Ricardian Equivalence

As I understand it, John Cochrane is a well-regarded economist. He also thinks Keynesian measures can’t work “Robert Barro’s Ricardian equivalence theorem was one nail in the coffin. This theorem says that [fiscal] stimulus cannot work because people know their taxes must rise in the future.” Brad DeLong observes that this isn’t what Barro’s theorem says—it applies to deficit-financed tax cuts not to deficit-financed temporary spending boosts.

But stepping beyond this, why on earth would anyone believe that Ricardian equivalence holds? The theory is that a tax cut today can’t boost spending tomorrow because people will know that taxes will have to rise in the future. Do you believe that people act like that? If so, I have this interesting theorem about how since cigarette smoking today causes cancer in the future, nobody smokes cigarettes. I’m not a specialist in this matter, but here’s the Wikipedia description of the theorem:

In 1974 Robert J. Barro published an article entitled “Are Government Bonds Net Wealth?” in the Journal of Political Economy (Vol. 82, No. 6. (Nov. – Dec., 1974), pp. 1095-1117). This model assumes that families act as infinitely lived dynasties because of intergenerational altruism, capital markets are perfect (meaning that all can borrow and lend at a single rate), and the path of government expenditures is fixed. Under these conditions, if governments finance deficits by issuing bonds, families will grant bequests to children just large enough to offset the higher taxes that will be needed to pay off those bonds.

Helpfully, with this assumption that families act as infinitely lived dynasties because of intergenerational altruism conjoined to strong assumptions about rationality, I can “prove” that there’s no child abuse as well as no smoking. The math sounds interesting, qua math, and there’s nothing wrong with constructing interesting models and analyzing them but are there seriously people who believe this works as a description of how the world operates?