Sage Journals: Discover world-class research

Abstract

This article employs a life-cycle model of consumption and U.S. time-series data covering 1929-1969 to estimate the long-run impact on capital formation of substituting one dollar of debt for a dollar of taxes to finance a given level of government spending. The income redistribution effects of debt service are shown to be critical to analyzing the impact of public debt upon saving and capital formation. The results indicate that one extra dollar of domestic debt induces a twenty-one cent rise in capital formation; an extra dollar of foreign-held debt has a nil effect. The positive impact on capital formation occurs because the negative wealth effects of taxes levied to finance debt interest causes an increase in saving that overbalances the induced fall in saving caused by the positive wealth effects of debt interest. In the case of foreign borrowing, the two effects just cancel each other.

Get full access to this article

View all access options for this article.

References

Atkinson, A.B. , and J. Stiglitz. 1980. Lectures on public economics. New York: McGraw-Hill

Barro, Robert. 1974. Are government bonds net wealth? Journal of Political Economy 82:1095-1117.

Blanchard, O.J. 1985. Debt, deficits, and finite horizons. Journal of Political Economy 93:223-47.

Brennan, G. , and James Buchanan. 1980. The logic of the Ricardian equivalence theorem. Finanzarchiv N.F. 38:4-16.

Cavaco-Silva, Anibal. 1977. Economic effects of public debt. New York: St. Martin's.

Economic Report of the President. 1985. Washington, DC: U.S. Government Printing Office .

Economist. 1988. A survey of the Italian economy. February 27, special insert after p. 49.

Fair, Ray C. 1984. Specification, estimation, and analysis of macroeconomic models. Cam-bridge, MA: Harvard University Press.

Feldstein, Martin. 1976. Perceived wealth in bonds and social security: A comment . Journal of Political Economy 84:331-36.

10.

—. 1982. Social security and private saving: Reply. Journal of Political Economy 90:630-42.

11.

Goldberger, Arthur S. 1964. Econometric theory. New York : Wiley.

12.

Gordon, Robert J. 1981. Macroeconomics. 3rd ed. Boston: Little, Brown.

13.

Jorgenson, Dale , and Z. Griliches. 1967. The explanation of productivity change . Review of Economic Studies 34:249-83.

14.

Kendrick, John. 1976. The formation and stocks of total capital. New York: National Bureau of Economic Research .

15.

Kormendi, Roger. 1983. Government debt, government spending, and private sector behavior. American Economic Review 73:994-1010.

16.

Leimer, D.R. , and S.D. Lesnoy. 1982. Social security and private saving: New time series evidence. Journal of Political Economy 90:606-42.

17.

Modigliani, Franco. 1961. Long-run implications of alternative fiscal policies and the burden of the national debt. Economic Journal 71:730-55.

18.

Musgrave, Richard A. , and Peggy B. Musgrave. 1973. Public finance in theory and practice. New York: McGraw-Hill .

19.

Pechman, Joseph A. 1985. Who paid the taxes, 1966-1985? Washington, DC: The Brookings Institution.

20.

Pechman, Joseph A. , and Benjamin A. Okner. 1974. Who bears the tax burden ? Washington, DC: The Brookings Institution.

21.

Psacharopoulos, G. 1973. Returns to education. New York : Elsevier North Holland.

22.

Seater, John. 1981. The market value of outstanding government debt . Journal of Monetary Economics 8:85-101.

23.

U.S. Department of Commerce. 1975. Historical statistics of the United States, colonial times to 1970. Parts 1 and 2. Washington, DC: U.S. Government Printing Office.

The Effect of Servicing the Public DEBT on Private Capital Formation

Abstract

Get full access to this article

References