Politics and efficiency of separating capital and ordinary government budgets
By: Marco Bassetto, Thomas Sargent.
Contributors: Sargent, Thomas J.; National Bureau of Economic Research.
Series: NBER working paper series -- no. 11030.; Working paper series (National Bureau of Economic Research) -- working paper no. 11030.
Publisher: National Bureau of Economic Research
Published: 2005
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 44
Subjects: Finance, Public -- United States -- Econometric models
Description: "We analyze the democratic politics of a rule that separates capital and ordinary account budgets and allows the government to issue debt to finance capital items only. Many national governments followed this rule in the 18th and 19th centuries and most U.S. states do today. This simple 1800s financing rule sometimes provides excellent incentives for majorities to choose an efficient mix of public goods in an economy with a growing population of overlapping generations of long-lived but mortal agents. In a special limiting case with demographics that make Ricardian equivalence prevail, the 1800s rule does nothing to promote efficiency. But when the demographics imply even a moderate departure from Ricardian equivalence, imposing the rule substantially improves the efficiency of democratically chosen allocations. We calibrate some examples to U.S. demographic data. We speculate why in the twentieth century most national governments abandoned the 1800s rule while U.S. state governments have retained it"--National Bureau of Economic Research web site.
Notes: "January 2005."

Includes bibliographical references (p. 40-44).

Also available in PDF from the NBER world wide web site (www.nber.org).