TY  - JOUR
AU  - Bassetto,Marco
AU  - Sargent,Thomas
TI  - Politics and Efficiency of Separating Capital and Ordinary Government Budgets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11030
PY  - 2005
Y2  - January 2005
UR  - http://www.nber.org/papers/w11030
L1  - http://www.nber.org/papers/w11030.pdf
N1  - Author contact info:
Marco Bassetto
Research Department
Federal Reserve Bank of Chicago
230 S. LaSalle Street
Chicago, IL 60604
Tel: 312/322-5909
Fax: 312/322-2357
E-Mail: mbassetto@frbchi.org

Thomas J. Sargent
Department of Economics
New York University
19 W. 4th Street, 6th Floor
New York, NY  10012
Tel: 612/373-4383
Fax: 650/723-1687
E-Mail: thomas.sargent@nyu.edu
AB  - 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.
ER  -