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Abstract
Democracy tends to cultivate short-sighted politicians, for whom the
horizon extends more or less till next election. This feature gives rise
to a discrepancy between the time rate of discount of a country’s polity
and the interest rates at which the country borrows. I show how this
discrepancy induces public debt swelling. Moreover, if the discrepancy
exceeds a certain threshold, public debt will accumulate to the point
of insolvency and, to make matter worse, this (unfortunate) state of
affairs will be approached at a finite time. Conversely, if budget decision
makers are so far-sighted that their time rate of discount is smaller than
the relevant interest rate, the country becomes an excessive saver. If
the polity’s time rate of discount falls neither below the market interest
rate nor exceeds it too much, equilibrium will be reached at a debt-to-GDP ratio between insolvency and excessive saving. Economic growth
exacerbates the debt accumulation problem, making insolvency more
likely compared to a ceteris-paribus stationary economy.