future and lower spending. We don’t really say that there is FULL equivalence because some level of drag or irrationality is expected. Robert Barro made his name in the 70’s developing this framework.
How do the tea parties fit into this debate? I hope some of you are thinking ahead. Here’s a quote from our very own salmon spartan:
“I’m confused as to what you’re all protesting. I’ve seen the signs, heard the rhetoric, I just don’t understand what specifically you’re upset with. There hasn’t been a major tax hike, unless you count the tobacco tax increase, there hasn’t been some new and terrifying war waged, there hasn’t been some new law telling us that the government can tap our phone lines or rummage through our trashcans at night. What are you trying to get done?”
I humbly submit that the protesters seem to be anticipating future tax increases from current spending, even though much of that current spending is “temporary” (we’ll see). It seems to throw a wrench into Krugman’s objection. Maybe that’s why Paul hates the tea parties so much.
