Heard the term "Ricardian equivalence"? It sounds impressive if you don't know what it means. It is another thing economist believe, and it is quite an influential notion. "Ricardian equivalence" is what they call the idea that people stop spending in a recession because they think that the government will have to raise taxes in the future to pay back the debt it incurs due to higher deficit arising from the automatic stabilisers etc. So instead of spending, people save up so they will be able to pay the higher taxes in the future.
This appears to completely overlook the fact that for most people tax is applied to current income, and is taken at source: even quite a large rise in the rate of income tax makes very little difference to their take home pay. And the fact that increases in VAT (the other big tax contribution people make) are indistinguishable from inflation, in practical terms, though inflation tends to increase in boom times ( we can see the reverse at present) so one would expect they would save to meet those extra costs when we are not in a recession, if this is how they think. And, indeed, the fact that they are human beings, and they just don't do that.
So far, so unsurprising (to me, anyway). But I came across this quote today, from M Trichet, who is a former chair of the ECB. Speaking in 2010, he apparently said:
QUOTE
For a given expenditure, a shift from borrowing to taxation should have no real demand effects as it simply replaces future tax burden with current one.
So losing income now will not make you spend less than not losing it?
Funny old world these economist types inhabit, ain't it?
