Debt: The Never-Ending Topic

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:

  1. 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?”.
  2. In that world, as in any world, government spending is costly.
  3. 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.
  4. 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).
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
  12. 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.
  13. 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.
  14. 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.
  15. 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.
  16. 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.

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83 Responses to “Debt: The Never-Ending Topic”


  1. 1 1 Mike H

    ” …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.”

    Isn’t there an externality here, since the next generation has no say in the matter?

    “Therefore nobody currently alive has any reason to object to [mechanism for shifting costs] – it expands your opportunity set, which you cannot be a bad thing (for you).”

    I may not have any reason to object if I am the only one with such a mechanism. But I surely have a reason to object if you have a mechanism to shift the cost to my descendants, no?

    Also : Krugman was addressing concerns by political commentators about foreign debt over domestic debt. As I’ve tried to point out in some of my comments, foreign debt would be different from domestic debt if foreigners were just sitting, Scrooge-like, on their unlent US dollars but domestic lenders were using them.

    You can substitute ‘foreigner’ with any other lender who just holds unlent money (eg, US banks circa 2009-2011), and ‘debt’ with any other means of extracting their money and putting it into circulation (eg, taxes or expectations of inflation).

  2. 2 2 Bennett Haselton

    I think #13 is a matter of semantics. Suppose today, a handout of goods to group A is financed by selling bonds to group B. Then when members of group B are still alive a generation later and cash in their bonds, all taxpayers alive at that point have to pay taxes to finance the bond payments.

    Whether this counts as passing on a “burden” to future generations just depends on the definition. The *net* burden is zero — group B (or the people who inherited their bonds) receives payments, while everyone else has to pay taxes to pay off the bonds. On the other hand, group B could argue that they are not “winners” because they lived austerely in the first generation (buying bonds instead of goods) so they could cash them in and spend them in the second generation.

    In other words it is possible to do more than “consume everything in sight”, sort of. Group A can consume everything, while group B lives austerely in exchange for an incontestible claim on a disproportiate share of the goods that will be available in the future.

  3. 3 3 Steve Landsburg

    Mike H:

    I may not have any reason to object if I am the only one with such a mechanism. But I surely have a reason to object if you have a mechanism to shift the cost to my descendants, no?

    In a world of lump-sum taxes, I have no such mechanism.

  4. 4 4 Steve Landsburg

    Mike H;

    Also : Krugman was addressing concerns by political commentators about foreign debt over domestic debt. As I’ve tried to point out in some of my comments, foreign debt would be different from domestic debt if foreigners were just sitting, Scrooge-like, on their unlent US dollars but domestic lenders were using them.

    I have not read all of your comments (I’ve mostly been on airplanes), but this makes no sense to me at all.

  5. 5 5 Major_Freedom

    “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 can be against it if I don’t want my descendants to be burdened.

  6. 6 6 Major_Freedom

    I can also be against deficit financing because of opportunity costs reasons.

    Deficits generate a reduction of savings going to private investment and an increase in government spending. That increases the ratio of consumption spending (one ought to treat all government spending as consumption spending due to the government being a consumer and not a profit driven investor) to investment spending.

    Imagine if starting tomorrow, in the real world, the totality of all money available for investment went not to reinvestment in production, but to buy government debt instead, after which the government spends the money.

    That would lead to a complete collapse of productive employment, a complete collapse in the demand for capital goods. Very rapidly, as capital is consumed, we’d eventually be driven back to the stone age.

  7. 7 7 Nick Rowe

    Steve: This is not yet an answer to your question, but I think it’s important nevertheless:

    “3. Deficit financing offers the older generation a mechanism to shift some of that cost to future [including unborn] generations…..” (I added the “including unborn” bit)

    30 years ago I would have said that 3 is wrong (in a closed economy with no capital and no distorting taxes etc.). I think a lot of economists will still say that is totally wrong. Ask Bob Murphy, for example, whether he believed 3 two weeks ago. The main point of my original post was to argue that 3 is true. Many of my commenters tried to argue against me. It came as a shock to them that 3 was true. “You can’t make apples travel back in time, out of the mouths of the unborn into our mouths”. The belief that 3 is false (except when we borrow from foreigners, invest less, have distorting taxes, etc.) is a zombie belief that is widely held and refuses to die.

    That was the main point of my post: to argue that 3 was true. And that the cost of deficit-financed spending *would* fall on future generations unless the current generation was Ricardian. Yes, it did need to be argued. Many Keynesians, I submit, believe *both*: there is no cost on future generations *and* Ricardian Equivalence is false.

    I will respond with my current beliefs later.

  8. 8 8 Nick Rowe

    Yep. A whole slew of macroeconomics students over decades have been taught that 3 is false. “Because today’s government spending must be financed with today’s resources [true], and so cannot be financed with the resources belonging to future unborn generations [false]“. Re-read Paul Krugman asking yourself whether or not he believes 3. My interpretation is that he is denying 3, or that many people might read him as denying 3. You can decide for yourselves.

    Here’s Paul: “That’s not to say that high debt can’t cause problems — it certainly can. But these are problems of distribution and incentives, not the burden of debt as is commonly understood. And as Dean says, talking about leaving a burden to our children is especially nonsensical; what we are leaving behind is promises that some of our children will pay money to other children, which is a very different kettle of fish.”

    Remember, Paul does not believe in Ricardian Equivalence, so it would be hard to interpret him as saying that the current generation will be taking offsetting transfers.

  9. 9 9 Nick Rowe

    Curses! I miswrote part of the above. I should have said “Because today’s government projects must be built with today’s resources [true], and so cannot be financed with the resources belonging to future unborn generations [false]“.

  10. 10 10 Max

    One way to think about the debt is as a government managed bubble. It can be a very stable bubble, but it will eventually pop when the government ceases to exist. At that point (if not before) the “burden” is realized.

    A hypothetical economy which has exhausted all the investment opportunities actually needs a bubble to function optimally. The bubble provides a means of saving in the absence of investment.

  11. 11 11 Nick Rowe

    OK. Here are my views right now:
    1,2,3, true

    4. Hmmm. Mostly true, but not always true. False in a world with distorting taxes (I don’t think Steve would disagree). It might be false in some voting models. I think JohnE (I may have got your commenter’s name wrong, sorry) had a counterexample 2 posts back. It might be false if different people have different numbers of kids and grandkids (one of my commenters raised that issue). But a good point even if not always true.

    5. (I was wrong to have overlooked 4.)

    6. Dunno. I will have to re-read Bob’s model.

    7. True. And they might make lots of other mistakes too, including voting for the wrong government policies.

    8. True.

    9. False. Well, more of a false dichotomy? There’s a zero lower bound on individual bequests (well, not precisely, but..), and deficits let people get around that zero lower bound. So I don’t think you can separate out deficits from the greed of the current generation.

    10. N/A.

    12. I have changed the order here. Disagree. It’s not credit constraints that are the issue. It’s the Zero Lower Bound on individual bequests.

    11. False, I think. Now I need to re-read Bob’s “time machine” to be sure, but Bob seems to be making an important point here, just like I made in 9 above. Bob’s time machine lets an individual go past the zero lower bound on bequests. Deficits also let us go past the zero lower bound.

    13. OK. Now I see the point you were making in 11 and 12. Sure, a Pay As You Go (unfunded) pension system can duplicate exactly deficit-financed transfer payments. This is semantic. I would say that the unfunded liability in a PAYGO is part of the national debt, even if there are no marketable bonds. And that the upper limit on the national debt+unfunded liability is indeed currently available resources, because you can’t sell the bonds otherwise.

    14. a) False. In an open economy, you can get around the limit that you can’t consume more than available current resources (see 13 above).

    b) Otherwise true. (And the fact that a lot of economists make a big deal over whether the debt is held by foreigners should tip you off that those economists believe 3 is false).

    15 and 16. Let me re-read Don.

    Pheww! And you are TOTALLY wrong when you say this stuff is easy!

  12. 12 12 Major_Freedom

    Nick:

    You said “The belief that 3 is false (except when we borrow from foreigners, invest less, have distorting taxes, etc.) is a zombie belief that is widely held and refuses to die.

    Would you agree that “invest less” is, for all practical purposes, tied in with lending to the government?

    Yes, it is conceivable that the money lent to government could have otherwise been consumed, or lent to private consumers to buy consumer goods instead, and yes, we’re talking about counter-factuals here, but how many people think to themselves “It’s a good thing government is issuing debt, because I would have otherwise consumed more” in their decision-making?

    I think the likelihood of investment being reduced, on account of the existence of lending to government, is so high as to be important enough to not be abstracted away. I mean after all, the whole purpose of this thought experiment is ultimately to explain the real world.

    What if the “refusing to die” mentality is due to people thinking that with more government borrowing, there is ipso facto less investment? I mean our mentality is in the real world, not in highly abstracted thought experiments. I think “except less investment” is far too strong an assumption.

  13. 13 13 Ken B

    Hmmm. Nick has made a couple of disturbingly excellent points. What if we combine Nick Rowe’s zero lower bound point with *foreign* borrowing?
    If we ignore foreigners altogether then collectively we have a zero lower bound on bequests — but we can get around that with, and only with, foreign borrowing. So we can all simultaneously die leaving a negative inheritance in the form of foregin debt. So if Nick is right, is foreign debt really an irrelevance?

    I would say it was still the spending that caused it — we borrowed and squandered.

  14. 14 14 wintercow20

    The lump-sum assumption, while necessary for this discussion to proceed reasonably, nonetheless is irritating. For example, points #3 and #4 indicate that Wintercow should be able to insulate his kids from the spending of his current generation. Agreed, totally. But they also imply that Wintercow himself should be no worse off either, because deficit spending increases his opportunity set.

    That’s where I stop the presses. I think the lump-sum transfers assumption is supposed to prevent me from making this point, but it is not obvious at all that everyone today has their opportunity set expanded by deficit spending, particularly when this spending is not on generally accepted public goods. We can still satisfy the lump-sum transfers assumption here I think. Suppose the government, instead of providing the lump-sum transfers in a liquid/usable form, borrows money and uses it to erect statues made up of important chemicals from the earth’s insides, it makes one statue for every single family and provides it to them in a lump-sum fashion just as they would a head-subsidy, and that these statues are for some reason denatured – that they can not be usefully transformed into their constituent parts? In this case, we have lump sum transfers, but the current generation is unquestionably worse off. Now, you might say that the current generation has “X” yesterday and “X + statues” today and therefore cannot be worse off. But this “lump-sum” literally destroys resources – which has both an income and substitution effect on current generations. With fewer resources, we are all poorer. But even if these resources are not denatured, wouldn’t this sort of a “lump-sum” distribution distort relative prices today? This may or may not harm me today, but we all know well the impacts of messed up prices.

    Now, I still have the option of saving and making sure my kids are insulated from our lump-sum statue spree, and yes, this issue is there whether or not we finance the statues with debt or current taxation or future reductions in spending.

    I’m blabbering. Can’t we just have a discussion about the usefulness and appropriate size of government spending? If we raised zero dollars in tax revenues and spent $2 trillion annually, our annual deficits would double over today’s levels, and our national debt would increase far faster, yet would folks see this outcome as worse than the current situation from a fiscal perspective? (we could issue zero-coupon bonds that are paid off with new bond issues as they mature). I’d find this a much more appealing outcome.

  15. 15 15 Ron

    I disagree with number 4. There are reasons for the older generation
    to object to deficit spending.

    1. Without deficit spending, there’s a limit to government
    expenditures. They can’t set taxes to higher than 100%. On a
    practical basis, they can’t even set taxes that high. Deficit
    spending removes that limit.

    2. Deficit spending allows borrowings to accumulate to such an
    extent that there’s no way it could ever be repaid. At some point,
    you get a currency collapse (e.g.: the Zimbabwe trillion dollar
    bill). That does affect the older generation.

  16. 16 16 Steve Landsburg

    Re 13, Nick (and others) are correct that this is wrong in an open economy. This is relevant, however, only in the extreme case where the current generation wants to eat all its current capital and then some, which is surely not the case in, e.g. the contemporary United States of America.

    Edited to add: Here is where I begin to see why Krugman thought it was relevant that Americans hold a lot of Chinese assets — this is another way of saying we’re nowhere near this extreme case.

  17. 17 17 JohnE

    @Nick Rowe

    I don’t think my example showed that 4 was false because it deals with an explicitly different model than the one you and Steve had agreed on. It was meant to encapture a lot of people’s discomfort with deficit financing by showing that deficit financing can impose externalities (through the political process and collective action) on people who disagree with additional government spending. This is largely the point that Don Boudreaux makes and that Steve agrees with in point 15.

    However I want to point out that my example did not take any stand on whether the additional government spending was desirable from a social standpoint (for that you would need a theory on desirable social outcomes, e.g. a social welfare function). Thus one could equally argue that prohibiting deficit financing imposes an externality on people who agree with additional government spending. (That is if new government spending must be paid by current taxes, then the swing voter, person C, will vote against it, thus imposing a cost on person A who wanted the government spending.) Thus Boudreaux’s argument boils down to the fact that he thinks additional government spending is bad. (I know Boudreaux has good reasons for believing this.)

  18. 18 18 Steve Landsburg

    Major_Freedom:

    I can be against it if I don’t want my descendants to be burdened.

    It really would be better if you read the post before trying to respond to it.

  19. 19 19 Steve Landsburg

    Nick Rowe:

    Many Keynesians, I submit, believe *both*: there is no cost on future generations *and* Ricardian Equivalence is false.

    I would be stunned to learn that anyone believes this.

  20. 20 20 Nick Rowe

    Steve: Re 13. OK with your last comment, except it might matter for real exchange rates in a multi-good world (to which you would presumably agree) even if we don’t go to the limit.

    JohnE: OK. I’m still unsure about the generality of 4.

  21. 21 21 JohnE

    Steve,

    Point 4 – “Deficit financing expands your opportunity set, which you cannot be a bad thing (for you).”

    So implicit in this point is the assumption that “more choices make you better off”. So if people violated this, say because they feared they will be tempted to consume too much today, then deficit financing can make you worse off.

  22. 22 22 Nick Rowe

    Steve: “I would be stunned to learn that anyone believes this.”

    Then put your crash helmet on now!

    I used to believe it. It is what I was taught (or, rather, it is what learned, which is not always the same thing) as an undergraduate. That is the message I took away from Abba Lerner. And I don’t think I was that bad a student or that bad a reader.

    If anyone wants his own random sample of what people believe, Google my name, over the last week, and read some of the responses. Or read some of the comments on my original post. You read things like “sure, the next generation will inherit the debt burden, but they will also *inherit* the bonds, so it’s a wash”. Now that second use of the word “inherit” is what’s problematic. Because the people who say this do not literally think the future generation will inherit the bonds as a free gift, because they don’t believe in Ricardian Equivalence.

  23. 23 23 Nick Rowe

    Put it another way. Many Keynesians want to believe BOTH:

    1. A bond-financed tax cut will increase desired consumption and stimulate Aggregate Demand. (True if Ricardian Equivalence is false).

    AND

    2. The national debt this creates is not a burden on future generations because they will inherit the asset as well as the liability so they will owe it to themselves. (True if Ricardian Equivalence is true).

    I would love to hear commenters chime in on this. How many macroeconomists believe both 1 and 2?

  24. 24 24 Steve Landsburg

    Nick Rowe writes:

    4. Hmmm. Mostly true, but not always true. False in a world with distorting taxes (I don’t think Steve would disagree). It might be false in some voting models. I think JohnE (I may have got your commenter’s name wrong, sorry) had a counterexample 2 posts back. It might be false if different people have different numbers of kids and grandkids (one of my commenters raised that issue). But a good point even if not always true.

    Yes, I’m behind on reading comments due to travel. You (and the original commenter) are right that this fails if different families have different numbers of children — unless we interpret “lump sum” taxes to mean lump sum per family rather than lump sum per individual.

  25. 25 25 Ken B

    How’s this for a quick summary?

    1. Krugsburg(and alas Ken B) are wrong in full generality. This is beacuse the argument depends on a zero lower bound. If the country goes to negative equity overall the debt can be a burden.
    2. Krugsburg (and Ken B) are right in the real world and especially right about the USA. Not even Greece has negative equity.
    3. In all cases you need (unproductive) spending to impose a burden, and so the most important thing is the spending. This is particularly the case in the real world; see point 2.

  26. 26 26 rob

    As someone who had never given this any serious thought until a few days ago I do find it interesting that (via the “magic” of government debt) even in a model with fixed output and consumption you can have generations with winners and no losers, and later generations with losers but no winners. I think this was perhaps Bob’s “revelation”.

    I had convinced myself before reading today post that Steve’s earlier post on Ricardian equivalence was a joke meant to demonstrate that this theory didn’t hold water. I doubt if there is a single person alive who is consciously offsetting today’s government borrowing with savings for their descendants (and in Steve’s simple model even with lump sum taxes I don’t think the maths works, most people would protect their grandkids better by paying the tax). Perhaps he is just saying that in general individuals who save more and leave bigger legacies will have richer descendants more able to pay their taxes? But if so he is very explicit in point 4 that no-one has any reason to object to govt debt (over taxes) as a way of funding spending – which seems plain wrong to me. There are many reasons.

    In any case I agree with Steve’s view that the real issue is the underlying greed that drives government debt. Hopefully we can now move onto discussing the policy implications of this insight.

  27. 27 27 Nick Rowe

    Aha! rob (if it’s the same “rob” who commented on my post) deserves credit for the # of grandkids point.

  28. 28 28 rob

    According to Wikipedia:

    “In 1979, Barro defined the Ricardian Equivalence Theorem as follows:

    … shifts between debt and tax finance for a given amount of public expenditure would have no first-order effect on the real interest rate, volume of private investment, etc.”

    And rests on the following assumptions:

    * families act as infinitely lived dynasties because of intergenerational altruism[10]
    * capital markets are perfect (i.e., all can borrow and lend at a single rate)
    * the path of government expenditures is fixed

    Is it just me or is this the kind of theory that gets economics a bad name as a field of serious study ?

  29. 29 29 Andy Harless

    Responding to Nick’s comment:

    Many Keynesians want to believe BOTH:

    1. A bond-financed tax cut will increase desired consumption and stimulate Aggregate Demand. (True if Ricardian Equivalence is false).

    AND

    2. The national debt this creates is not a burden on future generations because they will inherit the asset as well as the liability so they will owe it to themselves. (True if Ricardian Equivalence is true).

    Number 2 is not so clear cut in the case where there are unemployed resources (which presumably is the case to which you are referring, since #1 implies that trying to stimulate aggregate demand would be a sensible thing to do). You convinced me, in the comments section of your original post, that, at least in an overlapping generations model with no liquidity constraints (and with no hysteresis, no NPG violation, etc.), there will, under almost any scenario, be some burden on future generations. But unlike the full-employment case, there is nothing that requires the burden to be equal to the quantity of debt, because the debt also causes more to be produced.

    As I see it, the argument in the slack resources case is really a very different argument than in the full employment case. In the full employment case, we’re ultimately talking about a simple accounting identity: one cohort consumes more; no more ever gets produced; therefore some other cohort must consume less. In the slack resources case, it is an argument about behavior. It says (in the slack resources now, full employment later case), “Reasonable people, if they don’t behave according to Ricardian Equivalence but do have a choice about how much to save and borrow, will not be willing to consume more in the current period (when there are slack resources) unless you also allow them to consume more in the next period (when there will be no slack resources).” Again, that is a very different and more subtle argument, and it depends critically on the assumption that people are “reasonable” in the way that economists imagine agents in overlapping generations models to be.

    “Reasonable people” is actually a pretty strong assumption. Some economists would surely argue that reasonable people will also behave according to Ricardian Equivalence, in which case proposition 1 is already a violation of the “reasonable people” assumption, so why not also believe proposition 2 — which could be a reasonable proposition provided that there are slack resources and people are not reasonable.

  30. 30 30 RPLong

    Steve, I object to the following:

    1. The problem as you have expressed it in this point assumes perfect government transfer payments and monetary neutrality. This directly contradicts your point 2, or at least seems to put the two points at odds. If government spending is costly (if for no other reason than administrative costs and interest rate discounting) then when we transfer $50 from Period 1 to Period 2, we end up with something less than $50. That is a real economic cost that cannot be ignored.

    3. “Taking advantage” of government debt is NOT voluntary, it is compulsory. I cannot “opt out” of any of the government’s debt-financed projects. They will take me to jail if I attempt to do so. If there is positive utility associated with choice, then I experience disutility as a result of this.

    4. This is your most egregious point. The fact that I can use public debt to my occasional advantage in NO WAY implies that I experience a NET POSITIVE utility as a result of public debt.

    6. What Bob is getting at is transversality conditions. The debt must eventually be repaid, otherwise we live in La-La Land.

    7. People also miscalculate the impact of debt on their own future savings; furthermore, thanks to the associated market distortions and declines in currency value, they are forced to find increasingly innovative ways of mitigating against the costs of debt financing as time goes on. Utility decreases exponentially across time. The larger the debt, the more costly it is to individuals.

    9. Deficit spending DOES deplete inheritances, so the impact is double. The problem isn’t greed, the problem is viewing deficit spending as a panacea.

    13. You may not be familiar with Austrian School malinvestment theories.

    The most important burden of government debt is its impact on the broader economy. None of us are the government, therefore what the government decides to do is not something “our generation has chosen to do.” Granted, we could wage bloody revolution against a spendthrift government in order to try to stop it from behaving like a playboy, but that’s not exactly the same thing as “choosing to deficit-spend,” is it?

    Wealth and value cannot be created out of thin air. If we assume transversality conditions, then we assume that the debt will have to eventually be repaid by SOMEONE. That person is the person who suffers the disutility (Bob Murphy calls her Iris).

    If we do not assume transversality conditions, on the other hand, then what we are talking about is a systematic currency debasement. For that topic we have to expand the discussion beyond just the transfer payments and look at how things like food and commodity prices and wage rates are impacted by government spending then the question ceases to become an issue of accounting for transfer payments and starts to be a story about market distortion. That is the real cost of government debt.

  31. 31 31 Ken B

    SL:Here is where I begin to see why Krugman thought it was relevant that Americans hold a lot of Chinese assets — this is another way of saying we’re nowhere near this extreme case.

    Really? he added those extra words in a NYT op ed as an unnecessary caveat to an abstruse point it took a gaggle of trained economists the better part of a week to reach? I think Thomas Bayes has the right idea. Krugman wants more spending, which means more debt, so he wants to allay worries about debt, so he points out the debt is smaller than it looks.

  32. 32 32 Neil

    I am now pretty much in agreement. But when you combine the fact that current generations have the option to shift burdens to future generations with the fiscal illusion caused by deficit finance (for which there seems ample evidence), you get more burden shifting. And I doubt than any amount of education on the matter will change that, contrary to point 7.

  33. 33 33 Ken B
  34. 34 34 Neil

    Oh, one last point. One way to think about the distinction between domestic and foreign-held debt is as follows. If some future generation decides to default on the national debt, and the debt is domestic held, the collective consumption possibilities of that future generation are unchanged. But if the debt is foreign held, the collective consumption possibilities are increased (barring any change in the terms on which the US can borrow abroad.)

  35. 35 35 Steve Landsburg

    Nick rowe: you seem to be suggesting that “some keynesians” believe that debt-financed spending is a free lunch. If this were true, they would advocate an infinite amount of debt-financed spending. But i have never heard of anyone who takes this position.

  36. 36 36 Greg Ransom

    Because economists have sight blindness the choice theory involving the choice between production process that take more time and offer superior output and production processes that take less time and offer inferior output, it is simply NOT TRUE that that issues are “well understood” by economists — and it is equally not true that these effects and burdens can be separated one from the other.

    The largest burden is the opportunity cost of lost output caused by taking the process of re-evaluating and re-coordinating production and consumption processes out of the hands of folks responsive to changing price relations and local conditions involving the choice between longer / superior output processes and shorter / inferior output processes — and the constantly changing status and interrelations of these, intertwined with changing technology and tastes, etc.

    Lerner’s debt argument fails for exactly the same reasons his collectivist economic planning argument fails.

    Steve wrote.

    “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.”

  37. 37 37 Greg Ransom

    I should note that it took economists 50 years to have any clue that Lerner was wrong about resource coordination under collectivist economic ownership, Lerner never saw it.

    And if truth be told, not one economist in a thousand really sees what is the nub of the matter.

  38. 38 38 Keshav Srinivasan

    Steve, perhaps to first order they believe deficit spending is a free lunch, but the second-order effects on distribution and incentives result in debt having nonzero social cost.

  39. 39 39 iceman

    Always a great topic, and as usual, y’all have helped me refine my thinking in an enjoyable way. My current takeaways (perhaps even Austrians would agree):

    1) There is general agreement that to a large first approximation, the scope and nature of the spending determines the burden, while the way it’s financed can impact how that burden is distributed.

    2) The main quibble, or issue of “emphasis”, with #1 is where SL is saying debt doesn’t allow people to shift the burden in ways they otherwise COULDN’T, while others are saying debt can make it more likely people actually do so in ways they otherwise WOULDN’T. This seems true even for a fixed level of spending, although the larger concern is that borrowing facilitates greater (wasteful) spending (at least as long as people are willing to buy the bonds). I recently re-encountered the old quote attributed to Alexander Tytler: “A democracy…can only exist until the voters discover that they can vote themselves largesse from the public treasury.”

    1b) In my experience many if not most non-economists do not implicitly recognize #1, and do associate the burden with the debt. (I’m still hopeful there is greater agreement among economists.) This is pretty understandable if the usual political incentive is to defer payment, so people tend to observe a strong correlation between wasteful spending and deficits. Of greater concern would be if they also tend to view a given program as less wasteful if funded with current taxation. I believe we recently had a vibrant post on this topic.

  40. 40 40 Bob Murphy

    Steve, I think your points #9 and #13 are wrong, and here’s my counterexample.

    Two weeks ago, if you had told me you had a model of a pure endowment economy and no physical ability to save consumption goods across time periods, I would have said with confidence, “There is no way at all that people in the first generation can affect people in 5 generations. The government can of course redistribute the goods in any given time period, but the losses and gains at that time are a wash; the generation itself is neither poorer nor richer, and has no basis for caring what its ancestors did.”

    My counterexample shows that I was wrong. Maybe you already knew of this quirk. If so, more power to you. But I didn’t know, Dean Baker doesn’t know, Krugman doesn’t know, and all the people in your comments here who keep telling me, “It’s just a redistribution, you have to make an argument about deadweight losses from taxation” don’t know it.

  41. 41 41 Scott H.

    Ricardian Equivalence… really?

    These comments are in relation to #7 & #8.

    OK, Steve, you are smart and this is your subject matter, please answer the following:

    1.) What is your share of the current deficit?
    2.) What will be your child’s share?
    3.) What is the “correct” amount for you to save?

    Me? I walk around with no clue about the answers to these questions.

  42. 42 42 Steve Landsburg

    Bob Murphy:

    Two weeks ago, if you had told me you had a model of a pure endowment economy and no physical ability to save consumption goods across time periods, I would have said with confidence, “There is no way at all that people in the first generation can affect people in 5 generations. The government can of course redistribute the goods in any given time period, but the losses and gains at that time are a wash; the generation itself is neither poorer nor richer, and has no basis for caring what its ancestors did.”

    Two weeks ago you’d have been right. Your example shows precisely that the government can redistribute goods in any time period but the generation itself is neither richer nor poorer.

    It also illustrates that if government debt grows faster than the real growth rate of the economy (which in your example is zero) then there must eventually be a default. I do not think this is a new observation.

  43. 43 43 Greg Ransom

    #6 is an _unsolvable_ problem.

    The knowledge problem says that people won’t able to correctly calculate “the” effect on their grandchildren — indeed built into that _”the”_ there is a tacit assumption that there exists a single knowable/calculatable effect on each particular person of government debt.

    Also, government debt and future taxation prospects creates all sorts of uncertainty problems — will the government default on that debt? Will the government inflate it away?

    And tax burdens are _constantly_ shifted in ways no one can possibly predict.

    Only pure magic could overcome the knowledge problem and the uncertainty problem.

    “Assume a can opener ..” / “Assume magic …” / “Assume a God’s Eye view knowledge of events or probabilities of events now and into the future in the world.”

    Steve writes,

    “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.”

  44. 44 44 Greg Ransom

    Sorry, #7 is an _unsolvable_ problem.

    And the remarks just above are about #7.

    And what Scott H. said on this issue is spot on.

  45. 45 45 Greg Ransom

    The discussion is usually wholly motivated by folks concerned with debates over whether Keynesian “stimulus” borrowing could be any kind of burden, isn’t it?

    So the context is always the consequences of the _expansion_ of borrowing.

    And the vulgar Keynesian ratchet says just add more massive borrowing each recession, and never worry about paying it off during good times — which would only create a new recession.

    Steve writes,

    “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.”

  46. 46 46 Scott H.

    @ Greg

    I agree with you 100%. That is why I asked Steve those questions.

    On another note, I see a bit of “wisdom of crowds” type of thinking in Ricardian Equivalence. The idea is that some people will under save and some will over save, but in the end they will balance out and get roughly the best knowable(?) result. It is interesting that this exact same crowd says that we are cheating our grandchildren by having this level of deficit spending irrespective of any supposed Ricardian Equivalence. Hmmm… do I get to pick when to believe the crowd’s decision?

  47. 47 47 Ken B

    Steve’s & Bob’s comments on Bob’s latest intergenerational apple saga have an amusing aspect. Iris ends up with 41, and Hank with 159. Now by declining marginal utlity, if you can aggregate, and if you don’t play favorites, then this should have lower total utility than each having 100. Steve seems in some of his arguments to be a play-no-favorites utility aggregator, and Bob as an Austrian seems not to be an aggregator of any sort. But Steve is saying, look, no cost and Bob is saying oh the humanity.

  48. 48 48 Greg Ransom

    Real economists don’t aggregate over utils ….

    “Now by declining marginal utlity, if you can aggregate, and if you don’t play favorites, then this should have lower total utility than each having 100.”

  49. 49 49 Greg Ransom

    Scott H., re Ricardo, Lerner, etc. — sometimes the issue is centered on monetary / credit equilibrium and sometimes the issue is centered on the effect of forced temporary spending/saving on distribution and output.

    and note well, the math or conceptual models used (with “given” equilibrium or disequilibrium assumptions built in) by conceptual necessity have removed the knowledge problem and the choice and coordination problem of constantly re-evaluating and reshuffling alternative “more time and superior output” production processes and “less time and and less output” production processes, in a context where changing supplies and technologies make these choices have different outcomes at each point in time.

    I.e. just as a person with no functioning brain structures for identifying faces cannot see faces, economists using these constructs can’t see the heart of the matter when it comes to the costs and problems of coordination across time — the constant restructuring of more or less time taking processes producing more or less output — in constantly changing valuationally and physically related structures. And how money and government action link up to this ongoing combination knowledge / valuation / re-coordination problem.

  50. 50 50 Iceman

    @Scott H: It’s been a long strange trip I know, but 2 posts ago SL said “that’s a failure of RE, but it’s not a burden on all of the next generation.” (And Nick Rowe has said his main point was that you can’t believe in BOTH deficit stimulus in SR and no burden in LR.)

    Interesting comment on the ‘wisdom of the crowd’, but I didn’t see any claim that all the miscalculations exactly cancel, just that assuming RE fails still requires a story for why it goes one way or the other. Yours seems to be that people simply don’t bother thinking about it at all. SL might still say we only have ourselves to blame? That also made me think of the following question as a (possibly flawed) caveat to yours:

    What’s the correct price of an apple? I have no clue, yet the crowd gets that as right as an omniscient planner, so the story goes. Just wondering how interest rates might function as price here. In any event we can always complain about the burden of wasteful spending. The issue here is whether “deficit” = “grandchildren”.

  51. 51 51 Christopher

    Your disagreement with Dr. Murphy is what you call a ‘generation’.

    Based on Dr. Murphy’s last model:
    When you say generation you seem to refer to one horizontal row on his chart e.g. Young Iris and Old Hank form one generation.
    When he says generation he is talking about a certain person in his chart looked on over his or her lifespan e.g. Young Iris and Old Iris form one generation.

    So when he says that a generation in 100 years will be affected, in your language that means “someone in 100 years will be affected have less life-time wealth”.

    I think, that’s the whole issue. So if you settle this linguistic problem and somehow get Dr. Murphy to agree that one doesn’t need any debts to produce the results that he describes in his chart, I think you are in agreement. I, however, still disagree with 14 but I don’t even know how to argue my point of view because I have no clue why you think 14 is correct. The whole point is that a society can not consume more than they produce and thereby force people in the future to consume less than they produce… except(!) you find an outsider who allows you to consume more than you produce and promisse him that your children are going to make up for it by producing more than they consume. I think this actually follows, as a matter of logic, from your point 13. Just think of the US as a huge family.

    By the way, what are your thoughts on this scenario:
    http://s14.directupload.net/images/120107/bqbx7uv2.jpg
    Is it just an example of Ricardian Equivalence or something else?

  52. 52 52 Nick Rowe

    Scott H: “It is interesting that this exact same crowd says that we are cheating our grandchildren by having this level of deficit spending irrespective of any supposed Ricardian Equivalence. Hmmm… do I get to pick when to believe the crowd’s decision?”

    Suppose Ricardian Equivalence were true. What would the average individual in the crowd be saying? He would be saying this: “That deficit spending is going to be cheating my grandchildren, so I will have to increase my saving to increase my bequests to offset it.”

    If the average individual in the crowd were instead saying “Deficits do not create a burden on my grandchildren, because they will owe it to themselves, so I don’t need to increase my saving to increase my bequests”, then Ricardian Equivalence would be false.

  53. 53 53 JohnE

    @Nick Rowe

    However If the average individual in the crowd were instead saying “Deficits do create a burden on my grandchildren, over and above the spending itself, so I need to increase my saving to increase my bequests even more than the amount my taxes would be if the spending were tax financed”, then Ricardian Equivalence would also be false.

    Hence if RE failed that doesn’t necessarily mean there is a burden on the next generation. Rather the effect on the next generation is ambiguous. But don’t forget the effect on the current generation! The effect on them is ambiguous as well since over-savers are worse off due to the deficit financing while under-savers are better off.

    But why is tax financed spending the default from which to compare the effects of deficit financing? That is, one could equally talk about the burden on future generations of tax financed spending since the grandchildren of over-savers are made worse off if the spending is tax financed (because then they get less savings from their grandparents).

  54. 54 54 Bob Murphy

    Oops, after further review, Steve, I might be prepared to admit that all of your points you listed here are technically correct. However, in light of the very wrong intuition that Krugman et al. are deploying in the discussion of this stuff–and intuition on which I relied when writing up the treatment of this stuff in two of my books for the layperson–I think your points here would simply confirm their (wrong) views, rather than enlightening all of us on the right way to think about these things.

    Here’s what I don’t get: You yourself acknolwedge that Krugman shouldn’t have said, “If our grandkids hold the Treasuries, then the debt can’t be a burden to their generation on net, since the government would just be taking money from one subset and giving it to another subset.” You pointed out that even if the government in 100 years takes money *on net* from American grandkids, that the government debt isn’t making them poorer.

    But instead of you saying, “Ah, Krugman is thinking about this totally wrong, and he is reinforcing the bad intuition on the part of his readers,” you say, “Krugman is basically right, except for this little offhand remark he made.”

    No, I’m telling you Steve, a bunch of us were using bad intuition on this. Nick Rowe says he was explicitly taught it, I personally believed it when writing up two of my textbook discussions, and it is crystal clear to me that a lot of our commentators in the blogs believe “it.”

    I think what’s happening here is that since you are a mathematician in your approach to this stuff, you never relied on the bad intuition. So you’ve been firing off true statements, not realizing that you are encouraging those of us who haven’t been freed from the bad intuition, to remain mired in our error.

    Later tonight I will write all of this up.

  55. 55 55 Scott H.

    @Iceman…

    First, a minor clarification. I didn’t say that I don’t bother thinking about my share of the debt. To be more clear, it was when I really began to think about it that I realized the answer is mostly unknowable.

    As far as the apple example is concerned, I don’t need to know the “correct” price for an apple — you are right. I just need to know if its worth it to purchase an apple at the price given to me. In keeping with your analogy here… with my share of the deficit I have an apple with an unknown price. Interest rates are still not useful (enough). The interest is only the price to carry the debt. It doesn’t describe the cost of the whole debt. Even if it did, I still have the issue with determining “my share” of that interest and/or debt.

    As far as the “that’s a failure of RE, but it’s not a burden on all of the next generation”, well, I am still thinking about that one. =)

  56. 56 56 Neil

    The national debt IS a tax transfer scheme. Eligibility to receive the transfer is not based on age or income, as in most transfer schemes, but on the ownership of a piece of paper. This allows one to sell the right to receive the transfer

    Collectively, the right to receive the transfer is worthless, since the national debt just shuffles money from one pocket to another. New generations inherit the taxes, regardless. If they also inherit the right to receive the transfers, or equivalent value, then it nets out. If they have to buy the right to receive the transfer, they’ve been sold a bill of collectively worthless assets, and a generational shift of tax burden occurs.

    Needless to say, this is not the only way a greedy older generation can impoverish a future generation, but it is a tool.

  57. 57 57 Henri Hein

    “Nick rowe: you seem to be suggesting that “some keynesians” believe that debt-financed spending is a free lunch. If this were true, they would advocate an infinite amount of debt-financed spending. But i have never heard of anyone who takes this position”

    I have. I am unable to comprehend the Keynesian position, so I probably misunderstand them. That said, for any proposed stimulus of size S, (some) Keynesians argue for a stimulus of a size larger than S. I have not heard any of them stipulate an upper bound.

  58. 58 58 Iceman

    @Scott H: But for purposes of your decision to save, the interest rate would seem to represent the price to sell the bonds. Maybe this doesn’t work if foreigners are piling into Treasuries in a global flight to quality (markets are better at pricing relative than absolute risk). I was mainly trying to suggest a point of distinction for when to ‘trust the crowd’ – when there is a viable analogue to a price system. I see no comparable regulator for judging the wastefulness of govt spending.

    BTW I think you have a point on the uncertainty…not sure I’m sold yet that it’s entirely fair to say RE fails & we still (consciously) ‘chose’ to burden our grandkids / can only blame ourselves; I am usually quite content to blame politicians who play on our rational ignorance.

  59. 59 59 Andy Harless

    @Henri Hein:

    I have not heard any of them stipulate an upper bound.

    I don’t think any Keynesians believe that we have unlimited resources, so certainly they believe there is some upper bound. But a premise on which most Keynesians probably agree today is that the political upper bound on how much stimulus is possible is well beyond the economic upper bound on how much will continue to produce a marginal increase in output, so the latter upper bound, while it exists, is non-binding for any practically relevant thought experiment.

  60. 60 60 roystgnr

    The public debt always appeared to be a “new-money to old-money” transfer scheme to me. We take money from people in taxes based on income, and then we give it to other people in interest payments based on wealth. This ought to benefit wealth that isn’t invested in sovereign debt, too, as the government bonds reduce the supply of investment dollars and bid up higher interest rates elsewhere.

    I doubt that this is a *deliberate* plot by wealthy politically-influential families to slow their descendants’ regression to the mean, but if I were to try and come up with such a plot I’m not sure what better mechanism I could pick.

  61. 61 61 kebko

    I’m an amateur, but this is how I think of it (excuse the terminology):

    If the government spends, it can do 3 things:

    1) Raise taxes. This pulls money out of the existing economy today equal to the spending.

    2) print money. This reduces the value of existing money in the economy, equal to the spending – basically the same as 1.

    3) sell bonds. This pulls money out of the existing private economy today equal to the spending – basically the same as 1 and 2.

    In the future, the bonds will be repaid with a new round of 1, 2, or 3. I think the proponents of the “it’s just money we’re paying ourselves” idea see a future round of #2, and simply see an exchange of one form of money for another, so that there isn’t any future burden. In all cases the burden was imposed when the spending happened, because in all cases, money that could have been used to accomplish other things was instead used for the current government expenditures.

    To the extent that there are other effects, it would be the degree to which the government expenditures led to better investment of resources in the private economy or not, and we’re basically back to a non-empirical judgment call about whether marginal government spending is productive or not. So, the Ricardian equivalence is not just a matter of blank slate savings levels, but if there is slack in the credit markets, then does the new government spending cause investments to be made which otherwise would have been foregone even though they might have been possible in terms of the availability of money.

    Sorry if this is all incoherent or obvious stuff that just wasted your time.

  62. 62 62 Greg Ransom

    reystgnr, wonder if Krugman is a big holder of tax free government bonds, as so many of the 1%ers are.

  63. 63 63 Bob Murphy

    Steve (Landsburg), in light of my realization that I wasn’t fully getting your position before, I went back to re-read Krugman. And I am still sure that he has no idea of the stuff Nick Rowe and I are talking about or, even worse, he is aware of it and is deliberately misleading people.

    All of Krugman’s recent comments on this stuff is misleading, but this one is crystal clear. Krugman is relying on exactly the fallacy that had me in its snare for 10 years, and that Nick says he was explicitly taught in school.

  64. 64 64 Bob Murphy

    Steve, I find an even better one! Look at Dean Baker’s reaction to David Brooks. (And Krugman quoted this with approval.) You’re telling me the casual reader would walk away from Baker’s blog post, thinking that the present generation could lower the standard of living of future generations by handing down government bonds that they would need to tax themselves to retire?

  65. 65 65 Max

    “The public debt always appeared to be a “new-money to old-money” transfer scheme to me. We take money from people in taxes based on income, and then we give it to other people in interest payments based on wealth. This ought to benefit wealth that isn’t invested in sovereign debt, too, as the government bonds reduce the supply of investment dollars and bid up higher interest rates elsewhere.”

    This could be turned on its head if public debt were used to purchase private financial assets. You could reduce risk premiums – Dow 36,000! Of course, some old money would like that. You can’t win.

  66. 66 66 Doc Merlin

    How many of us are credit constrained? Furthermore, are we as a society currently credit constrained (and is that why interest rates are near 0)?

  67. 67 67 Henri Hein

    @Andy Harless:

    I think we agree. It is practically impossible for a human endeavor to result in anything that is mathematically infinite, and an unknown upper bound is not the same as no upper bound. Still, theoretically, a Keynesian executing a stimulus with a multiplier above 1 with no upper bound do not need infinite resources to start, just either infinite time or the ability to do it in zero time.

  68. 68 68 Mike H

    “I have not read all of your comments (I’ve mostly been on airplanes), but this makes no sense to me at all.”

    Ok, that’s fine. It wouldn’t make much sense under those circumstances.

  69. 69 69 vik

    Murphy’s model is silly because no one with Rational Expectations would buy a bond they will be taxed to retire- unless their discount rate is masochistically negative, in which case I’m willing to offer them worse terms than the Govt and punch them in the face into the bargain. In his model, the lumpsum tax is impredicatively determined by how much of the bond issue was taken up. For non masochists, or even for masochists who have my phone-number, bond take up and ‘debt burden’ is zero.

    Maybe Murphy thinks people have ‘bond illusion’- they don’t understand that the Govt can tax them the same amount they repay them.
    The answer to ‘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?”.- is there would be no Govt debt in such a (closed) world.

  70. 70 70 Steve Landsburg

    vik: You have very definitely not understood Murphy’s model.

  71. 71 71 Liquidationist

    I don’t thin point 3 is correct. Assuming an endowment model then it should really be restated to say:

    “Deficit financing offers the older generation a mechanism to reduce the consumption of future generations of tax payers and increase the consumption of future generations of bond-holders.”

    Consumption will be the same in the future period, no matter what the government does in the earlier period. Anyone who is likely to be taxed (or has a descendant who is likely to be taxed) in period 2 had better buy bonds if they want to avoid reduced consumption in period 2.

  72. 72 72 Steve Landsburg

    Liquidationist:

    Consumption will be the same in the future period, no matter what the government does in the earlier period.

    If govt policy increases consumption in the current period, it must reduce it in the future period. It can increase consumption in the current period if it induces people either to a) invest less or b) import more.

  73. 73 73 vik

    Don’t see why. He says ‘Anybody who lends money to the government does so voluntarily, taking government tax policies as fixed. (I.e. everyone is best-responding to the government’s lump-sum taxing amounts levied in each time period.)’ So his agents don’t have Rational Expectations. They have ‘bond illusion’. If their expectations were Muth Rational, they would know that money spent on bonds creates a lumpsum tax liability in the next period.
    Muth’s paper came out, what- 50 years ago? The Phillips curve- based on money illusion and gaming it- collapsed about 40 years ago.
    What is the point of this gedanken?

    Someone please tell me what I’m missing

  74. 74 74 Steve Landsburg

    vik:

    Someone please tell me what I’m missing

    What you are missing is that individuals take future tax policy as given.

    The “Iris” in Bob’s model is one of 100 million identical people, all named Iris. Iris-One’s tax bill depends not on her own previous lending, but on the previous lending of Iris-Two, Iris-Three, Iris-Four, etc, all of which Iris-One takes as given. Therefore Iris-One’s lending decision has no appreciable effect on her future tax bill.

    All of this is a completely standard set-up in models of this sort, and Bob very carefully explained that this what was he was doing.

  75. 75 75 Nick Rowe

    Steve: Aha! You are still watching this thread. Good.

    “Nick rowe: you seem to be suggesting that “some keynesians” believe that debt-financed spending is a free lunch. If this were true, they would advocate an infinite amount of debt-financed spending. But i have never heard of anyone who takes this position.”

    I’ve been thinking that over the last few days. I have three (different) responses:

    1. Keynesians do tend to believe in free lunches. (And they are right of course, if extra goods can be produced by printing more money).

    2. Tell me, when you read Paul Krugman’s piece, did you interpret him as implicitly assuming Ricardian Equivalence? (Because he doesn’t; he wants a deficit precisely because he thinks it will increase current demand for goods.)

    3. Anything whatsoever can be derived from a contradiction. Your question is a bit like asking: if they believe those two contradictory things, why don’t they also believe that 2+2=5?

  76. 76 76 Harold

    Can we say that the burden on future generations is zero with full Ricardian Equivalence. Without RE there will be a burden, but RE fails only to the exact extent we want it to fail?

    So in a literal sense, Steve was wrong to have said:
    “…government debt is too a burden on our grandchildren, unless you believe in Ricardian Equivalence.

    I want to explain what that means, and why it’s wrong.”

    There clearly IS a burden on our granchildren, but only to the extent that we want to burden them.

    On point 7, I suggest that (almost) everyone with zero savings will spend more if given more. Otherwise we are assuming that their balance just happened to be zero, rather than constrained to zero. Their choice will always be to spend more at the expense of their grandchildren. Now, you could suggest that this is a rational, informed choice, but I would suggest that those who wish to spend more than they have all the time are less likely to rationally assess the situation, at the expense of their granchildren.

    So the argument still stands, given the assumption of rational actors. But where we can confidently predict that a particular group will not behave in a rational, informed way, we are surely obliged to consider this when formulating policy.

    As Andy said, “Reasonable people” is actually a pretty strong assumption.

  77. 77 77 Major_Freedom

    I said: “I can be against it if I don’t want my descendants to be burdened.”

    Lansburg said: “It really would be better if you read the post before trying to respond to it.”

    *Sigh*, it would really help if you paid attention to the assumptions before you respond to what I said.

    I can say I don’t want deficit financing on the basis that I don’t want to burden my children and grandchildren, and I can say this not because I am not aware of your assumptions 3 and 4, but rather because my children and grandchildren will be burdened by deficit financing if it took place at all, REGARDLESS if I personally accept it for myself or not. As long as others engage in the practise, my children and grandchildren will be burdened by it.

    That is enough for me to be against the practise.

  78. 78 78 Steve Landsburg

    Major_Freedom:

    my children and grandchildren will be burdened by deficit financing if it took place at all, REGARDLESS if I personally accept it for myself or not. As long as others engage in the practise, my children and grandchildren will be burdened by it.

    This is a) incorrect in a world of lump sum taxes and b) incorrect in a world without credit constraints.

  79. 79 79 Steve Landsburg

    Harold:

    On point 7, I suggest that (almost) everyone with zero savings will spend more if given more. Otherwise we are assuming that their balance just happened to be zero, rather than constrained to zero.

    Yes, this is certainly right.

    Their choice will always be to spend more at the expense of their grandchildren. Now, you could suggest that this is a rational, informed choice, but I would suggest that those who wish to spend more than they have all the time are less likely to rationally assess the situation, at the expense of their granchildren.

    This could plausibly be either true or false.

  80. 80 80 Greg Ransom

    Nick writes,

    “1. Keynesians do tend to believe in free lunches. (And they are right of course, if extra goods can be produced by printing more money).”

    This of course, isn’t necessarily true.

    The production of goods is not the production of value.

    Examples.

    Bush/Fed stimulus led to the nearly completed construction of a housing project in North Los Angeles County. These homes were then bulldozed, because it would take more money to finish, maintain, and sell these homes than they could return in profits.

    “Stimulus” money was spend on “green” cars. All sorts of goods were produced. But these goods turned out not to be economically viable. So money was spend disposing of these cars and car parts.

    Why could Keynesians think that the production of goods could entail the production of value?

    Because they think in terms of a substance theory of value which is embedded in their aggregate and backward looking “economic” categories, much as Ricardo did.

  81. 81 81 Greg Ransom

    The production of goods is not the production of free lunches.

    I.e. the Keynesian activities invariable draw goods away from alternative production processes, and often the production processes “stimulated” are SHORTER production processes producing INFERIOR output over the long term.

    And often these goods turn out not to be economic in nature at all — e.g. as many Obama green “stimulus” goods have turned out to have negative economic value, required economic expenditure to

    “1. Keynesians do tend to believe in free lunches. (And they are right of course, if extra goods can be produced by printing more money).”

    These are only “free lunches” by the fiat of the math constructs used by economists which make it impossible to look at what actually takes place — i.e. the “givens” and “aggregates” of the economists are non-economic and hide the economic process from the mental imagination of the math constructor, just as math constructs did exactly the same thing to economists in the socialist planning debates, which math economists believed Lange and Lerner had “won” for generations, based on the _math_.

  82. 82 82 Keshav Srinivasan

    Bob Murphy has taken this argument to national television! Here is his appearance on the Fox Business Network discussing it:
    http://consultingbyrpm.com/blog/2012/01/my-freedomwatch-appearance.html

  83. 83 83 Harold

    I think I may be getting this – my comment above is partly point 12 at the top. Credit constrained people can impoverish their own granchildren, as though they had a time machine. Point 13 states that the whole generation cannot do this more with credit than they could otherwise have done – because there is no actual time machine to bring resources back from the future. I think the main point is that the extent the future is impoverished is in total the amount we would want it to be, so we have no reason to object.

    I was thinking perhaps along the lines of someone who dies owing $100 (whilst hoping for better times ahead). Had he received an extra $100 in tax benefits, and he cared about his grandchildren, he would have saved the $100, and then died leaving $0. The grandchild still gets nothing, and so is impoverished by the borrowing, even though the recipient of the tax benefit did reduce his consumption. However, the person he owes has an extra $100. However, to avoid burdening the future more than the collective desire, the recipient must save the extra rather than consume it, and he could not know that it was the result of reduced consumption of the debtor. He therefore has no incentive to “offset” this windfall, and savings must therefore be lower (to some extent) than we as a population desire.

    A bit more about the rationality of saving. This is a separate issue from much of the above -e xcept possibly point 7. Education may not be enough to getth erequired saving level. One recent study
    http://www.rotman.utoronto.ca/facbios/file/saving%20and%20number%20of%20goals%20final%20march%202011.pdf
    had broadly similar results from different places around the world (Canada, Hong Kong and India). They asked people to save for either a single goal or multiple goals. In India they asked some people to put the savings in an envelope. The saving rates from one experiment were as follows:

    10% – Single goal, with envelope
    8% – Single goal, no envelope
    6% – Multiple goals, with envelope
    5% – Multiple goals, no envelope
    3% – No specific savings goal.

    Now the experiment did not alter the situations of the families, except by asking them to think about a particular thing.

    We notice that asking them to think about more than one thing reduced the total savings. Providing an envelope increased the saving. I cannot see how these can be rational saving decisions.

    This finding seems to disprove that people will think rationally about saving the extra money they will have from Govt. borrowing rather than taxing. It showed that under these conditions asking them to save for an additional thing actually reduced saving.

    Showing that saving choices are often not rational is not the same as showing that any particular one is too high or too low. In the example above, which is the “right” level of saving? Maybe an envelope leads to oversaving, or thinking about only one thing leads to oversaving. However, it does destroy the link between how much we will save and our care for our grandchildren, making it very unlikely that the right level will be saved.

    Steve suggests that some people will save too much because they have mis-interpreted the effect on their grandchildren. The evidence in this study says that if they were saving for only one thing now, then asking them to save extra for their grandchildren would actually decrease savings. This suggests (although it certainly does not prove) that asking people to save enough to offset their benefit is much more likely to lead to undersaving than oversaving, and therefore the future generation will be impoverished more than we would like.

  1. 1 Future Generations Will Be Indebted to Me for the Clarity of This Exposition
  2. 2 We Will Not Solve the Debt Issue During This Generation
  3. 3 The Burden of the Debt Burden
  4. 4 Rowe Row « azmytheconomics
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