A Political Theory of Government Debt and Deficits in a Neo-Ricardian Framework

Alex Cukierman and Allan Meltzer

American Economic Review, 1989, vol. 79, issue 4, 713-32

Abstract: In the presence of different abilities, and therefore different bequests, some individuals are bequest constrained even in a neo-Ricardian world. Such individuals vote for taxes on future generations, through the issuance of bonds, thereby increasing their current consumption. This produces some crowding out of capital, reduces wage rates, and increases the interest rate. As a consequence, even unconstrained individuals are no longer indifferent to the size of government debt. The paper derives conditions that are conducive to larger debt and deficits when each of the living generations determines current taxes, social security benefits, and the national debt by majority rule. Copyright 1989 by American Economic Association.

Date: 1989
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