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.

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_.

“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.

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.

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.

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.

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.

“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?