Who Owes What , and To Whom ? Public Debt , Ricardian Equivalence , and GovermmemtsnP Form

The postwar literature on public debt has been concerned primarily with two related issues: (1)whether public debt allows the cost of government to be shifted forward onto future generations and (2) whether the creation of public debt involves a positive net wealth effect. The development of this literature can be portrayed chronologically by three works, even though many authors have contributed to that literature.' Lerner (1948)advanced the thesis that the burden of the debt rests upon people a t the time the debt is created, as illustrated by the aphorism "we owe it to ourselves." In sharp contrast, Buchanan (1958)argued that public debt allowed people in the present to shift the cost of government onto people in the f u t ~ r e . ~ Barro (1974)denied the ability of public debt to transfer cost forward in time because, with intergenerational altruism, an increase in debt would be accompanied by an increase in saving to pay the future taxes required to service the debt. At the same time, Barro also denied the effectiveness of fiscal policy by that very fact: debt-financed government services would not have the stimulatory impact portrayed in the postwar Keynesian models, because the increased government spending would be offset by increased private saving necessary to provide the means to service the debt. In this paper I accept the Ricardian argument that debt i s just taxation by another name, both as an analytical point of departure and as a condition of satisfactory modeling. I also explain why the theory of public debt must be applied differently in democratic political settings than in the authoritarian setting that provides the effective backdrop