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

102 The Life-Cycle Hypothesis
long, the interest bill on the incremental debt may provide a rough measure of
the average future (gross) burden placed on society as a whole. 36
Once more, recognising that the government action may involve a gross cost
to future society does not imply that the action should not be taken. In the first
place, because of multiplier effects the gain in income to those present is likely
to be appreciably larger than the lost stock of capital which approximates the
present value of the sacrificed income stream. In the second place, if the government
spends on projects which produce a yield in the future, then the gross
burden will be offset by the gross yield and the net outcome may even be positive.
In the third place, the gross burden can be eliminated if at some future point
of time the government runs a surplus and retires the debt. It is true that this will
tend to place the burden of the original deficit on those who pay the taxes financing
the surplus. But if the surplus follows the deficit in short order these people
will be, to a large extent, the very same ones that benefited from the original
deficit; thereby the questions of inter-generation equity are minimised. The case
for eradicating the deficit with a nearby surplus is, of course, strongest if the government
expenditure provides nothing useful for the future, or if the deficit
reflects a reduction in the tax bill, expenditure constant, resulting either from
built-in flexibility arrangements or from ad hoc tax rebates. Thus, our analysis
turns out to provide a strong case in favour of what used to be called the cyclically
balanced budget.
Although we cannot pursue further here the complex issues raised by the
burden aspects of counter-cyclical fiscal operations, we hope to have succeeded
in showing how the tools we have developed may provide some insight into the
problem. One point should be apparent even from our sketchy treatment: namely,
that in so far as counter-cyclical fiscal policy is concerned, our analysis does not
require any significant re-evaluation of currently accepted views. Yet, by reminding
us that fiscal operations involve considerations of inter-generation equity even
when used for stabilisation purposes, it may help to clarify some issues. It does,
for example, establish a prima facie case, at least with respect to ad hoc measures
as distinguished from built-in stabilisers, for a course of action that will
minimise the “deadweight” deficit and stimulate investment rather than consumption.
37 More generally, considerations of inter-generation equity suggest the
desirability of a compromise between the orthodox balanced-budget principle and
the principle of functional finance, which might be couched roughly as follows:
as a rule, the government should run a “deadweight” deficit only when fullemployment
saving exceeds the amount of capital formation consistent with the
most favourable feasible monetary policy; and it should run a surplus, in so far
as this is consistent with full employment, until it has wiped out previous deficits
accumulated in the pursuance of this policy.