JOURNAL OF POLITICAL ECONOMY (see, e.g., Modigliani 1961, sec. IV; Mundell 1971; and Tobin 1971 chap. 5),and in establishing nonneutrality of changes in the stock of money(Metzler 1951, sec. VI). More generally, the assumption tha government debt issue leads, at least in part, to an increase in the typical household,s conception of its net wealth is crucial for demonstrating a ositive effect on aggregate demand of"expansionary"fiscal policy, which is defined here as a substitution of debt for tax finance for a given level of government expenditure(see, e.g., Patinkin 1964, sec. XII. 4; and blinder and Solow 1973, pp. 324-25). The basic type of argument in a full- mployment model is, following Modigliani(1961), that an increase in government debt implies an increase in perceived household wealth ence, an increase in desired consumption(a component of aggregate finally, a decline in the fraction of output which goes to capital accumu g demand) relative to saving; hence, an increase in interest rates; an tion. However, this line of reasoning hinges on the assumption that the ncrease in government debt leads to an increase in perceived household lon-full employment context it remains true that the effect of bublic debt issue on aggregate demand(and, hence, on output and employment) hinges on the assumed increase in perceived household wealth It has been recognized for some time that the future taxes needed to finance government interest payments would imply an offset to the direct positive wealth effect. For example, in a paper originally published in 1952, Tobin(1971, p. 91)notes: How is it possible that society merel by the device of incurring a debt to itself can deceive itself into believing that it is wealthier? Do not the additional taxes which are necessary to carry the interest charges reduce the value of other components of private ley( 1962, pp 75-77)has gone somewhat further by arguing It is possible that households regard deficit financing as equivalent to taxation. The issue of a bond by the government to finance expenditures involves a liability for future interest payments and possible ultimate repayment of principal, and thus implies future taxes that would not be if th ditures were financed by current taxation If future tax liabilities implicit in deficit financing are accurately foreseen the level at which total tax receipts are set is immaterial; the behavior of the community will be exactly the same as if the get were continuousl There seem to be two major lines of argument that have been offered to defend the position that the offset of the future tax liabilities will be only partial. One type of argument, based on finite lives, supposes that Of course, most analyses of government debt effects do not offer a specific defense for this position. For example, Blinder and Solow(1973, p. 325, n 8)say: This [analysis ncludes government bonds as a net asset to the public. We are aware of. but not rsuaded by, the arguments which hold that such bonds are not seen as net worth by ndividuals because of the implied future tax liability