My Resolution of the Dastardly Debt Debate
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.)
This is nice Bob but I don’t see where you addressed the ‘it depends on the spending’ objection.
In your story the spending is a pig out for abraham.
But what if the spending is a banquet for Isaac? Then he gets 100 apples period 1 and 200 period 2.
I’m a little confused. With and without the borrowing Isaac consumes the same amount in period two. In this example, there’s a distributive effect in period one, and there would be a distributive effect in period two if you split Isaac into bond holder/taxee, but there is no inter temporal effect.
Is the argument that, of current government borrowing young people will have to consume less in the current period? That seems (I might be wrong) to be a different argument than Rowe is making.
“Is the argument that, of current government borrowing young people will have to consume less in the current period?”
The argument is that Isaac lent 10 apples to the government in Period 1, hoping to be paid 11 apples in period two, for a total expected 111 apples in period 2 (100 apples from his tree, plus 10 apples principle plus 1 apple interest).
But the government TAXED Isaac in period 2 in order to retire the debt, so instead of going from 100 to 111 apples as Isaac expected, he goes from 100 apples, momentarily down to 88 apples because of the tax, and then back up to 100 apples again because of the interest payment. He ends up with 100 apples instead of 111 apples as he expected.
So basically if the government borrows money and spends it on person A, but then taxes person B to pay off the loan (and the interest) then person A has done better than person B out of this deal. This remains true even if A and B live in different generations.
Is that it ?
You can’t really compare utility across people.
It’s better to say that A is better off than he otherwise would have been, and B is worse off than he otherwise would have been.
You are correct: If person B was Daniel K. he claims he enjoys the extra burden.
It’s the only way he can sound non-hypocritical in calling for taxes on others, which is, of course, the primary goal.
In this scenario, it is true that Abraham clearly benefits while Isaac clearly loses /given the behavior you assumed for them/.
However, if Abraham cared about his offspring’s future well-being, he could simply give the 10 apples back to Skynet in exchange for the bond, which he could give to Isaac. Consumption is then 100 apples all around again.
Since Abraham can change his behavior to avoid placing a burden on Isaac, then there will only be a burden on Isaac if Abraham chooses to put it there.
i think in order to examine the rest of the issue, you would need to add another father/son pair so that one father leaves the burden on his offspring while the other does not. from there it would be much clearer that it is the /spending/ of 10 apples in period 1 which causes the burden on Isaac, and not the borrowing:
Start with the same scenario as above, but with the addition of another family, Homer and Bart. Skynet announces its ‘greatest generation’ policy of giving 10 apples each to Homer and Abraham. It can do this in two ways:
1) Tax. Taxing Homer and Abraham would simply cancel out the program, so Skynet taxes Bart and Isaac. Homer gleefully eats his extra 10 apples, while Bart gets by with 90. Abraham doesn’t feel right taking 10 apples from his son, so he gives the 10 apple dividend to Isaac, and both consume 100. Both Bart and Isaac go on to consume 100 apples in period 2.
2) Borrow. Skynet finances its apple deficit by borrowing at 10%, as in the original example above. Homer again eats his 10 apples, while Bart either buys a bond now for 10 apples or pays 11 apples next period. Abraham uses his 10 apples to buy a bond, and gives it to Isaac.
In scenario 1, Bart suffers but Isaac does not. However, Bart only suffers because Homer chose to leave the burden on his offspring. In scenario 2, Bart suffers but Isaac does not. However, Bart only suffers because Homer chose to leave the burden on his offspring.
Abraham has no reason to prefer one financing policy over the other, as neither will have any effect on him or Isaac. Homer’s consumption is likewise unaffected by Skynet’s choice of financing. However, Bart (and also Homer if he values Bart’s utility at all) should prefer that Skynet BORROW, because at least then he has the choice of which period to bear the burden.
So, if there is a burden on the younger generation, it exists only because of (a) Skynet’s spending and (b) the younger individual’s father choosing to consume at his son’s expense. Not only does borrowing not create any new burden, it actually lessens the burden by allowing the option to choose which period in which to pay the tax.
The burden was placed on the younger generation (of greedy parents ONLY) the moment the spending happened, regardless of financing.
This ended up way longer than intended.
Cmprostreet wrote:
The burden was placed on the younger generation (of greedy parents ONLY) the moment the spending happened…
Well, in the same way that if someone fires a missile, he “places the hurt on me” the moment he presses the button. But if somebody else says, “The missile hurts me when it blows up in my face,” that is certainly a true statement.
So same thing here. No, the future taxpayers aren’t actually suffering when the money is spent. They suffer when the tax bill comes due. So the layperson is basically right. It takes a sophisticated PhD to doubt it (and that group included me as of two weeks ago), and an even more sophisticated PhD to alleviate those doubts. The layperson is basically right.
When people say “we are impoverishing our grandchildren,” I don’t think they mean we’re having them forego present consumption in order to be able to live the same lifestyle they would otherwise be able to in, say, 2050. If that is indeed what they mean, they should stop using confusing terminology.
In reality, of course, only some people are going to buy the bonds. But that just takes us back to there being a transfer between two different sets of grandchildren. Essentially young people are left with this choice between A and B—or some intermediate option: (A) Keep your present-day consumption where it would be without the borrowing, while accepting a hit in the future. (B) Take a hit in the present, in order to protect your future level of consumption.
Am I missing something?
“However, if Abraham cared about his offspring’s future well-being, he could simply give the 10 apples back to Skynet in exchange for the bond, which he could give to Isaac. Consumption is then 100 apples all around again.”
That’s Ricardian equivalence.
“Since Abraham can change his behavior to avoid placing a burden on Isaac, then there will only be a burden on Isaac if Abraham chooses to put it there.”
It’s not Abraham that would be responsible for that. The government is taxing Isaac. Abraham is not. An absence of helping someone who would otherwise be harmed by a third party is not the same thing as harming them yourself. The person harming them is the person actually aggressing against them.
Stop blaming the victims.
Nick Rowe and your situation here make good sense.
The point is the economy does grow, it does not end after two periods, government does not borrow primarily for consumption, and under those circumstances even Nick Rowe admits we have a free lunch on our hands (do you agree?).
I don’t think the thought experiments are the real obstacle here. I think the obstacle is that you think Krugman et al. are saying that under your scenario up there debt would still be a free lunch.
Somebody with Krugman’s ear (ie – not me) just needs to give him Nick Rowe’s list and ask him if he’s a #1 or a #4. I think he’s more of a #4. I’m certainly a #4.
One of the basic mistakes that people make is that they only think of debt as a liability and not as an asset. Krugman is right to point out the problems that emerge when you think like that.
Another basic mistake that people make is that they think about governments like they think about mortal actors in the economy, but stable governments probably shouldn’t be thought of as mortals.
Another basic mistake that people make is to assume government spending is waste and 15% of the budget goes to foreign aid and 25% goes to pork, and 35% goes to welfare. We should note that most of what the government does is a social investment of some sort, and that the really major consumption programs we have (SS and Medicare) are funded by taxes, not debt.
Because of all of these points I think it’s very, very reasonable for Krugman to do a little tutorial on public debt.
If you want to know whether he falls into some specific academic taxonomy Nick Rowe concocted, then we should just ask him. I think he’s a #4.
Another basic mistake that people make is to assume government spending is waste and 15% of the budget goes to foreign aid and 25% goes to pork, and 35% goes to welfare. We should note that most of what the government does is a social investment of some sort, and that the really major consumption programs we have (SS and Medicare) are funded by taxes, not debt.
Yeah, good point, Daniel_Kuehn, we need to correct these ridiculous misconceptions and teach people the TRUTH: specifically, that:
1) “Welfare”-like programs (i.e. entitlement spending) is over half of spending, not just 35%.
2) The fungibility of money makes it meaninless to say which expenditures were financed by taxes vs. debt.
Please, Daniel_Kuehn, help us fix these misconceptions!
-Entitlement programs aren’t welfare, and they aren’t funded by debt for precisely the reason that everybody’s been pointing out.
– “The fungibility of money makes it meaninless to say which expenditures were financed by taxes vs. debt.”
No, it’s an entirely different entity that pays the bills, Silas – the OASDI vs. the Federal government. Indeed, the OASDI has claims on the Federal government!
Entitlement programs aren’t welfare, and they aren’t funded by debt for precisely the reason that everybody’s been pointing out.
In the mind of most people who worry about this topic, it is close enough in conceptspace to be functionally the same as welfare. Don’t get hung up on whether it’s “really” welfare.
No, it’s an entirely different entity that pays the bills, Silas – the OASDI vs. the Federal government. Indeed, the OASDI has claims on the Federal government!
Wow, you’ve really fallen for it, haven’t you? I guess I can at least be thankful you didn’t go into accounting. Your argument is just a dressed up “No, my left hand isn’t in debt; my *right* hand is — in fact, it has claims on my left hand!”
If you seriously believe what you wrote, then fund your retirement by writing a check to yourself and stuffing it under your mattress. When it comes time to retire, demand your lump sum from the check!
“The point is the economy does grow, it does not end after two periods, government does not borrow primarily for consumption…”
Money that is spent not for the purposes of making subsequent sales is called consumption.
Money that is spent for the purposes of making subsequent sales (and profit) is called investment.
Since government does not spend for the purposes of making subsequent sales (and profit), their expenditures must be considered consumption.
The government is not an investor. The government does not produce. Everything they utilize depends on the productive efforts of those external to it. The government is therefore a consumer, not an investor.
“Somebody with Krugman’s ear (ie – not me) just needs to give him Nick Rowe’s list and ask him if he’s a #1 or a #4. I think he’s more of a #4. I’m certainly a #4.”
Ah so you also conflate nominal spending growth with real growth.
“One of the basic mistakes that people make is that they only think of debt as a liability and not as an asset. Krugman is right to point out the problems that emerge when you think like that.”
Debt that is paid back via coercive taxation and/or inflation is a liability and not an “asset” at all, even if the owners receive money. If I held a piece of paper that said “The owner if this note gets to receive $100 that Major_Freedom will steal from someone else, who may or may not be the owner of this note”, sorry, it’s not an asset. It’s only a liability.
One of the basic mistakes that people like you make is to make it seem like the government is a legitimate business enterprise, such that you see the words “debt” and “revenues” and “interest payments”, and then you believe that since they are used to analyze both government and everyone else, that government debt is just as legitimate as private debt.
“Another basic mistake that people make is that they think about governments like they think about mortal actors in the economy, but stable governments probably shouldn’t be thought of as mortals.”
Yeah, governments should instead be considered immortal.
“Another basic mistake that people make is to assume government spending is waste and 15% of the budget goes to foreign aid and 25% goes to pork, and 35% goes to welfare. We should note that most of what the government does is a social investment of some sort, and that the really major consumption programs we have (SS and Medicare) are funded by taxes, not debt.”
That isn’t a “mistake”. YOU are making the mistake that government spending is NOT waste. Do you know what waste means? It means waste relative to some standard. What standard is that? In economics it is individual acting man. Government STEALS INDIVIDUAL’S MONEY USING COERCION. They bring about spending that diverges from spending that individuals would rather have spent their own money on. That is waste generating par excellence you statist knob. If any citizen did what the government did, you’d consider them not only wasting resources, but criminally insane as well.
“Because of all of these points I think it’s very, very reasonable for Krugman to do a little tutorial on public debt.”
I think it’s very, very reasonable for you to find yourself a different career, because obviously you’re more concerned with how to advance the violent state and hurting innocent people’s lives than you are with economic science.
“If you want to know whether he falls into some specific academic taxonomy Nick Rowe concocted, then we should just ask him. I think he’s a #4.”
I think you’re a zero.
Nick Rowe said to me that his task was to prove that it is not impossible for public debt to be a burden on the future – that it could be a burden – and so his task was to come up with one counter-example.
Fine – I think you and Nick both succeeded on that.
I just don’t think Krugman ever set out to demonstrate that it’s a logical impossibility for debt to be a burden. Don’t take my word for it. Read what he said he was arguing:
“Again, I’m not saying that debt is never a problem. But it’s not the kind of problem people imagine.” (Krugman from December 29)
My bolded point is the key point. I can’t possibly imagine how anyone could disagree with Krugman on the bolded point.
People have just trumped it up into a much bigger assertion.
But the only circumstances where debt would not be a burden of the type described by Nick and Bob is where the tax was rolled over for ever and new loans taken out to pay the interest.
As a matter of fact 6% of tax revenue goes to service the debt. So we are the generation being hurt by the debt !
Or if it funded goodies to Isaac, Jacob, and Joseph, rather than to Abraham.
re: “As a matter of fact 6% of tax revenue goes to service the debt. So we are the generation being hurt by the debt !”
Speak for yourself – I feel no burden!
But if the loans are never paid off then eventually (I assume) future generations would stop benefiting from them
I am happy to pass my share of the debt burden on to you if you are feeling underutilized. You can have my share of the benefits as well if you like – oh wait a minute – there aren’t any.
“Speak for yourself – I feel no burden!”
It wasn’t a subjective feeling claim he made.
He was obviously making an economic point in the context of the discussion at hand, that is, given the definition of “burden” is when the government taxes in order to pay off its debts.
I don’t think he was interested in your pro-state value judgment concerning government taxes and interest payments.
Let me put it this way – couldn’t you just conclude blog post with this: “So clearly public debt to fund consumption by older generations comes out with exactly the same scenario as a current tax to pay for older generations – because we have Abraham consuming 110 in period 1 and Isaac consuming 90, with Isaac consuming 100 in period 2 – that’s just like taxing Isaac 10 in period 1 to give 10 to Abraham. So clearly there’s nothing about public debt that’s inherently burdensome (because Isaac’s 11 in taxes in period 2 went right back into his pocket). What’s burdensome potentially is what the government decides to do with that money, not public debt. Government could conceivably decide to do something different with that money. It could make an investment that actually helps Isaac, and not Abraham. Hell, government could make an investment that could help Jacob and Joseph too if it wanted!!!”
You’d be comfortable writing that, right?
Don’t you think saying that falls under Krugman’s point that “it’s not the kind of problem people imagine”?
I think so.
People are just too quick to assume that Krugman is making some naive leftist claim, when actually he’s just trying to make a pretty simple point that as far as I can tell Nick Rowe, you, and Don Boudreaux are actually largely on the same page with him on.
But don’t take my word for it – somebody should ask Krugman if Nick’s #1 or Nick’s #4 makes more sense. I bet Nick Rowe 50 (American) dollars he’d say #4.
stupid html
“So clearly public debt to fund consumption by older generations comes out with exactly the same scenario as a current tax to pay for older generations – because we have Abraham consuming 110 in period 1 and Isaac consuming 90, with Isaac consuming 100 in period 2 – that’s just like taxing Isaac 10 in period 1 to give 10 to Abraham.”
No it isn’t. As expected, you ignore the PURPOSEFUL BEHAVIOR element in your crude analysis.
In the borrowing case, Isaac VOLUNTARILY lent 10 apples, hoping to get 11 apples in return in the next period. In the taxing case, Isaac is INVOLUNTARILY deprived of 10 apples.
You’re focusing only on apple flows, ignoring thymology, and believe everything is equal as long as the physical apple flows remain equal.
“So clearly there’s nothing about public debt that’s inherently burdensome (because Isaac’s 11 in taxes in period 2 went right back into his pocket). What’s burdensome potentially is what the government decides to do with that money, not public debt.
Since in the real world not all debt is created equal, since not all debt obligations fall on the taxpayers equally, it means that saying the burden is due to the debt is equivalent to saying the burden is due to the spending. The spending is tied into the debt. You can’t have unproblematic spending when it comes to government spending, such that you can say the debt is not the problem, it’s the spending that is the problem. Spending problems are a flip side to the debt problem in the government coin, since the debt doesn’t fall on everyone’s shoulders equally that allows them to make it out “unchanged” as in your example.
The fact the government TAKES people’s money, the fact that they COERCE them, changes everything, regardless if the apple flows are the same in both cases.
If I robbed you at gunpoint, but then sometime later I gave you back what I stole, you still incurred a loss.
“Government could conceivably decide to do something different with that money. It could make an investment that actually helps Isaac, and not Abraham. Hell, government could make an investment that could help Jacob and Joseph too if it wanted!!!”
ALL HAIL THE ALMIGHTY AWESOME GOVERNMENT!!!
Opportunity costs, economic calculation, and scarcity be damned!
Daniel:
Here’s Paul: “The point that occurred to me is that since the real burden of debt is the possible distortionary effect of the taxes that must be levied to service that debt, …..”
http://krugman.blogs.nytimes.com/2011/12/31/a-thought-on-debt-history/
If he really thought #4, there wouldn’t need to be taxes levied to service the debt, and so there wouldn’t be any distortionary effects of those non-existent taxes.
Welcome aboard Bob! (I reckon Steve Landsburg has basically joined up too.)
I’ll email him tonight or tomorrow morning about it. This shouldn’t be that hard to resolve.
You don’t think there are any distortions taking place if a larger/smaller fraction of tax revenues goes to interest payments on a growing/shrinking debt?
What if the government’s total spending budget remained constant, but at some point interest payments grew so high so as to consume the entire government’s budget?
When pushing Krugman et al’s logic to its ultimate conclusion, you can “prove” that debt never matters in any way whatsoever. After all, when discussing any debt, you can dismiss it by saying “well, the human race just owes it to itself.”
What really matters is the fact that control over scarce resources has been (temporarily) tranferred from creditors to debtors. This isn’t really an inherently good or bad thing, but obviously it demonstrates that the use of credit, far from being irrelevant, alters the production structure of the economy
When pushing Krugman et al’s logic to its ultimate conclusion, you can “prove” that debt never matters in any way whatsoever. After all, when discussing any debt, you can dismiss it by saying “well, the human race just owes it to itself.”
You think properly.
Philosophical Platonists like Krugman hold “true” reality to be the abstract universal concepts we ascribe to groups of concrete distinct entities. His abstraction stops at national borders, since that is where government stops.
His mind is drawn to the abstract singular concepts like “government” as a fly is drawn to manure, and it is why he lumps all Americans up into the same concept and say “Group A owes Group A.”, where “Group” is “every cell, I mean human, who is exploited, I mean who lives, in the government’s free range prison, I mean country border.”
Furthermore, while there might be an intersection between the “bondholders” group and the “taxpayers” group, they are not the same. The taxpayers have a liability (or obligation, or burden) while the bondholders have an asset. This naturally yields 3 distinct groups:
1. Non-bondholding taxpayers
2. Non-taxpaying bondholders
3. Bondholding taxpayers
You could divide group 3 into net positive (more bond yield inflow than tax payment outflow) and net negative, but I don’t see a need to, here.
It is an empirical question as to which group any citizen falls into and thus their relative populations. Note that bondholding is voluntary while tax payments to service national debt are involuntary.
Can anyone deny that group 1 faces an additional burden (at some point) when the government issues more debt? Finally: “Gee Dad, I’m sorry I wrecked your car. It’s a good thing I don’t have the burden to return it you, since we owe it to ourselves.”
I thought of even better ways to illustrate this. Sorry Daniel, Krugman is just plain wrong. We’re not all “basically saying the same thing.”
But, I don’t fault Krugman for it, since I would have been equally wrong on this two weeks ago.
I still agree (I don’t know if you do) that government spending today is a burden on future generations, specifically because it funds consumption (public and private) at the expense of private investment and, hence, private capital accumulation is reduced in the long-run.
Bob:
So your government wants to give Abraham 10 apples in the first period.
Suppose it gets those 10 apples by taxing Isaac. It takes 10 apples from Isaac and gives them to Abraham. In period 2, it leaves Isaac alone.
Neither Abraham nor Isaac has the slightest reason to prefer your world to mine or vice versa. They are equivalent worlds. But in my world there is no borrowing. That is precisely what I mean when I say that Isaac’s problems have nothing to do with government borrowing.
So that shows us that the effect of internal borrowing is equal to taxation (except that taxation has different redistribution effects).
But what about external borrowing? As I tried to point out in the other comments, your scenario three in “PS to Sam” isn’t plausible.
The interesting thing about internal borrowing here is that it doesn’t work with generation that don’t exist yet. Isaac has to be a producing member of the society to be able to fund Abrahams’s overconsumption in period 1. But suppose Isaac is a little child an his tree doesn’t carry fruits yet in period 1. Abraham’s govt would have to find an outside supplier of apples and in period two, Isaac would have to pay taxes without getting the revenues. The amount of apples that he has to surrender through taxes are the same. They only shift from period one to period two. But the difference is, in the internal borrowing example he was a producing member of society who could at least try to influence the policy. Whereas with external borrowing the decisions that led to his taxes were made ata time where he wasn’t even able to articulate properly. Economically, this might not be a big difference, morally it is.
Steve Landsburg wrote:
Neither Abraham nor Isaac has the slightest reason to prefer your world to mine or vice versa. They are equivalent worlds. But in my world there is no borrowing. That is precisely what I mean when I say that Isaac’s problems have nothing to do with government borrowing.
Well right. Strictly speaking, it is the future taxation that hurts our children. But, the reason those taxes are necessary, is to pay off the debt we are accumulating right now.
Steve, like I said, I think you are sitting in the corner firing off true statements. But, you are missing the big picture, especially if you think Krugman is basically right. No, he is totally utterly wrong. (But again, I was this totally utterly wrong two weeks ago, so I’m not saying he’s dumb.)
[Note: Bob edited the comment because Steve forgot to fill out his name.]
Bob wrote: Well right. Strictly speaking, it is the future taxation that hurts our children. But, the reason those taxes are necessary, is to pay off the debt we are accumulating right now.
No; the reason those taxes are necessary is that the government decided to take from Isaac and give to Abraham. This necessitated the harm to Isaac. True, the borrowing caused that harm to take the form of future instead of current taxation, but the nature of the harm itself — which is what matters — has nothing to do with the borrowing.
I am quite sure you understand this, but am a little unclear on why you don’t think it’s the best way to think about it.
Sorry; that “Anonymous” reply was from me; I must have forgotten to fill in the Name/Email/Website form.
EXACTLY Steve. I made this point above.
You are ignoring the fact that being taxed is different from voluntarily lending.
Yes, Steve. I demonstrated the same thing in a blog post yesterday.
I am glad that Landsburg, Daniel Kuehn, Greg Ransom, and even some of my usual cheering section are quibbling with me. I totally understand. Believe me, I was ready to do a hatchet job on Nick Rowe (and Don Boudreaux) myself.
But now that the scales have fallen from my eyes, I am like this. Don’t get me wrong, your arguments are superficially compelling, but now that I have achieved total consciousness, they are bouncing off of me.
Nick Rowe brought me to this party, and I’m gonna dance with him till the end. Maybe later today I’ll put up another post to deal with your objections. You are all basically wrong, sorry…
Bob, this is kind of weird: Steve and I have both shown that your model shows that taxation and debt are exactly equivalent in your scenario, and I have shown that Rowe’s model is incoherent: but you are just going to ignore this, because Rowe brought you to the party?
Gene wrote:
…and I have shown that Rowe’s model is incoherent…
No you haven’t, Gene. Since you aren’t claiming my example here is incoherent, and since all I was doing is spelling out Nick’s original model in an Excel spreadsheet, I think you need to amp down your confidence on this stuff.
Look, I already had skin in the game, and lost. Maybe you think I’m taking glee in attacking Krugman, but no I’m not. It was painful for me to admit on my blog that I think I didn’t get this subtlety right in my textbook. (I also treated this incorrectly in my PIG to Capitalism, for the same reason.)
Maybe I’m wrong but instead of making a huge theoretical diskussion out of this subject, maybe people could just look at the real world and see whether government debt is a problem or not. And indeed, yes it is. For several reasons. If government debt just was value we owe ourselves without cost then we could basically (and should?) run higher and higher debt forever.
The interest rate on gov. bonds in Europe is record high during the euro era. Shouldn’t that count for something before making claims like “debt is not a real problem, we just owe the money ourselves”?
Landsburg describes states of a two period world identical to the Murphy world except Landsburg says ‘tax’ and Murphy says ‘borrow’. If Economics is supervenient on states of the World, then Landsburg has proved that what Murphy says about Govt. borrowing is something he should equally say about taxing.
Yet, Economics isn’t really supervenient on states of the world, on the contrary Economic theories change states of the world often in perverse ways.
History teaches us that States arise and compete on a fitness landscape related to their ability to tax and borrow. They aren’t equivalent because their crowding out effects operate differently. I suppose, if one is committed to super-neutrality of Money, and Rational Expectations and so on, one might argue the toss on this but there is something at the back of folk wisdom re. Public borrowing screwing up our kids futures. Look at Greece, at Ireland, Spain etc. No doubt young Athenians are pleased Gran got to retire at 50 and Dad at 60 but said young Athenian has to up sticks and go to Germany to get a job.
America, of course, is in no such danger. So perhaps its Economists can stick with elegant Mathematical models sometime longer.
‘ 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.’
This only works if Isaac can be fooled- he has ‘bond illusion’. If he understands that the bond will be retired by a lump-sum tax on himself he wont subscribe to it. Indeed, he’d be trying to sell apple futures, not buying Govt. bonds.
Landsburg argues that it is incorrect to say borrowing causes a burden just as it would be wrong to say the wheelbarrow in which the Govt carts away the apples causes a burden. What causes the burden is the Govt.’s redistributive zeal.
However, ‘wheelbarrow illusion’ is not psychological plausible (unless we are discussing some sort of primitive tribe ruled by a Govt. of witch-doctors who say ‘fear the wheel barrow God! Fill it with apples!’.
Bond illusion, like Money-illusion, is plausible in the short run.
Quite frankly, back in 2004, it looked as though Govt spending on the Gulf War was going to yield a huge dividend in terms of permanently lower energy and commodity prices, less uncertainty, the whole of the Middle East emerging as a second ‘sweat-shop of the world’ to give the Chinese a run for their money, vastly increased siegneurage to the U.S Treasury as Dollar denominated Trade explodes with the fall of dirigiste resource rich regimes- in that scenario, everybody’s McMansion really could go on appreciating in value because America would have surpassed Rome at its zenith.
vik, I made your same basic point about the crucial issue being Isaac’s ignorance of how his bond is going to be serviced, in a comment at Steve_Landsburg’s blog, but everyone seems to be ignoring it 🙁
landsburg is exactly right. its pure semantics. define “borrow” as force someone to give up some of their consumption then of course they are worse off.
isaac would never “lend” the government in period 1 in the example above because he knows theres no way to pay it off with his single production of 100 apples in period 2. so he could only be forced to do this by tax. period 1 is when he gets shafted. ie taxed.
so your introduction in your text book is exactly right. theres no way to borrow from future generations, but there sure is a way to shaft the young to benefit the old. (or vice versa, or to tax blue eyes to benefit green)