theory, taxation, public-policyDoes the empirical data show that Barro-Ricardian equivalence holds (i.e. is a government’s fiscal decision to borrow or tax irrelevant to the real interest rate and output)?
On the surface, this seems to run counter to voter and legislative preferences for deficit spending (although revealed behavior may have another story to tell).
Also, can Ricardian equivalence be reconciled with Kotlikoff’s idea of intergenerational wealth transfers? It seems that if the latter takes place thru the mechanism of deficits paid off by future generations, then Ricardian equivalence is false as the borrow/tax decision has real economic effects. In particular, a taxpayer might not anticipate higher future taxes as a result of deficits within their lifecycle.
The idea of using Ricardian equivalence to justify intergenerational wealth transfer assumes that future generations will be better off than the current one. In America, for instance, Presidential candidate Ross Perot observed in 1992 that historically, the American standard of living “doubled every forty years,” from say, 100 to 200.
Believing this, a current generation might engage in borrowing policies that might lift its own standard of living from 100 to 120, even costing the grandchildren the difference between 200 and 180.
Ricardo himself would be against such a policy. He believed that the population would expand faster than the economy, bringing it down to a “subsistence” level. If anything, the current generation could expect to be better off than its children and grandchildren, and therefore shouldn’t borrow against their future.
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