The experience of the 1980s:

Question

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The experience of the 1980s may be used to argue both in favor of and against the Ricardian equivalence view of the tax cuts, depending on the interpretation and the perspective of the economist. On one hand, the low national saving during that period may contradict the Ricardian equivalence view that tax cuts would lead to an equal increase in saving and investment. On the other hand, the optimistic behavior of consumers and investors, as reflected in the stock market, may support the Ricardian equivalence view that people saved little only because they expected higher future income and wealth, which would allow them to pay back the additional debt incurred from the tax cuts. Therefore, the validity of Ricardian equivalence cannot be determined solely based on the experience of the 1980s, but needs to be evaluated in a broader context of economic theory, empirical evidence, and normative criteria.

The Experience of the 1980s