Of the various reactions to our model, the one that has been most gratifying is its apparent influence on the modeling strategies of other researchers. Arrau (1990), Hamann (1992), Arrau and Schmidt-Hebbel (1993), Raffelhuschen (1989, 1993), Huang, He, Selo Imrohoroglu, and Thomas Sargent (1997), Altig and Carlstrom (1996), Heckman, Lochner, and Taber (1997, 1998), Hirte and Weber (1998), Schneider (1997), Fougere and Merette (1998,1999), Merette (1998), Lau (1999), Knudsen, Pedersen, Petersen, Stephensen, and Trier (1999), Bohringer, Pahlke, and Rutherford (1999), Malvar (1998), and Schmidt-Hebbel (1999) are examples in this regard. Equally gratifying, the model is starting to get attention in Washington. The Congressional Budget Office is now using the model to study both tax reform and privatizing social security and Joint Committee on Taxation of the U.S. Congress has included the model’s results in its recent analysis of the economic gains from tax reform (see the Joint Committee on Taxation 1997).
Our presentation of and emphasis on the government’s intertemporal budget constraint has helped clarify the fact that, apart from potential efficiency gains, the welfare effects of policy changes are zero sum in nature — the losses to the losers (including those coming in the future) have the same value in the present as the gains to the winners (including those coming in the future). Indeed, Alan, I, and Jagadeesh Gokhale have made the government’s intertemporal budget constraint the central structure of generational accounting. Alan and my presentation of the government’s intertemporal budget constraint in our original 1980 working paper was probably not the first such presentation, but it was surely one of the earliest.
Finally, I think the model has made a real contribution in distinguishing welfare changes arising from efficiency improvements from those arising from intergenerational redistribution. Too many public finance economists have substituted their own value judgements for economic science in measuring the net welfare gains from policy changes. payday loan lenders
The all too frequent practice here is simply to choose one’s own discount rate in discounting policy-induced welfare changes experienced by current and future generations and calling the net total a “welfare gain.” In so doing, one is imposing one’s own social welfare function (one’s own ethical norms) without acknowledging that to be the case; i.e. there is seldom any clarification in these studies that their authors are using their own social welfare function to make welfare statements and welfare comparisons.