Mark Thoma: John Cochrane vs. Robert Barro on Government Purchases and Aggregate Demand
Economist's View: More "Ricardianoid" Equivalence:
It's never part of Ricardian equivalence that the level of government expenditure doesn't matter.
Ricardian Equivalence ... is the theorem that stimulus does not work in a well-functioning economy...
...John Cochrane weighs in on the Ricardian equivalence debate, sort of. I say “sort of” because he defines Ricardian equivalence as
the theorem that stimulus does not work in a well-functioning economy
which isn’t at all what it means to the rest of us, and certainly not what Ricardo meant (for the record, it’s the proposition that the timing of taxes doesn’t matter for consumer spending, so that temporary tax cuts don’t change spending).
And then he “explains” that government spending can’t increase demand because of … Say’s Law! Which, of course, Keynesian economists have never thought of.
It’s quite remarkable. And I mean that in the worst way: 80 years of hard thinking about economics, completely forgotten.