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

Long-Run Implications of Alternative Fiscal Policies 99
dent of the methods used to finance it. It follows immediately that, independently
of financing, the war will impose a burden on post-war society as a whole to the
extent that the stock of capital in existence at its termination—counting only
whatever portion is useful to satisfy the post-war requirements—is less than what
would have been there in the absence of war. In order to examine the residual
effects, if any, of methods of financing, we must suppose that, in spite of the war’s
severity, we have some choice as to the extent of taxation. Also, to keep separate
for the moment the possible role of inflation, we must suppose that untaxed
income in excess of the predetermined consumption level is prevented from
bidding up the price of goods—whether through voluntary abstention or through
a fully successful system of rationing. In these conditions the unspent income
must result in an increase in government debt held by the private sector, either
directly or through financial intermediaries. Thus the level of taxation versus
deficit financing determines essentially the size of the increment in government
debt, dD. Now suppose, for the sake of the argument, that the war had been
entirely financed by taxes, dD being accordingly zero. It then follows from our
earlier analysis that the burden of the war will be borne almost entirely by
members of the war generation. For, in addition to the sacrifice of consumption
and other amenities during the war, they will also bear the brunt of the reduced
capital stock, their accumulation of net worth being limited to the permitted privately
financed capital formation. Thus the burden falling on society as a whole
after the war will fall primarily directly on the members of the war generation
(affecting others only to the extent that the reduction in the stock of capital
reduces total income by more than the return on capital). They will be forced
after the war to maintain a reduced level of consumption over the rest of their
life, tending to save heavily in their remaining earning span and to dissave at a
greatly reduced rate thereafter. This behaviour in turn will produce, after the war,
an abnormally large rate of aggregate saving, gradually declining with the disappearance
of the war generation. As a result, by the time the war generation has
disappeared, the war-time reduction in capital formation may have been substantially
made up—this being more nearly true the closer the oac is to unity and
the smaller the initial loss of capital.
If, on the other hand, through lower taxes the war generation is permitted to
increase its terminal net worth by an additional amount dD, the effect, with
respect to the present issue, is essentially the same as though at war’s end it had
been handed down gratuitously a corresponding amount of government bonds. 34
As usual, this will enable them to maintain a higher post-war consumption, reducing
capital formation, by an extent that can range as high as dD, if the oac is
unity. Thus the debt financing will generate both: (i) a transfer from the post-war
to the war generation to the extent of taxes levied on the former to pay interest