The Lucas Explanation of the Persistence of the Great Recession: The Barro Objection
Robert Lucas offers the following as one of his reasons for the persistence of the Great Recession: Likelihood of much higher taxes, focused on the “rich” Gavyn Davies and Paul Krugman argue that the Lucas attempt to explain the persistence of the Great Recession on purely classical principles lacks credibility with Davies noting: As yet, there has been no increase in taxation, on the rich or anyone else. Nor have the Obama administration’s medical and financial sector reforms really taken effect. It would take a remarkably far sighted private sector to have already reacted adversely to this set of long term reforms, even if they might do so eventually. One could argue, however, that the Barro reformulation of Ricardian Equivalence would argue that it is not current taxation that matters but the expectation of future taxes when government spending outstrips taxes. But if one is basing one’s argument thusly, I don’t see what has fundamentally changed in the past few years. We knew ...