21 Jan 2012

Krugman Almost Renders Landsburg and Me Speechless

Economics, Financial Economics, Krugman 56 Comments

On the issue of corporate taxation, Steve Landsburg recently declared that Krugman had rendered him “at a loss for words.” (Although I should add, Steve managed to find 543 words to put in his post.) In this post, Steve wrote:

But if his point is that you must claim a share of those profits in order to benefit from capital accumulation, then he really has stopped even pretending to be an economist. As Professor Krugman is surely well aware, the accumulation of capital is the primary driving force behind the growth of wages.

At the time–just as when Bill Anderson says similar things–I cringed a little, thinking Steve had gone overboard.

But Krugman’s antics today on the debt stuff make me feel Landsburg’s pain. I can understand what drove him to such rhetoric.

As many of you are well aware, some of us devoted basically a week of our lives hashing out the possible problems in Krugman and Dean Baker’s “the debt isn’t a burden to our kids” stuff. Some people were anxious for Krugman to weigh in on the debate; I know many emailed him, and even some of his associates (i.e. Keynesian-friendly bloggers) were tweeting him and Dean Baker, asking for their thoughts on the charges that Nick Rowe (and later I) leveled.

To be honest, I didn’t think Krugman would say a word more about it. In my mind, Nick’s little example–which I elaborated on, in a cute Excel table with lots of purty colors–epitomized the assumptions Baker and Krugman had been making, and showed precisely what was wrong with their logic. I knew there was no way Krugman could possibly comment on that demonstration without basically admitting that he had been wrong. (If you’re curious, I gave an example of how Krugman could try to punt on the matter, but even there, I had him admitting he had been wrong, in a Krugmanesque way.)

So in order to save face, Krugman had done the only possible thing–he didn’t talk anymore about the debt stuff. Until today.

In today’s post, Krugman approvingly links to Dean Baker. Did they take on me? No. But fine, I’m a punk. Did they take on Nick Rowe? No, which is far less excusable since he is a respected economist who doesn’t have knee-jerk right-wing policy prescriptions.

What did Baker and Krugman do, instead? They picked apart some goofball Wall Street guy who doesn’t even understand their original argument. Suh-weet. Then Baker and Krugman both repeat their original argument verbatim, as if there has been nothing interesting raised against it since they first spouted it.

For the record, here is their argument (from Baker):

debt itself is not an inter-generational burden. Since ownership of the debt will utlimately be passed on to future generations (ignoring the portion that is held by foreigners — which a function of the trade deficit), the debt itself is not a generational burden.

Nope. The statement was wrong when Baker and Krugman first made it a month ago, and it’s still wrong. Specifically, their mistake is in assuming that we “pass on” the debt by bequeathing it to the next generation. But if, instead, those of our children who are holding Treasury bonds had to invest in those bonds originally, when others of our children are taxed to service this debt, then the whole thing is a negative sum game. Some of the next generation is being taxed, just to give back to others of the next generation money that they had earlier lent (to people from our generation).

I suppose it’s possible that despite all the emails, tweets, posts on Nick Rowe’s blog, Daniel Kuehn’s blog (which Krugman and DeLong read, at least occasionally), the link from The Economist, the 4 consecutive posts on Landsburg’s blog (which Krugman has responded to I think at least twice in the past), the tweets from their admirers, etc. etc., that both Krugman and Baker honestly had no idea anybody had challenged their argument who had more competence than a Wall Street executive who can’t even recapitulate what their argument is.

But I can think of other explanations that are more likely, and less flattering.

56 Responses to “Krugman Almost Renders Landsburg and Me Speechless”

  1. Nick Rowe says:

    Bob: “But I can think of other explanations that are more likely, and less flattering.”

    Agreed.

    • Edwin Herdman says:

      Agreed again. This is rather disheartening (well, it would be, if I wasn’t jaded about this kind of thing; Krugman acting in the public capacity of chief pontiff). To be fair, I didn’t see much on which he was obviously required to weigh in (Daniel did a pretty decent job explaining there was in little difference between interpretations).

      However, there is another side to this argument. As I’ve become well aware recently, there are two tiers to these ‘net debates: On the top level you have Bob Murphy, Nick Rowe, Daniel Kuehn (for example), and lots of other people who are professionally qualified to talk about the issues. Then you have a whole handful of people who should be professionally disposed to talk about the issues in a meaningful way (aside from Rattner, there’s politicians in general) but end up doing the topic no justice.

      The average babe in the woods doesn’t realize that some people just don’t know what they’re talking about; editors naturally give deference to professionals working in a field (but are as ever lousy judges of a source’s grip of the facts).

      Krugman’s point in all this is that sometimes it’s the “unqualified professionals” that get the lion’s share of the attention. That he would himself serve to reinforce this artificial distinction is regrettable, but he has said in he past that this isn’t a game; he obviously feels it’s not up to him to lend his bully pulpit to those he doesn’t agree with. A bit Machiavellian, isn’t it?

  2. Adam (ak) says:

    “Some of the next generation is being taxed, just to give back to others of the next generation money that they had earlier lent (to people from our generation).”

    I am sorry but I strongly reject this argument as not related to the historic reality. I cannot see anyone willing to openly debate the main claims of this article which are in my opinion deeply flawed (“the [public] debt [is] a burden to our kids”) – I can take this challenge by quoting some well-known MMT arguments.

    1. When was the public debt repaid in the US and what the consequences were? (Hint – it happened once in the 19th century and the result was a severe recession). So maybe the issue does not exist as no generation will significantly reduce the level of their savings in public debt instruments. Net public debt which is coincidently equal to the net amount of financial assets held by the non-government sector will never be repaid and the whole reasoning about the consequences of repaying is based on flawed assumptions. (The same applies to “Ricardian Equivalence” but this is another story).

    2.This is because the next coming generation will be more than happy to acquire financial assets as well and therefore the existing bonds will be easily rolled over. The alternative to satisfying the saving needs of the economic agents by public debt is to acquire private debt instruments. The excessive level of private debt leads to economic instability as debt deleveraging is quite likely at some point of time when asset prices deflate for any reason. Yet another alternative is to tax the rich so much that they have nothing to save. This proposal applied indiscriminatingly would go too far even for somebody like me.

    3. It is obvious that there is some (currently rather insignificant) redistribution of the income between the people living in any given time period due to the interests on the debt. But who sets the bond yields? The market? The rating agencies? We may ask Ben Bernanke – he probably knows better. There are some people who hate the current arrangements but this is how it is – the Fed can not only set short-term interest rate but also influence the whole yield curve (they are doing it right now). Nobody sane will allow the interests on public debt to spiral out of control as it happened in Greece which is not a sovereign currency issuer.

    4. There can be some transfer of wealth between groups of people born at a different time but living during the same period of time due to the asymmetry in government spending, bond emission and taxation between these groups but this is insignificant compared to the blatant disregard to the future generations presented by these people who advocate exhausting non-renewable natural resources and wrecking the natural environment in the current period of time. Why isn’t this topic debated on this site?

    This is the real reason I developed an unhealthy interest in economics. Is the topic of the environment not economics-related?

    So what may happen in the US when the oil from the current resources is exhausted or even depleted significantly? You’ll go and invade yet another country? Please be aware that the Communist China is not only buying up mines and exploration rights to all the relevant minerals anywhere they can but also investing money in solar power technology and other technologies of the future – which are becoming available now but may still be too expensive to enable the private sector to make profits on them. They need a lot of energy extracted from the non-renewable resources to bootstrap the sustainable economy of the future if their 1.3 billion people are to improve their standard of living not for 20 years but for a bit longer. By doing this “bootstrapping” they may screw up the West, taxes or no taxes, bonds or no bonds, debt or no debt. I am not saying that this must happen but to me such a scenario is quite likely. If this happens the story with the rare earth elements is going to repeat itself on a much larger scale. Will the market anticipate and then solve in time these problems in the US? Will the free market beat the post-communist planners?

    The market will be as efficient in allocating resources in time as it was with the Newfoundland cod…

    • Christopher says:

      Adam,

      We already established that time period is something different than generation. When Krugman says that we won’t indebt future generation he is actually talking about time periods which is fine but missleading because the regular guy thinks that they are part of a different generation than their parents although they may all be alive during the current time period. And Dr. Murphy showed very well that it is possible to shift ressources from one generation to another (and thereby live on the expense of another generation). You don’t need a time machine because there are more than one generation alive at the same time.

      As for the environment stuff: so what? We aren’t allowed to talk about debt because there are other problems? By that logic, we should stop talking about the environment as well, because there are actually quite a number of people starving every day and they don’t give a damn about CO2.

      • Edwin Herdman says:

        Actually, it was pretty popular (especially in the period from Silent Spring on through the 70s) for people to be concerned about the environment throwing up a hard limit to population growth. Thank goodness for Norman Borlaug.

        There aren’t as many people holding that view these days, though I recognize that’s not because everybody has a blind faith in the messianic properties of scientific progress. Even if I don’t argue that much economics has a curious blind spot here, there’s still an ethical argument here.

        I agree with Adam on the historical record (as far as I’m aware) of debt hounding, and you can add to that the ’90s experience of Australia with paying down the debt. Turns out they had to issue “special” debt concurrently with paying down the debt, per Bill Mitchell.

        • Major_Freedom says:

          Wasn’t the Silent Spring exposed as almost entirely bogus?

  3. Daniel Kuehn says:

    I think he was aware, BUT the ASSAs were right in the heat of the debate – right when your posts were getting really good. He almost certainly wasn’t reading the discussion then, and I think we all know that sometimes coming back from conferences and stuff like that you don’t want to jump head-first into a week old debate that you think misses your original point anyway.

    • Joseph Fetz says:

      I am beginning to think that you’re PK’s PR agent.

      • Daniel Kuehn says:

        If you think it’s just PR, name a single unreasonable point I make.

        If you can’t perhaps I’m just making reasonable points. It’s all I ever intend to do after all (not that I always hit the mark). What possible interest could I have in fawning over a guy I’ve never met and don’t know?

        • Max says:

          “What possible interest could I have in fawning over a guy I’ve never met and don’t know?”

          JJooooooooooobbbbbbbb?

        • David says:

          ” What possible interest could I have in fawning over a guy I’ve never met and don’t know?”

          The misguided sense of feeling giddy that one will one day belong in “the club.”

          Kind of like the North Koreans crying hysterically in public at the death of Kim Jong Il, only with somewhat less integrity and intellectual consistency.

      • Daniel Kuehn says:

        In reading what i just wrote – that wasn’t meant to be snarky. Just the point that one always seem to think there’s something fishy in consistent agreement and judgements of reasonableness when it’s between two people one disagrees with.

        • Joseph Fetz says:

          I’m fugging with you. Lighten up.

          • Daniel Kuehn says:

            That second post was meant to say “don’t think I took that too seriously” ! :)

          • Daniel Kuehn says:

            Granted, if MF said it I probably would have taken it seriously!

            • Joseph Fetz says:

              True. Then again, it wouldn’t have been a one-liner.

              • Joseph Fetz says:

                ^ if MF said it.

              • Daniel Kuehn says:

                lol :)

                It’s been a while since I’ve actually read one of his comments. For all I know he could be my biggest fan now.

              • Major_Freedom says:

                LOL, it’s funny to see you talk about me completely unsolicited when I’m not there, and then see you contemplating the possibility that I might somehow be your fan.

                Ah well, no worries. There’s no such thing as bad publicity.

              • Joseph Fetz says:

                Hey, MF. Don’t take what I said as an insult. It is more of an observation that your comments are usually rather long.

  4. Daniel Kuehn says:

    I was actually figuring that the ASSAs were probably the only reason Scott Sumner never jumped in too.

    • Bob Murphy says:

      DK, it’s funny you mention Sumner. Part of what made me take Nick Rowe’s initial post seriously–even though I was “sure” it “had to be” wrong–was that Sumner had an early comment on it, saying basically, “Yep, good post Nick. The thing that bothered me is that Krugman dismisses the deadweight burden of tax servicing of the debt, which of course is a huge problem.”

      I.e. Sumner was acting like Nick’s post was obvious.

  5. Joseph Fetz says:

    Speaking of the ASSAs, isn’t that Yoram in this pic? http://www.aeaweb.org/Annual_Meeting/

    I swear, that must be the only t-shirt that guy owns.

  6. P.S.H. says:

    “Steve managed to find 543 words to put in his post.”

    You counted?

    • Bob Murphy says:

      PSH yes I pasted it into Word. There are no false statements that pass through the Free Advice post filter.

      • Joseph Fetz says:

        “Word Count” is right in the “Tools” menu.

  7. Greg Ransom says:

    Hayek gives the formal argument for this in his _The Pure Theory of Capital_:

    “But if his point is that you must claim a share of those profits in order to benefit from capital accumulation, then he really has stopped even pretending to be an economist. As Professor Krugman is surely well aware, the accumulation of capital is the primary driving force behind the growth of wages.”

    • marris says:

      When did people on the web decide that to respond to something, they should first write their response and then quote the thing to which they’re responding? Wan’t it just a few months ago that we always put the quote first? Now I’m seeing this response-then-quote pattern more and more.

  8. Rob says:

    Krugman appears to base his view on the debt burden purely on the fact that all future debts are matched by future credits, and not on intergenerational utility. However if he was to use a model that did measure the costs/benefits of debt to future generations would he not see a potential for net benefit from them ?

    The model in Bob’s example was setup so that any transfer of any kind based upon debt would lead to at least one future generations having lower lifetime utility, It is easy to find counter examples where future utility is increased by debt-financed govt transfers. In my opinion this argument isn’t about govt debt always and inevitably causing a burden of future generations but rather on the ability of the govt to make better choices on the use of borrowed money than would be made by the free market alone.

  9. David says:

    What you need to understand is that Krugman is not an economist, he is a PR crony for big-government-spending policies; he pushes political propaganda, not economic viewpoints. His job is to paint a faux veneer of economic legitimacy over government spending, to justify political policies. Robert, you keep thinking you can debate Krugman ‘economist to economist’, when Krugman is playing a completely different game. This is not like a boxing match of two boxers, it’s more like one person in the ring is boxing and his opponent is doing WWE. You’re playing chess and he’s playing snakes and ladders. Keynesian economics is a form of political propaganda, and the “big-name” Keynesian economists get the big bucks and top economic positions, not because of their economic sensibilities, but because they spew forth out their mouths what the big-government politicians want the public to believe. That’s why you’ll never get meaningful responses from someone like Krugman. He knows he’s lying. He’s a snake in the grass.

    • Daniel Kuehn says:

      You’re either projecting here or you’re extremely dense (or – I suppose – both).

      And please don’t complain about how mean I am in saying this. You’ve started with a paragraph long diatribe and it’s full of unambiguously false statements.

      • Major_Freedom says:

        Which “false” statements?

        David is right, except for maybe the “he knows he’s lying” part.

      • David says:

        And Daniel, from what I can tell you are basically a Krugman wanna-be, you want to play exactly this same dishonest PR/propaganda role. I bet you’d love to follow a similar career path, principles be damned – heck, if you preach enough Keynesianism maybe you can be chairman of the Federal Reserve someday — but to become that, you have to sell out any principles and push the pro-spending propaganda. Of course you will immediately knock down my viewpoint (without actually refuting any statements), you need to cover up any attempt at exposing what’s going on here because it’s people like you who stand to lose out on illicit gains when people wake up to what’s going on.

        • P.S.H. says:

          “Of course you will immediately knock down my viewpoint (without actually refuting any statements),”

          How exactly would someone refute the unbacked assertion that so-and-so is a charlatan? Go through a list of everything he has ever done?

          • David says:

            Unless you haven’t been following, either Krugman is severely incompetent, or he is dishonest. It’s one, or the other, you pick.

    • Bob Roddis says:

      David, you are so right. I’d like to add that Krugman must engage in such behavior because Keynesianism is and always has been a hoax to trick average people into passively allowing the theft of assets and purchasing power by the elite under the guise of “stimulating” an “economy” that does not require “stimulating”. And to be so confusing so as to intimidate the victims from speaking out.

      DK writes:

      “No such inflation was available to relieve debtors during the approach to the Great Depression or the financial crisis of 2008.”

      http://cje.oxfordjournals.org/content/36/1/155.full

      Under what theory of property rights and/or due process of law is it the business of the central bank or other producers of funny money to “relieve debtors” or change the terms of debts, contracts, wages or prices via inflation??????

      It’s all nothing but an evil trick to change such contractual terms without the parties to those agreements understanding what has happened and to suppress an intelligent response by freedom-loving people.

      And it’s all to cure the problem that does not exist: The non-existent tendency of the free market towards perpetual unemployment. This is one of the biggest hoaxes and lies in history but the jig is up.

      • David says:

        Spot-on, and the interesting thing is, once you start viewing things through this lens i.e. that Krugman’s role is propaganda flunky — *suddenly everything he writes makes sense* — it’s almost uncanny.

    • Bob Roddis says:

      Here is Hayek (on Firing Line, 1977) explaining how scientific Keynesianism swept the world:

      Hayek: You see, another political element was that, of course, politicians just lapped the argument and Keynes taught them if you outspend your income and run a deficit, you are doing good to the people in general. The politicians didn’t want to hear anything more than that — to be told that irresponsible spending was a beneficial thing and that’s how the thing became so influential.

      http://hayekcenter.org/?p=2701

    • Adam (ak) says:

      I am sorry I probably need to repeat and rephrase my main point because it still has not been addressed. It may look boring.

      The fundamental mistake some of the participants make in this debate is that they assume that people living in the future will have to repay the aggregate stock of public debt by extracting money from the economy via increased taxation and paying that money to the bond holders demanding bonds redemption on their expiry.

      What for?

      As long as the aggregate stock of the “public debt” does not have to be repaid (only individual bonds needs to be rolled over or redeemed for cash), that stock of debt it is not only a net burden (assets=liabilities) but not a significant burden on anyone at all. There will be some limited income redistribution between groups of agents due to interest payments on bonds but this can be moderated. Real interest rate on the bonds is usually very low.

      Net repayment of public debt has never happened on a large scale (even after WW2), budget surpluses are an exception. I know that there is an assumption in macroeconomics that the government is just an enlarged household which borrows and repays its debt like anyone else and that money is a pre-existing commodity which has to be acquired by the government before it can be spent but this is just plainly wrong. This could have been true in the Gold Standard era.

      If there is no demand for bonds, the central bank can always mop them up from the market, not allowing the yields to increase and exchange interest-bearing government liabilities into non interest-bearing central bank liabilities. This is an asset swap. The net position of the non-government sector is not altered by that operation. Why should it be altered, why should the non-government sector have its financial assets drained? What is the economic sense of levying excessive taxes which would damage the productive economy? NB the central bank can even pay interest on excess reserves and not allow for the overnight interest rate to fall to zero. This actually happened in Australia in 2009.

      The quantity of reserves does not determine the amount of credit in the banking system as the money multiplier model is incorrect even outside of the so-called “liquidity trap” . (this is the bit Paul Krugman may not understand but there is a BIS paper on bank lending, “The bank lending channel revisited”, Piti Disyatat, explaining that point – and there is more if this is not enough).

      If there is a risk of excessive private lending during the growth phase of the business cycle then jacking up interest rates is not the only option available to stop inflation on its tracks.

      It is absolutely obvious that the government may redistribute income between different social groups or generations living at the same time.

      This was the essence of the example with the apples but it does not prove that any particular generation will be worse off just because they have to repay the debt and won’t inherit the wealth. Because they won’t have to repay anything. The secondary re-distributional effects may exist, they may even not net to zero, I do not deny that but are they so significant?

      Can anyone prove that the current public debt may be a significant burden on the groups of people living in the future without making incorrect assumptions not related to the way the real economy operates such as the aggregate stock of debt will be repaid. In my opinion this challenge is still open.

      • Bob Murphy says:

        Adam, the only way the government debt isn’t a burden is if there are no taxes to service it at all. I.e. it just grows exponentially because every period, the gov’t borrows enough to cover both the interest and whatever principal is due at that time.

        Yes, if the gov’t only taxes to service the debt, as opposed to repaying the whole thing, then the people alive during that period aren’t burdened as heavily. But by the same token, the principal of the debt gets passed down, meaning people even further in the future now have to get taxed to service it too.

        This gross burden can be partially or even fully offset if the older generation bequeaths the bonds. But to the extent that anybody holding those bonds had to reduce his earlier consumption (say by taking money out of his paycheck to buy into a mutual fund, which in turn invested in government bonds), then the people who are alive when the debt is being serviced through taxation are collectively losers from the whole deal.

        • David says:

          Apart from economic arguments, surely government bonds are also, more importantly, immoral, since government’s power to repay is based almost entirely on its power to tax, so purchasing a government bond is basically purchasing a share in slave labor.

          In the 1800′s I suppose economists also debated the economic effects of traditional slavery, but eventually slavery was abolished when people realized it’s immoral. Debating the economic effects of government-bond-slavery is like debating the economic effects of traditional slavery.

          • David says:

            What Krugmanites want to imply is that if slavery has economic benefits, then we should practice it. This is abhorrent, and I hope one day our moral sense evolves. It’s fine and well to point out in this case that this form of slavery has economic detriment – but it’s still slavery!

        • Adam (ak) says:

          It is self-evident that taxation (also related to debt servicing) may make certain social groups worse off. I haven’t questioned this statement.

          However, the government does not need to run primary surpluses in order to service the debt as long as in the long run the rate of growth of nominal GDP is greater than the nominal interest rate on the debt multiplied by the ratio of debt to GDP. As long as this condition is true, the ratio of debt to GDP will not increase. That condition was true for the most of the immediate post-WW2 period in the US and the debt was not a burden in the sense demonstrated in the example with the apples. Of course, on the margin there will always some trade off unless the interest rate is zero.

          Another interesting issue worth exploring is the impact of budget deficits or surpluses and the size of government spending on the trajectory of growth of GDP. Assuming path dependency (which may be for example a result of wasting wealth accumulation opportunities due to low productive capacities utilisation or suboptimal investment in technological progress) even if some social groups have to pay higher taxes, they may be still better off.

          People may be better off even if they pay slightly higher taxes because they may pay them from a moderately higher real GDP and as a consequence higher disposable real income will be left for their consumption.

          On the other hand excessive and persistent government intervention in the economic processes may lead to economic and social stagnation.

          What I have written in this comment merely scratches the surface. I am not convinced that GDP has to be maximised at any cost, including the rapid exhaustion of non-renewable natural resources.

          Technological progress still gives us hope to reach a steady trajectory of sustainable growth – but we must give it a chance.

  10. Major_Freedom says:

    I’m reminded of that quote from Ghandi:

    “First they ignore you, then they ridicule you, then they fight you, then you win.”

  11. Bob Murphy says:

    I admire your tenacity Daniel Kuehn; it keeps us honest. I was tempted to say, “Daniel, what would it take for you to admit Krugman was out of line? Would he have to kill some people and say he didn’t even need to offer proof that they were bad guys?”… but then I realized what your answer would be.

    • Edwin Herdman says:

      He won the Nobel Prize for economics, not peace! It comes with fewer strings.

  12. Ralph Musgrave says:

    Bob Murphy, Your post contains a VAST amount of detail on the history of this argument, plus plenty of rhetoric, and a large number of less than flattering remarks about some of those involved in the argument.

    In contrast the only real SUBSTANCE is in the 3rd last and short paragraph. And your entire argument here hinges on the word “if” (always a dodgy word on which to base an argument). That you say “if those of our children who are holding Treasury bonds….”. Now wouldn’t it be an idea to think for three seconds about whether this “if” actually applies to the REAL WORLD?

    Well the answer is it DOES to some extent: that is oldies do actually sell bonds to youngsters, and they do it mainly via pension funds. That is people in their prime pay into pension funds, who in turn invest in government bonds. Then in retirement, oldies run down their claims on pension funds while youngsters build up their claims on those funds. In short, oldies effectively sell bonds to youngsters, hence oldies effectively impose a burden on youngsters, i.e. on the next generation. (Incidentally I’m invoking Nick Rowe’s model here rather than yours, but the two are very similar.)

    But the $64k question is this. In the absence of government bonds, would the total amount of “burden passing” be any different? The answer is “no”, because in the absence of government bonds, those planning pensions would just find alternative ways of getting youngsters to fund their retirement (e.g. by using other assets, like shares or houses) or by going for unfunded or pay as you go pension schemes.

    Therefor the existence of government bonds, or an increase in their volume or value has little effect on the total amount of “burden passing”.

    • Bob Murphy says:

      Ralph Musgrave wrote:

      In contrast the only real SUBSTANCE is in the 3rd last and short paragraph. And your entire argument here hinges on the word “if” (always a dodgy word on which to base an argument). That you say “if those of our children who are holding Treasury bonds….”. Now wouldn’t it be an idea to think for three seconds about whether this “if” actually applies to the REAL WORLD?

      Well the answer is it DOES to some extent: that is oldies do actually sell bonds to youngsters, and they do it mainly via pension funds. That is people in their prime pay into pension funds, who in turn invest in government bonds. Then in retirement, oldies run down their claims on pension funds while youngsters build up their claims on those funds. In short, oldies effectively sell bonds to youngsters, hence oldies effectively impose a burden on youngsters, i.e. on the next generation. (Incidentally I’m invoking Nick Rowe’s model here rather than yours, but the two are very similar.)

      But the $64k question is this. In the absence of government bonds, would the total amount of “burden passing” be any different? The answer is “no”…

      Ralph, I like how you start with, “wouldn’t it be an idea to think for three seconds” as if my premise were false, and then you admit in the next paragraph that (of course) it’s true that not every person who ends up holding Treasury bonds, was given them in the estate when his parents died.

      Anyway, at least you came up with a novel argument–claiming that if it were privately held debt, the outcome would be the same. But you’re wrong. The fundamental way that government debt allows the present generation to live at the expense of future ones, is that it effectively allows the government to tax people in the future to cover current spending. The bond market allows the government to pull that revenue forward (after discounting) and spend it today.

      There’s nothing analogous in private debt. I can’t run up a huge credit card bill, then have my kid be forced to pay some of his paycheck to Visa every month to service my debt. He can assume the assets and liabilities in my estate if he wants to, but presumably he would only do it if, on net, he is gaining from the action. I can’t foist a net burden on somebody in the next generation when I die, the worst that happens is the creditor who lent to me takes the hit.

      • Joseph Fetz says:

        “run up a huge credit card bill, then have my kid be forced to pay some of his paycheck to Visa every month to service my debt”

        That would actually be somewhat more just, in my opinion. The current arrangement is strangers, many of whom benefit immediately (and may disproportionately depending upon their connections), are pushing the debt upon complete unknowns.

        It is actually more akin to some “person” in Podunk, Arkansas putting some name down as collateral, and then when a person in the future is born with that name, he is automatically burdened with the debt.

        Not the best analogy, sure. But the government debt is primarily anonymous, with a further addition of collectivization.

      • Ralph Musgrave says:

        Bob, Thanks for the prompt response to my comment. Much appreciated. However, contrary to your suggestion, I didn’t actually say anything about “private debt”. I referred, first, to real assets: that is houses or shares in corporations. To illustrate, I have the choice between, first donating my house to my children, and second, selling it to them so as to support me in my retirement. This precisely analogous to Nick’s “oldies sell bonds to youngsters” scenario, and it results in the same “loss for youngsters” endured so as to support oldies.

        Second, I referred to “unfunded” pension schemes. Some sort of private debt could be construed here – I’m not sure how. But that is a bit semantic. These schemes are strike me as being what they appear to be: youngsters agreeing (or in the case of state pension schemes, being forced) to sacrifice income so as to support oldies. As with Nick’s hypothetical apple economy, if one assumes the final generation has no children, then that final generation loses out because it supports its parents, but there are no children to support the final generation.

      • Rob says:

        Bob’s model proves that government transfers can cause people to lose out either via having their lifetime consumption reduced or distributed in such a way that their utility is diminished. In as much as these transfers are causally connected to earlier government borrowing he shows that debt can be a burden on future generations.

        To the extent that Krugman denies that debt can ever be a burden then Bob has proven him wrong by showing a model where it is.

        However it is also possible that govt transfers simply emulate (or even optimize upon) transfers that would take place in a free-market. Examples of this would be transfers from the young to the old that (arguably) the govt can facilitate easier than the free market could. In these cases the debt has not caused a burden. Free-market economists may think these examples unlikely or non-existent but liberals will generally see much if not all govt debt being of this type.

  13. RG says:

    Off subject, but isn’t the Krugman’s beard a hypocritical symbol of his Keynsianism? Think of the reduction in GDP if people began to forego shaving. The economy would start losing jobs at an incredibly rapid pace. The savings of facial hair would lead to a deflationary spiral that would destroy the economy.

    • Joseph Fetz says:

      True, but Krugman trims his beard.

      • Joseph Fetz says:

        He also shapes his beard, and I am pretty sure that he combs it, too. (for some reason I cannot get that glossy, black and white publicity photo out of my head)

        Sorry, I am just trying to think logically about your “masculine toiletries” theory.

    • David says:

      I wonder if he also, say, destroys his own cars regularly and buys new ones, because it would stimulate aggregate demand, or regularly burn his own house down and build it again … or do his principles only apply to “other people” but not himself?

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