Politics and Efficiency of Separating Capital and Ordinary Government Budgets

Marco Bassetto and Thomas Sargent

No 11030, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We analyze the democratic politics of a rule that separates capital and ordinary account budgets and allows the government to issue debt to finance capital items only. Many national governments followed this rule in the 18th and 19th centuries and most U.S. states do today. This simple 1800s financing rule sometimes provides excellent incentives for majorities to choose an efficient mix of public goods in an economy with a growing population of overlapping generations of long-lived but mortal agents. In a special limiting case with demographics that make Ricardian equivalence prevail, the 1800s rule does nothing to promote efficiency. But when the demographics imply even a moderate departure from Ricardian equivalence, imposing the rule substantially improves the efficiency of democratically chosen allocations. We calibrate some examples to U.S. demographic data. We speculate why in the twentieth century most national governments abandoned the 1800s rule while U.S. state governments have retained it.

JEL-codes: E6 H6 H7 (search for similar items in EconPapers)
Date: 2005-01
New Economics Papers: this item is included in nep-his, nep-mac, nep-pbe and nep-pol
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published as Marco Bassetto & Thomas J Sargent, 2006. "Politics and Efficiency of Separating Capital and Ordinary Government Budgets," The Quarterly Journal of Economics, MIT Press, vol. 121(4), pages 1167-1210, November.

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Journal Article: Politics and Efficiency of Separating Capital and Ordinary Government Budgets (2006)
Working Paper: Politics and efficiency of separating capital and ordinary Government budgets (2005)
Working Paper: Politics and Efficiency of Separating Capital and Ordinary Government Budgets (2004)
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