Paul Krugman has an excellent post about Ricardian equivalence. What is Ricardian equivalence? It is an economic model that claims that any money spent by the government will be offset by money not spent by the private sector. Basically, it goes like this: if the government spends $100, the private sector will know that at some point that $100 will have to be paid back in taxes, so they will set aside $100 that they would normally spend. Unfortunately for the model and the conservatives who believe in it, the model depends upon such untrue assumptions as “[C]onsumers have perfect foresight, live forever, have perfect access to capital markets.” Krugman shows that even if you do accept this highly questionable model, government stimulus can still be used to help the economy. But then one of his commenters—CES from California—responds:
I wish you would make a detailed list about where you think the government should be spending the additional $2 trillion you think it needs to spend to get us out of this liquidity trap. Without saying that, you’re just waving your hands around.
Just so you understand: although it would be nice if the government spent money on useful things, it doesn’t matter. Remember how World War II got us out of the Great Depression? Wars are not a good way to spend money; they don’t build infrastructure. And yet, even though much that government spending was effectively thrown away, it still got us out of the Great Depression!
Any more foolish comments CES?
