We analyze the democratic politics and competitive economics of a ‘golden rule’ that
separates capital and ordinary account budgets and allows a government to issue debt to
finance only capital items. Many national governments followed this rule in the 18th and
19th centuries and most U.S. states do today. We study an economy with a growing population
of overlapping generations of long-lived but mortal agents. Each period, majorities
choose durable and nondurable public goods. In a special limiting case with demographics
that make Ricardian equivalence prevail, the golden rule does nothing to promote efficiency.
But when the demographics imply even moderate departures from Ricardian equivalence,
imposing the golden rule substantially improves the efficiency of democratically chosen allocations
of public goods. We use some examples calibrated to U.S. demographic data and
find greater benefits from adopting the golden rule at the state level or with 19th century
demographics than under current national demographics.