Channels, Spring 2018

Page 24 Schwartz • Public Principles and Economic Legacy determined that such shifting, at the margin was nonoptimal. Since the change in B does not alter the relevant opportunity set in this sense, it follows that—through the appropriate adjustment of the bequest—the values of current and future consumption and attained utility will be unaffected. 55 Barro generalizes these results to generations further from the initial debt issue and mathematically justifies the argument for equivalence. With the first attack on Ricardian equivalence critiqued, he moves to the second assumption of imperfect capital markets. This he disposes of by arguing that the government may be a more efficient lender than the private market over a certain range of lending behavior. As a result, “at the margin, the net- wealth effect of government bonds would be zero, despite the continued existence of ‘imperfect private capital markets.’” 56 Given these findings, Barro is prepared to make strong conclusions about the overall public finance impact of debt issue by the government. He wrote that, “a change in the stock of government debt would have no effect on capital formation,” and “fiscal effects involving changes in the relative amounts of tax and debt finance for a given amount of public expenditure would have no effect on aggregate demand, interest rates, and capital formation.” 57 On this ground, Buchanan’s contributions regarding the burden of public debt appear outmoded because debt finance, absolutely or relative to tax finance, has little substantive impact on economic fundamentals. Its primary effect on behavior is simply to stir the reaction to equivalence so that no party is either better or worse off than under an alternative. Barro did recognize that some of his underlying assumptions in modelling are fairly unrealistic. For instance, Barro concedes that, given the fact that households may not be identical, the impact of government debt issue depends on the preferences of the households and the relative share of each type of household in variable bequest motive scenarios. 58 Further, he argues that the equilibrium utility under his model of equivalence not only requires individuals to bequest optimization, but that all individuals “choose the same amount for their bequests.” 59 Nevertheless, he presented the model and its resulting conclusions with strength and chose to back them up further in subsequent articles. One such contribution was the article “Federal Deficit Policy and the Effect of Public Debt Shocks” written in 1980. Here, he argues that the systematic parts of federal deficit policy 55 Ibid, 1103. 56 Ibid, 1112. 57 Ibid, 1116. 58 Ibid, 1104. “When households are not identical, the aggregate effect of government debt issue will depend on the fraction of households at a corner {where bequests are equal to 0}.” 59 Ibid, 1109. “The equilibrium satisfies two properties: (1) each individual chooses his bequest optimally, subject to a given choice of bequests by all other individuals; and (2) all individuals choose the same value for their bequests.”