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LONG-RUN IMPLICATIONS OF ALTERNATIVE FISCAL POLICIES
AND THE BURDEN OF THE NATIONAL DEBT
Franco Modigliani
I
Introduction
The time-honoured controversy over the burden of the national debt has flared
up once more. The view, almost unchallenged a few years back, that the national
debt is no burden on the economy and that the real cost of government expenditure,
no matter how financed, cannot be shifted to “future generations” has been
on the retreat under a powerful counterattack spearheaded by the contributions
of J. M. Buchanan, 1 J. E. Meade 2 and R. A. Musgrave. 3 These authors, while
relying to a considerable extent on older arguments, have significantly enriched
the analysis by blending the traditional approach with the new insights provided
by the Keynesian revolution. But even these most recent contributions have
failed, in our view, to provide an altogether adequate framework—a failure resulting
at least in part from the Keynesian tendency to emphasise flows while paying
inadequate attention to stocks. It is the purpose of this paper to propose a fresh
approach to this problem, and to show that, unlike its predecessors, it leads to a
consistent and yet straightforward answer to all relevant questions.
Unless otherwise noted, the national debt will be defined here as consisting of:
(1) all claims against the government held by the private sector of the economy,
or by foreigners, whether interest bearing or not (and including therefore bankheld
debt and (government currency, if any); less (2) any claims held by the government
against the private sector and foreigners. 4
From a methodological point of view, the central contention of our analysis is
that to grasp fully the economic effects of alternative fiscal policies and of the
national debt, we must pay proper attention to stocks as well as to the usual flow
variables and to the long-run as well as to the impact effects. Among the substantive
implications of this line of approach, the following may be mentioned
here by way of a rough summary: (1) Given the government purchase of goods
Reprinted with permission from Economic Journal 71 (December 1961), 730–755.