Government Debt and The Pigou Effect
Robert Barro argued that due to Ricardian Equivalence in the presence of an operative bequest motive the public is not fooled into thinking they are richer when the government issues bonds to them, because government bond coupons must be paid from increased taxation. Therefore, he said that:
- At the microeconomic level, the subjective level of wealth would be lessened by a share of the debt taken on by the national government.
- Bonds should not be considered as part of net wealth at the macroeconomic level.
- Therefore: There is no way for the government to create a "Pigou effect" by issuing bonds, because the aggregate subjective level of wealth will not increase.
Read more about this topic: Pigou Effect
Famous quotes containing the words government, debt and/or effect:
“Whenever the society is dissolved, it is certain the government of that society cannot remain ... that being as impossible, as for the frame of a house to subsist when the materials of it are scattered and dissipated by a whirlwind, or jumbled into a confused heap by an earthquake.”
—John Locke (1632–1704)
“However patriarchal the world, at home the child knows that his mother is the source of all power. The hand that rocks the cradle rules his world. . . . The son never forgets that he owes his life to his mother, not just the creation of it but the maintenance of it, and that he owes her a debt he cannot conceivably repay, but which she may call in at any time.”
—Frank Pittman (20th century)
“I have no faith in human perfectability. I think that human exertion will have no appreciable effect upon humanity. Man is now only more active—not more happy—nor more wise, than he was 6000 years ago.”
—Edgar Allan Poe (1809–1845)