David Ricardo has been through a lot in the past few years. For someone who’s been dead since 1823, he’s taking quite a beating from the New Right and the current Trump administration — he’s not just misinterpreted but butchered beyond recognition.
First, Oren Cass and his protectionist ilk repeatedly mangle Ricardo’s most famous contribution to economics: the concept of comparative advantage — an error that has forced Don Boudreaux to play full-time referee.
And now, Larry Kudlow and Treasury Secretary Scott Bessent have decided to massacre Ricardian equivalence.
In a recent interview at The Economic Club of New York, Bessent claimed that the “Ricardian equivalence doesn’t work if other countries have very different economic and social policies.” As if this was not bad enough, Kudlow doubled down and said, “The free trade theory of Ricardian equivalence is very interesting, but there is no equivalence” with China because the country’s economic and political system is not equivalent to ours. He went on to say, “We are a free market democracy; they are an authoritarian socialist political enemy.”
But here is the thing: no free trade theory of Ricardian equivalence exists. It’s not a thing.
For those who need a refresher, Ricardian equivalence has nothing to do with trade or trade policy. It is a theory about the effects of government borrowing and fiscal policy. It was famously formalized by Harvard University economist Robert Barro (who drew on Ricardo’s ideas). It states that when the government finances spending through deficits, rational citizens anticipate higher future taxes and therefore increase their savings today to create a fund to pay off higher taxes tomorrow, thereby neutralizing the impact of fiscal stimulus. In other words, it’s a theory about the relationship between budget deficits and consumer behavior. It’s not remotely related to trade theory or trade policy.
And let me tell you: We may have issues with China, but the idea that Ricardian equivalence somehow applies to those problems is as ridiculous as saying that the Laffer curve explains why Argentina’s soccer team is better than Mexico’s — a complete non sequitur.
It occurred to me that these individuals may be conflating Ricardian equivalence and the Ricardian theory of comparative advantage. If that’s the case, it’s depressing. That’s in part because, once again, it shows that their grasp of economics is weak when it comes to trade. (Bessent, in that interview, otherwise says solid things about spending and growth.)
For years now, the nationalist wing of the GOP has tried to argue for protectionist policies by resting much of their case on a fundamental misunderstanding of comparative advantage — the idea that what matters is not the absolute quantity of some particular output that a country can produce compared with other countries but, instead, the cost to that country of producing that output, in terms of the forgone production of other outputs.
Protectionists, however, push a zero-sum vision of trade, treating it as a competition to “win” rather than an opportunity for mutual gain. It doesn’t matter how many times you correct them and explain that Ricardo’s logic remains sound regardless of whether a country has higher overall wages, a trade deficit, or a different industrial base relative to its trading partners. The misunderstanding persists, infecting debates about tariffs, industrial policy, and so-called economic nationalism.
If we are going to debate economic policy, let’s at least start with a shared understanding of these theories. Until then, poor Ricardo will continue doing somersaults in his grave. And we Americans are in deep trouble.