In a recent piece, Tarun Ramadorai of the Said School of Business, Oxford University, has evoked upon Ricardian Equivalence (RE) to base his argument for optimal debt management.
Does economic theory offer any guidance about the optimal management of government debt?
One of the fundamental concepts in thinking about government debt is Ricardian Equivalence. David Ricardo posited in the 1800s that since debt must eventually be repaid by governments, it is essentially equivalent to future taxation (and will be perceived as such by taxpayers). Essentially all work in economics on public debt management relies on this concept in one way or another.
If debt and future tax policy are two sides of the same coin, the obvious step is to think through the role of debt in the context of sensible tax policy.
His article can be found at:
http://www.livemint.com/Opinion/RJDJPFZ7X65Kqa4DlbSZPK/Public-debt-management-back-to-school.html
Without examining what he says about this, it is interesting to see how economists evoke RE to build upon their arguments. RE simply does not hold true in a world of fiat currency. Ricardo's principle perhaps held true in a world of commodity currency but economists seem indifferent to this changed reality.
The fundamental flaw with RE have been examined in this piece by Auerback and should be read.
https://www.creditwritedowns.com/2010/07/why-ricardian-equivalence-is-nonsense.html
But what interests me is how economic jargon and hi-sounding terms like RE find their way into popular discourse and are swallowed by general readers.
No comments:
Post a Comment