Ricardo-Barro Effect

See: Ricardian Equivalence Theorem.

The Ricardo-Barro Effect, a.k.a. the Ricardian Equivalence Theorem, is the economic theory that says debt-financed government spending as an attempt to stimulate consumer spending doesn’t work, because people will save that money for future tax increases.

Much of macroeconomic policy today is based on a bastardized Keynesianism. We’ve got central banks, who do things like tinker with interest rates and the money supply to keep employment and inflation stable. When the economy is down, central banks will lower interest rates and raise liquidity. There also might be stimulus packages from other governmental bodies to give the economy a kick in the pants.

Ricardo is saying that pumping more money into the economy won’t make those cogs turn any faster. People can see the national debt, and they’ll save money for those future tax hikes. They see the burden they are bearing not only now, but in the future, too.