States' Rights and the Role of the Federal Government by Amidon Lusted Marcia;

Author:Amidon Lusted, Marcia;
Language: eng
Format: epub
Publisher: Greenhaven Publishing LLC

Are Deficits Irrelevant?

There is a school of thought, led by Harvard’s Robert Barro, which argues that deficits essentially do not matter. This is not my argument. What Barro and his many followers (still a minority among economists) claim is that financing government expenditures by borrowing and by taxes (at least nondistortionary “lump-sum” ones) are equivalent in their effects on the economy. This proposition is called “Ricardian equivalence,” after the great classical economist, David Ricardo, who first suggested the possibility before later rejecting it. It reasons that if taxpayers have greater aftertax incomes because government expenditures are financed by borrowing instead of by taxes, they will not spend their extra income. Instead, they will save it to pay the future taxes necessary to service the resulting debt, or else leave the money to their children, who will pay those taxes.

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