@Canard DuJour
Okay, I decided to do some digging of my own.
I found this:
In this paper, we utilise data from a German population survey to test the validity of the
Ricardian equivalence theorem (RET). In 2013, 2,000 representatively chosen people
were asked whether they have altered their consumption and saving behaviour in
response to the significant increase in public debt that occurred between 2008 and 2012.
Our findings suggest that, in general, RET does not hold. Only 7% of our respondents
reported consuming a smaller proportion of their income, and saving a larger proportion,
in response to public debt accumulation. In the case of respondents required to pay social
security contributions, we can control for their expectations about the future and find
that 36% behave in line with RET. We interpret our findings as microeconomic evidence
in support of the ‘rule-of-thumb’ consumer assumptions employed in macroeconomic
models. Moreover, using multinominal logit regressions, we find that individuals’
consumption responses are significantly related to their economic situation, time
preferences, education, and age.
Suggested Citation: Hayo, Bernd; Neumeier, Florian (2016) : The (In)Validity of the Ricardian
Equivalence Theorem – Findings from a Representative German Population Survey, ifo Working
Paper, No. 233, ifo Institute - Leibniz Institute for Economic Research at the University of
Munich, Munich
However, there have also been cases where a Ricardian equivalence actually was discovered in real world scenarios, and here is one example:
Abstract: Two of the most common measures adopted by the government to stimulate the economy
are increasing government borrowings and implementing tax cuts. These tax cuts are financed
through increased debt. According to the Ricardian equivalence theory, the consumers will not
change their current spending when they anticipate a tax increase in the future. In order to pay
high taxes in the future, the government should increase its present savings. However, the extent of
applicability of Ricardian equivalence could vary across nations. In this context, the present study
explores the long-running relationship between domestic borrowing and private savings in Turkey.
For this purpose, the researcher collected the data for key variables, gross domestic savings, and
government debt, for the period of 1980–2017. The researcher used unit root, cointegration, VECM,
and the Granger causality test to examine the relationships among the variables. Apart from this,
ARDL regression was used in order to examine the long-term relationships among the variables. The
empirical results indicate that there is presence of bidirectional causality, indicating that Ricardian
equivalence is applicable in the economy. Households display a rational behavior by increasing their
savings during the periods in which high government expenditure is incurred.
İkiz, Ahmet S. 2020. "Testing the Ricardian Equivalence Theorem: Time Series Evidence from Turkey"
Economies 8, no. 3: 69.
https://doi.org/10.3390/economies8030069
Now, my question to you is this: is there really a scientific consensus regarding RET? I see what seems to be legitimate research that both supports and refutes RET. Is it possible that Ricardian equivalence actually does occur in some cases but does not occur in others?
This is one of the reasons why I have come to believe that I do not really know enough about economics to really make vast sweeping opinions about the subject. It sometimes seems like I have found a well-supported theory, but then I run across evidence that it might not be so very well-supported.
As far as I can decipher from all of the research, though, it seems like redistribution of wealth actually works best in undeveloped cultures where the wealth is not currently controlled by people that are able to make the most efficient use out of it.
The place where I grew up, for example, was controlled by a large number of inbred degenerates leftover from decayed Southern gentry. They are clinging to land that they do not need for reasons more related to pride than to any intention of ever making use of it. They intentionally undermine the advancement of the area because they see any kind of progress at all as a threat to their way of life, which is based primarily upon idleness, animal-murder, and alcoholism. I have seen this phenomenon first-hand. In a situation like that, I think that the forcible redistribution of wealth really could awaken an economy that has utterly failed to develop.
From the University of Würzburg study, they explain it thusly:
In early stages of development, op-
portunities for investments in human capital are unequally distributed among households.
In the presence of underdeveloped financial markets, weak public education systems and
high opportunity costs for education, budget constraints are binding and the initial wealth
endowment of the family determines the education level of the children. In this case, re-
distribution as a policy measure to increase equality of opportunities exerts positive effects
on growth.
I am glad to find that what I observed with my own eyes is validated by somebody. In fact, it says pretty much the same thing I said.
At minimum,
@Canard DuJour, I believe that I am justified in saying that the redistribution of wealth is disproportionately beneficial to economies that have failed to develop, due to the, due to the little capital in those economies being controlled by economically and culturally sedentary families.
Therefore, even if the evidence in support of RET is all complete bunk, which I am not sure about but open to depending on what kind of evidence you were to bring forward, the paper still has value. The paper demonstrates very apt arguments for how undeveloped economies really should consider redistribution of wealth in order to get capital into the hands of people that are intent on exerting effort to develop their economies.
*blows smoke-rings* tell me I'm adorable, and feed me more science.
The key premise of 'RET' (that so-called "govt debt" must be paid back with taxes) is
wrong as a matter of fact, so I'm not sure what a "scientific consensus" about it could mean.
Re the Würzburg thing, I think the consensus is, if anything, the opposite - i.e.
that income inequality is beneficial to economic growth in poor countries, but that it is detrimental to economic growth in advanced economies. I'd be skeptical of anything based on economists' models (mostly ideology posing as science) but it's now pretty clear that inequality is detrimental in advanced economies.
The University of Würzburg study actually uses the Galor and Zeira study as part of their synthesis. *purrs* It would seems that Oded Galor has cast a long shadow with his Unified Growth Theory. It constitutes some of the most exciting economics research that I have read about in a while, and its heavily empirical roots are heartening to me. It might take me a while to dig through the references used by the University of Würzburg Study, but this will be one of the most charming that I have had the pleasure of reading about.
*puts on some Light in Babylon and begins tapping one hindpaw and swishing her tail in time to it*
I tend to be sympathetic toward chimeras and hybrids, though. It's a dragon thing. It constitutes one of the reasons why I am such a raving fan of Knut Wicksell. There was just something sexy and salacious about that three-way that he conceived, between Lauseanne school, Austrian school, and Ricardian economic theory. It excited me on such a visceral level.
This fetish also extends to why I simply adore New Keynsianism, just as a matter of principle. It occurred due to the most delightful synthesis between Keynesian and neoclassical economics. While a complete and comprehensive understanding of it is truly beyond the understanding of a parrot-size dragon with a head only about the size of a small tangerine at the most, it nonetheless tickles my intellectual miscegenation fetish.
Anyhow, I don't think that you are really bringing anything new into the discussion by citing the Galor and Zeira study simply because of its assumed validity in the University of Würzburg study. The University of Würzburg study was actually a synthesis study that included Galor and Zeira. Thank you for drawing my attention to Galor and Zeira, though. I have spent a little while brushing my eyes over Galor's ideas, in particular, and I find him to quite enchanting.
*nods her head appreciatively* Thank you, my tovarish. I am not quite certain, yet, that the University of Würzburg was wrong to include Barro's conclusions in their synthesis.
It was quite late at night when I went off on that wild goose chase regarding RET, but it is apparently not relevant to the the University of Würzburg study at all. It was nonetheless interesting to read about, and I shall investigate it with greater depth later. However, Barro has apparently not spent his career focused on promoting RET to the exclusion of all other ideas. He does other stuff. Here is what the study really has to say about Barro's ideas.
We use a standard approach in specifying our empirical model, considering the growth rate
of real per capita GDP to be a function
d
dt
= F(yt−1,ht,Xt,Ψt,Rt) (1)
where yt−1 denotes the log of initial production per capita, ht is human capital endow-
ment per person, and Xt comprises an array of control and environment variables. When
holding constant these country specific potentials for economic growth, we study to what
extent inequality Ψt and redistribution Rt contribute to income increases.
It is crucial to specify the basic system accurately, as the disregard of covariates could lead
to inconsistency in the estimated coefficients, particularly as redistribution and inequality
may depend on the political and institutional environment of the countries. For this reason,
we apply the basic system specification of Barro (2000, 2003, 2013), which has been proven
to explain empirical growth patterns quite accurately in a number of studies.
In spite of the fact that Barro's fame is based on the fact that right-wing politicos have been exploiting his old views on RET to fuel their polemic, it would be a tragic oversimplification to assume that all he really does for a living is to provide fuel for right-wing polemic. I disagree with that sort of pigeonholing unless there is actually justification for it. I am not really sure that he is at fault for how some of his findings have been abused.
Here are the actual studies they were referring to, there:
Barro, R. J. (2000). Inequality and growth in a panel of countries. Journal of Economic
Growth, 5(1):5–32.
Barro, R. J. (2003). Determinants of economic growth in a panel of countries. Annals of
economics and finance, 4:231–274.
Barro, R. J. (2013). Education and economic growth. Annals of Economics and Finance,
14(2):301–328
Therefore, here is what they have to say about the Barro, R. J. (2003):
Instead, we follow Barro (2003) by assuming
that higher levels of yt−1 and ht reflect a greater stock of physical capital. Initial production
is measured by the logarithmic value of real per capita GDP, denoted by log(GDPpc). Hu-
man capital is gauged by average years of schooling (SCHOOLING) and by the logarithm of
life expectancy at birth (LIFEEX) to proxy education and health of the population, respec-
tively. Yet, whereas higher life expectancy reflects better health, an increase in log(LIFEEX)
simultaneously raises effective depreciation. In order to disentangle these effects, we also
include the logarithm of the fertility rate log(FERT) in the empirical system, thereby isolat-
ing the negative effect of population growth predicted by the standard growth model. The
model also includes investments in physical capital, gauged by the investment share (INVS)
So many Frith-forsaken acronyms. Damn math. Lord Frith, in his infinite wisdom, chose to bless me with greater aptitude in other areas. However, I understand basically what shape a logarithmic function represents. It's like a half a pancake, right? Sharp on one side and flat on top? Durrrrrr.
*materializes a beanie hat and a marijuana cigarette* I don't know, man, I just don't know!
/beanie
/marijuana cigarette
Anyhow, the synthesis study does not seem to me to be focused on Barro's views on RET. I was incorrect to let myself get distracted by that.
You should really consider moving past your prejudices and embracing the fact that the University of Würzburg study actually validates your views regarding the Unified Growth Theory. They are merely saying that the effectiveness of redistribution alone might turn out to be logarithmic, simply due to the harder-to-alter effects of individual skill level and personal preference.
Our findings strongly support the implications of the unified growth theory. Provided
that human capital accumulation has already become the prime engine of growth in most de-
veloping countries, the effect of inequality and redistribution changes over the development
process due to variations in the equality of opportunities. In early stages of development, op-
portunities for investments in human capital are unequally distributed among households.
In the presence of underdeveloped financial markets, weak public education systems and
high opportunity costs for education, budget constraints are binding and the initial wealth
endowment of the family determines the education level of the children. In this case, re-
distribution as a policy measure to increase equality of opportunities exerts positive effects
on growth. The development process of the economies is typically accompanied by a sub-
stantial expansion of the financial system, international capital inflows, and improvements
in the public education systems. All of these effects lead to a decline in the influence of
inequality by improving families’ prospects of achieving a higher education level for their
children, which is mirrored by a decline in intergenerational income elasticity (see Corak,
2013). Once the distribution of human capital endowment is due much more to preferences
and individual skills rather than to initial wealth, high education rents may even lead to
a growth-enhancing effect of inequality. In this case, redistribution may be an impediment
to growth. The reason is that incentives for human capital investments, labor supply, and
entrepreneurship rise if income gaps increase. Our results yield tentative implications in this
direction, but the effects are far from significant.
All that the study really means is that it is really more imperative to address inequality in those countries where the causes of inequality could not possibly be related to personal preference or individual skill level alone. There are both just and unjust reasons why one person might be more poor than another. In the most economically desolate countries, though, this research suggests that the cause of inequality cannot really be explained adequately by differences in individual skill level or personal preference. Unless you want to get a little bit more detailed about attacking their underlying assumptions, I think they might be correct to find a logarithmic relationship:
In addition, we introduce an interation term between
redistribution and the initial income level, denoted by REDIST×L.log(GDPpc).20 The figure
highlights that redistribution contributes positively to economic growth in earlier stages of
development. However, once the economies reach an average income level of approximately
13,000 USD, the negative incentive effects triggered by redistribution prevail, which is why
34
the effect on growth tends to be negative.
Nonetheless, I still believe that the United States could be broken down into subsets. Instead of imposing redistribution primarily at the national level, we could consider breaking up dysfunctional power structures in immature local economies that hinder development. This could include either economically desolate rural areas or blighted areas in the inner cities. By targeting our reforms at a local level, we could restore the incentive structures that tend to help produce the world's more advanced economies.
However, I am quite frankly a little skeptical of 13,000 break-point, to be fair. The University of Würzburg study seems to dismiss "individual skill level" and "preference" as immutable absolutes, and I believe that one of the flaws in the University of Würzburg study is that they fail to address factors other than education alone.
*gestures to herself with one wing* For example,
@Jarhyn and I are both examples of people that are neurodivergent. Just raw investment in the education system, alone, cannot remedy the internal injustices of the education system that affect us that are neurodivergent. We are often hindered grievously from reaching our full potential due to the fact that we are not provided with adequate accommodations. While I would not be so overweening as to self-describe as "gifted," I nevertheless believe that the paucity of accommodation for me, throughout my education, has had a distinctly negative impact on my ability to make a sound contribution to my society. This is only one of perhaps an endless number of examples of how economic injustice is really more complex than what the University of Würzburg study implies.
I know that it makes a difference how we are treated because after I relocated to an urban area where I survived for a while as semi-homeless, I found out that many workplaces in urban areas are actually substantially friendlier toward people that are neurodivergent. I was actually shocked at the difference. I had never been able to get myself hired in the place where I had come from. I had been been laughed out of interviews with essentially a "don't call us, we'll call you." I'm quite the opposite of a lazy person, though. I work my ass off once I get started. I am highly focused. I do not waste time with gossip. I move at a frantic pace when fulfilling duties that have clear objectives. I am a valuable and highly dependable employee, so it did not make any sense that I was not being given a shot in the place where I came from. Turning away a potentially valuable employee because of an absolutely futile prejudice ended up being costly to everybody, not just to me. Those bigots did not gain a damn thing from ruining my life, and the cost to them was dear.
The primary shortcoming I find in the University of Würzburg study, then, is a simple lack of imagination. If we were to examine more diverse methods that could be used for promoting economic justice, I believe that the 13,000 USD mark could be moved upward. We could engineer means of making redistribution efficient in economies that have higher average incomes. I think that the routes for redistribution ought to metamorphose as we approach economies that have higher average incomes, for I think that in advanced economies, people that otherwise would have barely had a chance to survive could be groomed as unusual talents. Without negating the general validity of the study, I do not believe it can stand on its own. I think that more research is needed.
Regardless of my reservations about the University of Würzburg study, though, I believe that it is adequate to justify us in taking a needs-based approach to addressing economic injustice. Rather than concentrating on economic injustice between the "1%" and the middle-class, we should actually be profoundly alarmed about local economies that have failed to realize their indigenous potential. I honestly do not care a rodent's rectum either way if Jeff Bezos wants to build a moon factory. Good for him. Let him have his billions. It's not important how much wealthier he is than I am. What I actually should be worried about is the wasted potential of rural and inner city areas that have failed to reach even the most basic level of economic development, much less self-sufficiency. Those constitute things we could fix.
