Public debt, growth, and distribution

Abstract

This paper discusses the problem of public debt in the long run. The working premise is that debt has negative effects on growth, mainly because it stimulates consumption spending that ultimately crowds out capital accumulation. Since this is a controversial viewpoint among Keynesian economists, the paper first provides an impressionistic survey of empirical evidence that supports the working premise before turning to a family of two-class growth models in the Kaldor–Pasinetti tradition that provide a theoretical environment conducive to gaining a deeper understanding of the burden of debt, both across overlapping generations of workers and across social classes. These models show how public debt can have regressive effects on the distribution of income and wealth as well as negative effects on growth. The policy implication is that fiscal consolidation needs to address these regressive effects, thus shifting the conversation away from the productivity-based narrative associated with neoclassical theory to a distributional narrative in the classical and Keynesian traditions.