Ricardian Equivalence Does Not Show That Fiscal Policy Can't Work

Conservative economists, like Robert Borro at Harvard, have gone back in time to raise the concept of Ricardian Equivalence to argue that fiscal policy cannot be effective in stimulating the economy. Its one of the ways that the rational expectation idea is used to argue against government intervention into the "free market". Krugman explains why they are wrong. They are not only wrong but they don't even understand Ricardian Equivalence. They assume a perpetual increase in government spending to make their case against stimulus. When the stimulus, like the one used in the US, is a one time event the argument falls apart. Borro, of course, is a smart guy and he understands this. On the other hand, he is also a Fellow at one of the top conservative think tanks. He knows on which side his bread is buttered.

Its also important to understand that rational expectation theories are loaded with assumptions that simplify reality by a wide measure. They have not been very good at predicting what will happen in the real world for that reason. Krugman grants the assumptions in the model in order to show that its an improper use of Ricardian Equivalence itself and not just the assumptions behind the model. This has not stopped folks like Borro from using it, however, to support their ideological opposition to fiscal policy.