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

106 The Life-Cycle Hypothesis
the net yield of wealth below r, which in turn will, in principle, affect the proportionality constant g
of equation (1). However, exploration of several alternative assumptions suggests to me that the
outcome is unlikely to be appreciably different from that derived above, at least in the case of direct
taxes.
It can also be shown that the above formulæ will tend to hold, at least asymptotically, for an expanding
economy in which population grows at an approximately constant rate and/or so does productivity
as a result of technological change which is neutral in Harrod’s sense (cf. Toward a Dynamic
Economics (Macmillan, 1949), p. 23). The main features of such a growth model are discussed in
Ando and Modigliani, op. cit.
34. If the bonds issued during the war carried an exceptionally low rate of interest because of the
monopoly position of the Government in the market the gift in question should be regarded, for present
purposes, as represented by the market value of the bonds.
35. Note that the incremental debt dD could be regarded as a burden on society even if the economy
tended to suffer from long-run stagnation, i.e., a chronic tendency for a very low or zero marginal
productivity of capital. For while it is true that the larger consumption bestowed on the war generation
would help to sustain consumption, and thus full employment, the same result could be achieved
by reducing the taxes and expanding the consumption and saving of whoever was present at the appropriate
later time.
36. Of course, under our present assumptions the burden as measured by the opportunity cost will
be essentially zero during the period in which the debt is created, regardless of whether it takes the
form of long-term debt, short-term debt or currency creation. But in the last two cases the current
interest cost will not appropriately reflect the average future burden, unless we also take into account
the rate the government will have to pay on bonds sold at later points of time to refinance the shortterm
debt or to reduce the money supply in order to prevent inflation.
37. These consideration, e.g., cast some doubt on the desirability of relying on personal tax cuts
explicitly announced to be but temporary. For there is at least some ground for supposing that the
temporary nature of the cut will tend to reduce the desirable impact effect on consumption and increase
instead short-run saving and the (possibly) undesirable delayed consumption.