Working Paper: NBER ID: w11030
Authors: Marco Bassetto; Thomas J. Sargent
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.
Keywords: No keywords provided
JEL Codes: E6; H6; H7
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| demographic structure (J11) | effectiveness of the 1800s rule (C52) |
| 1800s rule (N41) | efficiency of public goods allocation (D61) |
| separation of capital and ordinary government budgets (H60) | incentives for majorities to choose an efficient mix of public goods (H49) |
| demographics deviating from Ricardian equivalence (J19) | efficiency of democratically chosen allocations (D61) |
| historical abandonment of the 1800s rule by national governments (N93) | varying impacts of demographic changes on fiscal policy effectiveness (J18) |