The political economy of public savings and the role of capital mobility

This paper explains public saving and investment in economies where many groups compete for scarce public funds. We show that there is a collective action problem. If there is no strong center, then this problem manifests itself in a very low savings and investment rates. In the extreme, current spending may be determined simply by the current tax income and access to borrowing. This explains why in the face of a temporary boom, governments may not save but may even borrow more to finance even higher levels of expenditure. We deal also with several mitigating factors (repetition, insiders-outsiders interaction, elections).