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

100 The Life-Cycle Hypothesis
to the latter, and (ii) a permanent burden on society as a whole to the extent that
the stock of capital is permanently reduced by dD—less any increase in W resulting
directly from dD. 35 In so far as in the immediate post-war period the government,
to speed up the reconstruction, pushes capital formation by raising taxes
and creating a surplus, the long-run effect is eliminated. But the burden of debt
financing is placed to that extent on those living in the relevant post-war period,
which may again consist in part of the very same war generation.
If inflation is permitted to develop in the course of the war or immediately
following it our analysis remains valid, provided the increment in the debt is
measured in real, rather than money, terms. This net real increment can be
expressed as
D0
+ dD
- D0
,
1+
dP
where D 0 is the pre-war debt and dP is the relative increase in the price level in
the course of the war inflation. The above quantity, it will be noted, may even be
negative if
dP >
dD ,
D
0
i.e., if the increase in prices exceeds the relative increase in the debt. In this case
the war generation will be made to carry even more than the cost of the war
(unless its plight is improved by post-war transfers of income); and later generations
may conceivably end up by benefiting from the war, at least following the
transient period of high saving rates and rapid capital accumulation. Perhaps
the picture we have been drawing has some relevance for an understanding of
the post-war experience of such countries as Germany, Italy, and Japan.
It seems hardly necessary to point out that our analysis in no way implies that
in financing a war the use of debt should necessarily be minimised. Quite aside
from obvious incentive considerations, there may be perfectly good equity
reasons for lightening the burden of the generation that suffered through the war
by granting them a more comfortable life after the war, at the expense of later
generations.
We come finally to the effects of debt generated as a counter-cyclical measure.
In view of the complexity of the problem, we shall have to limit ourselves to a
sketchy treatment of a limited class of situations. Our main concern is to show
that, even in this case, debt financing, though quite advantageous to the current
generation, will generally not be costless to future generations, at least in terms
of gross burden.