Wednesday, February 11, 2009

Barro Versus Krugman

Clive Crook's blog reports responses by the two economists regarding the debate on the effectiveness of a government spending based stimulus package. According to McArdle:

The difference between the two responses is striking. Paul Krugman says, basically, "You can't expect me to dignify my responses to amoral dolts with a measured tone." Robert Barro brings the economics. Quite a lot of it.

Barro wins the day by making a very important distinction that has been frequently disregarded even by professional macroeconomists:

One thing I think you need to be clear on is the distinction between Ricardian equivalence and Keynesian multipliers. The first bears, for example, on how a deficit-finance tax cut affects aggregate demand. The Ricardian view is no effect, and the "standard" view is that the effect is positive but less than one. The multiplier has to do with how a change in aggregate demand affects output. It is possible to have a large multiplier even with Ricardian equivalence, and it is possible to have a small multiplier even without Ricardian equivalence.

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