Tuesday, December 18, 2012

New article in the Huffington Post: Why conservatives shouldn't fear the fiscal cliff

I have a new article up at the Huffington Post. Basic idea: Conservatives tend to believe in the power of forward-looking expectations. That will tend to reduce the impact of the fiscal cliff - yes, even the distortionary part - because if people are forward-looking, they will have been expecting taxes to go up ever since Reagan raised deficits in the 80s, and this will dramatically reduce the impact of the cliff. Excerpt:

[A]ccording to a central tenet of conservative economics, the fiscal cliff is not going to be a big deal. I'm talking about the principle known as "Ricardian equivalence."... 
Ricardian equivalence has become a pillar of conservative thinking about economic policy. When President Obama was preparing the 2009 "stimulus" bill, a number of economists -- including Robert Barro himself -- took to the editorial pages to vigorously protest. Deficit spending, they argued, couldn't boost the economy, because people would expect future taxes to pay for today's spending, and would cut back accordingly, exactly canceling out the "stimulus." 
By the same logic, conservatives shouldn't be worrying about the fiscal cliff. Yes, taxes will go up if we go over the cliff. But according to Ricardian equivalence, people have known all along that this would have to happen at some point, and they have been planning accordingly... 
In other words, the fight over the fiscal cliff might just be an elaborate form of political kabuki theater. Conservatives, if they believe their own economic doctrine, are probably not actually losing any sleep.
Read the whole thing here!


  1. Excellent demolition.

  2. "Conservatives, if they believe their own economic doctrine,"

    You are being disingenuous. Conservatives know that the "economic" doctrines they spout are all self serving nonsense aimed at gullible hicks (and any conservatives who do believe the nonsense are among the gullible hicks being manipulated).

  3. Anonymous4:53 AM

    I find it laughable that myriad additional taxes can be imposed since 1980 and anyone wastes their time comparing tax rates. At what point is spending too much? We currently spend 40% of gdp in government revenue and borrowing of all types.

    1. Anonymous7:04 PM

      "At what point is spending too much? "

      Spending is too much when you can show where the money being spent would be better spent elsewhere, including by individuals. Proponents of spending cuts have notably failed to do this.

      Without specifics calling for spending limits is all smoke.

    2. "Spending is too much when you can show where the money being spent would be better spent elsewhere"

      I think you would like the opportunity cost concept...

      "If you combined the time you waste cutting grass with the time you waste shaving your face, we'd be goin' to Venus, you know, we could be doin' whatever." - Jase Robertson (Duck Dynasty)

  4. Noah,

    "This notion was thought up by Harvard economist Robert Barro (who was too humble to attach his own name to the result)."

    There you go again, wildly over-attributing advances in economic thought to Robert Barro. What is it with you and Barro? Sigh.

    Actually it really was David Ricardo who thought it up. The difference is Ricardo thought it merely interesting, but of little practical consequence. Barro's contribution was to note that it's a direct consequence of ratex plus the usual assumptions. Barro actually *believes* in ratex and the usual assumptions, so perhaps he bears the distinction of being the first person ever to believe in Ricardian equivalence.

  5. Ben Johannson12:50 PM

    An excellent point to make, Noah. Note conservative economists, who repeatedly and flatly stated that fiscal policy could not be of help during the Great Recession, are suddenly urging compromise to deal with the fiscal cliff.

    If fiscal policy cannot improve growth and employment, then fiscal policy cannot hurt them either.