After spending yet another hour of my life trying to enlighten those of you who still don’t see the debt stuff, what do I get? Gene Callahan still “explaining” why I’m wrong by claiming things about my model that aren’t true.
And, as a special treat, here was the first comment by Daniel Kuehn after my last effort at elucidation:
I still don’t see how you are saying anything more than what Krugman initially said here:
“talking about leaving a burden to our children is especially nonsensical; what we are leaving behind is promises that some of our children will pay money to other children”.
This is the cost and the benefit that you’ve shown – costs and benefits on individual children, if you add up their whole lifetime income.
But within each period you don’t have a transfer of resources.
Isn’t this the Krugman position?: winners and losers but no additional burden on any particular future time period?
That’s exactly what your model shows, and what Steve, Gene and I have been trying to point out. Gene was exactly right to point out that your model shows what we’ve been saying all along.
If you look at future income levels, that remains unchanged.
If you look at individuals in the future, obviously some of them win and some of them lose – but that’s what Krugman said, from the very beginning, was “a different kettle of fish”. That’s why I’ve been saying from the very beginning that Nick Rowe (and now you) are saying what Krugman said.
At this point, I am done trying to free you guys from your blindness–now I want to profit from it. So here’s my wager:
Let’s work with my 9-period OLG framework. But let’s be more specific. Assume each person has the utility function of U = sqrt(a1) + sqrt(a2), where a1 is the number of apples the person eats in the first period of life, and a2 is the number eaten when old. (Of course, Old Al has utility function sqrt(a), and same thing for Young John, since they are only alive for one period.)
Now then, I claim that I can construct a scenario in which the following conditions are true. Obviously I am not here spelling out everything about the scenario, but I claim that a scenario exists in which the following are all true statements describing it:
==> The government runs a deficit in period 1 by borrowing from Young Bob to make a transfer payment to Old Al.
==> Al, Bob, Christy, Dave, and Eddy all get more utility in this scenario than they would in the endowment scenario (where everybody consumes 100 each period).
==> Frank, George, Hank, Iris, and John all get less utility in this scenario than they would in the endowment scenario.
==> I am just restating the previous two conditions, but let me do it this way so people understand the relevance: In this scenario, anybody who is alive in periods 1, 2, 3, or 4 strictly benefits from the new arrangement, while anybody who is alive in periods 6, 7, 8, or 9 strictly loses from the new arrangement, relative to the endowment scenario.
==> Anybody who lends money to the government does so voluntarily, taking government tax policies as fixed. (I.e. everyone is best-responding to the government’s lump-sum taxing amounts levied in each time period.)
==> The government doesn’t destroy apples; 200 apples are consumed by the two people collectively, in each period.
==> There is certainty; everybody knows the whole model, including all future tax levies, and knows the government won’t default.
==> The government retires its debt by period 9, so that we have a closed system.
If I understand what Daniel is saying above–and what he claims Krugman’s position is–then he must think I am bluffing. After all, the government can make some grandkids poorer, and some richer, but there is no way that deficit financing and lump sum tax transfers within a given time period can make the first five people benefit at the expense of the last five people, right? That’s crazy! I mean, how in the world could it possibly be the case that everyone in the later generations loses, while everyone in the earlier generations gains? There’s not a time machine for crying out loud!! All the government can do is take apples from one guy and hand them to another guy!!
My offer: If Daniel takes me up, then I have one week to convince Steve Landsburg that I have come up with a model that satisfies the above conditions. It’s OK for me if I send him an attempt, and he says, “Nope, you screwed up the interest rate in period 2, your math doesn’t work.” I am allowed to revise the numbers until Landsburg signs off on it. If I do that within one week of Daniel accepting the wager, then Daniel mails me a check for $250.
On the other hand, if a full week goes by and I can’t come up with a model that Landsburg agrees satisfies the above conditions, then I mail Daniel a check for $500.
(If for some reason Steve doesn’t have the time to play these games, I’ll just post it on my blog [assuming I can find such an example] and we’ll hope that the community will be able to tell if I’ve succeeded or not, within the week time limit. I mean, this will basically be a math problem, and just a matter of checking to make sure the apples add up to 200 each time period, that sqrt(a1)+sqrt(a2) is more than 20 for Bob but less than 20 for Iris, etc.)
To keep transaction costs manageable, I’m not opening the wager up to others. It’s Daniel or nothing. However, if Daniel wants to hedge by going in 50% or whatever with some of you, that’s fine; but I’m paying Daniel if I lose, and he’s paying me if I win.
Last thing: If some of you on your own find the solution, I encourage you not to post it before Daniel has accepted the wager. At this point, there needs to be a penalty applied for making me take up so much of my time trying to explain to him why Krugman is totally utterly wrong on his handling of this issue.
So what do you think, Daniel? Am I bluffing?