Knowing and Making

I've posted the following over at Worthwhile Canadian Initiatives : JKH: I'll have a go at that (no doubt Nick will add more insight too). The multiplier effect depends on the extent to which Ricardian equivalence holds. If it holds perfectly - i.e. people expect all increase in income to be eaten up by future tax increases - then the multiplier effect should in theory be zero. However, the truth of Ricardian equivalence also depends on the multiplier effect! Full Ricardian equivalence is based on the idea that national income will not be affected by a stimulus. If instead the stimulus does increase income, then future tax revenues will be increased automatically, partly offsetting the marginal tax rises that are expected. And does the stimulus increase income? Well, that depends on the multiplier effect! Although I haven't worked out the mathematics, I expect there would be at least two stable equilibria: one where Ricardian equivalence is complete and self-fulfilling, an...

Driving through the US it is slightly hard to believe that a place with such a vast and humming industrial economy could have a recession. But it's all relative, and it is entirely possible that the $60-70,000/head GDP of this region could decline by $2,000/head in a year or so. I was provoked to wonder about how the US economy can sustain what appears to be a much higher level of consumption and infrastructure than the UK. On the surface there are no great insights or mysteries here - the US has more natural resources and space, therefore needs to spend fewer resources on working around those shortages; it spends proportionally less on public goods, and (arguably) its infrastructure is of lower quality - built quicker but also decaying faster. People work more hours and therefore create more resources (which are included in GDP), but spend less time on leisure (which isn't). But I wonder to what extent this is not to do with explicitly differing preference, but with multiple e...