閤 Are Government Bonds Net Wealth? OR。 Robert J. barro The Journal of political Economy, Vol. 82, No 6.(Nov -Dec, 1974), pp. 1095-1117 Stable url: http://inks.jstororg/sici?sici0022-3808%28197411%2f12%2982%3a6%3c1095%3aagbnw%3e2.0.co%3b2-1 The Journal of political Economy is currently published by The University of Chicago Press Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/about/terms.htmlJstOr'sTermsandConditionsofUseprovidesinpartthatunlessyouhaveobtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the jsTOR archive only for your personal, non-commercial use Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.istor.org/iournals/ucpress.html Each copy of any part of a JSTOR transmission must contain the same copyright notice that ap on the screen or printed page of such transmission STOR is an independent not-for-profit organization dedicated to and preserving a digital archive of scholarly journals. For more information regarding JSTOR, please contact support @jstor. org Thu mar1522:34:002007
Are Government Bonds Net Wealth? Robert J. Barro The Journal of Political Economy, Vol. 82, No. 6. (Nov. - Dec., 1974), pp. 1095-1117. Stable URL: http://links.jstor.org/sici?sici=0022-3808%28197411%2F12%2982%3A6%3C1095%3AAGBNW%3E2.0.CO%3B2-1 The Journal of Political Economy is currently published by The University of Chicago Press. Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/about/terms.html. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/journals/ucpress.html. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is an independent not-for-profit organization dedicated to and preserving a digital archive of scholarly journals. For more information regarding JSTOR, please contact support@jstor.org. http://www.jstor.org Thu Mar 15 22:34:00 2007
Are Government Bonds Net wealth? Robert Barro The assumption that government bonds are perceived as net wealth by the private sector is crucial in demonstrating real effects of shifts in the tock of public debt. In particular, the standard effects of exp fiscal policy on aggregate demand hinge on this assumption. Government bonds will be perceived as net wealth only if their value exceeds the cap- alized value of the implied stream of future tax liabilities. This paper onsiders the effects on bond values and tax capitalization of finite lives, imperfect private capital markets, a government monopoly in the production of bond"liquidity services, and uncertainty about future x obligations. It is shown within the context of an overlapping generations model that finite lives will not be relevant to the capitalia tion of future tax liabilities so long as current generations are nected to future generations by a chain of operative intergenerational transfers(either in the direction from old to young or in the direction from young to old ). Applications of this result to social security and to other types of imposed intergenerational transfer scheme noted In the presence of imperfect private capital markets, government debt issue will increase net wealth if the government is more efficient at the margin, than the private market in carrying out the loan process Similarly, if the government has monopoly power in the production of bond"liquidity services, "then public debt issue will raise net wealth. Finally, the existence of uncertainty with respect to individual future tax liabilities implies that public debt issue may increase the overall risk contained in household balance sheets and thereby effectively re- duce household wealth The assumption that government bonds are perceived as net wealth by the private sector plays an important role in theoretical analyses of monetary and fiscal effects. This assumption appears, explicitly or im- plicitly, in demonstrating real effects of a shift in the stock of public debt I have benefited from comments on earlier drafts by Gary Becker, Benjamin Eden, Milton Friedman, Merton Miller, Jose Scheinkman, Jeremy Siegel, and Charles Upton. The National Science Foundation has su dgz bf The univesity of Chicag ain ri his reserved 095
JOURNAL OF POLITICAL ECONOMY (see, e.g., Modigliani 1961, sec. IV; Mundell 1971; and Tobin 1971 chap. 5),and in establishing nonneutrality of changes in the stock of money(Metzler 1951, sec. VI). More generally, the assumption tha government debt issue leads, at least in part, to an increase in the typical household,s conception of its net wealth is crucial for demonstrating a ositive effect on aggregate demand of"expansionary"fiscal policy, which is defined here as a substitution of debt for tax finance for a given level of government expenditure(see, e.g., Patinkin 1964, sec. XII. 4; and blinder and Solow 1973, pp. 324-25). The basic type of argument in a full- mployment model is, following Modigliani(1961), that an increase in government debt implies an increase in perceived household wealth ence, an increase in desired consumption(a component of aggregate finally, a decline in the fraction of output which goes to capital accumu g demand) relative to saving; hence, an increase in interest rates; an tion. However, this line of reasoning hinges on the assumption that the ncrease in government debt leads to an increase in perceived household lon-full employment context it remains true that the effect of bublic debt issue on aggregate demand(and, hence, on output and employment) hinges on the assumed increase in perceived household wealth It has been recognized for some time that the future taxes needed to finance government interest payments would imply an offset to the direct positive wealth effect. For example, in a paper originally published in 1952, Tobin(1971, p. 91)notes: How is it possible that society merel by the device of incurring a debt to itself can deceive itself into believing that it is wealthier? Do not the additional taxes which are necessary to carry the interest charges reduce the value of other components of private ley( 1962, pp 75-77)has gone somewhat further by arguing It is possible that households regard deficit financing as equivalent to taxation. The issue of a bond by the government to finance expenditures involves a liability for future interest payments and possible ultimate repayment of principal, and thus implies future taxes that would not be if th ditures were financed by current taxation If future tax liabilities implicit in deficit financing are accurately foreseen the level at which total tax receipts are set is immaterial; the behavior of the community will be exactly the same as if the get were continuousl There seem to be two major lines of argument that have been offered to defend the position that the offset of the future tax liabilities will be only partial. One type of argument, based on finite lives, supposes that Of course, most analyses of government debt effects do not offer a specific defense for this position. For example, Blinder and Solow(1973, p. 325, n 8)say: This [analysis ncludes government bonds as a net asset to the public. We are aware of. but not rsuaded by, the arguments which hold that such bonds are not seen as net worth by ndividuals because of the implied future tax liability
GOVERNMENT BONDS the relevant horizon for the future taxes(which might correspond to the remaining average lifetimes of the current taxpayers) will be shorter than that for the interest payments. 2 Accordingly, a stream of equal values for interest payments and taxes will have a net positive present value. This argument has been used explicitly by Thompson(1967, p. 1200). The ally based on imperfect tal markets, supposes that the relevant discount rate for tax liabilities will be higher than that for the interest payments. Hence, even with an infinite horizon for tax liabilities, a stream of equal values for interest payments and taxes will have a net positive present value. This argument has been used by Mundell(1971). 3 The first part of this paper deals with the effect of government bond issue on the calculus of individual wealth in an overlapping-generations economy with physical capital where individuals have finite lives. No elements of"capital market imperfections "are introduced into this model The key result here is that, so long as there is an operative intergenerational transfer(in the sense of an interior solution for the amount of bequest or ft across generations), there will be no net-wealth effect and, he effect on aggregate demand or on interest rates of a marginal change in government debt. This result does not hinge on current generations' weighing the consumption or utility of future generations in any sense on an equal basis with own consumption, nor does it depend on current generations' placing any direct weight at all on the consumption or utility f any future generation other than the immediate descendant. Current generations act effectively as though they were infinite-lived when they re connected to future generations by a chain of operative inter generational transfers The analysis then shows that social security payments are analogous to anges in government debt. Marginal changes in this type ( or other types)of imposed intergenerational transfers have no real effects when current and future generations are already connected by a chain of opera tive discretionary transfers, The effects of inheritance taxes and of transaction costs"for government bond issue and tax collections are also considered. It is shown that inheritance taxes do not affect the basic the net-wcalth effect of government bonds would actually be negaliathat results, but that the presence of government transaction costs implies The second part of the deals with the existence of imperfect private capital markets. It is shown that, to the extent that public debt This type of argument applies taxes or to taxes based on wage income, but not to taxes which are based on the of nonhuman assets. This distinction has been made by Mundell(1971, pp. 9, 10) a different line of argument that leads to a similar conclusion is that cts like a monopolist in the ion of the liquidity services yielded by its liabilities. I discuss this argument in part Ill, below
JOURNAL OF POLITICAL ECONOMY issue entails a loan from low-discount-rate to high-discount- rate individ- uals, a positive net-wealth effect results if the government is more efficient th e private market carrying out this sort of loan. If the government is more efficient only over a certain range, and if the public choice process determines the amount of government debt issue in accord with efficiency criteria, it is again true at the margin that the net-wealth effect of government bond issue is nil The third part of the paper discusses government debt as a bearer of nonpecuniary"liquidity services. It is shown that if the government acts like a competitive producer of these services, as would be dictated by a public choice process which reflects efficiency criteria, then the net wealth effect of government bond issue would be zero on this count. More generally, the net-wealth effect would be positive if the government acts like a monopolist and would be negative if the government is an overproducer of liquidity The last part of the paper deals with the risk characteristics of govern- ment debt and of the tax liabilities associated with the interest payments on this debt. It is argued that if relative tax liabilities are known, a change in government debt will not alter the overall risk contained in household balance sheets, When relative tax liabilities are uncertain, the effect of government debt issue on the overall risk may be positive or negative depending on the nature of the tax system and on the transaction costs associated with private insurance arrangement I. The Effect of Finite Lives-a Model with Overlapping Gener use here a version of the Samuelson(1958)-Diamond(1965)over lapping-generations model with physical capital. Each individual lives two periods, which will be distinguished by the superscripts y(young) and o(old). Generations are numbered consecutively beginning with the generation which is currently old(subscript 1); followed by its descendant which is currently young(subscript 2); followed by its descendant; and so on. I assume here that there are the same number of people, N, in each generation, and that all individuals are identical in terms of tastes and productivity. I also abstract from any technological change over time The members of each generation work(a fixed amount of time set equal to one unit)only while young and receive an amount of wage income we Expectations on w for future periods(i. e, for future generations)are ssumed to be static at the current value. Asset holdings(4)take the form of equity capital (K). Subsequently, government bonds are introduced as an additional form in which assets can be held. The rate of return on assets