OK I think I’ve boiled down the issues to their essence. In the debate of Nick Rowe and Don Boudreaux versus Paul Krugman and Matt Yglesias (I’m leaving people out for sure, like Landsburg and John Carney because I’m not sure where to plug them in), the former are basically right. The irony here is that two weeks ago, I would have confidently sided with Krugman and Yglesias. But kung fu master Rowe’s logic was irresistible.
For me, it really “clicked” when I stripped down Nick Rowe’s apple example even more. So think through the following demonstration, and then notice that your objections (which will make sense in this weird world) fall away as we make the scenario closer to reality. In other words, my story below will seem really contrived, but that’s because I’m trying to isolate what I think the real issue is that Krugman et al. are overlooking when claiming “the debt isn’t a burden to future taxpayers if they owe it to themselves.”
So here goes:
Consider a very simple world where there are only two periods, and only two people. In period 1, Abraham has an apple tree that will yield 100 apples. His son Isaac has his own tree, that will also yield 100 apples. In period 2, Abraham and his tree are dead. Isaac is the only person alive, and his tree yields 100 apples. Then Isaac and his tree die too, so that everything is dead by period 3. The apples can’t be stored across periods because they would rot. And there’s no way to plant more trees; Isaac will be dead at the end of period 2, and a new tree wouldn’t be yielding fruit by then.
Clearly, in a world without altruism and just private transactions, there are no trades. Abraham eats 100 apples in period 1, while Isaac eats 100 apples in period 1 and also in period 2.
Now suppose there is a government (which is run by Skynet I guess, since there are no other humans). In period 1, it has 0 taxes but gives Abraham a “greatest generation” bonus payment of 10 apples. It finances the 10-apple budget deficit by issuing bonds. At a 10% interest rate, Isaac’s intertemporal preferences lead him to voluntarily give up 10 apples in period 1, for an airtight claim to 11 apples in period 2.
Period 2 comes along. The government institutes a lump sum tax of 11 apples on the citizenry, i.e. Isaac. Then it uses those 11 apples to retire the bond.
In this scenario with the government, in period 1 Abraham eats 110 apples, while Isaac eats 90. In period 2, Isaac eats 100 apples.
Now let’s make some observations about this outcome:
==> Abraham clearly benefits from the government’s actions, while Isaac clearly loses.
==> If the government in period 2 decides to default on its bonds, that doesn’t help Isaac. Yes, he is spared the 11 apples in taxes, but then he doesn’t get the 11 apples in payment that led him to lend apples in period 1.
==> Yes, there is a definite sense in which Isaac “really” paid for Abraham’s 10 apples of higher consumption back in period 1. But, if Isaac views the government’s actions as exogenous–i.e., it is definitely going to tax him 11 apples in period 2, end of story–then he really is voluntarily buying the government bond in period 1. From his individual, micro perspective, Isaac really isn’t harmed by lending his 10 apples to Abraham, because he is compensated by the promise of 11 apples in period 2. (If a private party (Jacob) had his own tree and made such a deal with Isaac, we wouldn’t consider it a problem.)
So, in conclusion I think Boudreaux and Nick Rowe are basically right. When the government announces its policy in period 1, Isaac thinks, “Oh cr*p. I’m going to get slapped with an 11-apple tax next period. That is going to hurt me then. Right now it’s just a future burden. So, how can I deal with it? Well, maybe I should start saving more. I know! I’ll trade 10 of my apples out of today’s crop, to get paid 11 next year. That way, I can still consume 100 apples next year after taxes.”
It’s good that we had this discussion, and Krugman et al. are right that the average layperson doesn’t get all of the above nuances. But, the average layperson is basically right. Fundamentally, where Krugman et al. go wrong in their “it’s not a burden if the taxpayers owe it to themselves” is just where Boudreaux (relying on Buchanan) thought they went wrong: It ignores the fact that the government is a distinct entity, and that taxation is involuntary. Once you factor those crucial facts into the picture, you see that in a very real sense, government deficit spending today imposes a burden on future generations, when their taxes are raised to retire the debt. This is true even if, at that time, those taxpayers themselves hold the bonds being retired.
(I could try to say more now, and forestall objections in the comments, but I know that is futile. Like I said upfront, if you are getting hung up with Isaac’s complacency in the above scenario, then realize in reality Isaac is one person among millions. He can’t change government policies.)