« Does GDP tell us how we are doing? | Main | Limits of Monetary Policy and “Quantitative Easing” »
December 12, 2008
Ricardian Equivalence
By Wade Rousse
Recently, there has been a lot of talk about the economic policies the new administration may quickly implement once in office. I’ve heard utterances of tax cuts for the middle class, and an increase in infrastructure spending, to name just a couple. One thing is for certain. Both will increase the government’s debt.
In this posting, let’s discuss the middle class tax cuts. It’s interesting to think about the different economic theories that lie beneath this policy. The traditional view of this type of government program, which “temporarily” increases the budget deficit, is that consumers will respond to their increase in after-tax income by spending more. As a result, this increase in spending will help the overall economy.
But let’s consider an alternative view. It’s called Ricardian Equivalence. Here, consumers are forward-looking. They consider their current incomes, as well as their future incomes, when making consumption decisions. Realizing that the government seldom reduces spending, consumers know that their increase in current income will be offset by a reduction in future income because the government must eventually raise taxes to re-pay the increased budget deficit. As a result, consumers do not spend more. Therefore, a person who subscribes to Ricardian Equivalence believes a middle-class tax cut would not affect the overall economy.
I’m curious as to which one of these views do you think is correct? In addition, how forward-looking do you think consumers really are?
Posted by Wade at December 12, 2008 6:47 PM
Trackback Pings
TrackBack URL for this entry:
http://www.chicagofedblogs.org/cgi-bin/mt/mt-t.cgi/34
Comments
Thank you very much for that useful entry.
Posted by: mcdonalds coupon at September 14, 2009 6:26 AM
Man, really want to know how can you be that smart, lol...great read, thanks.
Posted by: rachat de credit at November 4, 2010 12:53 PM
Hey friend can i publish some paragraph of your article on my little blog of university.I have to publish a good articles out there and i really think your post Fits best into it.I will be grateful to give you an source link as well.I have two blogs one my own and the other which is my college blog.I will publish some part in the university blog.Hope you do not mind.
Posted by: Sydney at June 25, 2011 4:45 PM
Wonderful Web site! I wondered if I would be able quote a portion of your pages and use a handful of items for a school assignment. Please let me know through email whether or not its ok or not. Thanks
Posted by: Jarrod Capella at November 3, 2011 3:21 PM
Post a comment
Commenting Policy:
All comments and links posted to FRBC blogs are reviewed. The Federal Reserve reserves the right to protect against spam, off-topic and profane comments and links; any such comments or links will be deleted and the domain address of the poster blocked.