On April 1, 1996, Taco Bell, the fast-food chain, ran a full-page ad in the New York Times with this news: “In an effort to help the national debt, Taco Bell is pleased to announce that we have agreed to purchase the Liberty Bell, one of our country’s most historic treasures. It will now be called the Taco Liberty Bell and will still be accessible to the American public for viewing. We hope our move will prompt other corporations to take similar action to do their part to reduce the country’s debt.” Would such actions by corporations actually reduce the national debt as it is now measured? How would your answer change if the government adopted capital budgeting? Do you think these actions represent a true reduction in the government’s indebtedness? Do you think Taco Bell was serious about this plan? (Hint: Note the date.)
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Draft a letter to the member of Parliament described in Section 16-3, explaining and evaluating the Ricardian view of government debt.
The Canada and Quebec pension system levies a tax on workers and pays benefits to the elderly. Suppose that government increases both the tax and the benefits. For simplicity, assume that the government announces that the increases will last for one year only.
How do you suppose this change would affect the economy? (Hint: Think about the marginal propensities to consume of the young and the old.)
Does your answer depend on whether generations are altruistically linked?
Some economists have proposed the rule that the cyclically adjusted budget deficit always be balanced. Compare this proposal to a strict balanced-budget rule. Which is preferable? What problems do you see with the rule requiring a balanced cyclically adjusted budget?