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This paper argues that some propositions reported in a recent paper by Fanti and Spataro (2006) are not warranted. They claim that including an endogenous labor supply in an overlapping generations model may change the conclusions concerning the capital accumulation and welfare effects of (internal) public debt issue. We show that their results are not the consequence of the Cobb-Douglas preferences they posit, but of a rather incomplete development of their model. When this incompleteness is corrected, and under general assumptions on preferences and technology, the propositions arrived at originally by Diamond (1965) in a model that does not take the labor-leisure decision into account continue to hold. In particular, no matter whether the starting point is a dynamically efficient or inefficient steady state, an increase in the stock of public debt per taxpayer unambiguously depresses the capital-labor ratio and raises the interest rate. Moreover, the welfare level will increase (decrease) when the starting point is a dynamically inefficient (efficient) steady state.
