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

Long-Run Implications of Alternative Fiscal Policies 81
(1) Individuals or sub-groups within an economic system can, by means of
borrowing, increase the current flow of goods available to them and pay for this
increase out of future output. But they can do so only because their borrowing is
“external,” i.e., matched by a lender who yields current goods in exchange for
later output. But a closed community cannot dispose of more goods and services
than it is currently producing. It certainly cannot increase this flow by paying
with future output, for there is no way “we can dispose to-day of to-morrow’s
output.” Hence the goods and services acquired by the government must always
be “paid for” by those present at the time in the form of a reduction in the flow
of goods available to them for private use, and cannot possibly be paid for by
later generations, whether the acquisition is financed by taxes or by internal borrowing.
Only through external borrowing is it possible to benefit the current generation
and to impose a burden on the future.
(2) Although internal borrowing will leave in its wake an obligation for future
tax-payers to pay the interest on the national debt and, possibly, to repay the principal,
this obligation is not a net burden on the community as a whole, because
these payments are but transfers of income between future members of the community.
The loss of the tax-payers is offset in the aggregate by the gain of the
beneficiary of the payment. These transfers may, of course, occur between people
of different ages and hence of different “generations,” and in this sense internal
borrowing may cause “intergenerations transfers,” but it will not cause a net loss
to society.
The above two arguments, or some reasonable variant thereof, have provided
the cornerstone of the no-transfer, no-burden argument over the last two centuries
or so. It was left for Keynesian analysis to provide a third argument, removing
thereby a potentially troublesome objection to the first two. If the cost of government
expenditure always falls on the current generation, no matter how
financed, why not forego altogether the painful activity of levying taxes? Yet our
common sense rebels at this conclusion. A partial answer to this puzzle was provided
by recognising that taxes, even when paid back in the form of transfers,
generate some “frictional loss,” because most if not all feasible methods of raising
tax revenue tend to interfere with the optimum allocation of resources. 7 Presumably
the ever-increasing level of the national debt resulting from full deficit
financing of current expenditure would require raising through taxes an evergrowing
revenue to pay the interest on the debt. Eventually the ratio of such taxes
to national income plus transfers would exceed the ratio of government expenditure
to national product, giving rise to frictional tax losses which could have
been avoided through a balanced budget. While these considerations do provide
a prima facie case for a balanced-budget policy, the case is not tight, for could
not the interest itself be met by further borrowing?