Don Boudreaux, who as always merits careful attention, attempts to mediate among me, Paul Krugman, Bob Murphy and Nick Rowe on the subject of the public debt. His title is “Let’s not Talk Past Each Other on the Burden-of-Public-Debt Issue”. Indeed, I think that to a very large extent we are all saying exactly the same thing (as you’d expect, because we’re all good at thinking about this kind of stuff, and really, it’s not that hard), but disagreeing about where the emphasis should lie. So let me sum up the major points here. (For background see here, here, here, and the links therefrom.) I think it would be great if Bob, Nick, Don and Paul would let us know, by number, which of these points (if any) they disagree with:
- Public debt has redistributive effects and incentive effects. We all agree on this. There remains the question of whether there is a “burden-of-the-debt” effect over and above these well understood effects. The right way to approach that question is to ask “Would there be any burden of the debt in a world with lump-sum taxes—i.e. a world in which the redistributive and incentive effects are assumed away?”.
- In that world, as in any world, government spending is costly.
- Deficit financing offers the older generation a mechanism to shift some of that cost to future generations. Individuals will take advantage of this mechanism if and only if they want to.
- Therefore nobody currently alive (or, in Bob Murphy’s Abraham-and-Isaac model, no member of the older generation) has any reason to object to deficit financing. Deficit financing expands your opportunity set, which you cannot be a bad thing (for you).
- I called Nick Rowe “wrong” for overlooking point 4; that was, in his words, a rhetorical flourish. Nothing he said was actually wrong except (in my opinion) for his choice of emphasis.
- Speaking of Bob’s Abraham-and-Isaac model: This introduces a minor twist. Instead of the choice between taxing one cohort today or another cohort tomorrow for the benefit of the former, Bob offers the choice between taxing a single cohort either today or tomorrow, in order to benefit an older cohort. But this changes none of the fundamental issues. Regardless of whether Isaac is taxed today or tomorrow, Abraham has the opportunity to restore the status quo, and has no cause for complaint if he chooses not to.
- When the government runs a deficit, some people miscalculate the effect on their grandchildren and therefore save the wrong amount. It would be good to educate these people.
- The people in the preceding point might, a priori, either underestimate or overestimate the costs of current spending to their grandchildren and hence might either oversave or undersave. Therefore it’s possible we’d do these people a service by raising alarms, but it’s also possible we’d do them a service by quelling their fears.
- As far as future generations are impoverished by the greed of the current generation, their main beef should be not with deficit financing but with the underlying greed. Indeed, a greedy current generation is perfectly capable of impoverishing future generations without deficit spending, by depleting their inheritances.
- Bob seems to disagree with the preceding point. I still don’t understand why. But this is not fundamentally a disagreement about what happens; it’s a disagreement about how to describe what happens.
- Bob’s got some cockamamie story to tell about going into the future with a time machine and stealing pizzas; he observes that the time machine enables the theft and therefore it is natural to talk about the “burden of the time machine”. This is true, but the difference between a time machine and deficit finance is that a time machine enables you to transfer resources across generations in a way you might not otherwise have been able to, while deficit financing is just a new way of doing something you could have done anyway.
- There’s an exception to the above: People who are credit-constrained can consume more (and hence impose greater costs on their grandchildren) when the government borrows. The grandchildren of those people might find Bob’s time machine analogy perfectly apt.
- On the other hand, even with credit constraints, deficit finance does not allow an entire generation to increase the burden on its descendants beyond what it could have done anyway (and in that sense is nothing like a time machine). It only allows some families to increase the burden on their descendants. The greatest damage one generation can inflict on the next is to consume everything in sight, and this is always possible without deficit finance.
- None of this has anything whatsoever to do with whether the debt is held by domestic citizens or by foreigners. The analysis runs exactly the same either way. Krugman got this wrong.
- All of the above holds government spending fixed. Don’s argument (for which he credits Buchanan) is that this is a bad assumption. Here’s why: Deficit finance creates the option of passing costs on to the next generation. Some taxpayers will choose that option. Those taxpayers, having successfully pushed part of the cost of spending onto others, will vote for more spending, and sometimes they will prevail.
- Don’s argument makes perfect sense and could well be empirically important. (I don’t know whether it is.) But it’s not the same thing that people are usually referring to when they talk about the burden of the debt. What’s usually meant by that is an additional burden over and above the burden created by a given level of government spending.
I am guessing we can get near-unanimity on all of these, with one exception: Bob Murphy keeps insisting there’s something the rest of us aren’t seeing, and I can’t figure out what it is. (Perhaps it’s just point 12 above, in which case I have to tell him that everybody else already knew this; it’s a commonplace observation in the literature on Ricardian Equivalence. Please don’t read that as snarky; we all have our blind spots and every one of has somehow overlooked a thing or two that everybody else has been onto forever.) I like Nick Rowe’s model a lot, but I don’t see where it teaches us anything we didn’t already know. (That’s not a criticism! It’s extremely important to find new ways of verifying the things you “already know”!). Bob, however, somehow sees it as revelatory. Exactly what it revealed to him is still a mystery to me.