Sunday, January 24, 2010
So, if the interest rate is supposed to calibrate the amount saved and the money demanded for capital investment, what does a Social Security system do to the interest rate? Social Security both decreases current income and is somewhat interchangeable with private savings, so it seems to me that by taking money out of the private savings market and spending it on government expenditures (so, assuming the government doesn't just go and put it back in the loanable funds market), wouldn't this artificially inflate the interest rate? (Quantity of saved funds drops as people defer less of their actual income for future consumption since the government does that for them, causing the equilibrium rate to go up).
Posted by Ryan Langrill at 3:13 PM