human capital investment in wealth constrained families with two sided altruism abstract it is well known that with one sided altruism a bequest constrained household will under invest in their child s human capital government transfers to such a household will unambiguously increase human capital investment we show with two sided altruism and an operative gift motive human capital investment will be efficient under a subgame perfect equilibrium but will remain inefficiently low under a nash equilibrium government transfers cease to affect investment under either equilibrium notion

effects of welfare reform on illicit drug use of adult women exploiting changes in welfare policy across states and over time and comparing relevant population subgroups within an econometric difference in differences framework we estimate the effects of welfare reform on adult women s illicit drug use from 1992 to 2002 the period during which welfare reform unfolded in the u s the analyses are based on all available and appropriate national datasets each offering unique strengths and measuring a different drug related outcome we investigate self reported illicit drug use from the national household surveys on drug abuse and national surveys on drug use and health drug related prison admissions from the national corrections reporting program drug related arrests from federal bureau of investigation uniform crime reports and drug related emergency department episodes from the drug abuse warning network we find robust evidence that welfare reform led to a 10 21 decline in illicit drug use among women at risk of relying on welfare as well as associated declines in drug related arrests 6 7 drug related hospital emergency department episodes 7 11 and possibly drug related prison admissions 11 19 the findings indicate that an appropriately designed system with sufficient job opportunities for those are able to work can result in both increases in employment and decreases in drug use

effects of welfare reform on women s voting participation this study investigates the effects of welfare reform in the united states in the 1990s on voting among low income women using the november current population surveys with the added voting and registration supplement for the years 1990 through 2004 and exploiting changes in welfare policy across states and over time we estimate the causal effects of welfare reform on women s voting registration and voting participation during the period in which welfare reform unfolded during this time period voter turnout was decreasing in the united states we find robust evidence that welfare reform led to smaller declines in voting about 3 to 4 percentage points which translates to about 10 relative to the baseline mean for women who were exposed to welfare reform compared to several different comparison groups of similar women who were much less exposed the robust findings suggest that welfare reform had prosocial effects on civic participation as characterized by voting the effects were largely confined to presidential elections were stronger in democratic than republican states were stronger in states with stronger work incentive policies and appeared to operate through employment education and income jel d72 h53 i38 j21

evaluating welfare reform in the united states this paper reviews the economic literature on welfare reform over the 1990s a brief summary of the policy changes is followed by a discussion of the methodological techniques that analyze the effects of these changes on outcomes the paper then critically reviews the econometric and experimental literature on caseload changes labor force changes poverty and income changes and family formation changes a growing body of evidence suggests that recent policy changes have influenced economic behavior and well being one particular set of new style welfare programs seems to show especially promising results with significantly increased work and earnings and reduced poverty

from physical to human capital accumulation inequality and the process of development this paper develops a growth theory that captures the replacement of physical capital accumulation by human capital accumulation as a prime engine of growth along the process of development it argues that the positive impact of inequality on the growth process was reversed in this process in early stages of the industrial revolution when physical capital accumulation was the prime source of growth inequality stimulated development by channelling resources towards individuals with a higher propensity to save as human capital emerged as a growth engine equality alleviated adverse effects of credit constraints on human capital accumulation stimulating the growth process this research develops a growth theory that captures the endogenous replacement of physical capital accumulation by human capital accumulation as a prime engine of economic growth in the transition from the industrial revolution to modern growth the proposed theory offers a unified account for the effect of income inequality on the growth process during this transition it argues that the replacement of physical capital accumulation by human capital accumulation as a prime engine of economic growth changed the qualitative impact of inequality on the process of development in the early stages of the industrial revolution when physical capital accumulation was the prime source of economic growth inequality enhanced the process of development by channelling resources towards individuals whose marginal propensity to save is higher in the later stages of the transition to modern growth as human capital emerged as a prime engine of economic growth equality alleviated the adverse effect of credit constraints on human capital accumulation and stimulated the growth process the proposed theory unifies two fundamental approaches regarding the effect of income distribution on the process of development the classical approach and the credit market imperfection approach 1 the classical approach was originated by smith 1776 and was further interpreted and developed by keynes 1920 lewis 1954 kaldor 1957 and bourguignon 1981 according to this approach saving rates are an increasing function of wealth and inequality therefore channels resources towards individuals whose marginal propensity to save 1 the socio political economy approach provides an alternative mechanism equality diminishes the tendency for socio political instability or distortionary redistribution and hence it stimulates investment and economic growth see the comprehensive survey of benabou 1996b

the effects of welfare and tax reform the material well being of single mothers in the 1980s and 1990s abstract the tax and welfare programs that provide income and in kind benefits to single mothers have changed dramatically in recent years these changes began as far back as the mid 1980s and culminated with the 1996 welfare law that ended welfare as we knew it these tax and welfare changes have sharply increased the employment of single mothers and cut welfare rolls however little is know about the effects of these policy changes on the material well being of single mothers and their children studies of those leaving welfare have found that a substantial percentage have problems paying rent purchasing enough food and paying utility bills other studies found a decline in income among the worst off single mothers after 1994 or 1995 the goal of this paper is to examine the material well being of single mothers and their families before and after recent welfare and tax reforms using data from two nationally representative household surveys we examine the consumption patterns of single mothers and their families from 1984 2000 we find that the material conditions of single mothers did not decline in recent years either in absolute terms or relative to single childless women or married mothers this pattern holds for the average single mother as well as for low educated single mothers at both the 15th and 25th percentiles of the consumption distribution in most cases our evidence suggests that the material conditions of single mothers have improved slightly

the role of permanent income and demographics in black white differences in wealth we explore the extent to which the large race gap in wealth can be explained with properly constructed income and demographic variables in some instances we explain the entire wealth gap with income and demographics provided that we estimate the wealth model on a sample of whites however we typically explain a much smaller fraction when we estimate the wealth model on a black sample using sibling fixed effects models to control for intergenerational transfers and the effects of adverse history we find that these factors are not likely to account for the lower explanatory power of the black wealth models our analysis of growth models of wealth suggests that differences in savings behavior and or rates of return play an important role

role of parental income in educational attainment during the post world war ii era u s governmental policy has often been based on the idea that in the absence of government action access to college and to a lesser extent high school education may be limited because of liquidity constraints the federal and state and local governments have instituted a number of policies to overcome these constraints these policies include the basic opportunity grants loan programs that have been issued at or below market interest rates the expansion of state supported colleges that charge below market tuitions rates and the inception and expansion of local community or county colleges that also charge below market tuition rates while there may be noneconomic reasons that explain these changes or their magnitude economic reasons that rely on differences between private and social costs and benefits can also be advanced these include a wiser societal choices made by a more educated society b recoupment of social costs from higher tax revenues c the reduction of private risks from lending arising from the pooling of risks thereby making the social supply of funds curve available to all individuals at the social discount rate and d state and local economic development reason c implies that in the absence of governmental initiative some children would be restricted from achieving their socially optimal amount of education because parents income and wealth limit their children s choices gary becker 1975 arthur okun 1975 and jere behrman and myself 1985 argue that governmental policy to reduce private borrowing costs to the level of social costs reduces inefficiency while increasing equity a rare result in the realm of economics in this paper i consider why parental income might influence offspring s educational attainment and the policy implications of such an influence

saving determinants in colombia 1925 1994 abstract this paper analyzes the determinants of saving in colombia using the framework of an intertemporal model national saving partially responds to temporary changes in output according to the permanent income hypothesis higher government expenditures in relation to their permanent level are associated with lower national saving refuting the existence of ricardian equivalence the paper tests other common hypotheses in regard to saving behavior in particular we find that changes in national savings and changes in investment are perfectly correlated and that savings cause growth in the granger sense the results also indicate that increases in urbanization and age dependency have had a significantly negative effect on private saving in colombia finally we find that much of the recent reduction in private savings can be accounted by the effects of higher taxation

is welfare reform responsible for low skilled women s declining health insurance coverage in the 1990s we use data from the 1989 2001 march supplements to the current population survey to determine whether welfare reform contributed to declines in health insurance coverage experienced by low skilled women between 1988 and 2000 women with less than a high school education experienced an 8 0 percentage point decline in the probability of having health insurance against this backdrop of large declines welfare waivers and tanf are associated with modest increases in coverage for low skilled women of 2 3 and 3 6 percentage points respectively overall our findings suggest that welfare reform did not contribute to declines in coverage but rather offset them somewhat

the connection between public transfers and private interfamily transfers abstract this paper investigates the anti poverty effectiveness of public transfers taking private transfer responses into account widespread altruistically motivated private transfers would neutralize the distributional impact of public transfers but exchange motivated transfers can reinforce the effects of public transfers on the distribution of economic well being the common technique for gauging anti poverty effectiveness subtracting public transfers from other income and measuring the poverty rate counterfactual yields results that are close to a more complex procedure that takes private transfer responses into account and some of the empirical findings suggest an exchange rather than altruistic motive for private transfers indicating that the effects of public transfers can be magnified by private behavior this is an exact reversal of the prediction that public transfers merely supplant private ones

incentive effects of the u s welfare system a review the author would like to acknowledge support for prior work on this topic from the u s department of health and human services and helpful comments from three anonymous referees rebecca blank howard chernick john fitzgerald irwin garfinkel peter gottschalk edward gramlich david greenberg judith gueron james heckman v joseph hotz robert hutchens michael keane frank levy larry mead michael murray robert plotnick anuradha rangarajan philip robins howard rolston jeffrey smith and daniel weinberg all opinions and errors are those of the author alone

time limits and welfare use time limits represent a substantial departure from previous welfare policy theory suggests that their effects should vary according to the age of the youngest child of the family i test this prediction using data from the current population survey and find that time limits indeed have larger effects on families with younger children i further estimate that anticipatory responses to time limits have decreased welfare use by 6 to 7 percent accounting for 12 to 13 percent of the decline in welfare use during the late 1990s

the spirit of capitalism and savings behavior abstract this paper presents a capitalist spirit model of savings by including wealth in the intertemporal utility function while this model includes the life cycle model and bequest model as two special cases it sheds light on why wealth holding has tended to increase with age why decumulation of wealth after retirement has not happened and why households with and without children have not shown significant differences in their savings behavior the capitalist spirit approach is especially useful for understanding savings by the rich and savings across countries and over time jel e21 b10

like grand parent like child multigenerational mobility across the eu abstract this study shows that the multigenerational transmission of inequality in most of the 28 eu countries is higher than what a parent to child paradigm would suggest while a strand of the literature claims that this is due to a direct grandparental effect economic historian gregory clark argues that multigenerational mobility follows a markovian process in his view not only are previous estimates severely attenuated by an errors in variables problem but persistence is also constant across time and space using a unique retrospective survey containing information on three generations of european citizens we provide suggestive evidence against such a universal law of mobility while estimates based on measurement error models show that persistence is indeed as strong as clark suggests there are cross country differences furthermore for a few eu countries we cannot reject the hypothesis of a direct grandparental effect overall there is no single data generating process to describe multigenerational persistence that fits all eu countries 2

the consumption value of schooling an empirical estimate of one aspect the purpose of this paper is to demonstrate by example that human capital is more than just a capital good in the strictest sense of the term certain forms of human capital have consumption value in addition to the value of the increased stream offuture monetary and nonmonetary benefits a methodfor empirically estimating the consumption value of schooling as a vehicle to avoid the vietnam war draft is presented

the effect of increased longevity on capital accumulation one of the more startling demographic trends of the 1970 s has been the sharp rise in lifespan in the united states between 1970 and 1980 the life expectancy of 25year old men and women increased by at least two years while longevity has been steadily rising for many decades the recent spurt has hastened the trend the increase for both men and women in the 1970 s more than doubled the improvement of the 1960 s 1 the 1970 s were also characterized by a decline in labor force participation of older workers although rising income and increased disability payments may have explained some of the decline donald parsons 1980 it seems clear that expanding longevity has not been strongly associated with deferred retirement daniel hamermesh 1984 2 thus the retirement years have assumed greater importance in financial planning for the consumer as he or she retires earlier and lives longer the traditional life cycle model would predict greater savings rates as consumers increase accumulation of assets for their retirement consumption while young would drop and there might be an increase in labor supply as individuals substitute leisure while young for greater levels of life cycle consumption even under a social security system as long as the current generation s tax liabilities reflect their longer lifespan total savings private plus public should also rise 3 the predicted increase in savings is substantial a simple example using the modigliani ando brumberg life cycle model can illustrate the extent of the savings shift assume that earnings and consumption are constant over working years and lifespan respectively and that the interest rate is zero consumption is then a constant proportion k of earnings where k is the ratio of working years to one s lifespan if consumers made plans based on average lifespan the representative 25 year old would have saved 18 percent of earnings in 1970 1 40 49 when he plans to retire at age 65 and expects to live until age 74 in 1980 after a rise in life expectancy of two years the representative 25 year old would have increased savings to 21 percent of earnings or a net rise in the savings rate per worker of 17 percent that is this simple life cycle model implies that savings in the last decade should have risen other things held constant by approximately 17 percent or about 80 billion dollars per year the evidence from aggregate time series data appears to contradict the life cycle model s prediction of rising savings rates the net private savings rate in the united states declined from 7 8 percent of nnp in 1970 to 6 2 percent in 1980 while alan auerbach 1982 has suggested that some of the reported decline in savings may be caused by mismeasurement it seems clear that there has been no substantial rise in the savings rate there are numerous explanations for department of economics university of virginia charlottesville va 22901 i am grateful to maxim engers daniel hamermesh william r johnson laurence j kotlikoff john strauss and especially james davies and john r wolfe for helpful suggestions and comments life table data can be found in daniel hamermesh 1985 the life insurance fact book various years or in unpublished form from the national center for health statistics 2john wolfe 1983 provides an ingenious argument for why the social security benefit schedule has induced those with shorter life expectancies to retire early we might therefore expect some rise in the average retirement age as those expecting to live longer defer retirement until age 65 3if the social security taxes do not rise as expected lifespan increases perhaps because current tax proceeds are paid out as current benefits rather than retained in a trust fund young workers will save more to offset the lower expected benefits in the future 4in a two period model the percentage change in savings by the young is equal to the percentage change in aggregate savings

breaking the caste barrier intergenerational mobility in india we contrast the intergenerational mobility rates of the historically disadvantaged scheduled castes and tribes sc st in india with the rest of the workforce in terms of their education attainment occupation choices and wages using survey data from successive rounds of the national sample survey between 1983 and 2005 we find that intergenerational education and income mobility rates of sc sts have converged to non sc st levels during this period moreover sc sts have matched non sc sts in occupation mobility rates we conclude that the last 20 years of structural changes in india have coincided with a breaking down of caste based barriers to socioeconomic mobility

persistent inequality an explanation based on limited parental altruism abstract this paper proposes an alternative theory for the observed persistence in income inequality across households a theory based on limited parental altruism we argue that the degree of parental altruism is limited by the economic status of the parent a poor parent not only has less ability but also has less willingness to invest in children s human capital formation this generates a non linearity in such investment expenditures as a result initial income differences may perpetuate over time even with convex technology and convex preferences in this context we also compare the efficacy of the public vis a vis the private education system from the perspective of long run growth

fiscal incidence in an overlapping generations model with a fixed asset abstract we analyze a model of overlapping generations with a fixed factor land malleable capital and labor we consider the dynamic effects of various fiscal policies including taxes on rent wages and creation of public debt on capital accumulation land prices and intergenerational welfare minimal assumptions uniqueness and stability imply that a land tax may initially raise land values but the upper bound is less than one half of the tax revenues assuming homothetic utility the ratio between the long run capital responses to a land tax and to a lump sum transfer of equivalent revenue from the young to the old depends solely on the share of labor

uncertain lifetimes retirement and economic welfare the effect of increased life expectancy on retirement age is ambiguous because a change in the survival probability is analogous to a change in intertemporal prices it is shown that the decision to retire earlier or later depends on the old age saving behavior early retirement could emerge if one saves in old age it is also shown that the effect of intertemporal substitutions arising from the imperfection of the annuity market could produce a tilt to the reservation wage profile which in turn makes early retirement possible copyright 1991 by the london school of economics and political science

mps for sale returns to office in postwar british politics many recent studies show that firms profit from connections to influential politicians but less is known about how much politicians financially benefit from wielding political influence we estimate the returns to serving in parliament using original data on the estates of recently deceased british politicians applying both matching and a regression discontinuity design to compare members of parliament mps with parliamentary candidates who narrowly lost we find that serving in office almost doubled the wealth of conservative mps but had no discernible financial benefits for labour mps conservative mps profited from office largely through lucrative outside employment they acquired as a result of their political positions we show that gaining a seat in parliament more than tripled the probability that a conservative politician would later serve as a director of a publicly traded firm enough to account for a sizable portion of the wealth differential we suggest that labour mps did not profit from office largely because trade unions collectively exerted sufficient control over the party and its mps to prevent members from selling their services to other clients

when equal opportunity is not enough training costs and intergenerational inequality this paper develops an individual optimization model with persistent intergenerational immobility its key feature is that training costs are negatively correlated with family background leading to differences in privately optimal training levels across population groups heterogeneity of innate abilities is shown to reduce but not eliminate the importance of family backgrounds conversely wage thresholds which result from indivisibilities in the production or training functions or noncompetitive elements in the economy such as segmented labor markets increase the scope for inequality in the steady state

consumption during retirement the missing link in the life cycle this study presents the first evidence on the relation of consumption to lifetime wealth based on data from the 1973 and 1975 retirement history survey that have been linked to social security earnings records nearly 500 white married fully retired couples ages 62 69 form the basis of the analysis on average their consumption early in retirement exceeds by 14 percent the income that their financial pension and social security wealth can generate this implies that their saving both private and through social security is insufficient to sustain consumption throughout the rest of their lives additional evidence based on changes in spending between 1973 and 1975 shows that these households respond by reducing their real consumption at a rate sufficient to generate positive changes in net financial worth within a few years after retirement these two pieces of evidence can be rationalized by a rate of time preference much higher than the interest rate coupled with either a bequest motive or uncertainty about the length of life they also imply that even when combined with private pensions and savings social security in the united states today does not enable most recipients to maintain their living standard at the levels they enjoyed before they retired this abstract was borrowed from another version of this item

does education expansion increase intergenerational mobility education expansion may lead to over education where the social connections of parents may exert more significant influence on the return to education of children with the assumption of a positive correlation between return on human capital and parental income in the presence of over education we show that i the expansion of education may cause horizontal inequity in education opportunities and inefficiency in human capital accumulation ii the positive correlation between return on human capital and parental income causes a more persistent intergenerational immobility iii an expansion of education especially higher education leads to more persistent intergenerational immobility

das human kapital a theory of the demise of the class structure this paper suggests that the demise of the capitalists workers class structure was a socio economic transformation orchestrated by the capitalists in reaction to the increasing importance of human capital in sustaining their profit rates physical capital accumulation in the process of industrialization enhanced the importance of human capital in production and generated incentives for capitalists to support the provision of public education for the masses triggering the demise of the existing class structure the implications of the theory are consistent with the voting patterns on england s education reform of 1902

the role of intergenerational transfers and life cycle saving in the accumulation of wealth he purpose of this paper is to review what economists know at present about the following question how large a portion of the existing wealth is the result of a bequest motive that is of accumulation for the specific purpose of leaving bequests i will also endeavor to clarify why an answer to this question is of interest in the early keynesian period when the study of national saving first attracted wide interest relatively little attention was paid to what led people to save though it was generally understood that the main systematic reason was to leave bequests j m keynes in the famous chapter 9 of the general theory of employment interest and money 1936 had listed seven distinct motives for saving besides the leaving of bequests but five of these which include to increase one s future income or to insure one s independence and power implied that all or nearly all the accumulation would finally wind up as bequeathed wealth this in turn meant that most private wealth originated through bequests that is it either had been received through bequests or was destined to be bequeathed and indeed how else could society accumulate wealth however keynes 1936 p 107 also mentioned two further motives precaution that is to build up a reserve against unforeseen contingencies and foresight that is to provide for an anticipated future relation between the income and the needs of the individual or his family different from that which exists in the present as for example in relation to old age family education or the maintenance of dependents these motives in contrast to most of the previous ones have the

random earnings differences lifetime liquidity constraints and altruistic intergenerational transfers abstract this paper develops a model of private savings behavior in which households care about their descendants cannot have negative net worth and have lifetime earnings depending on random draws from an exogenous distribution of abilities the elements interact very lucky parents are likely to leave large estates constrained children are unusually likely to receive intergenerational transfers the paper proves the existence of a stationary cross sectional distribution of wealth endogenously determines where liquidity constraints will bind and shows that the long term interest rate must be such that ricardian neutrality fails its last section generates several illustrative numerical simulations

transformative technology and institutional transformation coevolution of biotechnology venture firms and the institutional framework in japan abstract japan is developing a national strategy for biotechnology which it sees as a transformative technology of strategic importance significant institutional transformation has occurred including changes to the legal structure of universities partly in an effort to enhance technology transfer these and other institutional changes are proving conducive to entrepreneurship and have developed alongside an increase in the number of biotechnology venture firms this paper presents an overview of these institutional transformations in the light of recent deregulation and legislative changes it posits that the emergence of bioventure firms the increase in their number and arguably their changing nature are manifestations of the coevolution of organizations with changes to the institutional framework finally it gives examples of several bioventures based on interviews conducted with the founders and chief scientists in japan and reveals some of the salient characteristics of these firms

ricardian equivalence long run leviathan abstract this paper presents a heterogenous overlapping generations with altruism model in which intergenerational discounting is stochastic the model nests three popular macroeconomics models those of ramsey economic journal 38 152 1928 543 559 diamond american economic review 55 1965 1126 1150 and a variant of the blanchard journal of political economy 93 2 1985 223 247 buiter the economic journal 98 391 1988 279 293 weil journal of public economics 38 2 1989 183 198 model it is shown that under a mild condition originally derived by weil journal of monetary economics 19 3 1987 377 391 the long run capital intensity is robust to practically every popular theoretical criticism of the standard ricardian model these criticisms include the imperfect inheritability of time preference parameters and hence finite horizons on the part of all households myopia in the form of overly discounting the future borrowing constraints distortionary labor taxation exchange strategic bequest motives common cultural constraints egalitarian bequests and primogeniture endogenous fertility and joy of giving while precautionary saving can theoretically violate long run neutrality the asymptotic capital intensity is still bounded below by preference parameters the overall conclusions are sharply at odds with those found in most articles dealing with the theoretical foundations of ricardian equivalence

a theory of intergenerational mobility we study the link between market forces cross sectional inequality and intergenerational mobility emphasizing complementarities in the production of human capital we show that wealthy parents i

intergenerational education mobility and the level of development abstract the main goal of this paper is to analyze the empirical relationship between economic development and intergenerational education mobility by exploiting large regional variation in the level of economic development across turkey we find that educational outcomes of daughters who grow up in more developed regions depend less on their parents educational outcomes we do not find evidence for a similar relationship between development and mobility for males moreover the development level of place of residence during childhood has a stronger positive association with intergenerational education mobility compared to the development level of place of residence during adolesence we find that regions that feature higher school availability greater level of social capital more favorable cultural attitudes toward women higher level of home resources and lower degree of educational inequalities also tend to feature higher degree of intergenerational mobility

life cycle saving and dissaving in retirement abstract in a life cycle saving model with no bequest motive it is shown that aged persons may continue to accumulate wealth during the early years of retirement the key features of the model are the lack of borrowing opportunities and the recognition of empirically based mortality probabilities

black white wealth inequality is inheritance the reason i introduction on average black americans have less wealth than white americans previous studies of wealth reveal that blacks hold on average between 10 and 25 of the wealth held by whites as reported in terrell 1971 smith 1975 sobol 1979 blau and graham 1990 and wolff 1992 a number of possible explanations for this gap have been suggested particularly differences in income and various socio economic characteristics between black and white households however the average difference in black white household income is much less than the difference in black white household wealth wolff 1992 reports that black household income averaged 63 of white household income in 1989 a ratio which had persisted over the previous twenty years consequently there must be additional factors which explain the greater racial wealth differential recently economists such as blau and graham 1990 and wolff 1992 have surmised that differences in intergenerational transfers might account for much of the unexplained racial difference in wealth we document the large difference in wealth between blacks and whites and then attempt to account for this difference paying particular attention to the effect of inherited wealth a number of investigators have speculated on the possible importance of inheritances in explaining racial differences in wealth in a comment on smith s 1975 analysis of black white wealth differentials vito natrella 1975 noted that smith only explained 25 of the wealth differential through differences in economic variables natrella conjectured that the really significant determinants not included in smith s analysis were prior income inherited wealth and the propensity to save p 370 wolff 1992 suggested that differences in intergenerational transfers provide a plausible explanation of the black white wealth gap but provided no supporting evidence in a recent article blau and graham 1990 attempted to explain racial differences in wealth at the household level as a result of differences in household income location and demographic factors however they found that three quarters of the racial difference in wealth remained unexplained they speculated that racial differences in inheritance and other intergenerational transfers most likely play an important part p 338 in explaining the remaining black white differences in wealth if true this explanation would have important policy implications e g higher rates of inheritance taxation could reduce wealth differences between races ii data in this paper we attempt to empirically verify the hypothesized importance of inheritances in explaining the differences in black and white household wealth our empirical analysis makes use of two data sets which report both household wealth and household inheritances the 1976 national longitudinal surveys of mature men nls76 and the 1989 survey of consumer finances scf89 the nls76 sample was chosen to be representative of the u s male population aged 45 to 59 years old in 1966 with an oversampling of black households our analysis focuses on the sample of 2 019 respondents who survived through 1976 and reported all variables required for our analysis 1 more information about the nls76 can be obtained from the center for human resource research 1992 the scf89 sample was chosen to provide a comprehensive picture of the financial situation of all u s households in 1989 the scf89 oversampled high income households we make use of the complete sample encompassing the multiple imputation procedure employed by researchers at the board of governors of the federal reserve system more information about these data can be obtained in kennickell and shack marquez 1992 since both data sets employ oversampling of particular population segments all sample statistics reported in this paper are sample weighted in the nls76 respondents were asked to report whether they or their spouse had received any girl inheritance or prize such as a lottery or award greater than 1 000

developing innovative competences the role of institutional frameworks the recent development of the biotechnology and computer industries has highlighted the variety of ways in which firms in different countries and sectors can develop innovative competences four aspects are particularly important the degree of involvement in the public science system involvement in industry collaborations reliance on specialist skills of individuals and the ability to change collective competences radically national and regional variations in these result from differences in dominant institutional frameworks in addition to the organization of capital and labour markets and the structure of inter firm relations these frameworks include the nature of the public science system particularly important features of these systems include the organization of research training the flexibility of researchers and organizations in developing novel goals and approaches the organization of scientific careers and the prevalent science and technology policies of the state distinct combinations of these institutional features have become established in different market economies and led to contrasting styles of innovative competence development being adopted these in turn help to explain continuing variations in patterns of technological change between countries

intergenerational mobility new evidence from consumption data the intergenerational persistence of consumption describes the extent to which children inherit the living standards of their parents evidence on this parameter is scarce due to limited data on the joint consumption of parents and children this paper identifies parents who participated in the danish expenditure survey links them to their children through population wide danish registries and estimates the intergenerational elasticity of consumption in denmark the results suggest that consistent with intergenerational consumption smoothing the persistence of consumption across generations is higher than the persistence of earnings and income

the effect of social security on lifetime wealth accumulation and bequests this paper is an empirical study of the effects of social security on lifetime wealth accumulation and bequests using a sample of wisconsin males we have matched lifetime earnings records from income tax returns with their social security account records and their bequests obtained from probate court records since the cohort of males was born between 1890 and 1899 they represent a cohort that saw a great change in the size and coverage by occupation of the system hence there is substantial within cohort variation in social security wealth from which effects can be estimated for nearly 30 years the life cycle theory of savings has enjoyed an enormous amount of academic support in the no bequest variant individuals save with the sole intention of consuming their savings in later years the economy wide stock of capital can therefore be generated by this pattern without any reliance on bequests modigliani 1966 such a model will lead to rather strong predictions about the effect of a pay as you go public pension hereafter social security on private savings as feldstein 1974 points out social security should displace private savings as well as reduce macro saving since the programme is unfunded this result follows from the assumption that each household will consume all of its assets during its own lifetime some recent research however has been at odds with the no bequest variant of the life cycle model see kurz 1984 and included references darby 1979 claims that life cycle assets savings consumed later in the life cycle constitute only 13 29 per cent of total assets kotlikoff and summers 1981 report that the major share nearly 80 per cent of capital stock in the united states is due to intergenerational transfers 2 indeed these authors write life cycle models of savings that emphasize savings for retirement as the dominant form of capital accumulation should give way to models that illuminate the determinants of intergenerational transfers p 706 in addition recent empirical work suggests that people tend to accumulate or fail to significantly decumulate wealth wealth in old age a finding at odds with the strict life cycle model 3 given the potentially large role of bequests in the process of capital accumulation it is important to know how bequests are affected by the large public programme that social security has become even if social security depresses private savings among those near or at retirement if people bequeath it is conceivable that saving during retirement is augmented by the programme 4 aside from the issue of savings effects the response of people s bequests to their old age benefits might allow one to assess the target efficiency of the social security system since the original objective of the system was to ensure adequate levels of consumption among the elderly a finding that benefits

a theory of time preference grant a taylor this article proposes that people generally prefer present consumption to future consumption because their expected utility from consumption eventually falls as their mental and physical abilities eventually decline with age moreover contrary to the ubiquitous intertemporal formulation with a constant rate of time preference and contrary to three recent theories of time preference that predict decreasing discounting as people age this article asserts that discounting increases over the life cycle this hypothesis is supported by data from the panel study of income dynamics as well as evidence from numerous previous studies jel d91 1 introduction despite the almost universal assumption of time preference in models of intertemporal choice an adequate explanation of why people discount the future has not been provided 1 olsen and bailey 1981 make a convincing case for positive time preference by contradiction i e without time preference models of intertemporal choice do not yield predictions consistent with observed behavior but they do not explain why individuals would rationally discount the future 2 three recent studies have attempted to provide the explanation rogers 1994 argues that societies that discount the future at a rate of about 2 will be the long run survivors in an evolutionary fitness situation 3 posner 1995 argues that discounting occurs because individuals have multiple selves that is people are weighting their present consumption far more heavily than their future consumption because the present self and the future self are in some meaningful sense separate persons 92 becker and mulligan 1997 argue that discounting occurs because of a rational defective recognition of future utilities 730 but as will be shown these three theories are inconsistent with empirical evidence on consumption over the life cycle in at least one important aspect this article constructs and empirically supports a new theory of time preference the hypothesis is that people do not have an intrinsic preference for present consumption relative to future consumption instead the instantaneous utility function also known as the felicity function is expected to vary with age just as people s physical and mental abilities vary with age in other words the ability to enjoy consumption eventually deteriorates over the life cycle along with other abilities this life cycle view of the expected utility function causes people to rationally devalue consumption in periods of low expected felicity that is discount future consumption perhaps this is what is meant by the cliche don t wait until you are too old to enjoy it moreover this causes individuals implicit discount rates to vary systematically with age 4 in fact this provides the testable implication of the theory the standard specification of intertemporal preferences holds the discount rate constant over th e life cycle 5 to be more precise in the early stage of the life cycle the capacity to enjoy consumption may be expected to rise hence a young individual s discount rate may be negative figure 1 illustrates this possibility with a hypothetical adult life cycle marginal felicity function for a given level of consumption u sub c c a c denotes consumption and a denotes age and its corresponding discount rate function rho a the vast majority of wealth is held by older people that is those in the declining stage of their abilities thus the preference for present consumption over future consumption appears to hold in the aggregate this view of intertemporal preferences may at first seem inconsistent with practically all dynamic analyses which are based on the notion of stationary utility on further consideration however the hypothesis is quite consistent with modern consumer theory since becker 1965 it has been widely accepted that households derive utility from commodities that are produced with market goods combined with household time and skills i

the role of intergenerational transfers in aggregate capital accumulation this paper uses historical u s data to directly estimate the contribution of intergenerational transfers to aggregate capital accumulation the evidence presented indicates that intergenerational transfers account for the vast majority of aggregate u s capital formation only a negligible fraction of actual capital accumulation can be traced to life cycle or hump savings a major difference between this study and previous investigations of this issue is the use of more accurate longitudinal age earnings and age consumption profiles these profiles are simply too flat to generate substantial life cycle savings this paper suggests the importance of and need for substantially greater research and data collection on intergenerational transfers life cycle models of savings that emphasize savings for retirement as the dominant form of capital accumulation should give way to models that illuminate the determinants of intergenerational transfers

inheritances and wealth inequality 1989 1998 survey evidence on the importance of bequests is fairly consistent dorothy projector and gertrude weiss 1966 using the 1963 survey of financial characteristics of consumers reported that only 17 percent of families had received any inheritance paul menchik and martin david 1983 using probate records of men who died in wisconsin between 1947 and 1978 estimated that the average intergenerational bequest amounted to less than one fifth of average household wealth in 1967 and about 10 percent of the average household wealth of families 65 or over in age michael hurd and gabriella mundaca 1989 found from the 1984 survey on the economic behavior of the affluent data that only 12 percent of households in the top 10 percent of the income distribution reported that more than half their wealth came from gifts or inheritances and only 9 percent in the 1983 survey of consumer finances however william gale and j k scholz 1994 using the 1983 survey of consumer finances estimated that at least 51 percent of household wealth is accounted for by inheritances and other intentional wealth transfers ii data sources and methods

does income inequality raise aggregate saving this paper reviews analytically and empirically the links between income distribution and aggregate saving consumption theory brings out a number of direct channels through which income inequality can affect overall household saving positively in most cases however recent political economy theory points toward indirect negative effects of inequality through firm investment and public saving on aggregate saving on theoretical grounds the sign of the saving inequality link is therefore ambiguous this paper presents new empirical evidence on the relationship between income distribution and aggregate saving based on a new and improved income distribution database for both industrial and developing countries the empirical results using alternative inequality and saving measures and various econometric specifications on both cross section and panel data provide no support for the notion that income inequality has any systematic effect on aggregate saving these findings are consistent with the theoretical ambiguity q 2000 elsevier science b v all rights reserved

savings of the elderly and desired bequests cross section data often show that the wealth of the elderly increases with age even at advanced ages these and other results suggest that the life cycle hypothesis of consumption should be augmented to include a bequest motive for saving in this paper the author proposes a model of bequests and a test for a bequ est motive using panel data he finds that over a ten year period the elderly in the data set dissaved in contradiction to most cross section results the test offers no support for a bequest motive copyright 1987 by american economic association

the effects of government transfers on monthly cycles in drug abuse hospitalization and mortality this paper analyzes the monthly patterns of adverse outcomes due to the consumption of illegal drugs by recipients of government transfer payments we find evidence that certain subpopulations on government cash aid significantly increase their consumption of drugs when their checks arrive at the beginning of the month and as a result experience adverse events including hospitalization and death using data from california we find that the overall rate of drug related hospital admissions increases abruptly at the beginning of the month with admissions increasing 23 during the first five days of the month we find that this cycle is driven largely by recipients of supplemental security income ssi ssi recipients also experience an abrupt 22 increase in within hospital mortality after receiving their checks these findings suggest that full wallets adversely affect some aid recipients and that policymakers should explore alternate disbursement regimes such as a staggered disbursement schedule or in kind support that have the potential to reduce the rate of adverse events

a language theory of discrimination any advanced industrial society is composed of a number of speech communities with different verbal and nonverbal languages in particular in the united states blacks and whites and men and women have sharply differing methods of speaking and listening this paper develops a model in which people can only work together if they speak the same language and in which it is costly to learn a second language the competitive market will tend to minimize communication through segregation but if interaction is required the cost will be borne by the minority a number of nontrivial predictions are derived from the model

historical evolution of technological diversification a positive relationship exists between national technological size and technological diversification across fields of innovative activity this paper shows how the nature of this relationship has changed historically there has been a downward structural shift in the cross country size diversification frontier since 1965 for any given size countries have become less diversified or more narrowly concentrated in their technological specialisation one explanation is that international technology sourcing by mnes has led locations to focus on what they do best a supporting factor may be a rise in technological interrelatedness which encourages focus upon a specific selection of complementary combinations

snapshots versus movies empirical studies of the intergenerational inheritance of economic status should use observations on complete lifetime status profiles of parents and children to be consistent with underlying theory but they cannot only snapshots rather than movies on status are currently available in samples estimates of the degree of intergenerational inheritance may therefore be subject to lifecycle biases the paper investigates these in the context of a lifecycle earnings model and shows that these biases may be large that their direction varies and that correction methods suggested hitherto have questionable reliability until more complete data sets become available researchers should be more temperate in the conclusions they draw

the importance of bequests and life cycle saving in capital accumulation a new answer as the workhorse of consumption and saving research for the past four decades the life cycle model has proved flexible and useful for examining a variety of questions in a classic paper albert ando and franco modigliani 1963 p 56 stated a key assumption of the basic model t he individual neither expects to receive nor desires to leave any inheritance although the authors contended that the absence of a bequest motive was not critical to the heart of their results the assumption set off a long standing battle over the relative importance of different motives for saving in an influential study laurence kotlikoff and laurence summers 1981 estimated that a large fraction of the u s capital stock was attributable to intergenerational transfers modigliani and his collaborators vigorously disagreed and based on their own empirical work claimed that life cycle saving was the primary source of capital accumulation modigliani 1988 subsequent work has failed to reach a consensus since this debate began an important advance in the consumption literature has been the incorporation of uncertainty in life cycle models see e g r glenn hubbard et al 1995 we argue that allowing for uncertainty resolves the controversy over the importance of life cycle and bequest saving by showing that these motives for saving are overlapping and cannot generally be distinguished a dollar saved today simultaneously serves both a precautionary life cycle function guarding against future contingencies such as health shocks or other emergencies and a bequest function because in the likely event that the dollar is not absorbed by these contingencies it will be available to bequeath to children or other worthy causes under this view households have a bequest motive but bequests are given i e the motive is operative in only some states of the world wealth is something like traveler s checks you take them along on vacation just in case but odds are they will remain uncashed and available for sundry goods after the journey is complete we first demonstrate the result using a simple model and then argue that this approach reconciles the apparent importance of bequests with households declared focus on life cycle saving finally we consider implications of our analysis

income distribution and macroeconomics the persistence of inequality in a convex technology framework i show that non convexities in technology assumed in the capital market imperfection literature on the relationship between income distribution and economic development can be replaced by an assumption that the bequest function is convex with respect to income 2002 elsevier science b v all rights reserved

motives for private income transfers private income transfers are becoming increasingly recognized as a key aspect of the u s economy the majority of private income transfers occur inter vivos i e between living persons but very little is known about this type of transfer behavior this paper tests alternative hypotheses concerning motivation for inter vivos transfers two motives are considered altruism and exchange evidence presented here casts doubt on the altruistic model of transfer behavior observed patterns for inter vivos transfers are more consistent with exchange related motives this finding has important implications for the effects of public transfer programs on the distribution of economic well being

the family inheritance and the intergenerational transmission of inequality unequal inheritance of material wealth is commonly considered a major cause of inequality in consumption however theoretical models of the intergenerational transmission of inequality by becker blinder and ishikawa imply that unequal inheritance may either increase or reduce consumption inequality differences in inherited wealth resulting from unequal parental incomes increase inequality in recipients consumption however unequal bequests caused by differences among families in the endowed ability of children or the costs of producing human capital are equalizing empirical results confirm these predictions the inheritance received by children is inversely related to both children s income and parental education thus bequests are compensatory in that ceteris paribus low income children inherit more than their advantaged contemporaries

terms of trade and national saving rates in asia abstract in recent theoretical work obstfeld and svensson and razin re examine the harberger laursen metzler effect of terms of trade changes on the balance of payments current account their models of intertemporal utility maximization indicate that individuals saving responses to a change in the terms of trade are ambiguous in theory from this they infer that the corresponding movements in the current account are also ambiguous however they ignore the positive rate of growth effect incorporated in the life cycle theory on the aggregate saving rate this paper presents an empirical analysis of the terms of trade effect on aggregate national saving rates in 14 asian developing countries over the period 1961 1981 it turns out to be significantly positive as the life cycle model predicts

a test of the relative income hypothesis the original permanent income and life cycle models were constructed around the view that savings rates are independent of the level of long run income 19 since then it has been well documented using household data that savings rates rise with long run income to be consistent with the empirical evidence modigliani suggests modifying the life cycle hypothesis to include a bequest motive his hypothesis however is that the share of lifetime resources that a household plans to devote to bequests is an increasing function of its lifetime resources relative to others in the same age cohort 17 the share of resources devoted to bequests is made a function of the relative and not the absolute level of resources so as to be consistent with menchik and david s empirical study of the bequest function 16 but if saving for bequests is influenced by relative income why not other forms of saving a simple model in which all types of saving are influenced by relative income was proposed by duesenberry in 1949 4 his basic hypothesis was that households are concerned about community consumption standards and that this concern leads to savings rates being an increasing function of a household s position in the income distribution although a per se desire for status is seen by some economists as inconsistent with rational behavior it is clear that a relative advantage is often instrumental in achieving absolute goals 6 7 10 11 22 while several policy implications of the relative income hypothesis have come to light 2 6 it has rarely been analyzed empirically the purpose of this paper is to present a test of the relative income model the hypothesis is that if income rank is really the variable driving savings rates then it should be possible to hold the level of income constant and still see the average propensity to save aps moving with income rank section ii presents a simple model of the savings decision in which concern for relative standing in the current consumption hierarchy is integrated into a permanent income framework the model is then used to explore the issue of functional form section iii discusses the data the equation to be estimated and the regression results section iv presents a summary and concluding remarks

savings and wealth in models with altruistic bequests during recent years much attention has been given to the role of bequests in explaining various aspects of economic behavior for example authors have studied the impact of bequests on physical wealth accumulation laurence kotlikoff and lawrence summers 1981 the interest elasticity of savings owen evans 1983 tax reform laurence seidman 1984 and the distribution of wealth alan blinder 1976a more recently economists have begun to distinguish between human and physical bequests gary becker and nigel tomes 1986 acknowledging the presence of bequest in human form is important in analyzing each of the issues mentioned above outlays on children affect the shape of the family s labor supply and expenditure profiles upon which the level of aggregate savings crucially depends if these outlays are interest sensitive substitutes for physical bequests they will also influence the interest elasticity of savings in the area of tax reform the neutrality of the consumption tax depends on the ability of the government to identify human capital bequests from general consumption raymond batina 1987 if this is not possible the portfolio choice of investment in human versus physical capital may be distorted at the margin finally the unequal transmission of wealth across generations may be explained by the lack of physical bequests and the inefficiently low levels of human bequests made by wealthconstrained households becker and tomes 1986 to distinguish clearly the behavior of constrained households from unconstrained households who make sizeable physical bequests both types of bequests must be recognized this paper introduces a model that makes explicit examination of these issues possible it extends lord s 1989 multiperiod model of life cycle savings and adult human capital investment by adding altruistically motivated human and physical bequests 2 the model is calibrated using microeconomic data on earnings time and goods expenditures on children s human capital and physical bequests we then use the model to examine the contribution of bequests to wealth accumulation and the level of savings this topic is the source of an important but yet unresolved debate between franco modigliani 1988 and kotlikoff 1988 kotlikoff maintains that u s wealth accumulation is primarily the consequence of bequests as opposed to life cycle savings for retirement one type of evidence cited by kotlikoff comes from simulation results demonstrating the failure of realistically calibrated life cycle models to generate sufficiently high saving rates and wealth income ratios alan auerbach and kotlikoff 1987 we show however that if a pure life cycle

uncertain lifetime consumption and dissaving in retirement this paper asks whether the continued accumulation or mild dissaving observed among the retired can be explained by uncertain lifetime in the absence of annuities after an initial period influenced by borrowing constraints under constant relative risk aversion uncertain lifetime depresses consumption by a proportion increasing with age if the elasticity of intertemporal substitution in consumption is small illustrative computations based on actual income and survival data show that plausible elasticities are sufficiently small to give this effect the reduction in consumption is large enough to explain much of the lack of decumulation by the elderly

intergenerational transfers and the accumulation of wealth h t ouseholds acquire wealth from two sources they save out of income they have earned and they receive transfers from other people the first method of wealth accumulation goes under the name of life cycle saving in which people save during their working lives and dissave after retirement the second involves either an inter vivos transfer that is a transfer between living people or a bequest a transfer that occurs at the death of the donor while inter vivos transfers and bequests will arise in dynastic models where preferences include a taste for the well being of one s descendents few empirical life cycle models reflect these concerns indeed a sharp debate has arisen over the ability of the simple life cycle model to explain observed wealth accumulation understanding the relative sizes of these sources of wealth accumulation affects a variety of issues for example the effects of government debt social insurance public transfer programs estate taxes and incentives for charitable giving depend to some extent on the magnitude and nature of private saving and transfers of wealth analyses of the inequality of wealth may depend on whether most of wealth is earned or received as transfers appropriate policies for encouraging private saving may look rather different depending on whether most saving is to be consumed later in life or passed along to the next generation finally evidence on transfer patterns relates to more fundamental

three meanings of intergenerational mobility we axiomatize three different motivations for being concerned about intergenerational mobility mobility as a description of movement as an indication of equality of opportunity and as an indication of equality of life chances these three motivations are shown to be incompatible none of the existing measures is acceptable as an indicator of equality of opportunity or equality of life chances we propose two new measures of intergenerational mobility which more adequately reflect these concerns

altruism deficit policies and the wealth of future generations i introduction there is now a substantial body of evidence suggesting that altruistic financial bequests are zero for the vast majority of households 1 other studies seem to indicate that the financial bequests which are made are not likely to be altruistically motivated 2 while this evidence against the importance of altruistic financial bequests seems reasonably convincing it is by no means clear that the importance of altruism per se has been dismissed 3 for example the results reported in altonji hayashi and kotlikoff 1992 tables 14 17 indicate that extended family resources while not perfectly linked to own resources are important for explaining own consumption the authors do not reject the notion that substantial altruistically motivated transfers occur in the u s rather they suggest the altruistically motivated transfers which are made take the form of less than fully efficient human capital transfers to children if most altruistic transfers do take place via educational expenditures how does this affect the ricardian equivalence theorem robert barro 1974 1989 argues the presence of any altruistic transfer is sufficient to guarantee that intergenerational transfers caused by government policy are neutral other forms of intergenerational transfers such as inter vivos gifts to children support of children s education and so on can work in a similar manner therefore the ricardian results will hold even if many persons leave little in the way of formal bequests 1989 41 4 an alternative view however is expressed by allan drazen 1978 he argues if parents possess an insufficient mix of wealth and altruism intergenerational transfers could be exhausted before the efficient level of human capital investment is achieved if explicit or implicit loans between parents and children are not possible then the government may be able to improve welfare by generating intergenerational transfers from children to parents 5 a cut in the parents tax burden and an equal present value increase in the tax on the next generation is equivalent to a government enforced loan at the going market interest rate since educational expenditures are inefficiently low the return on human capital investment exceeds the loan rate therefore parents could put an amount less than the tax cut into their children s education and still leave the children with enough additional income to pay for the future tax increase thus a deficit policy serves to expand the consumption possibility set of the family viewed in this way drazen 1978 514 footnote 7 imagines an argument for a pareto optimal level of public debt issue 6 a third possibility was identified by nerlove razin and sadka 1988 who conduct the most explicit analysis of government transfers in an economy with altruistic but financial bequest constrained households they also find a transfer or implicit loan to parents from their children will make the parents unambiguously better off however they were the first to point out that a deficit policy may lower the welfare of the children although they fail to explain why thus even in the presence of altruistic transfers from parents to children the effect of deficits on the consumption of future generations is far from clear in this paper we wish to clarify the effect of intergenerational transfers on bequest constrained families the next section intuitively explains why a government loan or deficit policy generates an ambiguous effect on the children s consumption even though altruistic parents are fully capable of making both generations better off after the loan we also identify the key structural determinants of the change in the children s wealth due to the loan in section iii we extend the simple model of section ii to a more quantitatively realistic multi period life cycle simulation model of a bequest constrained household the simulation model is then used in section iv to examine how a government intergenerational transfer affects the consumption of each generation under various settings of the key structural determinants identified in section ii

intergenerational health mobility an empirical approach based on the echp despite the importance of the study of health mobility few attempts have been made to measure intergenerational mobility not only in the european union but also in other countries such as united states this article is focused on the study of intergenerational health mobility using data from the european community household panel echp in particular the relationships between self assessed health of parents and their sons are analysed the evidence obtained suggests that in spain sons reported health depends significantly on the self assessed health of their fathers

wealth distribution and optimal inheritance taxation in life cycle economies with intergenerational transfers we introduce intergenerational transfers into a general equilihrium life cycle model in order to explain observed levels of wealth heterogeneity in our overlapping generations model heterogenous agents face uncertain lifetime and leave both accidental and voluntary bequests to their cinldren furthermore agents face stochastic employment opportunities the model is calibrated with regard to the characteristics of the us economy our resuits indicate that hequests onl account for a sniall proportion of ohserved wealth heterogeneitv the introduction of an inheritance tax increases both welfare are measured by the average value of the newborn and equality of the wealth distribution preliminary versions of this paper have been presented at conference on intergenerational transfers taxes and the distribution of wealth in uppsala 1999 and the econoinetric societv european meetirig in santiago dc compostela 1999 we would like to thank michael kaganovieli john laitner james smith frank stafford and carl cristian von weizsacker for comments on earlier versions of the paper all remaining errors are ours

a neoclassical perspective on budget deficits i n the 1988 presidential campaign virtually every serious candidate spoke of the urgent need to trim government budget deficits public opinion polls have identified federal deficits as a key economic issue second only to unemployment while many economists are relieved by what they perceive to be a long overdue political response to a critical economic problem others regard the fuss as much ado about nothing it is indeed remarkable that economists can disagree so severely over an issue which commands such a uniform reaction from laymen of widely different ideologies and political affiliations generally speaking there are three schools of thought concerning the economic effects of budget deficits neoclassical keynesian and ricardian before proceeding further it is useful to review the basic structure and implications of each paradigm the neoclassical paradigm envisions farsighted individuals planning consumption over their own life cycles budget deficits raise total lifetime consumption by shifting taxes to subsequent generations if economic resources are fully employed increased consumption necessarily implies decreased saving interest rates must then rise to bring capital markets into balance thus persistent deficits crowd out private capital accumulation in the current economic environment most economists would agree that these consequences would be highly detrimental