Deficit Financing and the Next Generation

This year's Reith lectures are being given by Prof. Niall Ferguson of Harvard.  Ferguson argues in his lectures that young voters should welcome austerity as they will have to repay the huge debts being amassed by present-day governments.  It is well-known that whenever a government finances its expenditure via bond issues, it shifts some of the cost of the expenditure unto future generations.  This makes perfect economic sense if future generations benefit from the expenditure.  For example, traditionally democracies have amassed huge debts to fight wars.  If the country is victorious in the war, current and future generations will both benefit.  The war debt finance helps shift some of the cost of defending the nation unto future generations.  

The late Earl Thompson has an interesting theoretical piece on why democratic governments should run peacetime deficits - they compensate the current generation for investments they make in the future generation.  Thompson suggests that Western democracies have an in-built benevolent bias against excessive redistribution from future generations.  However, this in-built bias may have been undermined in recent decades as witnessed by the huge debts amassed by modern democracies.  Will our children be picking up the tab for us?

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