Public Investment and Its Effects on the Burden of the Public Debt

Abstract

Few problems in economics have been so thoroughly debated without being resolved as the question about whether the burden of the public debt is passed on to the future. The key issue in the debate is whether taxation and debt are equivalent in their real effects as methods of raising public revenues.' The question in this form is an old one, and both sides of the debate were eloquently discussed by Ricardo.2 The purpose of this paper is to present a framework within which the choices facing the many different individuals in the society can be analyzed. As is explained below, the nature of the economy's adjustment to debt issue cannot be fully understood without first understanding that different individuals will adjust differently to the issuance of additional debt. It is unlikely that a single paper could end a debate that is well over two centuries old. Hence, our goal is more modestly to extend the framework of the debate. Adding some more realistic features to a Barro-like model illustrates that there are areas of commonality that unite both sides of the debate. This study extends the current debate in two ways. First, it examines the intergenerational transfer of public sector wealth by including the effects of intergenerational bequests of assets in addition to the intergenerational transfer of debt. After all, when individuals consider the well-being of their heirs, they must consider the value of the assets that are passed from one generation to the next in addition to the stock of public debt.3 Second, it