Imperial Master of the Ming Dynasty

Chapter 160 Barro-Ricardo Equivalence

Under the new crooked neck tree, Jiang Xinghuo looked up at the crown of the tree, which had been damaged by the autumn rain but had become tough and green.

After looking at it for a while, he said.

"Before answering this question, we might as well make a conjecture first. How about you decide whether this conjecture is correct or not?"

"Of course it's okay."

"For example, the imperial court will issue Ming Dynasty national debt."

Jiang Xinghuo lowered his eyelids and deliberately explained to Mr. Qiu: "Well, you didn't hear it in the last class. The meaning of national debt is that the country issues a piece of paper, which is equivalent to an IOU, with several years of interest written on it. Whatever the rate is, the people who subscribe can then use the national debt to get money from the court with interest. It is roughly like the country has given the people an IOU."

Xia Yuanji showed his sudden realization without missing a beat, nodding his head repeatedly, and occasionally saying words of praise.

Watching Mr. Qiu's performance, Jiang Xinghuo became more and more confident.

Pack!

Then install it!

First of all, it is impossible for Big Beard to find the former Ministry of Household Prison officials from the imperial edicts through a temporary search.

Secondly, although the contact time is not long, according to secret observation during half a class, this Mr. Qiu has extraordinary conversation and broad knowledge, which is obviously not what ordinary Yuanwailang can possess.

Finally, the Great Sun and Moon Treasury Bonds have come out, and the genuine Ming Dynasty Treasury Bonds have begun to circulate. What are you waiting for me to suddenly realize?

In fact, this class was also a test for Jiang Xinghuo.

There are only the last four classes left in the imperial prison.

This cannot be changed.

As for amateur literacy, that is, the two months before his release from prison, which will not delay his release from prison.

Jiang Xinghuo planned to test whether the top brass of the Ming Empire paid attention to his suggestions, or whether they could be implemented even if the suggestions were a bit difficult.

Therefore, the tax soldier guard was proposed.

If it really appears outside, it means that the new emperor of the Ming Dynasty, the legendary Emperor Yongle, has already paid attention to himself.

The reason is also very simple. If Li Jinglong was in prison before, then there is another possibility that Li Jinglong wrote his own name to submit the suggestion.

But now that Li Jinglong has gone to Ryukyu as envoy (Jiang Xinghuo didn’t know that he was actually going to Japan), it’s impossible to write his own name, right? Sent from the sea and on land, one check revealed that Jin Yiwei was not a fool.

Therefore, if Li Jinglong was not present to attend the lecture, the senior officials of the Ming Empire tried their own suggestions again.

There is only one conclusion.

"Am I really noticed by the top brass of the Ming Empire, and even changed the historical line?"

This thought made Jiang Xinghuo feel a little angry for a while.

Damn it, I'm just sitting in jail to give some advice.

How come you guys really did it all?

What will happen after you are released from prison?

Thinking of this, Jiang Xinghuo hesitated a little as he wondered how the top brass of the Ming Empire would treat him in the near future.

I am just joking.

Why do you guys really take it seriously?

Fortunately, Jiang Xinghuo has always been open-minded.

"I'm not afraid of death anyway."

After thinking about it, Jiang Xinghuo continued: "So, do you think there is a possibility?"

"What's possible?"

The last admirer, Mike Jinglong, is now being worshiped as the Supreme Emperor in Japan. All forces are vying to curry favor with him and win his support. With him gone, Zhu Gaoxu can only dutifully take over the baton of praise.

"That is, if the country issues national bonds to raise funds, the effect is the same as raising taxes to raise funds, is it the same?"

Jiang Xinghuo simply wrote a mathematical model on the ground, including the utility function of the economic entity, the current budget constraints representing the national sector and the household sector, and the intertemporal budget constraints (which can be understood as the expected limits on spending money in the future).

economic agent utility function

U=c1+βc2

household sector

s1 (current budget constraint): c1=w1-t1-b

s2 (intertemporal budget constraint): c2=w2+(1+r)b-t2

national department

s1 (current budget constraint): G1=Nt1+Nb

s2 (intertemporal budget constraint): G2=Nt2-N(1+r)b

Then the Lagrange multiplier method is used to solve the utility maximization problem of economic agents, and the FOC (first-order condition) is obtained, that is.

c2=β(1+r)c1

This is the most basic and entry-level economic model in classical political economics, also known as "Ricardian equivalence".

This is the argument expressed by David Ricardo in Chapter 17 of the book "Principles of Political Economy and Taxation": Whether the government chooses to pay a lump sum tax or issue public bonds to raise funds for the government, it will not affect consumption. and investment.

At the same time, "Ricardian equivalence" has still played a lasting role after the emergence and subsidence of Keynesian thought, and has also become an important part of neoclassical macroeconomics. It is useful for studying government debt, especially modern fiscal structures. Similar to the iconic meaning of "Tao".

Naturally, the two of them couldn't understand the strange numbers and symbols on the ground.

But this does not prevent them from raising questions based on their own instinct or experience.

"The effect will definitely be different." Zhu Gaoxu answered with very simple truth: "If taxes are raised, farmers will rise up in rebellion."

Jiang Xinghuo nodded and looked at 'Mr. Qiu' again.

Xia Yuanji's brows tightened, and he vaguely realized that the problem did not seem to be as simple as Zhu Gaoxu said.

Everyone knows that tax increases will lead to rebellion. The core of the problem is, why can the national debt be linked to tax increases?

This couldn't help but make Xia Yuanji feel a little uneasy. Could it be that the Ming Dynasty's national debt operation was wrong?

"What do you think?"

"I think it's different. It's definitely not as simple as raising taxes will lead to rebellion, but I can't figure out where this barrier will be for a while." Xia Yuanji said honestly.

Jiang Xinghuo simply said: "I'll give you an example, and you guys can understand and see if it's right."

“Are state taxation and state borrowing (Ming Dynasty national debt) logically the same?”

"Assuming that the population of the Ming Dynasty reached its peak state, due to the contradiction between man and land, it is difficult for the total population to continue to grow, so it can be regarded as not changing over time."

"[Suppose] Ming Dynasty decided to reduce the current tax (one-time lump sum tax) by 100 copper coins for each person. The resulting reduction in fiscal revenue was made up by issuing 100 copper coins of Ming Dynasty treasury bonds to each person (assuming again that Ming Dynasty treasury bonds The term is one year and the annual interest rate is 5%) to ensure that the scale of Ming Dynasty’s financial expenditure will not change.”

Jiang Xinghuo asked: "So in the second year after the tax reduction, if Ming Dynasty still decides to maintain a balance of revenue and expenditure, what will happen?"

Xia Yuanji seemed to have understood something. He replied: "In the second year after the tax reduction, if we still decide to maintain a balance of revenue and expenditure, in order to repay the principal and interest of the Ming Dynasty's national debt, Ming Dynasty must increase taxes on everyone by 105 copper coins."

Jiang Xinghuo nodded slightly and continued.

"Faced with the temporal adjustment of taxes, if a tax-paying citizen is [absolutely rational], can he/she increase savings to cope with the next increase in taxes?"

"In fact, the Ming Dynasty treasury bonds worth 100 copper coins issued by the state as a result of tax cuts plus 5% interest can be used as expenditures to cope with the government's increase in taxes of 105 copper coins to repay the principal and interest of the national debt."

"In this way, the original consumption patterns of taxpayers will not change."

Zhu Gaoxu had already started "Mother gave birth", but Xia Yuanji's eyes were a little bright.

"By the same token, if the Ming Dynasty treasury bonds have a maturity of several years, the result will be the same. Because the holders of the Ming treasury bonds can obtain bond interest from the government with one hand, and use the principal and interest of these bonds to pay for Higher taxes are levied to repay the principal and interest of bonds. In this case, replacing taxes with debt will not affect current and future consumption, and the equivalence theorem is established."

Jiang Xinghuo specifically explained: "Consumption means spending money."

In fact, this is just a purely theoretical guess. That is to say, even Ricardo himself, who proposed this theory in classical political economics, did not think that the above guess would work in reality. However, Barrow in later generations believed that rational people are indeed What works in this way is that part of the higher taxes imposed by the government to repay debts will fall on future generations, but people care about future generations, so they will still increase savings to meet debt repayments for the sake of future generations. This is based on "Ricardian equivalence" Derived from the so-called "Barro-Ricardo Equivalence Theorem".

According to this theorem, the additional public debt issued by the government due to tax cuts will be regarded as potential future tax revenue. Taking into account the entire budget constraint, in the absence of liquidity constraints, the limits of public debt and potential tax revenue are equal. of. In this way, the two budget constraints before and after the change are essentially consistent and will not affect people's consumption and investment.

Logically speaking, a normal person can see that this theory is not quite right. How could anyone think that far ahead?

Therefore, the "Barro-Ricardo Equivalence Theorem" has been questioned and criticized by the neoclassical synthesis and New Keynesianism. One question about Ricardian equivalence theorem is whether people have an incentive to save for future tax increases beyond their lifetimes.

If you were to write a literature review, it would be that Modigliani proposed in the finite-period theory that people do not care about things other than life, so the tax cut effect brought by bond issuance will bring about an increase in consumer demand; Tobin He believes that the Ricardian equivalence theorem has too many restrictions and is inconsistent with reality; Mankiw analyzed the reasons why the Ricardian equivalence theorem does not hold true from three perspectives: consumer shortsightedness, debt constraints and intergenerational wealth redistribution.

Barro proposed the "Barro-Ricardo Equivalence Theorem", which was actually to prove the ineffectiveness of fiscal policy.

Xia Yuanji's head turned the fastest.

Xia Yuanji said: "From Mr. Jiang's explanation, it can be seen that the equivalence theorem can be established whether the current tax reduction is achieved by issuing short-term or long-term Ming government bonds."

"but."

Xia Yuanji changed the subject and said: "I'm afraid this equivalence theorem cannot explain the phenomenon I mentioned."

"you say."

"Say it!"

Seeing Jiang Xinghuo and Zhu Gaoxu's urging, Xia Yuanji pondered for a while.

“If some or all of the people who bought the Ming Dynasty national debt died before the imperial court repaid the Ming Dynasty national debt, such as a plague, war, or flood, etc. They will not have to bear the resulting future taxes (because they are dead), so will their spending behavior during their lifetimes also not change?"

"yes!"

Zhu Gaoxu then thought: "What should we do if a person dies?"

"When he was alive, he enjoyed the tax cuts from the imperial court; when he dies, he won't have to pay taxes!"

To the two's surprise, Jiang Xinghuo nodded and said.

“The answer to this question may be that for those ordinary people who lived during the tax reduction period but died before the Ming court repaid the Ming national debt, the present value of the taxes they paid decreased because they did not have to use the Ming national debt to pay it. The imperial court increased taxes to repay the Ming Dynasty's national debt. Their current and future consumption will increase with the increase in their disposable income. Well, that is, the amount of money they can spend. If these ordinary people are completely self-interested, then the above answer would invalidate the equivalence theorem.”

"but."

Jiang Xinghuo also changed the subject.

"There are two issues here."

"First, will the people think about future generations?"

"Second, will ordinary people predict when they will die unexpectedly?"

——————

"Stop, stop, stop!"

Zhu Di hit his head with his fist.

"What is this all about?"

"Two ministers, please explain to me from the beginning!"

Jian Yi and Ru Yu looked at each other.

Jian Yi first explained: "Your Majesty, what Jiang Xinghuo means is that all the people from father to son care about themselves and their descendants. So when the Ming court issued 100 Ming government bonds to replace 100 taxes , thus reducing the tax burden of the current year by 100 Wen, the common people know that this means that the future tax burden will increase by 100 Wen."

Zhu Di nodded, he understood this, and motioned for Jian Yi to continue.

Emperor Jian Yi slowly explained: "So in the face of this year's reduction in tax burdens, the reaction of ordinary people will not be to increase their own spending, but to save the 100-Wen Ming Dynasty Treasury Bond they purchased. If he buys the Ming Dynasty Treasury Bond when it reaches If he dies before the end of the period, these 100 Ming Dynasty national debts will be left to his descendants as a legacy to pay the court's increased taxes due to the increase in the principal and interest burden of the Ming Dynasty national debts (the court increased taxes in order to repay the money). It is assumed that during the lifetime of his descendants, the Ming Dynasty If the national debt has not yet matured, it can continue to be left to their descendants so that it can be used to pay for the increased taxes when the Ming Dynasty national debt matures."

"This is just Jiang Xinghuo's hypothesis." Ru Jin followed up: "For any ordinary citizen who cares about future generations, whether he or his descendants should pay for the additional taxes imposed by the imperial court to pay off the principal and interest of the Ming Dynasty national debt issued by the Ming Dynasty. , there is no difference.”

Ru Jin further elaborated: "In other words, whether the common people die before the national debt matures, it will not have an impact on his spending (consumption) this year. Purchasing Ming Dynasty national debt will reduce personal consumption this year, just like paying taxes."

"To put it bluntly, we are discussing whether the issuance of Ming government bonds will affect people's spending?" Zhu Di interrupted Ru Yu.

"exactly."

Zhu Di struggled to explain: "Then what's the point of discussing this kind of issue? Few people care about paying taxes for their children and grandchildren, right?"

Monk Daoyan, who had been silent until now, suddenly flicked the cuffs of his black cassock and said.

"Of course it makes sense."