Supply-side Dissatisfaction, II
By Arnold Kling
N. Gregory Mankiw, incoming chairman of the President’s Council of Economic Advisers, continues to take flak from supply-siders. In this essay, I discuss the latest attack, from The Wall Street Journal’s Susan Lee (subscription required).
Her objection to Mankiw is current. She complains that “his best-selling textbook argues that deficits or government debt pushes up interest rates.”
I raise a concern with the “Ricardian equivalence” theory.
I do not know anyone who makes their savings decisions by looking up the government Budget data. So you have to argue that somehow people are factoring in the government Budget implicitly without being aware of it. Although as an economist I believe that people can solve complex optimization problems intuitively if they have enough practice, there is no way for people to “practice” making long-term saving decisions–you only go around once in life.
For Discussion. Are there mechanisms that I am missing that make Ricardian equivalence more plausible?