There is a peculiar argument against stimulus called the Ricardian Equivalence. It argues that if individuals have rational expectations, then when the government gives the economy a boost during a recession by cutting taxes or deficit spending, individuals will know that this deficit will have to be paid off at a later date and therefore the extra money will merely increase savings. This increase in saving will cancel out any stimulating effect the deficit might have. In other words it doesn’t matter whether taxes are raised now or later, the effect will be the same. In 2010, the President of the European Central Bank, Jean-Claude Trichet and current head of the IMF, Christine Lagarde both mentioned the Ricardian Equivalence as a reason why they didn’t support a stimulus. Continue reading “Time To Bury The Ricardian Equivalence”
Few economists openly admit to believing in Say’s Law anymore. It is generally considered a relic of the past, a once dominant theory that had faded away. Although it was prominent in the 19th century, it was swept away in the Keynesian revolution like so much of Classical economics. However, economic theories never die. Say’s Law lives on in conservatives think tanks like the Heritage Foundation and when Marco Rubio (who many favour as the next Republican candidate for President) rose to reply to Obama’s State of the Union address, it was Say’s Law he invoked. Even in the world of economics, some economists unconsciously channel the spirit of Say when they preach about the worries of crowding out and through Walras’ Law which is just a weak version of Say’s. This year’s joint winner of the (pretend) Nobel Prize in Economics Eugene Fama constructed an argument against government stimulus (unconsciously) based more or less on Say’s Law. Continue reading “Say It Isn’t So”
I nearly fell out of my chair with shock when I read the e-mail asking me to write a chapter for a book on Ireland’s future. Twenty young people from all different areas were to present a vision for Ireland’s future and the wonderful Lou Hodgson thought (for some reason) that I had something to offer. Six months later, the first copy of the book has arrived and it will be in shops next week. Its called “New Thinking, New Ireland” and I still cannot believe I’m part of it. Continue reading “I’m In A Book!”
Economics is a broad and vast field comprising intricate areas that would take years to master. This makes it very hard to summarise or reduce it to a simple point. However, if there was one simple lesson that I wished everyone knew about economics, one easy sentence or sound bite that could explain the essential core to people who know nothing else about economics, it would be: “My spending is your income”. This simple point, properly understood, explains everything you need to know about the important policy issues of the economy. It doesn’t explain everything, but it explains the important parts.
My Spending Is Your Income
Don’t get me wrong, I’m a liberal, a Democrat and I’ve voted for Obama for this election. My problem is that my main reason for voting for Obama is that I want Romney to lose. Obama’s campaign has consisted solely of stating Romney’s ideas are bad (which they are), yet he has not defended his own ideas or offered any new policies for his second term. Obama is fighting a defensive campaign, offering to prevent Romney from making things worse, but not offering any ideas for how to make things better. If you ignore the rhetoric and look only at the actions, you will see Obama has not been offering the radical solutions to turn America around. Continue reading “My Problem With Obama”
Republicans regularly criticise Obama’s stimulus plan, claiming it was an ineffectual waste of money. The internet is full of people arguing it failed to work, that unemployment is still high and growth is low. However what few people realise is that the stimulus did work. Without unemployment would be higher and growth lower. In fact the only problem is that it was too small to solve the greatest crisis since the Great Depression. Continue reading “The Truth About Spending And The Stimulus”
Einstein once defined insanity as doing the same thing over and over again and expecting different results. For four years the government has being cutting spending and raising taxes. For four years we have been told it is the only way to reduce the deficit, restore growth and create jobs. Yet four years later we still have a large budget deficit, high unemployment and the economy is still contracting. Continue reading “Why Austerity Isn’t Working”