### Debt Again

I hadn’t intended this to be national debt week here at The Big Questions, but when you get into a back-and-forth with a guy as compulsively readable as Bob Murphy, you milk it for all it’s worth.

Murphy objects to formulations along the lines of “government debt is not a burden because we owe it to ourselves” and offers a parable that he thinks illustrates all the key issues. I agree that his parable illustrates all the key issues, so let’s review it — and see what it really illustrates.

In Year One, Abraham (who is old) owns an old apple tree and Isaac (who is young) owns a young apple tree. Each tree delivers 100 apples to its owner. Shortly thereafter, Abraham’s tree dies and Abraham follows suit. In Year Two, Isaac’s tree delivers him another 100 apples, and then both the tree and Isaac die.

Now in Year One, Abraham’s government decides to give him a present of 10 extra apples, which it borrows from Isaac. As a result, Abraham gets to eat 110 apples and Isaac eats only 90. In Year Two, the government owes Isaac 11 apples (including interest). It gets these apples the only way it can, by taxing Isaac. Therefore Isaac pays 11 apples tax, receives an 11 apple bond payment, and eats 100 apples. Bottom line: The government policy has increased Abraham’s lifetime apple consumption at the expense of Isaac’s. Therefore, says Bob, it’s clear that the government’s debt constitutes a burden to Isaac.

Fine. Here’s my counter-parable. In Year One, Abraham’s government decides to give him a present of 10 apples, which it gets by taxing Isaac. In Year Two, the government does nothing. The government policy has increased Abraham’s lifetime apple consumption at the expense of Isaac’s exactly as in Bob’s story. The Landsburg-Isaac feels exactly the same burden as the Murphy-Isaac, even though there is no debt in the Landsburg world. Therefore debt cannot be the source of Isaac’s burden.

Indeed, the source of Isaac’s burden, plain and simple, is that his government decided to transfer resources from him to Abraham. Whether they do this via debt or via taxation is as irrelevant as whether they deliver the apples to Abraham by truck or by train.

If the apples are delivered to Abraham in a wheelbarrow, one could, I suppose, blame everything on the wheelbarrow and talk about the “burden of the wheelbarrow”. And in some very contorted sense, one could defend that position. But why would you want to?

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#### 51 Responses to “Debt Again”

1. 1 1 HN

Lovely example (and counterexample at the same time !).

But I do see a difference between the Murphy world and the Landsburg world. In the Landsburg world, there is a strong incentive for Issac to remove himself (and his tree) from the iron grip of his govt before Period 2. If he goes overseas, then the govt can’t (easily) tax him (while of course, he will still demand repayment of his loan and interest).

In a global world with super easy mobility, net producers / savers will always tend to flee the reach of their government towards friendlier climes and thus trigger trouble for the indebted govt. If everyone is free to travel, what is the difference between resident and non resident. You note that “we owe the debt to ourselves”, but who exactly is “us” ?

Hence Japan is in trouble .. We shall see.

2. 2 2 Sean

Steve, thanks for all these thought. Would you mind doing a Lorentz-like transform to one of the individuals in these examples?

I liked Nick’s original example because it showed how for each cohort, averaged over their life, they did not feel any pain. Only when the default on debt came was it clear that the first cohort benefited at a later cohort’s expense (averaged over their lifetimes).

I think the trouble comes when people speak about these issues is that even though we, as an aggregate economic entity, are an aggregate, we, as people, are not. We have trouble thinking as such.

So yes, old people know they are living from the transfers from children now, and children now think they will live off the benefits of their children. The government has engineered a shift in consumption for each cohort. The “debt” only exists in society’s expectation that each generation provides resources for the older generation.

3. 3 3 Major_Freedom

“Fine. Here’s my counter-parable. In Year One, Abraham’s government decides to give him a present of 10 apples, which it gets by taxing Isaac. In Year Two, the government does nothing. The government policy has increased Abraham’s lifetime apple consumption at the expense of Isaac’s exactly as in Bob’s story. The Landsburg-Isaac feels exactly the same burden as the Murphy-Isaac, even though there is no debt in the Landsburg world. Therefore debt cannot be the source of Isaac’s burden.”

Steve, I suspect the following is besides the point you are making, but I cannot help but mention that you’re only focusing on apply flows and you’re not taking into account consensual versus non-consensual exchanges, i.e. the human intention aspect of it.

Isaac will most certainly NOT “feel the same burden” between voluntary LENDING 10 apples expecting to get 11 apples the next period, and being TAXED of 10 apples. The latter incurs a greater cost to Isaac than the former. Therefore, the “burden” will be greater for the tax scenario than the lending scenario, despite the apple flows being the same in both scenarios.

Cash flows are empty of economic content without taking into account human valuation of those cash flows.

Therefore, when you say:

“Indeed, the source of Isaac’s burden, plain and simple, is that his government decided to transfer resources from him to Abraham. Whether they do this via debt or via taxation is as irrelevant as whether they deliver the apples to Abraham by truck or by train.”

I must insist that it is wrong to say that it is irrelevant (not to mention transport by truck or train would also be relevant, since they have different times of delivery, carrying capacity, location, price, etc).

4. 4 4 JohnE

I think the assumption many people take issue with is that government spending is fixed in these examples. I agree with Steve’s argument that if government spending is fixed, then no one alive today should care if that spending is financed through borrowing. However if government spending is not fixed, then it is certainly possible that people will care whether deficit financing is an option for the government for additional spending.

To see this consider the following example. There are three individauls: A, B, and C. A new government program is proposed, and whether that program is enacted is decided by majority vote. A and B care about their own consumption today and their grandchildren’s consumption tomorrow. So they don’t care whether the proposed program is financed by taxes or borrowing, their respective votes hinge on whether they think the cost of the program exceeds the benefit. Suppose A thinks the benefit exceeds the cost and B vice versa. Individaul C however does not care about his grandchildren’s consumption tomorrow, but he also thinks the cost of the program exceeds its benefits. Therefore individual C’s vote hinges on whether the program is financed by taxes or borrowing: he votes against the program if it is financed by taxes, he votes for it if it is financed by borrowing. Thus A wants to have borrowing as an option because then C will vote with him. B does not want to have borrowing as an option because then C will vote with him.

This example shows that if there are people who disagree about the benefits of new government spending and if there are also people who do not care about their grandchildren’s consumption, then there will be people who disagree about whether the government should be able to run a deficit. It does not say anything about whether the new program is desirable. It only points out the political conflict due to deficit spending.

I think a lot of the words written on this topic are coming from B-type people who view Krugman as an A-type person.

I think Nick Rowe is concerned that B-type people will read Krugman and wrongfully think that deficit spending is costless.

Steve has largely sidestepped this discussion, but has rightly pointed out that the current debt is a sunk cost and if you don’t want it to affect your grandchildren then you should tax yourself.

Though less entertaining then the kerfuffle with Yoram Bauman, this discussion has been much more enlightening.

5. 5 5 Bennett Haselton

@Major_Freedom you wrote:

“Isaac will most certainly NOT “feel the same burden” between voluntary LENDING 10 apples expecting to get 11 apples the next period, and being TAXED of 10 apples.”

But that description of the first scenario is incomplete. In the former case, Isaac voluntarily lends 10 apples, expects to get 11 apples the next period, and is then TAXED of those 11 applies in the same year. Adjusting for interest, that is the same as being “TAXED of 10 apples” in the first year.

Obviously voluntary lending is not as painful as being taxed, but the involuntary tax hits you the same either way.

6. 6 6 Bennett Haselton

Here’s a problem: What if “Jacob” is born at the beginning of Year Two, along with a newly planted apple tree that also bears 100 apples a year, and everything else remains the same, except the government policy is to raise funds by taxing all living citizens at any given time? (After all, this is closer to reality — a birth, as well as a death.)

Then in Bob Murphy’s parable, in Year Two, when the government has to pay 11 apples to Isaac, it taxes (say) 5.5 apples from Isaac and 5.5 apples from Jacob, then gives the combined 11 apples to Isaac. Isaac and Jacob equally share the burden of making up for Abraham’s consumption of 10 extra applies in Year One.

In the Landsburg counter-parable, to finance Abraham’s consumption of 10 extra apples in Year One, the burden fell entirely on Isaac, in that year.

So “borrowing” (in the Bob Murphy parable) really did pass on more of the burden to future generations, than present-day taxing (in the Landsburg parable).

7. 7 7 Bennett Haselton

Hang on, my model is flawed because I’m assuming that Isaac has to pay the entire tax burden if it’s assessed in Year One, but gets to split it with Jacob if it’s assessed in Year Two.

If we’re building a model with multiple taxpayers, then you’re sharing the burden with other taxpayers in both years, and there’s no reason to think there will be more taxpayers to share the load in Year Two than in Year One, hence no reason for Isaac to prefer paying in Year One or Year Two. (Well, population growth, but we’re trying to illuminuate issues that would still arise even with a steady-state population.)

Here’s a better-articulated problem: Even assuming a constant number of taxpayers, with births and deaths some of the taxpayers in Year Two won’t be the same as the ones in Year One. If we pay for Abraham’s apples through taxation, it will be financed by the taxpayers in Year One. If we pay by going into debt, it will be financed in the short term by selling a bond to (i.e. borrowing applies from) Isaac, and then Isaac is repaid by taxing taxpayers alive in Year Two. (Isaac’s consumption is no longer exactly the same in the two scenarios. In the first one, “taxation”, he merely pays his share of taxes towards Abraham’s apples in Year One; in the second one, “debt”, he gives up 10 apples in the first year and has them repaid with interest in the second year, minus a small amount representing his share of the taxes to repay himself. But it should still be “a wash” since he bought the bond voluntarily.)

@JohnE this is what you zeroed in on with your person “C” — the person who doesn’t mind present-day borrowing because they expect to die before the taxes have to be raised to repay the bonds. Such people are more likely to vote for irresponsible spending because the burden is (gasp!) passed on to future generations.

8. 8 8 Josh

Thank you for this, this makes your position very clear.

But it seems that you are actually *confirming* that debt is a burden on future generations. Your counterpoint is emphasizing that taxes are a burden on whoever pays them, which is sort of obviously true. But current debt forces future generations to repay that debt through taxes. Taxes are the medium through which that burden is realized. But debt is the way that that burden gets spread through time.

Or said a different way – current taxes used to fund “presents” are redistribution from one group of current people to a different group of current people. While debt used to fund presents is redistribution from one group of current people to a group of *future* people (“future” being whenever the debt is to be paid off). The fact that future taxes will be used to collect from those future people doesn’t change this fact.

9. 9 9 Dave

Bob Murphy. Any chance you can speak to your buddies and get prof landsburg a spot on freedom watch or Peter schiff or something?

10. 10 10 J Storrs Hall

I think the wrong question is being answered here. Taxes, as a percent of GDP, have been roughly flat since forever. Debt and spending have been increasing exponentially (also relative to GDP). The bottom line is that debt is NOT being paid off using tax receipts as per the above stories, but with new debt. It’s a Ponzi scheme. Now the bigger the population you can run a Ponzi scheme on, the longer it lasts; so it does matter to some extent whether the Chinese or anyone else is in the sucker pool. But at some point you do run out of suckers and the scheme collapses. End of bubble. Ill effects are mostly due to people who thought that Govt debt was a “safe as houses” investment.

Isaac has planned for his retirement on the belief that the govt would support him with the take from Jacob, so he didn’t plant a new tree for himself — and indeed his seed apples were being given to Abraham to eat directly. But the take from Jacob has also been promised to Esau. So to pay them, the govt borrows from Abimelech and Phares and Zara and Esrom. And keeps doubling every generation so that by the time we get down to Zorobabel, it’s run out of begats.

11. 11 11 Steve Landsburg

Major_Freedom:

Isaac will most certainly NOT “feel the same burden” between voluntary LENDING 10 apples expecting to get 11 apples the next period, and being TAXED of 10 apples.

Isaac is involuntarily taxed in both scenarios.

12. 12 12 Steve Landsburg

JohnE:

Steve has largely sidestepped this discussion, but has rightly pointed out that the current debt is a sunk cost and if you don’t want it to affect your grandchildren then you should tax yourself.

This is an excellent summary statement.

13. 13 13 Dirk

So I’ve read both Steve’s and Bob’s post on this topic and tried to come up with a summary conclusion.

In short we are trying to prove (or disprove) that government debt is a burden to our grandchildren.

I think Steve does a great job of showing that the real burden is the transfer payment made when government actually spends the money, but when it does it through debt financing it pushes the burden to our grandchildren. If we are smart though, we can pull this burden back on ourselves by saving more money now and giving it to our children (or grandchildren) once we die.

Does that sum it up succinctly?

14. 14 14 Steve Landsburg

Dirk:

I think Steve does a great job of showing that the real burden is the transfer payment made when government actually spends the money, but when it does it through debt financing it pushes the burden to our grandchildren. If we are smart though, we can pull this burden back on ourselves by saving more money now and giving it to our children (or grandchildren) once we die.

Does that sum it up succinctly?

Not quite. You say that “when it does it through debt financing it pushes the burden to our grandchildren”. But one could equally well say that “when it does it through current taxation it pushes the burden to our grandchildren”, by reducing their inheritances (or, in Bob Murphy’s example, by taxing them directly while they’re young).

15. 15 15 Jonatan

Is this still the same point as yesterday, that government debt is not a burden on the grandchildren?

And Isaac is the grandchildren? Then your example exactly shows that government debt is a burden on them. It even shows that it is a burden on them in the same way it would be if you could somehow tax them directly.

16. 16 16 Jonathan Campbell

The question of whether borrowing money is a bad way to finance things is a different question from whether you should be unhappy to find out about the debt, when you already know everything else about your finances. The answer to the first question is “no” and the answer to the second question is “yes.”

17. 17 17 Bob Murphy

If the apples are delivered to Abraham in a wheelbarrow, one could, I suppose, blame everything on the wheelbarrow and talk about the “burden of the wheelbarrow”.

Steve, they are going to need a wheelbarrow to carry your crumpled body away from the blog post I will write later tonight.

Joking aside, I am almost jealous of you. Right now, you don’t see the brilliant insight that Nick Rowe got me to recognize. I feel like I’m about to show someone the escape scene from _Silence of the Lambs_ who’s never seen the movie before.

18. 18 18 Bob Murphy

Bennett (I think?) wrote:

But that description of the first scenario is incomplete. In the former case, Isaac voluntarily lends 10 apples, expects to get 11 apples the next period, and is then TAXED of those 11 applies in the same year. Adjusting for interest, that is the same as being “TAXED of 10 apples” in the first year.

No no no. This is the essential point that Krugman, Landsburg, and other collectivists (ha ha) are missing.

From an individual investor’s point of view, if he lends money to the government today, he is NOT reducing his future tax burden dollar-for-dollar (in PDV terms). No, he effectively takes those future taxes as a given, and that adjusts his lifetime consumption/investment decisions accordingly.

But what is true for one investor is true for them all. That’s how you can get the admittedly shocking result, that even if investors today lend money to fund the government’s budget deficit, such that they are all taxed in 20 years to retire the IOUs that they are holding, then there is a very legitimate sense in which the looming threat of that *future* taxation makes them worse. The “real burden” to them comes from their inability to prevent the government from giving goodies to people now, and imposing taxes on them in 20 years to pay for it. The fact that people today, through their individually optimal best-response saving decisions, collectively make that financially feasible, doesn’t alter the outcome.

Nick Rowe and I were trying to be helpful by reducing the model down to a few people, but this might be tripping some people up.

19. 19 19 Tal F

Debt is not financed by just any tax, but a tax in the future. Hence your equivalent parable is only equivalent if Isaac lives for 2 periods. I think you would agree that the burden of debt-fueled spending is felt in the period in which the taxation occurs. What is different between debt-fueled spending and taxation-fueled spending is that the burden falls upon the generation holding the bonds when they are ultimately repaid.

20. 20 20 Neil

It has already been said, but worth repeating since Steve is so (wrongly) insistent that taxes and debt are always equivalent. The government can effect transfers among living, overlapping generations by taxes, but it requires government debt to transfer burdens to generations not yet born.

21. 21 21 rob

Steve’s example shows that it is possible to harm individual members of future generations to the benefit of individual members of the current generation and both borrowing and taxation are needed to achieve that. Bond holders are needed to play an intermediate role in adjusting consumption by individuals for which they are rewarded by interest payment

If the bond holders are deemed outside the economy then consumption in the economy will actually be higher in the period when the borrowing is made to the period when it is repaid

Most of the examples I have seen assume a fixed output in each period. To that extent all the models discuss issues of distribution. So to fully cover this issue we also need to decide whether current government borrowing/taxation will increase or decrease the size of the future output (that future borrowing/taxation will then help to distribute).

Krugman’s point though is

22. 22 22 JohnE

@TalF

“What is different between debt-fueled spending and taxation-fueled spending is that the burden falls upon the generation holding the bonds when they are ultimately repaid.”

This is incorrect. The burden of current spending falls on whomever the current generation wants it to. And it doesn’t matter if it is debt financed or tax financed. This is Steve’s whole point.

In summary:

If you don’t want debt financed spending today to affect your grandchildren, then tax yourself by increasing your savings. Pass this savings on to your grandchildren. Voila, the burden falls on you.

However if you don’t want tax financed spending today to affect you, then pay the tax by reducing your savings. Pass the reduced savings on to your grandchildren. Voila, the burden falls on your grandchildren.

23. 23 23 JohnE

@Neil

“it requires government debt to transfer burdens to generations not yet born.”

This is incorrect. See my post just above to see why.

24. 24 24 Sean

Neil, no it only requires that the government continue effecting transfers each period. This is essentially what most pension systems were set up to do: Current workers subsidize retiree’s expenses. Debt need never enter it.

25. 25 25 Silas Barta

Both Steve_Landsburg and Bob Murphy are right, but you have to add a few more assumptions to get to the position (of worry) that the layperson is in. Specifically, the layperson is going to be concerned about *when* and with what *awareness* the burden is going to hit Isaac.

From the very “ivory tower” standpoint of these examples, Isaac is indifferent between being taxed now vs being taxed later with interest. But when it comes to policy debate, the concerned citizen would (when thinking of Isaac) not expect him to fully account for the lifetime impact of the Abraham gift, and thus come up short in his future planning. That, I think, is the hidden assumption that drives the worry of the layfolk.

If I had to extend the above scenarios, I would introduce the character Noah, who warns Isaac about the need to build a refuge in Period 2 with 111 apples. Isaac says, “Don’t worry, Noah, I’ve got that covered: my tree will make 100 apples, and I have this bond which will cover the rest …”

Certainly, in this very narrow situation, it seems absurd that Isaac would overlook the government’s future taxation of 11 apples from him, but in the messier real economy, you have to assume (a kind of?) full Ricardian equivalence to say that the debt-vs-tax-now issue doesn’t matter. And so the Bennett_Haseltons of the world are not going to feel reassured about the Isaacs.

If the government taxed Isaac 10 apples now, Isaac would more easily see the shortfall in his plan, and perhaps rectify the shortfall by working for a job for Job to earn the extra apples.

26. 26 26 Steve Landsburg

JohnE:

This is incorrect. The burden of current spending falls on whomever the current generation wants it to. And it doesn’t matter if it is debt financed or tax financed. This is Steve’s whole point.

Exactly.

27. 27 27 Neil

JohnE,

That arbitrage is possible only if bequests are positive. If everyone has positive bequests, taxes and debt are potentially equivalent. (Whether they are actually equivalent is an empirical question.) I pointed this out in a comment to Steve’s last post. But if bequests are zero, then taxes and debt are NOT equivalent. You cannot make your bequest negative in order to pay the tax. Now you need the government’s help to transfer the burden, whether it be different taxes among living, overlapping generations, or government debt. For unborn generations, you need government debt.

Sean,

Public pension plans are simply a disguised form of government debt–unfunded liability.

28. 28 28 Seth

You can only spend wealth that has been created in the past or that you expect to be created in the future, no?

29. 29 29 Neil

I realize now that, as happens in so many of Steve’s mind benders, the argument has been reduced to semantics. Government debt, at bottom, is just a tax and transfer scheme. One that happens to have a piece of paper, or virtual piece of paper, called a Treasury bond attached to it. Steve wants to argue that government debt is no burden because it can be replicated by a tax transfer scheme reaching across generations. The latter is true, but that is the mechanism through which the government can potentially shift burdens. The important issue is not that semantics, it is whether households can or do undo the generational shift by bequest behavior.

30. 30 30 Bob Murphy

I am going to object. John E said “Steve’s whole point” was that Abraham can offset the impact on Isaac by bequeathing the transfer point. Steve then said “Exactly.”

Uh, how can that be, when *in this post* there is no mention of Abraham saving the gift at all? There are no savings possible in this example.

No, what Steve is trying to argue here, is that because in this particular example, Isaac is indifferent to a present tax of 10 apples or a future tax of 11 apples, Krugman was basically right when saying the debt isn’t a burden on future taxpayers. Steve isn’t here doing anything about Ricardian Equivalence and its ability to offset things.

Krugman and Steve are wrong on the narrow point that Steve is illustrating in this particular post. Yes, the Ricardian Equivalence stuff in general is right, that just shows a mechanism that could prevent the national debt from hurting future taxpayers. According to Krugman’s “they owe it to themselves” logic, there should be no potential harm to offset, period.

Let me put it this way: In this contrived world where there is no physical savings, and each time period “society” collectively consumes total apple output no matter what, then Krugman’s “insights” should lead us to think that the present generation in no way can harm future generations. But he is wrong. There is a very real sense in which they can, and Landsburg’s (mostly correct) statements are obscuring this fact.

Tonight I hope to write up a big post, with a long numerical example, showing all of this so crisply that even Steve Landsburg will finally see it.

31. 31 31 Todd

It seems to me that if you have a situation in which Abraham has the power to make a claim on Isaac’s productivity, but Isaac has no such power to make a claim on Abraham’s, then in aggregate, Isaac will bear some burden for Abraham’s benefit. Abraham may not always take advantage of this power, but I think it’s safe to assume that he will at least some of the time, and Isaac has no power to even things out.

So if Abraham represents present producers who can make a claim on future generations through debt, and Isaac represents those future generations who have no power to make claims on their ancestors, how is it that debt will not be a net burden for Isaac? Perhaps I am missing something, in which case I would be interested to learn the flaw in this line of reasoning.

32. 32 32 Ken B

Can someone on the anti-Krugsburg side come up with a SPENDING FREE example? Perhaps for example where the govt takes 10% of all incomes and holdings and burns them, and where they issue bonds to raise the same amount and burn it. (So the govt consumes no apples or houses or labor.) Because if the selling of bonds causes harm *all by itself in a way taxing does not*, you you be able to display it in a spending-free example.

On the other hand it is easy to come up with no-tax no-borrowing burdensome spending (by which I mean consumption of real goods). Blowing stuff up for example.

33. 33 33 Steve Landsburg

Bob Murphy: typing on iPhone in airport so must be brief. Abraham in this example can undo the govts action by giving Isaac 10 apples. This is the exact analogue of saving his apples in other examples that do allow physical saving. Nothing important differs. In any example, Abraham has it in his power to undo the damage to Isaac and has only himself to blame if he chooses not to.

34. 34 34 PhilKing

Why is the idea of Abraham saving even being entertained? The government is presumably transferring (via debt, tax, whatever) because there are people who demand (in some respect) the goods. If everyone were going to save and pass down, there would be no incentive to tax. It’s clear that older generation certainly will consume some of the transferred good.

And sure the transfer is what hurts and the debt may be sunk cost. But its the primary vehicle that we dig deeper. It’s disingenuous to say the debt leaves no burden a la Krugman.

35. 35 35 Bob Murphy

Steve Landsburg wrote:

In any example, Abraham has it in his power to undo the damage to Isaac and has only himself to blame if he chooses not to.

OK right, I probably shouldn’t have earlier said that this particular blog post by you has nothing to do with the Ricardian Equivalence. That was too strong on my part.

Even so, you guys are all still missing the big picture. I am not kidding, I am excited to share it with you. It really caused me almost physical discomfort when Nick Rowe’s apple example destroyed me previous worldview. I mean, it had seemed so “obvious” to me that in a world with no physical investment, that the government could only redistribute in each time period. But, to repeat ad nauseum, this way of looking at things is extremely shortsighted.

My post tonight will be my final word. It will be blazingly obvious why I have refused to concede thus far. To reiterate Steve, I’m not saying that your specific observations have been wrong. What I *am* saying is that “it’s just a matter of redistribution if our grandkids end up holding all the Treasury bonds” is utterly wrong.

36. 36 36 JohnE

@Todd

Let me try one more time to summarize Steve’s point: Debt per se is neither necessary nor sufficient to burden the following generation. The current generation can impoverish the next generation without debt (by saving less). Similarly it can undo any borrowing by the government by simply saving more.

37. 37 37 Bob Murphy

JohnE, using a time machine to steal 800 pizzas from the year 2050 is also “neither necessary nor sufficient to burden the following generation.” So if someone does that, and I say, “Whoa! You’re living high at the expense of our children!” would I be wrong?

38. 38 38 Todd

JohnE,

“The current generation can impoverish the next generation without debt (by saving less).”

This statement seems to assume that the current generation is obligated to leave \$X to the next generation, and that leaving less than \$X is an act of impoverishment. Perhaps there is a good reason for making this assumption, but I don’t see it.

It seems to me that the natural order of things is that each generation consumes roughly as much as it produces, and anything left to the next generation is a bonus, or a gift. We do not speak of one group impoverishing another by way of withholding a gift, and I don’t think it makes sense to say so here.

The only way to impoverish anyone is make a claim on his/her productivity, and the only way to do this to a future generation is through debt.

39. 39 39 rob

RE: Steve’s comment – “Abraham in this example can undo the govt’s action by giving Isaac 10 apples”.

The exact same thing could be said in the case of Steve’s own example based on a tax transfer within the same generation. Does that mean we can ignore any effects of taxation on the same grounds ?

40. 40 40 Henri Hein

If you assume Ricardian equivalence, it makes intuitive sense to me that debt and taxes would come out equivalently.

A big problem with public debt is that it is politically less costly than taxes (whether financially it is or not). Thus we get a bigger government than the electorate prefers. Therefore, if we could make taxes and debt equivalent in the minds of the ‘man in the street,’ that would be a good thing.

41. 41 41 Henri Hein

Nitpicking on myself, I meant “bigger government than the electorate prefers to pay for.”

42. 42 42 JohnE

@Bob Murphy

I’m challenging two claims in that statement. First, I’m challenging the assertion that debt is always a burden on the next generation. If debt is offset by increased savings, then it is not a burden. Second, I’m challenging the assertion that debt is the only way to burden the next generation. Tax-financed government consumption can be a burden on future generations if it causes people to save less.

To answer your question, I do not think you would be wrong to say “You’re living high at the expense of our children!” But I do think it is wrong to say “Were it not for the debt, we would not be impoverishing our children.” The time machine in your example is just a sophisticated wheelbarrow, to borrow from Steve.

43. 43 43 JohnE

@Todd

I don’t know about obligation, but that statement is assuming that savings is positive. It is true that if my savings are zero, then I cannot pass today’s taxes on to my grandchildren by saving less.

44. 44 44 Mike H

@Todd “The only way to impoverish anyone is make a claim on his/her productivity, and the only way to do this to a future generation is through debt”

Not so. I could consume or fail to maintain or provide resources (such as fossil fuels, education or savings) that they need to be productive, spending the money on other things. Whether I impose a debt on them or consume or fail to provide resources they will need, the effect is the same – their productivity is reduced for the sake of my consumption.

In fact, if I fund my consumption through debt, it is easier for the next generation to avoid my hit on their productivity – since they can roll the debt over for their next generation to pay off. If I’ve used up the fossil fuels or savings or let the education system fall into disrepair, they can’t just roll that over. They’ll have to forgo some spending to fix things up.

45. 45 45 Todd

MikeH,

Fair point, but it really isn’t related to government spending and the methods of funding it, which is what we’re discussing here. Perhaps I should have specified that my statement applies within the specific parameters of our current discussion.

46. 46 46 Major_Freedom

Bennett Haselton:

“But that description of the first scenario is incomplete. In the former case, Isaac voluntarily lends 10 apples, expects to get 11 apples the next period, and is then TAXED of those 11 applies in the same year. Adjusting for interest, that is the same as being “TAXED of 10 apples” in the first year.”

“Obviously voluntary lending is not as painful as being taxed, but the involuntary tax hits you the same either way.”

Steve Landsburg:

“Isaac is involuntarily taxed in both scenarios.”

Bennet and Steve, yes Isaac is taxed in both scenarios, but he is taxed at different times!

In the first scenario, he lends 10 apples. But he’s not a psychic. He lends because he expects not to be taxed in period 2.

If on the other hand he were a psychic and KNEW he was going to be taxed in period 2, then why would he lend in period 1? It would be like me lending you \$10, knowing that when you pay me back later, you’ll take my own money to pay me back \$11. Clearly if I knew you were going to do that, I wouldn’t lend to you. I’d simply keep my money, or lend it to someone else.

You two are focusing only on mere cash flows, ignoring time and uncertainty, and claiming that they are the same when they are certainly not the same. The error lies in conceiving of yourself as some sort of all knowing God who has a bird’s eye view on everything, when you have to think AS IF you’re Isaac.

47. 47 47 Keshav Srinivasan

FYI, Bob Murphy has written a response to this post on Daniel Kuehn’s blog, since he’s apparently having some issues with his own blog:
http://www.factsandotherstubbornthings.blogspot.com/2012/01/guest-post-from-bob-murphy-on-national.html

48. 48 48 JKH

“The Landsburg-Isaac feels exactly the same burden as the Murphy-Isaac, even though there is no debt in the Landsburg world. Therefore debt cannot be the source of Isaac’s burden.”

I certainly agree with that.

“Indeed, the source of Isaac’s burden, plain and simple, is that his government decided to transfer resources from him to Abraham. Whether they do this via debt or via taxation is as irrelevant as whether they deliver the apples to Abraham by truck or by train.”

I don’t agree with that, or if I was to agree with what I understood to be your intended meaning, I’d say it somewhat differently.

The choice isn’t between debt and taxation.

The choice is between taxation without debt, versus debt followed by taxation.

Now this may just be a matter of chosen language.

But in substance, its an important distinction – there’s no choice not to have taxation, because without repayment of debt by taxation, there is no burden.

So it’s important not to characterize this as an either/or proposition with respect to taxation.

I emphasize this point here as I emphasized it at Nick’s. It all depends on taxes.

And given the necessary role taxes play, debt only serves in its effect as a bridge between different options for taxation timing.

And in that sense, debt is certainly not the direct issue, as per your first statement above.

49. 49 49 andy

I think there is one Buchanan’s point that was not that much present in the discussion: people that don’t have high enough income cannot compensate to their children.

If I am greedy the deficit financing allows me to put burden on children in a way I would otherwise not be able to.

50. 50 50 Doc Merlin

“Therefore debt cannot be the source of Isaac’s burden”

I like how you keep hammering this point over and over again. Debt isn’t the problem, government spending is the problem.

51. 51 51 Chas Phillips

I accept the argument that the how a country chooses to finance its deficit (through taxation, or borrowing and the implied future taxation it implies) is not of consequence. It is true, however, that the option of external borrowing has practical limits. When Greece, for example, is unable to secure external funding, it will either have to cut spending, raise taxes, sell assets or, most probably, a combination of the three. Am I correct in concluding that, because the ability of any economy to support indebtedness or generate tax revenues has practical limits, government spending will be determined at the margin not by politicians but by investors?

1. 1 Let’s Not Talk Past Each Other on the Burden-of-Public-Debt Issue
2. 2 Rowe Row « azmytheconomics
3. 3 Debt: The Never-Ending Topic at Steven Landsburg | The Big Questions: Tackling the Problems of Philosophy with Ideas from Mathematics, Economics, and Physics