Tuesday, December 4, 2012

Ricardian Equivalence

From the Flow of Funds accounts, Corrections presents net private and net government savings, along with net total U.S. savings (click to enlarge).  Notice the mirror trends of net private and government savings as a percent of GDP.  

The graph certainly doesn't discount Ricardian Equivalence as a first-order effect:  households know that deficit spending means future taxes:  to smooth consumption, they save more  If true, this equivalence would suggest that financing government consumption through deficits or through taxation is equivalent, to a first order approximation:  households know net present value of taxation will rise and save for the event.

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