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Chapter 14: Q. 14.2LO (page 303)

Evaluate circumstances under which the public debt could be a burden to future generations.

Short Answer

Expert verified

The issuance of debt becomes a burden on the long run generation because more taxes are necessary to regain the identical income earned at the arrival of the issuance.

Step by step solution

01

Introduction

Almost all advanced countries are concerned by the massive amounts of public debts carried over from the past. It seems to be unredeemable within a generation, and thus intergenerational conflicts during this regard are likely to become increasing. However, besides the seminal work of Diamond (1965), who shows that the segregated sequence of intergenerational economic decisions ends in market failure (i.e. dynamic inefficiency) which the issuance of debt prevents the sufficient capital accumulation, other famous studies are rather optimistic about the redemption of debt despite the aforementioned grievous fact.

02

Evaluation

Each individual possesses the identical utility functionU,
Ut≡uc1t,c2t+1−δt×α,ckl≡∫01 ckl(ω)1−η−1dω11−η−1,η>1

where Uis a concave and homothetic function. α denotes the disutility of labor. δt is a definition function, which takes value unity when employed and zero when unemployed.


The public debt accrues units of cash at gross rate, which is about at the govt discretion. Accordingly every individual wishes to avoid wasting his or her income in terms of the general public debt because there's no uncertainty.

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Most popular questions from this chapter

Refer back to Problem 14-11. If the politician defines "the rich" as people with annual taxable incomes exceeding \(1 million per year, what is another difficulty with the politician's reasoning, given that "the rich" rarely earn a combined taxable income exceeding \)1 trillion, yet the federal deficit has regularly exceeded $1 trillion in recent years?

Why do you suppose that governments do not rely on asset sales as a major revenue source over many years?

Suppose that the share of U.S. GDP going to domestic consumption remains constant. Initially, the federal government was operating with a balanced budget, but this year it has increased its spending well above its collections of taxes and other sources of revenues. To fund its deficit spending, the government has issued bonds. So far, very few foreign residents have shown any interest in purchasing the bonds.

a. What must happen to induce foreign residents to buy the bonds?

b. If foreign residents desire to purchase the bonds, what is the most important source of dollars to buy them?

Explain how each of the following will affect the net public debt, other things being equal.

a. Previously, the government operated with a balanced budget, but recently there has been a sudden increase in federal tax collections.

b. The government had been operating with a very small annual budget deficit until three hurricanes hit the Atlantic Coast, and now government spending has risen substantially.

c. The Government National Mortgage Association, a federal government agency that purchases certain types of home mortgages, buys U.S. Treasury bonds from another government agency.

A fraction of the funds borrowed by the federal government between 2008 and 2015 were utilized to fund public investments in a number of solar power companies that produced little output and halted operations. These concerns provided no repayments to the government. In what sense might this fraction of deficit spending arguably have imposed a "burden" on future generations?
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