"Life Cycle" Hypothesis of Saving: Aggregate ... - Arabictrader.com

90 The Life-Cycle Hypothesis
expenditure. If, for whatever reason, a portion dD of the government expenditure
is not financed by taxes but by deficit, capital formation tends to be reduced by
approximately c(dD). This conclusion is, however, subject to one important qualification,
namely that for T = Ḡ, i.e., with a level of taxation balancing the budget,
there exists a monetary policy capable of achieving full employment—or, in terms
of our previous notation, of enforcing the required rate of interest r(T¯ ). When
this condition is satisfied we shall say that there is a “potentially adequate private
demand,” or more briefly, an “adequate demand.” We shall for the moment concentrate
attention on this case, reserving the task of examining the implications
of a lack of adequate demand to a later point.
Our result so far, then, is that even with an adequate demand, the net or differential
burden placed on the future by debt financing is not nearly as large as
suggested by the classical conclusion. But note that the implied error is poor consolation
for the no-transfer proponents, for they maintained that the burden is
always “paid as you go.” The error we have uncovered would seem to lie instead
in not recognising that a part of the burden of the expenditure is always shifted
to the future. This last conclusion, however, is somewhat puzzling and disquieting.
And this uneasiness can be easily increased by asking ourselves the
following embarrassing question: roughly how large is the coefficient s which
determines the unavoidable burden on the future? This question is embarrassing
because recent empirical as well as theoretical research on the consumption function
suggests that the answer depends very much on the length of time which is
allowed for the adjustment. In the long run, the average propensity to save has
remained pretty constant in the general order of 0.1, meaning that the marginal
propensity is of the same order. But the quarterly increase in saving associated
with a quarterly increase in income seems to be of a much larger order of magnitude,
with estimates ranging as high as 0.5 and even higher. 18 Which is the relevant
figure and why? Or does the answer depend on whether we look only at
the impact effect of taxation or also at its delayed and ultimate effects? We will
argue that this is indeed the case, and that in so far as we are interested in the
distribution of the burden over time and between generations, the total effects are
paramount.
VII
Impact Versus Total Effects of Deficit and Tax Financing
Let us come back to a comparison of rows (b) and (c) in table 3.1, but this time
let us concentrate on the effect of taxation on the terminal net worth position of
the households. We can see that if the expenditure is debt-financed this terminal
position is (at least to a first approximation) the same as if the expenditure had
not been undertaken. On the other hand, in the case of tax financing, in addition