38 Journal of Economic Perspectives taxation leads to an expansion of aggregate consumer demand. In other words, desired private saving rises by less than the tax cut, so that desired national saving declines. It follows for a closed economy that the expected real interest rate would have to rise to restore equality between desired national saving and investment demand The higher eal interest rate crowds out investment, which shows up in the long run as a sm stock of productive capital. Therefore, in the language of Franco Modigliani (1961), the public debt is an intergenerational burden in that it leads to a smaller stock of capital for future generations. Similar reasoning applies to pay-as-you-go social security programs, as has been stressed by Martin Feldstein(1974). An increase in the scope of these programs raises the aggregate demand for goods, and thereby leads to a higher real interest rate and a smaller stock of productive capital In an open economy, a small country' s budget deficits or social security programs would have negligible effects on the real interest rate in international capital markets Therefore, in the standard analysis, the home countrys decision to substitute a budget deficit for current taxes leads mainly to increased borrowing from abroad, rather than to a higher real interest rate. That is, budget deficits lead to current-account deficits Expected real interest rates rise for the home country only if it influence world markets, or if the increased national debt induces foreign lenders to demand higher expected returns on this countrys obligations. In any event weaker tendency for a country's budget deficits to crowd out its domestic investment in the short run and its stock of capital in the long run. However, the current-account deficits show up in the long run as a lower stock of national wealth -and correspond ingly higher claims by foreigner If the whole world runs budget deficits or expands the scale of its social insurance rograms, real interest rates rise on international capital markets, and crowding-out of investment occurs in each country. Correspondingly, the world's stock of capital is lower in the long run. These effects for the world parallel those for a single closed before The Ricardian Alternative The Ricardian modification to the standard analysis begins with the observation that, for a given path of government spending, a deficit-financed cut in current taxes leads to higher future taxes that have the same present value as the initial cut. This result follows from the government,'s budget constraint, which equates total expendi- tures for each period (including interest payments)to revenues from taxation or other sources and the net issue of interest -bearing public debt. Abstracting from chain-letter cases where the public debt can grow forever at the rate of interest or higher, the present value of taxes(and other revenues)cannot change unless the government changes the present value of its expenditures. This point amounts to economists standard notion of the absence of a free lunch-government spending must be paid for now or later, with the total present value of receipts fixed by the total present value of spending. Hence, holding fixed the path of government expenditures and