Reply to Feldstein and Buchanan

Abstract

Feldstein's comment deals with my conclusion that government debt (and social security) will not add to net wealth in a model with operative intergenerational transfers (either from old to young or from young to old). He accepts this conclusion in the case of a static economy, but argues that it is incorrect when the economy is growing. It is important to distinguish two cases-the first in which the growth rate, g (the sum of population growth and growth in real income per head), is below the steady-state (real) rate of return, r; and the second where g > r.1 The first case is straightforward and turns out to require no modifications to my previous results. Feldstein's contrary conclusion is the result of an error in calculating present values of future tax liabilities. The second case is both more interesting and more difficult, and I present some analysis of it below.

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