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DeAnne Julius, former member of the Monetary Policy Committee of the Bank of England, wrote in the Financial Times defending David Cameron's austerity policy for the U.K. He wrote:

"If debt is the underlying problem and two previous attempts at deficit spending failed to ignite a sustained recovery, why should more do so now? In effect, the public is demonstrating what economists call 'Ricardian equivalence', namely the rational expectation that government spending now will require higher taxes later. Taxpayers react by increasing their savings now, rather than their spending. Perhaps the sharp falls in business and consumer confidence surveys reflect this view. If so, further fiscal stimulus in the U.S. will not ignite growth."

It is ironic that he cited the discredited "Ricardian equivalence" theory, and strange that he failed to see the tremendous turnaround of the U.S. economy that was clearly a result of the stimulation measures.

If there is any truth to Ricardian equivalence, the past deficits and the current difficulties of Greece would have been anticipated and many Greeks, well aware of coming job losses and higher taxes, would have accumulated considerable savings. They should then have little difficulty in sustaining more or less the same level of consumption as before: i.e., they should have already reduced their consumption during the unreal "good times" that were sustained by the deficits, and that their consumption today would not have to be cut much, if at all.

The turnaround of the U.S. economy from routinely monthly job losses at well over half a million to modest job growth is actually much better than expected.

Without the stimulus program, it is quite likely that we were struggling with 15 to 20% unemployment at this time, and that the deficit had been much worse. When a government runs a deficit, generally it is matched by excess savings over investment in the private sector(reduction of private sector indebtedness), or/and an increase in the current account deficit. In the case of the U.S., following the stimulus programs, household balance sheets have indeed improved noticeably just as expected, while corporate earnings have also increased:

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Consider the case of the U.K., which had the benefit of unprecedented monetary easing including the weakest currency among all industrial nations - and Japan would have so much envied its weak currency. Yet it is still barely growing. Worse still, there is no evidence that the prognosis for its deficit problem is any better than that of the U.S.. The fiscal austerity measures of the U.K. dictate that more monetary easing is in the pipeline, and, as long as Cameron insists on more austerity, any strength of the British pound can be presumed to be temporary. On the other hand, there are signs that the American economy rather than slipping into another recession is going to pick up some strength. With generally strong profit performance, American equities are expected therefore to outperform that of the U.K. or European bourses.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Ricardian Equivalence Is A Sad Joke