Politics and Efficiency of Separating Capital and Ordinary Government Budgets

Marco Bassetto, Thomas Sargent

NBER Working Paper No. 11030
Issued in January 2005
NBER Program(s):   EFG

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.

download in pdf format
   (639 K)

email paper

This paper is available as PDF (639 K) or via email.

This paper was revised on May 24, 2006

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w11030

Published: Marco Bassetto & Thomas J Sargent, 2006. "Politics and Efficiency of Separating Capital and Ordinary Government Budgets," The Quarterly Journal of Economics, MIT Press, vol. 121(4), pages 1167-1210, November. citation courtesy of

Users who downloaded this paper also downloaded these:
Hall and Sargent w15702 Interest Rate Risk and Other Determinants of Post-WWII U.S. Government Debt/GDP Dynamics
Sargent, Williams, and Zha w10764 Shocks and Government Beliefs: The Rise and Fall of American Inflation
Cogley, Primiceri, and Sargent w13749 Inflation-Gap Persistence in the U.S.
Sargent, Williams, and Zha w12606 The Conquest of South American Inflation
Hansen and Sargent w3479 Recursive Linear Models of Dynamic Economies
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us