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

84 The Life-Cycle Hypothesis
would indeed seem to result in a pure transfer, for the income associated with the
bonds would not have come to exist had the government decided respectively to
tax, or to print money, instead of borrowing.
J. E. Meade has also lately associated himself with those maintaining that the
national debt is a burden, 9 but his argument is quite different from the classical
one, and bears instead all the marks of post-Keynesian analysis. He is not concerned
with the differential effect of deficit versus tax financing, but asserts none
the less that government debt in excess of government-owned physical capital—
the so-called deadweight debt—is a burden on the economy. Unfortunately his
contribution, which is so stimulating in analysing the effects of a major capital
levy, is less than convincing in its attempt to establish that the deadweight debt is
a burden. For his demonstration seems to rely entirely on the proposition that elimination
of the debt would be a blessing for the economy in that it would encourage
saving through a “Pigou type” effect, besides reducing the frictional costs of
transfers. Now the tax-friction proposition, though valid, is not new, 10 and had
already been generally accepted as a second-order amendment to the no-burden
argument. On the other hand, the first and central argument is rather unconvincing.
For, as Meade himself recognises, a reduction in national debt, be it through
a capital levy, budget surplus or inflation, would spur saving whether or not the
debt reduced thereby was “deadweight” debt. In fact, at least the first two means
would tend to increase saving, even if they were applied in a situation where the
national debt was zero to begin with, and the outcome would be that of driving
the economy into a position of net indebtedness vis-à-vis the government. Finally,
Meade’s analysis throws no light on whether the increase in saving following the
capital levy is a permanent or a purely transitory phenomenon, nor on who, if
anyone, bears the burden of a debt reduction. In spite of these apparent shortcomings,
I am encouraged to think that Professor Meade’s views are fundamentally
quite close to those advanced here. I hope this will become gradually
apparent, even without much further explicit reference to his argument.
IV
Fallacies in the No-transfer No-burden Argument
The classical argument summarised in the last section appears so far rather convincing,
and if so we should be able to pinpoint the fallacies in one or more of
the three propositions of section II.
The fallacy in proposition (1) is not difficult to uncover. It is quite true that a
closed community cannot increase its current resources by relying on tomorrow’s
unproduced output. None the less, the way in which we use today’s resources can
affect in three major ways the output that will result tomorrow from tomorrow’s
labour input: (i) by affecting the natural resources available to the future; (ii) by