Pubic Debt and U.S. Saving: A New Test of the Neutrality Hypothesis

The substantial post war decline in the U.S. saving rate has added great impetus to the debate over whether public debt policy crowds out saving. Rather than attempting to reject specific saving models, empirical research on debt policy and savings has primarily focused on the impact of particular policy variables on savings. In this paper we examine Barro's infinite horizon, intergenerationally altruistic model. A distinguishing feature of this modelis that aggregate consumption depends only on collective resources and not the age distribution of resources.To test this proposition we specify the Barro model under earnings uncertainty, rate of return uncertainty, and demographic change and test whether, given the level of consumption predicted by this model, variables measuring the age distribution of resources influence actual consumption. Data on the age distribution of resources are primarily obtained from the annual Current Population Surveys. Our results imply a rejection of the hypothesis that aggregate consumption is independent of the age distribution of resources.They therefore cast doubt on the contention that government debt policy does not affect consumption and saving.