Keynesians have the same answer whenever there’s a recession: spend, spend, spend. Then, uh...spend some more.
Who? Everyone. You, your mom, your BFF, and the government, too. The theory: spending is what makes the cogs of the economy turn. Saving slows them down. Therefore, we must spend. To get more people to spend, sometimes a government will spend money via debt. Maybe on public works, maybe as a stimulus package, maybe giving more liquidity for banks to lend out. That should get people spending, right?
Economist David Ricardo said, "I don’t think so."
The Ricardian equivalence theorem is the theory that debt-financed government spending doesn’t get people to spend more. During economically down times, people will save money. If they get more money than they anticipated, they’ll save that too. Why? Because it’s still gloomy outside, and because people expect tax increases in the future to pay off that debt the government accumulated. Ricardo (perhaps foolishly) believed people are no fools—if they see government debt rising, they know they’ll have to pay for it one day.
The bottom line? Ricardo thinks that, whether the government tries to stimulate spending by using debt or taxes, it doesn’t matter—people will behave the same. And that, therefore, a government can’t really get people to spend by spending itself.
That’s a big assertion, since most modern governments attempt to affect their economies via their central banks, doing monetary policy things. So...be mindful of whom you’re talking to on this one.
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Finance: What is Laissez Faire?9 Views
Finance a la shmoop what is laissez faire? alright well you know the
Renaissance Fair you know about playing fair and what about with laissez faire?
French term for more or less a Beatles [Beatles band singing]
song yeah let it be well as it applies to economics let it be means that the
economy is smarter than we are or at least a better arbiter of what works
what doesn't and what is fair ish so the ideology of laissez faire argues that
economic forces should be allowed to work themselves with maximum freedom and
minimal government interference part of the logic is purely economic government [Stash of cash appears]
involvement is friction bureaucrats who insert their noses only serve to hit the [Car driving uphill and approaches woman with stop sign]
brakes on the economy and make transactions more expensive by applying
taxes, ever been to the DMV and you know gotten the angry stare from the woman
whose Facebook page updating you just interrupted while hoping to get your [Dog on a leash appears]
license renewed yeah that's big government at work friction tax dollars
being spent to employ that woman instead of just figuring out a website that'll
let you go do it all on your own for about one millionth of the cost but part
of the argument of laissez faire is ethical, laissez faire advocates argue that
government interference distorts the natural and equitable forces of economic
development like think global warming for economics courtesy of our carbon [Earth heating up]
pollution otherwise known as regulatory friction slowing down the natural forces
of the commercial markets well in the heyday of laissez faire economics in
the last decades of the 19th century you really could buy happiness money was
pretty much everything government could be bought and it was kind of not a real
force without money behind it right kill someone well, you pay a fine of 199.95
kind of the way you know mexico works today
so what's fair about laissez faire? is it fair to have no minimum wage well laissez faire [Scribbles appear on graph of federal minimum wage]
would say yes but john steinbeck you know The Grapes of Wrath guy yeah he
would say no no and a half the logic is that human being
needing to eat will do pretty much anything to feed their kids right and [Man using shovel]
can't blame them will they work for just five bucks an hour to pay for that last
meal and probably a dollar an hour if it'll feed their last kid yeah you bet
fair well maybe among cave people but not today [Cave people by a fire]
but then there are other perspectives to consider like is it fair to have child
labor laws? if kids want to earn money cobbling shoes or making straw hats or
working 16-hour days in a stock brokerage or at shmoop...
shouldn't they be allowed to do so what do you think fair
not fair laissez faire yeah we don't know for sure what do you think? [People in shmoop boardroom]
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Who was John Maynard Keynes, and how did he contribute to economics?