2.
"Robert Barro's Ricardian equivalence theorem was
one nail in the coffin. This theorem says that
stimulus cannot work because people know their
taxes must rise in the future. Now, one can argue
with that result. Perhaps more people ignore the
fact that taxes will go up than overestimate
those tax increases. But once enlightened, we
cannot ignore this central question... [G]overnment
must fool people into forgetting about future
taxes, an issue Keynes and Keynesians never thought of."


Bruce included this quote from Cochrane in his post. This is surely 
disingenuous on Cochrane's part - I hope it is, at any rate. 
Ricardian equivalence, it is true, implies that deficit-financed tax 
cuts cannot affect demand. Deficit-financed temporary increases in 
Government spending, on the other hand, can. Consumption falls today, 
because the present value of future taxes is higher by the amount of 
the spending increase, but not by as much as G rises. The reduction 
in the present value of life-time income implies that the *sum* of 
reductions in current and *future* consumption will be equal to the 
increase in G, so the reduction today will be small.  Moreover, if 
the spending is for public investment with a return equal to the 
private rate of return, life-time income is unaffected and there is 
no fall in consumption at all. And if the rate of return is greater 
than the private return, C will increase along with G!


Kevin Quinn