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

Long-Run Implications of Alternative Fiscal Policies 83
that, and in so far as, the resources acquired by the government are surrendered
in a voluntary exchange by the savers, who thereby acquire government bonds
(in lieu of some other asset).
(2) The burden is imposed instead on all future tax-payers, who will have to
pay taxes to service the debt. These taxes are not a mere transfer of income, but
a net burden on society, for, in the absence of the debt-financed expenditure, the
taxes would not have been levied, while the investors in bonds would have
received the income just the same, directly or indirectly, from the return on the
physical assets in which their savings would have been invested. This argument
does not imply that a debt-financed expenditure will necessarily affect future generations
unfavourably. In order to assess the “net outcome,” we must subtract
from the gross burden represented by the extra taxes benefits, if any, resulting
from the expenditure. Thus the net outcome might even be positive if the expenditure
undertaken produced greater benefits than the private capital formation
which it replaces. But the argument does imply that, through deficit financing,
the expenditure of the government is being “paid for” by future generations.
A careful application of the reasoning underlying (1) and (2) will reveal circumstances
in which the above conclusions do not hold and the allocation of the
burden may be independent of the form of financing used. There are in particular
two important cases which are treated at some length by Buchanan and which
bring to light the contribution of Keynesian analysis also to this side of the argument.
The first is the case of debt-financed expenditure in deep depressions, when
private capital formation could not, in any event, provide an adequate offset to
full-employment saving. Here, according to Buchanan, not even a gross burden
need result to future tax-payers, for the expenditure could in principle be financed
by interest-free issuance of currency. The second exception discussed by
Buchanan is that of a major war. Unfortunately, the chapter on war financing is
one of the least convincing in his book, and what follows may represent more
nearly my application of his framework than a faithful summary of his argument.
Suppose the war effort is sufficiently severe so that the allocation of resources to
various uses, and to capital formation in particular, is completely determined by
war necessities. In such a situation the way in which the government finances its
expenditure cannot affect private consumption or capital formation. It would
seem therefore that the burden of reduced consumption must be borne by the
current generation, even if the reduction is achieved not through taxes but through
a combination of rationing and voluntary increases in saving and the unspent
disposable income is invested in claims against the government. Similarly, the
burden of the reduction in useful capital formation is borne by those living after
the war, again independently of financing. In this case, as well as in the case of
depression financing, the taxes levied to pay the interest on the increased debt