10 Jan 2012

My Name’s Bob, and I Have a Debt Addiction Problem

Economics, Financial Economics, Krugman 33 Comments

I see my Team Leader has retreated back to his monastery in the snowy mountains up north, to resume his meditations and emerge again only when disaster strikes and all hope seems lost. By the same token, I seriously have a bunch of work I have been neglecting because of all this, so I must force myself to make this pledge: Unless a blogger of at least as much notoriety as Brad DeLong revisits this topic, I won’t do another post on it. I might do mopping up operations in the comments here or at other blogs, but read my lips: No New Debt Blog Posts.

In closing, a few loose ends:

* It is clear that Daniel Kuehn still has no idea what Nick Rowe (and later me) are bringing to this discussion. And I say that, acknowledging that Daniel and I are the MVPs of the two teams, respectively. It’s also true that I was misunderstanding Landsburg and Daniel for much of the debate. Nonetheless, since Daniel thinks Nick’s slogan is goofy, it shows Daniel still doesn’t understand the absolutely critical perspective Nick (and Boudreaux) brought to this issue.

* A few days ago, Daniel Kuehn at his blog announced that he could use deficit financing to flip my result, and make the later generations benefit at the expense of the earlier ones. Gene Callahan declared that this result was, “Game, Set, Match.” However, I pointed out to Daniel that actually, what he was trying to do was impossible, at least within the type of world we’ve been playing with. It’s true, in my simple apple model, you can use government taxing and the bond market to hurt Old Al while helping everyone else (for example). But the way you do it is tax Old Al, then have the government run a budget surplus and lend the apples to young people each time period, at a negative interest rate. (E.g. tax Old Al 64 apples and lend them to Young John at -50%. Then in period 2, the government gets paid off 32 apples and lends them to Young Christy at -50%. etc. In period 9, when Old Iris pays the fraction of an apple she owes the government, it makes a transfer payment to Young John.) So I think Daniel’s interesting attempt to flip my result actually proves that the layperson’s intuition is perfect correct: When the government runs a deficit today, that can allow the present generation to have a higher standard of living by imposing a lower standard of living on all people who will be born in the future. On the other hand, if the government spends less than tax receipts today and builds up a surplus (or pays down debt), then the present generation sacrifices on behalf of future people. There is nothing “naive” in this way of thinking. So go back and look at Gene’s “Game Set Match” post. He said, “I was about to set out building an OLG model in which the later generations benefit at the expense of the earlier ones, but I see Daniel Kuehn has done it for me. That’s it folks, it’s all over. This demonstrates quite plainly that it is the transfers, not the debt, that matters.” Note that to do it right, you have to have negative government debt. So is it really the case that this approach shows that debt isn’t really intimately related to burdening future generations?

* In the last post I asked people to show me a “sentence fragment” where Krugman said taxes needed to finance our debt could make future generations poorer. Let me anticipate one response: Krugman did indeed say that taxes could make them poorer, but he quite clearly was talking about the deadweight loss of distortionary taxes, like say an income tax. That’s why he called it a problem of “incentives.” That’s why, in my simple apple world, there were just lump sum taxes. If instead the government in period 8 (say) taxed people 10% of the apples they picked, then real GDP would be lower in period 8. So Krugman was acknowledging that issue, but he was not at all talking about the possibility of us having a higher standard of living through the wacky bond-market-OLG-framework stuff.

* Finally: I can’t find the link, but at his blog Landsburg was incredulous that Nick Rowe and I weren’t throwing in the towel. Landsburg said something like, “If you guys honestly think Krugman doesn’t believe that deficit financing can make future generations poorer, then why doesn’t he advocate an infinite deficit today? There’s no cost, right?”

There are two answers: First, Krugman was acknowledging that in the real world, there were “second order problems” with deficit finance. For example, our tax code is distortionary. Second–and more to the point–Krugman’s way of thinking also made him believe that there would be no net benefit for the present generation, if they implemented such a scheme. Go back to my apple model, but assume each person just lives one period. In that world, it is correct to say that future generations (collectively) are utterly unaffected by the government in period 1. (Assume people can bequeath government bonds to the people who will be born next period.) So if we recognize that fact, it wouldn’t then follow that, “Oh! So how come the government in period 1 doesn’t borrow 100 apples from Old Bob and pay them to Old Al? You guys just said that the people in period 2 won’t on net be impoverished by this.” Right, but by the same token, the people in period 1 on net won’t be enriched by it: Old Al wins and Old Bob loses. [Later added: And that’s why the scheme wouldn’t get off the ground; Old Bob would never voluntarily lend his money to the government if he has to bequeath the IOUs to somebody who doesn’t care about. Now, if he does care about the next generation, then the government deficit finance helps Bob–it allows him to achieve higher utility. Think about it, kids: Deficit financing is voluntary when it starts; investors have to agree to lend money to the government. So it can’t possibly be the case that government uses deficits to hurt the lenders in order to benefit future people, unless it defaults in the future.]

That’s what’s so funny about all of this. Back when I believed in the Dean Baker-Paul Krugman-Matt Yglesias position on deficit finance, I didn’t walk around saying, “Hey let’s run huge deficits and make ourselves richer, because there’s no burden we are imposing on our descendants!” No, I was telling people, “Don’t think we’re making ourselves richer by running up the debt! Every ton of steel that goes into tanks today, comes out of present resources. We collectively are paying for our government spending, no matter if we’re taxed or they borrow it from us.” See how that all fit together and seemed like a closed book? Until Nick Rowe warped my fragile little mind with his 3-person apple example.

33 Responses to “My Name’s Bob, and I Have a Debt Addiction Problem”

  1. Nick says:

    Here’s another simple example.

    1. Government takes 100 pounds a year from tax payers. Promises to pay a pension in the future. Lets say it offers 1000 a year as a return. Both linked to inflation.

    So the value is roughly 40 * 100 = 4000 on the contribution side. 1000 * 20 or 20,000 on the payment side.

    Future taxpayers are down 16,000 grand.

  2. Nick Rowe says:

    That’s a better response to Steve Landsburg than mine was.

    Here’s what Steve said: “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.”

    and the link: http://www.thebigquestions.com/2012/01/06/debt-the-never-ending-topic/#comment-39275

    • Bob Murphy says:

      Nick Rowe, I’m not talking to you for a month since you said in the other post that government spending might get us out of the recession.

    • Silas Barta says:

      If this were true, they would advocate an infinite amount of debt-financed spending

      Um, they do. More specifically, for all debt-funded stimulus packages of size X, the Keynesian will say X was too small.

      That’s why they’re thinking on this is so flawed.

      • Bob Murphy says:

        Heh I wanted to play nice though, Silas.

      • Daniel Kuehn says:

        I think you need to google the word “infinite”.

        Hint: it does not mean “any value that is more than a given finite value X”.

        • Silas Barta says:

          I think you need to brush up yourself.

          I didn’t say “a given finite value X”; I said, Y such that for all values X, Y is greater than X.

          That’s basically what one does when one says “the limit of f(x) as x approaches infinity is 3”. Once you expand out the definiton of a limit, that means, “past some point, you can choose any x1 and there will be some x2 greater than x1 such that f(x2) is closer to 3 than f(x1).

          Keynesians will always say a debt-funded stimulus package was too small, so technically they do advocate infinite debt-financed spending.

          • Daniel Kuehn says:

            You didn’t say that. You said “for all debt-funded stimulus packages of size X”

            All debt funded stimulus is finite, ergo…

            • Silas Barta says:

              And all finite debt stimulus is too small, ergo …

              • MamMoTh says:

                True Keynesians should argue that an infinite stimulus of cardinality alpha0 is not enough.

            • Silas Barta says:

              But yes, I should have been more clear by phrasing it as, “For all X, a debt-funded simulus package of size X is too small”.

              Then I might have avoided your mssing-the-point attempt at nitpicks — maybe.

        • Silas Barta says:

          To clarify, the second paragraph should be:

          I didn’t say “greater than a given value X” …

          • Yancey Ward says:

            Let me take over the Barta defense.

            Daniel, I have a history of correctly interpreting Silas, and he didn’t mean to say what you claim he said.

        • Bob Murphy says:

          Daniel Kuehn, I have to side with Silas here. Here’s what he said:

          for all debt-funded stimulus packages of size X, the Keynesian will say X was too small.

          Now it’s true, you *could* zing him if you took him to be saying, “Pick some X. Now, every single stimulus package of size X–whether it’s spending X on bananas, spending X on tanks, or spending X on condoms–the Keynesian will say that that one value of X is too small.”

          But even you weren’t interpreting Silas as holding X constant, and varying the stimulus package that was of size X.

          Instead, you took him to be saying pick any X, and then the Keynesian will say X is too small.

          So how is that not the same thing as saying the Keynesian advocates an infinite stimulus package? How *should* Silas have worded it?

          • Silas Barta says:

            Thanks, Bob and Yancey_Ward. Most people arguing over such a point with Daniel_Kuehn don’t get such help.

            In fairness, I now see how my statement could be taken to mean varying over all stimulus compositions (and indeed, Daniel_Kuehn tends to think in terms of “how big?” not “whether”). But why would you take the free variable be something that isn’t even called out or given a variable name?

            As I said above, I could have been clearer by shortening the first X clause (i.e, “for all X, any … of size X is too small).

            Or, you know, Daniel_Kuehn could have gone with the non-stupid interpretation and turned his attention to the logical implication I just highlighted, of claiming every stimulus package is too small.

  3. Greg Ransom says:

    Murphy has shown that this debt scenario violates Rawls’ mini-max principle, from behind his ‘veil of ignorance’.

  4. Bill Woolsey says:

    Bob:

    I think it is almost certain that Krugman believes that if the budget deficit is large enough (and less than infintie,) that there would be crowding out of capital goods, and a reduction of future output. (As long as we are in a liquidity trap (which we would leave well before the budget deficit was infinite,) Krugman believes there is not a crowding out problem.)

    As you emphasize, he would also agree that anything other than lump sum taxes to fund future interest payments would adversely impact labor supply and future investment and so future income as well.

    • Greg Ransom says:

      The problem isn’t “crowding out” in the finance market, it the channeling of production goods away from more productive uses, more valuable uses, to less valuable uses.

      Labor expended on Solarus takes goods and labor away from other production possibilities, and it takes goods and labor to de-commission the Solarus factory and re-purpose whatever can be salvaged of the Solarus operation, and dispose in the garbage dump the rest.

      The challenge Soviet planners had in attempting to create value output greater that value input is the same challenge that Krugman’s politicians and government bureaucrats have — and Krugman & his crew are not endowed by _magic_ which allows wishing to make it so.

      The government cannot extrude value like a machine extruded donuts, based on the value demarcated in the past and poured into the machine.

  5. Anonymouse says:

    Daniel Kuehn: “You say Krugman tells us this: ‘Don’t worry about imposing a burden on our descendants’. I still don’t see that.”

    Paul Krugman: “Talking about leaving a burden to our children is nonsensical.”

    • Greg Ransom says:

      Um, can’t we play this game with Daniel on any number of posts where he’s commented?

      X is said.

      Daniel say X hasn’t been said.

      Daniel says Y, Daniel says he hasn’t said Y …

      That the game I’ve played with Daniel more times than I’d have liked.

      • Daniel Kuehn says:

        You realize that every time you think this has happened it implies that I think you do exactly the same thing, right?

        X is not said.

        Greg insists X has been said.

        I’d put my reputation in the blogosphere for keeping things above board up against yours any day of the week.

        • Greg Ransom says:

          Let’s stick to direct evidence.

          Anonymouse put the cards on the table, for everyone to see and decide for themselves.

          And that’s what I did. But I’m sick of the game.

          You do this. You won’t acknowledge you do this or you aren’t self aware that you doing this.

          Whatever.

          It happens, and I believe that it’s absurd not to put this out on the table when we see it happening again and again, pretending as if this is not what we are dealing with.

          The notion that it is impolite to put out on the table what is we are dealing with when people are trading in informal fallacies, non-attention to words and clear meaning, BS, dishonesty, incompetence with classic texts or the history of ideas, what have you, I find offensive.

          When Delong or Krugman (or even Summer and other guys) trade in such stuff, I’m not the bad guy for pointing it out.

          And there is nothing impolite about suggesting that people put some work into not polluting the public square with this stuff.

      • Daniel Kuehn says:

        I’ve got a pretty good track record on accurately representing Krugman and DeLong too.

        • Greg Ransom says:

          Krugman and DeLong have a pretty good track record of NOT accurately representing the economic literature or the writings of other economists and bloggers.

          And Krugman and DeLong are so inconsistent and dishonest, folks should be given a bit of lee-way in their recounting of what Krugman and DeLong are saying.

          They say many incompatible and false things — and stringing a coherent argument out of it ain’t easy, and one can hardly be faulted much for coming up with multiple and incompatible accounts of “what they have said” .. e.g. Krugman on the housing bubble over the last decade.

        • Greg Ransom says:

          You have a track record of directly mis-reporting what I said to you, and said to you multiply times, directly correcting what you wrote before.

          A track record.

        • Matt Tanous says:

          Krugman and DeLong don’t even have a good track record on accurately representing themselves. You are just caught up in the flurry of confusion and backtracking, and think yourself wise.

    • Daniel Kuehn says:

      “our children”

      Do you think Krugman means the same thing by this as Murphy and Rowe?

      Sorry anonymous – it’s not quite so easy as that.

      I’ve granted everything that Bob and Nick have said about the model itself (which in some ways is more than Gene even). That’s not the issue here.

      • Anonymouse says:

        “Do you think Krugman means the same thing by [‘our children’] as Murphy and Rowe?”

        Yes.

        “Sorry anonymouse – it’s not quite so easy as that.”

        Murphy: “future generations”
        Callahan: “later generations”
        Kuehn: “our descendants”
        Krugman: “our children”

        I think most native speakers of English would regard all of the above as equivalent in the context of the current discussion. The burden is upon you to demonstrate that they are different, for it is certainly not self-evident. Failing that, you’ll have to concede that Krugman was indeed wrong.

  6. Chase Hampton says:

    It’s not just a transfer which is required to make another generation poorer. The same result can be had with a government investment. Consider the following example:

    Population consists of two groups, young and old.
    Period 1- A is old and B is young
    Period 2- B is old and C is young
    Period 3- C is old and D is young

    Government Investments

    For the sake of simplicity, any “government investment” is considered to realize all returns the next period and benefits are equally distributed across the population (the original investment is also brought forward into the next period and is distributed equally among the population as well).

    1) Government investment is financed by taxes.

    i) Tax is levied on A.
    Result: B and C are better off at the expense of older generation A.

    ii) Tax is levied on B.
    Result: C is better off. B may be better off, indifferent, or worse off depending on how he values the additional consumption in period 2 as compared to the consumption given up during the first period.

    Analysis: Just as if B would have voluntarily foregone consumption in period 1, in the form of a private investment instead of being taxed it, if it turns out that he valued the consumption lost in period 1 less than what he would have valued the increase in period 2 consumption. (Note: The valuation of period 2 consumption is also considered from his period 1 preferences, hence the use of the second conditional progressive.)

    2) Government investment is financed by bonds which are paid off by taxes in the following period.

    i) Tax is levied on C in period 2.
    Result: B is better off. C may be better off, indifferent, or worse off depending on how the rate of return on the investment compares to the rate of interest to be paid on the bond. Since the return is split evenly among the population consisting of two people, if the rate of return is double the rate of interest, he is indifferent.

    ii) Tax is levied on B in period 2.
    Result: C is better off. B may be better off, indifferent, or worse off depending on how he values the additional consumption in period 2 as compared to the consumption given up during the first period (The same as number 6 part ii).

    Analysis: Since the promise of greater future consumption (from the interest on the bond) was broken, the purchasing of the bond in period 1 basically turns into a tax and the analysis becomes the same as number 6 part ii.

    3) Government investment is financed by bonds which are paid by issuing more bonds in the second period. The second set of bonds is then paid off by taxes in period 3.

    i) Tax is levied on D in period 3.
    Result: B and C are better off at the expense of younger generation D.

    ii) Tax is levied on C in period 3.
    Result: B is better off. C may be better off, indifferent, or worse off depending on how the rate of return on the investment compares to the rate of interest to be paid on the bond. Since the return is split evenly among the population consisting of two people, if the rate of return is double the rate of interest, he is indifferent. (Note: C would have definitely been better off had the promise of greater future consumption been fulfilled.)

    What we’ve learned about government investments…

    Once again, whoever bears the burden of the eventual taxation is key. More importantly, government investment, when not paid for by those who stand to benefit from such investment, will create a burden on a different (most likely future) generation. If the investment is paid for by those who gained from it, then clearly, just as with any other transaction, benefit needs to be weighed against the cost in order to determine if those involved truly did end up better off. Needless to say, that sort of inquiry goes beyond this discussion, but many arguments made by public choice analysts and free-market economists make a compelling case against these benefits outweighing their associated costs.

  7. Major_Freedom says:

    I think I finally figured out a major source of disagreement, and it has to to with, interestingly, a failure to make explicit property rights. If we can’t agree on who owes who, if we’re arguing over who owes what to who, then why not make explicit who exactly owns what? Both sides are treating the same debt money as being owed by both the government, and by those not in the government, interchangeably.

    An individual loss occurs when an individual owner loses their property, and an individual gain occurs when an individual owner gains more property.

    The reason why this debate is so messy is that we have a failure in keeping all property titles separate from each other and in clear view.

    Team Krugman is only focusing on money property.

    Team Murphy is focusing on goods property, but because they treat the goods as money property also, what happens is that every time the teams are compared, the money property is made clear, but the real goods property is not.

    I’ve solved this using property. Always keep in mind ALL property and always keep the properties SEPARATE from each other. DO NOT MIX THEM. This will become clear.

    Real GDP is 200 apples per year. Nominal GDP (aggregate spending) is $200 per year. Government borrows $1 at and of year 1 at 100%, and rolls it over at end of each year, also at 100%.

    Goods property: Each year, there are 200 apples property produced, owned, and consumed.

    Money property: Each year, there is $200 money property.

    Asset (bond) property: Each year, the outstanding asset property value increases: $1, $2, $4, $8, $16, $32, etc.

    These are ALL the property in the debate. This supply of “stuff” is where losses will occur if there are going to be any losses occurring because of the existence of government debt.

    So here’s why, finally, it is true that government debt, indeed ANY debt issued by a taxer, defraud, cheater, thief, etc DOES IN FACT burden future generations, and by burden I mean collective burden, the moment it issues debt and introduces assets into the economy, but keeps the liability outside the economy. I want to be clear. EVEN IF the government just taxes some to back the debt owned by others, there is still a collective loss of property to the entire generation.

    Year 1 end, total property = $200 + 200 apples + $1 in asset (bond).

    Year 2 end, total property = $200 + 200 apples + $2 in asset (bond).

    Year 3 end, total property = $200 + 200 apples + $4 in asset (bond).

    Year 4 end, total property = $200 + 200 apples + $8 in asset (bond).

    Year 8 end, total property = $200 + 200 apples + $128 in asset (bond).

    Year 9 end, total property = $200 + 200 apples + $256 in asset (bond).

    Foreshadowing: Notice each year there is no corresponding liability to the asset. Why? Because in the real world, nobody alive, not even those in the state, have a personal liability for that debt. But it is STILL valued and bought and sold for money, for goods and services, by private property owners. Therefore, in terms of property owners, who own the total supply of property that has the potential to be destroyed, property owners act and value property as if government debt is an asset with no corresponding liability.

    Sure, the government can account for the “liability” numerically on their books, but that liability is not personally “owned” by anyone in the government. It was not incurred by anyone in the economy, because no private citizen can issue government debt “payable by the US government, yadda yadda yadda.” The fallacy is presuming that because private citizens voluntary own an asset, that somehow those in the economy must also have voluntarily incurred a liability. But as long as the government doesn’t tax anyone to pay back the debt, that liability is kind of in a non man’s land. Not owned by private citizens, not owned by governmental individuals, it’s kind of just “out there”, owned by “society”, “we”, “the country”, etc. But in strict PROPERTY terms, the asset is definitely owned, and valued as such, but the liability isn’t owned by ANY property owner! It kind of makes government debt, and any debt from a taxing agency, illegitimate. I mean, do you REALLY have the “right” to demand being paid back from an agency that is going to take people’s money to pay you back?

    In Year 8, what happened? A bond for $128 was created. That asset property is valued at $128 at the end of Year 8, with an expected resale price of $256 at the end of Year 9.

    But wait, how can that resale value be had, when there is only $200 available to be spent?

    No matter what the issuing agency does at this point, no matter what lenders do at this point, no matter what the apple producers and consumers do at this point, no matter what “taxes and transfers” take place, there is going to be a guaranteed $56 loss of property. That property destruction will fall on the whole generation collectively. There is no property being introduced into the system to replace this lost property!

    This is what Rowe was originally getting at when he said “[The debt] cannot be rolled over forever” and his assumption of “Debt rising faster than GDP.” After all, GDP is measured in spending. Rowe was right that the debt cannot be rolled over ad infinitum, but he was wrong why. It has nothing to do with the size of the real economy.

    Now let’s introduce a tax at the end of Year 8, where the government taxes people $128, in order to pay the $128 property debtholders.

    Thus,

    Year 8 end, total property is $200 + 200 apples + $0 in asset (bond).

    The pre-extinguished $128 asset (bond) just before the tax and payback was a property in the economic system. The liability at that point was OUTSIDE the economic system. This is the kicker people: The government, by introducing debt into the economic system in Year 1, INTRODUCED AN ASSET WITH NO LIABILITY, in strict property terms of course, which I must emphasize is the basis of my argument here. The liability is not owned by any property owner at that time, the very time that in the OLG example that we are all looking at what “people” own, and we say aha, mhmm, there’s 200 apples in assets total, 110 apple asset bond, and….that’s it. No liability owned by any of the named people like Iris or John!

    How can we possibly believe that Old Bob and Young Rumpelstilskin own an asset, and yet nobody owns the liability? We’re adding up assets for OURSELVES, but we’re not adding up the liabilities that the future generations are ACCRUING IN THEIR NAME.

    Now, I can anticipate an objection at this point. Surely in the real world bonds are created and then paid back and extinguished all the time, and you wouldn’t call a bond being paid back in this way “reduction/destruction of property” would you? No, I wouldn’t, but that’s because the liability was ALREADY in the economic system! That is not the case when the Liabilities and Assets are SEPARATED BY TIME, as they are when the government keeps the liabilities out of the economic system, introduces assets owned by “the people”, with no other “the people” owning the corresponding liability!

    Krugman et al are doing what almost all democratic minded people do: They conflate the people with the government. No, the government is the government and everyone else are everyone else. If “the people” treat government debt as an asset, then what happens is that OTHER GOODS AND SERVICES become intertwined with that fact. People start buying and selling government debt for money, and then buy goods, and benefit from them, etc. THAT’S where people are personally benefiting, and yet nobody is incurring a personal liability anywhere.

    If people are gaining because of the fact that they value the debt as an asset, and trade it as such, and CONSUME from the proceeds, then the liability doesn’t just disappear. It gets transferred to future generation PROPERTY owners!

    So when Team Krugman says something like “There’s 200 apples per period consumed! It can’t be a collective loss if all that happens is that apples get transferred!” that ignores the bond liability introduced into the system that while moving the 200 apples around, it still collapses the ASSETS that the future generations own. They just sloppily think “The liability of government debt just has a corresponding asset, no big deal.” Well yes, the debt assets are owned by “the people”, but no bondholder, nobody in the economy, has a corresponding LIABILITY. The entity that owes money is the government, which, incredibly, is so casually transferred away from the government to the people as if future generations lent the money and incurred the liability.

    But the “big deal” is that by adding assets into the economic system initially, but not a corresponding liability into the economic system initially, and keeping the liability out of the economic system in government’s hands, and deferring the liability to the future, it makes people believe they had a free lunch.

    But once that liability enters the economic system, in our case Year 8, or whenever else the government imposes a tax to pay back the debt, what happens is that the “future generation” experiences an introduction of a liability with no NEW introduction of assets! The future generation loses collectively.

    So yes folks, Murphy and Rowe’s conclusion is right.

    The reasoning error of Team Krugman is they are all equivocating debt asset property and money property. That is why he can’t see any collective property loss generated by taxing some people to pay the debt off.

    The reasoning error of Team Murphy is that they are all equivocating real goods property and money property. That is why although they *can* see the collective property loss generated by taxing some people to pay the debt off, they nevertheless can’t convince Team Krugman, because Team Krugman can only take away the fact that Team Murphy is conceding no loss in money property.

    I hope you read this far, because Team Major_Freedom has settled this.

    • Major_Freedom says:

      To add to this:

      Suppose that instead of property owners valuing only the asset side of the government debt, they start to act in accordance with Ricardian equivalence and “took ownership”, somehow, of the the liability side of the government debt.

      Year 1 end, total property = $200 + 200 apples + $1 in asset (bond) – $1 liability (bond).
      Year 2 end, total property = $200 + 200 apples + $2 in asset (bond) – $2 liability (bond).
      Year 3 end, total property = $200 + 200 apples + $4 in asset (bond) – $3 liability (bond).
      Year 4 end, total property = $200 + 200 apples + $8 in asset (bond) – $8 liability (bond).

      Year 8 end, total property = $200 + 200 apples + $128 in asset (bond) – $128 liability (bond).
      Year 9 end, total property = $200 + 200 apples + $256 in asset (bond) – $256 liability (bond).

      This case is identical to the case where debt is only created “internally” by those who cannot tax from outside the property rights system.

      In this sample, there is less property, since all asset (bond) property has a corresponding liability (bond) property. The whole debate on whether we are passing down THIS kind of debt “to our children” doesn’t even enter people’s consciousness, and for good reason. The liabilities are already in the economic system the whole time, and total property is lower.

  8. Rob says:

    I would like to try to explain why Bob’s model does not show that debt leads to future generations having lower lifetime utility. It is transfers that do it as a result of the utility function and endowment distribution chosen in the model,

    1. The model is set out so that the best outcome is for the govt to do nothing so everyone gets 20 utils

    2. As soon as the govt does any transfer then average utils for all present and future generations goes down below 20

    3. If the govt uses a transfer in a period to correct lost utils from a transfer in a previous period then it may help an individual but it will again further reduce the average utils for all present and future generations

    4. The best policy for a govt who wishes to maximize utility is always to do nothing. Any action will make things worse. Bob has introduced an assumption that all bond payment will be honored (no defaults). In this case the govt should always uses tax to offset the bond transfer to equalize utility in that period.

    Every net transfer reduces utility further. It is the transfers that do the damage not the bet per se.

    If one leaves the utility function alone but changes the distribution of the endowment (say youngsters get 150 and elders get 50) then a transfer is always needed via a simple tax or via a more complex bond-based transfer.

    I think if you changed the utility function to weight it towards consumption when young then the model outcomes would change again but that too complicated for me to work out.

  9. Greg Ransom says:

    Bob, do you think you could make an Excel spread sheet demonstrating this Hayek vs Keynes point?

    Cross-posted from Worthwhile Canadian Initiative:

    What to you call it when someone choses to switch the use of short term production good which produces an inferior output into a longer production process that produces superior output?

    Your immediate consumption ISN’T REDUCE ONE BIT .. what changes is your ability to consume and invest in the future …

    Just one more Keynesian / macroeconomic fallacy put on the table .. when can we address these?

    We can expand our savings by changing the consumption and investment patterns in the future, without changing them in the present.

    Maybe Robert Murphy can make us an Excel spread sheet. Economists seem to need them.

    Nick writes,

    “Saving isn’t a thing, it’s a non-thing. It’s a residual. It’s defined negatively, as not consuming part of your income. So when an individual increases his saving, for a given income, all we know for sure is that he is reducing his consumption.”

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