Working Paper: NBER ID: w2053
Authors: Laurence J. Kotlikoff
Abstract: This paper questions the widely accepted view that deficits have real effects in the life cycle model. Standard analyses of deficits within life cycle models treat the government as a dictatorial entity that can effect any intergenerational redistribution it desires. In contrast, this paper drops the assumption of compulsion and models the government as a coalition of self-interested young and old generations whose bargaining determines government decisions. Since each generation is selfish, no generation will voluntarily absorb the debts of another except as a quid pro quo for receiving particular goods or services. Hence, redistribution per se between generations will not arise. Because each generation is ultimately responsible for its own liabilities, deficit finance, while altering the timing of tax receipts, has no economic impact.
Keywords: deficits; life cycle model; intergenerational redistribution; government debt
JEL Codes: H63; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government debt is neutral (H63) | deficits do not have real effects on the economy (H62) |
| level of debt (dt) (F34) | young generation's payment (fyt) (J13) |
| young generation's payment (fyt) does not change overall economic burden (H60) | they will eventually have to repay their own obligations (G32) |
| timing of tax payments does not affect present value (H25) | current tax cut will lead to equivalent future tax increase (H22) |
| bargaining process over public goods financing (H40) | outcome is independent of government labeling (taxes vs. borrowing) (H19) |