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

96 The Life-Cycle Hypothesis
yield, if any, produced by dG beyond t 1 . In particular, if dG results in a
(permanent) addition to the stock of capital we must distinguish between W, K
and K*, the latter denoting the total stock of private-plus government-owned
capital. K* will exceed K by dG. Thus in the case of a debt-financed capital expenditure,
K* will everywhere tend to coincide with W, the government capital formation
simply replacing the private one. For the case of tax financing, the
behaviour of K* is shown by the broken line in figure 3.1 (b). Here the burden
on the taxed generation results in a permanent gain for those living beyond t 1 ,
which will gradually approach the yield on dG. In this sense one might well say
that the cost of current government services can be paid for not only by the current
and future generations but even by past generations.
There remains to consider how far our conclusions need to be modified if the
omc is less than unity. Since a debt-financed expenditure does not affect the
behaviour of net worth, our analysis of this case basically stands, although one
can conceive of some rather fancy circumstances in which modifications would
be necessary. 26 In the case of tax financing, however, an omc of less than one
implies that part of the burden of the expenditure will fall on later generations,
who will receive a smaller bequest. It can be readily seen that the reduction in K
= W available to them will be of the order of (oms) (dG), where oms denotes now
the over-life marginal propensity to save. The differential burden of debt versus
tax financing on society will correspondingly be of the order of r(omc) (dG)
instead of rdG. 27 In other words, the propensities to consume and save relevant
to the long-run effect are precisely the over-life ones. 28 Unfortunately, these are
propensities about which information is currently close to zero, both in terms of
order of magnitude and stability, although some attention has begun to be devoted
to this question. 29
Our analysis of the differential burden of tax versus debt financing could stand
a great deal of refinement and qualifications to take proper account of the specific
nature of the taxes levied to pay for dG or for the interest on the debt. But
it is clear that these refinements can in principle be handled by proper application
of the framework set out in this section. We shall therefore make no attempt
at working out a long list of specific cases, 30 and will proceed instead to point
out the implications of our framework for a somewhat different class of problems,
namely where the change in debt occurs without any accompanying change
either in government purchases or taxation.
VIII
“Gratuitous” Increases in Debt, Repudiation, and Inflation
For analytical convenience we may start out by considering a case which has
admittedly rather limited empirical relevance: namely, where the government