Channels, Spring 2018

Channels • 2018 • Volume 2 • Number 2 Page 23 taxpayers will experience a net positive present value for government bonds over the future costs in taxation they entail because of their finite lives. 49 Second, taxpayers will have a higher discount rate for future tax liabilities than for the interest payments with which they correspond. 50 While Barro does not cite Buchanan in defense of these two arguments, the latter author had used both in Public Principles of Public Debt 15 years earlier. In the first case, Buchanan wrote that “the Ricardian argument would be acceptable if individuals lived eternal lives…[but the] individual must operate within a reasonably limited time horizon. If this is accepted the Ricardian argument falls”. 51 Second, Buchanan argued that “the same absence of a market will cause the individual also to undervalue (in a relative sense) future tax payments which are necessary to service debt which has financed current capital outlay.” 52 Barro’s paper seeks to disprove these two critiques of Ricardian equivalence , because they both suggest a net positive present wealth effect for government bonds that is necessary for debt issue to increase aggregate demand as expansionary fiscal policy hopes. These two critiques on Ricardian equivalence suggest a net positive present wealth effect for government bonds that is necessary for depth issue to increase aggregate demand as expansionary fiscal policy hopes. Because of these suggestions, Barro’s paper seeks to disprove Buchanan’s critiques. Barro attempts to show that the aggregate demand impact is not tenable, thus critiquing Keynesianism but also undercutting Buchanan’s fundamental assumptions. To begin his critique of the finite lives argument, Barro assumes an overlapping generations model where individuals maximize their utility based on their present consumption and that of their descendants. 53 Thus, following government bond-issue, individuals will alter their bequest amount to create an equivalence that offsets the tax payments of the future generations. 54 Similarly, spending on educational infrastructure by the government will result in households decreasing their discretionary transfers. To defend the likelihood of this occurring in terms of the individual choices, Barro wrote as follows: [I]f, prior to the government bond issue, a member of the old generation had already selected a positive bequest, it is clear that this individual already had the option of shifting resources from his descendant to himself, but he had 49 Robert J. Barro, “Are Government Bonds Net Wealth?”, Journal of Political Economy 82, no. 6, 1096-7. 50 Ibid, 1097. 51 James Buchanan, The Collected Works of James Buchanan: Volume 2 - Public Principles of Public Debt: A Defense and Restatement , (Liberty Fund Inc., Indianapolis: IN, 1999), 123. 52 Ibid, 125. 53 Robert J. Barro, “Are Government Bonds Net Wealth?”, Journal of Political Economy 82, no. 6, 1100. 54 Ibid, 1103.