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Monday, January 26, 2009

"Righty Economists" and Ricardian Equivalence

Via email:

Has it occurred to either of you that we have Greg Mankiw approvingly posting links to Barro, and also to John Taylor arguing that a perm tax cut counts as a stimulus?

While we're at it, in quoting an abstract from Mountford & Uhlig's paper, he bolds the last sentence:

We find that deficit-financed tax cuts work best among these three scenarios to improve GDP, with a maximal present value multiplier of five dollars of total additional GDP per each dollar of the total cut in government revenue five years after the shock.

Multiplier of 5, 5 years later. Boy, you can't reject Ricardian equivalence much more emphatically than that. Yet Kevin Murphy, in the slides Brad posted yesterday, touts the idea.

I'm willing to give up on getting righty economists to provide a serious defense of their positions. At this point, I would settle for their

1. dividing into the camps that do and don't believe in Ricardian equivalence so the rest of us know, and

2. fighting it out among each other before they try and convince anyone else that it's simultaneously true that

(a) stimulus is unnecessary,
(b) it's impossible for a stimulus to do anything due to identities and R equivalence, and
(c) tax cuts--permanent ones!--are the best way to stimulate AD.

    Posted by on Monday, January 26, 2009 at 01:08 PM in Economics, Fiscal Policy, Taxes | Permalink  TrackBack (0)  Comments (49)


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