What is Ricardian Equivalence?

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    Does the Ricardian Equivalence theory have any merit to it?


    Here’s a useful discussion of Ricardian Equivalence.


    There are two important points. First, no matter how the government finances its command over resources, the inefficiency of transferring resources from entrepreneurs in the market to bureaucrats in the government occurs in the present. Resources are taken out of the realm of decision-making with economic calculation and pulled into the realm of decision-making without economic calculation. Neither debt financing nor monetary inflation delay this burden into the future.

    Second, the methods of financing a government expenditure (taxes, borrowing or monetary inflation) have different secondary effects on the efficiency of economic activity as it plays out into the future.

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