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Monday, July 06, 2009

Heather Scofield, "Ricardian Equivalence makes comeback," Globe and Mail Report on Business, July 6, 2009.

A long-forgotten theory suggesting that stimulus spending is doomed to failure draws attention nearly 200 years later.

Stimulus is supposed to be the key to recovery, and governments around the world are embracing it as never before.

But a long-forgotten theory dating back almost 200 years is increasingly weighing on the minds of policy makers: Ricardian equivalence.

Named after the writings of David Ricardo in the early 1820s, the theory suggests that stimulus spending is doomed to failure because taxpayers tend to save their stimulus dollars rather than spend them.

  “People see today's stimulus as tomorrow's tax hike.”

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