Don’t worry everyone, all that stuff about government debt and future generations is out of my system. After several colleagues have told me repeatedly that I am being obtuse on this, I realize that I’m not cut out for economics and commentary on public policy. Instead, I’ll turn to writing for TV. I have an idea for a new series called “The Economist Zone.” Here’s the pilot. Tell me what you guys think, if you have a few minutes to read it. Thanks.
The scene opens with a million people–all named “Old Al,” oddly enough–looking very sick, and a million other people–all named “Young Bob”–looking very concerned. In addition, there is a politician, and a pundit named David Brooks. Oh, and there are economists–lots of them.
POLITICIAN: The Old Als are weak and dying!
POLITICIAN: We need to do something to help them!
CROWD: Woo hoo! Yeah!
POLITICIAN: They each deserve 3 more apples before they die!
CROWD: Woo hoo! Yeah!
POLITICIAN: So I’m gonna tax each Bob 3 apples to pay for it!
POLITICIAN: (pauses) Uh, I know! I’m gonna borrow 3 apples from each Bob, at a 0% interest rate, to pay for it!
POLITICIAN: OK, make it 100% interest! I’ll give each Bob 6 apples back in period 2 if you lend me 3 apples today!
CROWD: Woo hoo! Yeah!
VOICE FROM BACK OF CROWD: But wait, how are you gonna get the 6 apples to pay us back next period?
POLITICIAN: (pauses) Uh, I’ll tax the young Christys 6 apples each!
CROWD: Woo hoo! Yeah!
VOICE FROM BACK OF CROWD: But wait, we didn’t even want to cough up 3 apples to help our elderly. Why will the million Christys next year agree to a tax hike of 6 apples?
POLITICIAN: (pauses) Uh, because I’ll tell them that if investors ever doubt the willingness of the government to redeem its bonds, then trees will stop producing apples and we’ll all starve!
POLITICIAN: (pauses) Uh, I know! I’m gonna borrow the 6 apples from the young Christys, at 100% interest! They’ll love rolling the bonds over! If you guys want to do it this period, so will they, next period!
CROWD: Woo hoo! Yeah!
DAVID BROOKS: You should all be ashamed of yourselves! If you want to give our elderly Als 3 apples each, fine, but let’s have the decency to tax ourselves and pay for it. We can’t pass on a huge debt burden to our kids and grandkids.
DEAN BAKER: Don’t listen to him, everyone. Brooks is a fool who does little but eat more than his fair share of apples every year. As a society it is impossible for us to impose government debt burdens on our children. The reason is simple, by period 3 we will all be dead. That means that the ownership of the government debt will be passed on to our children. If we have some huge thousand trillion apple debt that is owed to our children, then how have we imposed a burden on them? There is a distributional issue — Christys’ children may own all the debt while Daves’ children don’t hold any bonds — but that is within generations, not between generations. As a group, our children’s well-being will be determined by the productivity of the trees, which we all know in the real world is forever fixed at 200 apples per period.
Now don’t get me wrong, if our kids ended up owing apples to some hypothetical guys that lived in a different Excel spreadsheet across the ocean, then our kids would be burdened if we borrowed apples today. But Brooks never said a word about this hypothetical possibility, so clearly this subtlety isn’t even on his radar screen.
DAVID BROOKS: Hey I object–!
PAUL KRUGMAN: Well spoken, Dean. But let’s make this empirical for a second: Looking at the data, we see that we live in a closed Excel spreadsheet. There are no apples flowing into or out of our hands or our children’s hands. That’s why David Brooks doesn’t understand debt.
He thinks of debt’s role in the economy as if it were the same as what debt means for an individual: there’s a lot of apples you have to pay to someone else. But that’s all wrong; the debt our government creates is basically apples we owe to ourselves, and the burden it imposes does not involve a real transfer of resources.
That’s not to say that high debt can’t cause problems — it certainly can, if our politician were to do something silly like impose a tax that weren’t lump sum (can you imagine?!?). But these are problems of distribution and incentives, not the burden of debt as is commonly understood. And as Dean says, 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 apples to other children, which is a very different kettle of fish.
DAVID BROOKS: You are such a Keynesian scumb–
PAUL KRUGMAN: Please, let me continue. I can see you’re still not getting this. Instead of dealing with a hypothetical example, consider our own history: Remember what happened on the previous tab in this Excel workbook? When our Excel table had that big war with the 9-period orange growers who lived in a different Excel table? Our government emerged from that war with debt exceeding 200 apples; because there was almost no way to move fruit between tables at the time, essentially all that apple debt was owned by people who lived in our table, people like Christy and Dave and Eddy.
Now, here’s the question: did that debt directly make the whole table poorer? More specifically, did it force the table as a whole to have less apple consumption than it would have if the debt hadn’t existed?
The answer, clearly, is no. Yes, some taxpayers in the table had to pay the interest on that debt. But who received that interest? Other taxpayers. Not exactly the same people, of course — maybe Frank had to pay George. But the table was not like a home buyer who has to scrimp to find enough apples to make his mortgage payments; the table was both the borrower and the lender, and was essentially paying apples to itself.
DAVID BROOKS: Huh, I never thought of it like that. And I watch the History channel a lot, where they have documentary after documentary about those evil orange pickers and the big war we had with them. I guess I see what you mean about the Excel table just owing apples to itself collectively…But still, I can’t help worry about us burdening our descendants by passing down a gigantic debt burden that they will have to service.
PAUL KRUGMAN: Look, don’t beat yourself up; we can’t all be trained economists. Try thinking of it like this: Suppose that for some reason the Excel table temporarily ends up being ruled by a guy who is driven mad by power, and decrees that
everyone will have to wear their underwear on the outside (sorry, Woody Allen reference) everyone will receive a large allotment of newly printed government bonds, adding up to 500 percent of GDP–that’s 1000 apples, a fantastic sum.
The government is now deeply in debt — but the Excel table has not directly gotten any poorer: the public, in its role as taxpayers, now owes 500 percent of GDP, but the public, in its role as investors, now owns new assets equal to 500 percent of GDP. It’s a wash.
So where’s the problem? Well, to pay interest on that debt, the government will have to raise a lot more apple revenue. Again, this is a wash — the extra apple revenue is matched by the extra apple income people receive as bondholders. Now it’s true, if we imagined some crazy hypothetical world where the politicians implemented taxes that varied based on behavior, then high debt might make the whole Excel table poorer. But fortunately in the real world, we just have lump sum taxes, so this isn’t an issue. Our real GDP–how many apples we produce collectively per period–won’t be affected by this alleged “debt burden” that’s got you so worried will hurt our kids.
DAVID BROOKS: Gosh, I admit you make a lot of sense, but I feel like I’m being hoodwinked. Surely this plan is going to foist a huge debt burden on our descendants. I mean, it has to!
MATT YGLESIAS: Dr. Krugman, sometimes you’re too tied to your academic models. Let me try a different approach on this guy; I know how pundits who have no formal training in economics think. OK Mr. Brooks, Dr. Krugman is correct to argue that so long as government debt is held within our Excel table, then it doesn’t create a “burden” on the table in the sense of draining it of apples. I think the point can maybe be more clearly made in reverse. If a few generations down the road–let’s say in period 7–George and Hank are furious at us for passing on this alleged “burden,” then they can enrich themselves at that time by telling the politician to default on the debt. Will that work?
DAVID BROOKS: Well, no! It won’t, because whoever was supposed to get paid–either George, Hank, or both–will lose out as bondholders! Ha, nice try, Yglesias.
MATT YGLESIAS: (sighs) I can see you’re not a philosopher. You’re correct to point out that it won’t enrich them if the government defaults. But that just shows why your worries are unfounded. A government borrowing apples from its own citizens doesn’t gain access to any orchards that wouldn’t have been available by just raising taxes, and by the same token an Excel table doesn’t enrich itself by its government refusing to make promised apple payments to its own citizens. It’s only when borrowing from or repaying foreigners from other tables that our table as a whole is gaining or losing access to fruit. None of which is to say that debt dynamics are a matter of indifference. Obviously people care quite a lot about which specific people possess the apples. But it’s bad weather or locusts that can immiserate the next generation, not the prospect of the next generation’s taxpayers transferring apples to the next generation’s bondholders.
DAVID BROOKS: I admit, I can’t really put my finger on what’s wrong with your guys’ argument, but to be honest I never really trusted you Keynesians who think we just need to bake some more apple pies for prosperity. I’m going to turn to this guy over here, a trusted Austrian who isn’t afraid to write books on politically incorrect stuff.
BOB MURPHY: You know it’s ironic, Mr. Brooks, normally I can’t stand what these three knuckleheads say about government policy. But in this instance, I think they are technically correct. Although I’m against this deficit spending plan because I don’t think it’s fair that anybody down the road gets hit with an involuntary tax on his apple crop, even so I have to admit that the scheme won’t make our descendants on net poorer. Some grandkids might be poorer because of the tax bill, but–like these guys have been saying–those apples will just go right into the mouths of other grandkids. I mean really, it’s not like we have a time machine, for crying out loud! We can’t literally take apples away from our descendants and eat them today. Every period, no matter what we do, there are 200 apples produced and consumed. All the government down the road will ever be able to do to our descendants is rob one to enrich the other; it can’t make them all collectively poorer than they otherwise would have been. It’s not like we’re dumping chemicals in the soil that will reduce apple output in period 3 or something. It is physically impossible for us to affect what happens to the people collectively in period 9, because we know that no matter what, the two of them will eat 200 apples total. If one person eats fewer because of taxes to service the debt, then necessarily the other person will eat more apples.
Don’t misunderstand me: In a hypothetical world where we could cut back on our apple consumption today, in order to plant more apple trees and raise total apple output in (say) period 5, then this immoral scheme would also objectively make our descendants poorer. But in the real world, where we have no such growth in real output, this isn’t an issue.
DAVID BROOKS: You spend time thinking about hypothetical worlds where apple output increases over the time periods?
BOB MURPHY: Once you start thinking about apple crop growth, it’s hard to think about anything else.
DAVID BROOKS: Well, I guess that’s that. If the Keynesians and Austrians agr–
BOB MURPHY: (puzzled, grimaces, shouts for joy) Yeah! Holy smokes! They’re right! Sorry Mr. Brooks, I was totally wrong. It is possible for our generation to impoverish future ones. Wow this is really neat! Let me walk you through a diagrammatic explanation…
DAVID BROOKS: OK now it’s back to being the free-market guys against the Keynesians. I need a tie breaker. What about you, Professor Landsburg? You’ve always struck me as a pro-market guy who’s still a straightshooter.
STEVE LANDSBURG: Krugman has been saying a lot of good stuff on this. I’m sorry Mr. Brooks, but if you ask me what I think of your fears about a debt “burden” I have to tell you that I think they are idiotic. My only quibble with Krugman is that he’s wrong to focus on whether the government bonds are held by Eddy, Frank, etc. Even if the government in period 9 had to ship apples over to a different Excel table, our descendants wouldn’t be burdened by the IOUs floating around at that time. They would essentially be apples they owed to themselves.
DAVID BROOKS: Well that last line makes absolutely no sense to me, but I know you academics like to be deliberately provocative. But OK, you side with Krugman. So you’re saying that these other guys are wrong?
STEVE LANDSBURG: Look, you’re putting me in an awkward position. I’m friends with those guys. But yeah, I mean Boudreaux likes to go read verbal stuff, instead of thinking it through with precise models, and Nick Rowe is a Canadian, so there ya go.
DAVID BROOKS: And this Murphy character?
STEVE LANDSBURG: He’s a nice guy.
DAVID BROOKS: But when it comes to his dispute with Krugman on whether the government debt can be a burden on future generations, do you think Murphy is making intelligent points?
STEVE LANDSBURG: (pause) Bob makes really funny videos.
DAVID BROOKS: Well, I guess that does it. Go ahead, Mr. Politician, let ‘er rip! A round of 3 apples, for all the old timers! And 100% interest income, for all the young people!
CROWD: Woo hoo! Yeah!
After the decision to give the Old Als 3 apples as a transfer payment, paid for by running a government deficit, events unfold in the following manner:
DAVID BROOKS: (stunned) What the–what the heck just happened?!
BOB MURPHY: Perhaps I can be of assistance. First of all, remember that all of us have the same utility function of U=sqrt(A1)+sqrt(A2). If we had all just consumed our endowments, we would all have 20 utils during our lifetimes (square root of 100 plus square root of 100), with the exception of Old Al and Young John who would only have utility of 10 because they live only one period. Now if you check the math, you can see that Al, Bob, Christy, Dave, and Eddy all have more than 20 utils with their actual consumption patterns, while Frank, George, Hank, Iris, and John all have fewer than 20 utils with their actual consumption patterns. Just like Boudreaux, Rowe, and I were saying, government deficits allow the earlier generations to benefit at the expense of subsequent generations.
DAVID BROOKS: (turns to Landsburg, furious) You lied to me!!
LANDSBURG: What the heck are you talking about? Dude, you need to calm down. Try having some more sex, we’ll all thank you for it.
DAVID BROOKS: You told me our debt wouldn’t impose a burden on our descendants. You told me to trust Krugman!
LANDSBURG: Right, the debt didn’t impose a burden. In fact, it helped our descendants.
DAVID BROOKS: What the heck are you talking about?!!?!
LANDSBURG: You’re even thicker than I thought. Check the numbers. Look, take period 7, where Young Hank lends 10 apples to the government. You’re getting hung up on the fact that with his consumption stream of (90, 105), Hank now only gets 19.7 utils over his life, as opposed to the endowment 20. So you’re blaming his loss of welfare on the debt. But no, his reduction in utility is stemming from the tax the government levies on him in period 8. Suppose Hank didn’t engage in a bond deal with the government, and instead just consumed his after-tax endowment each period. He would then consume (100, 85), yielding utility of 19.2. So contrary to your silly assertion, government debt makes Hank better off. It’s the tax that hurt him. Duh.
DAVID BROOKS: But the reason Hank is being taxed in period 8 is to service the government debt!! The government in our Excel table doesn’t tax for any other reason except to service/retire the debt that our generation initially created by giving a transfer to Old Al. So the debt causes the taxes levied on future generations!
LANDSBURG: Whoa, whoa, whoa. I can tolerate a lot of things, but I won’t stand idly by while someone impugns debt finance. You better take that back, mister. Debt didn’t force the government to levy taxes on those people. Rather, it was the fact that the first five people wanted to all increase their utils. Since we started out in a Pareto optimal allocation of apple consumption paths, obviously when Old Al and Young Bob both improved their lifetime utilities, you had to know people down the road were going to take the hit. Haven’t you ever heard the expression, “There ain’t no such thing as free applesauce”?
DAVID BROOKS: (lip quivering) But…but…Krugman and all those guys led me to believe that it wouldn’t hurt our descendants!
LANDSBURG: You didn’t think levying taxes on people in the future would hurt them? And you call yourself a pundit?
DAVID BROOKS: Well I knew it would hurt some of our great-grandkids, but I thought the government would just take apples from one great-grandkid and give them to another.
LANDSBURG: Right, it did. Don’t you understand how our world works?
DAVID BROOKS: But I mean, I thought it would be a wash, as far as our great-grandkids collectively were concerned. I mean, Yglesias’ thing about the government defaulting, and it just being a wash…
LANDSBURG: Right, it would be a wash if the government had defaulted, say, in period 6. That act would hurt some people but help others, but wouldn’t make society richer or poorer on net.
DAVID BROOKS: Agghh! I’m going crazy here! So how did we end up making Frank through John worse off?! If we had defaulted, and you’re saying it’s a wash…?
LANDSBURG: Oh, I see what’s tripping you up. If the government had defaulted in period 6, it would have been a wash relative to the new scenario where Frank through John already had less utility. Once Al through Eddy had lived and died, and had each achieved more utility than 20, it was obvious that somebody from Frank through John would take a hit. But government tax and bond payment policies could redistribute the hit. For example, if the government had defaulted in period 6 and then levied no taxes, then Frank alone would have taken the full hit. Al through Eddy would have benefited, Frank would have gotten crushed, and George through John would have been unaffected (each consuming 100 apples per period). So Yglesias was right, defaulting on the government’s debt in a particular period can’t make society richer–if it did, then we’d all make side deals with each other and default! Duh. Seriously, you call yourself a pundit?
DAVID BROOKS: (tears welling up in his eyes) But…but…all the stuff about “apple output in any future period is always 200″… If the government takes an apple from one person, it can only give it to someone else…
LANDSBURG: Right, that’s all true. Why is this so hard for you? Look: You guys wanted to give Old Al 3 apples. Somebody had to get taxed to pay for it. You could have taxed the Young Bobs, but chose not to. Instead, you taxed Frank through John, and then the bond market brought that revenue forward (after discounting of course) by getting loans from young people. It’s not the debt per se that made your descendants poorer, it was the government’s decision to tax them instead of taxing the Young Bobs.
DAVID BROOKS: But all of that stuff they were saying about not shipping apples to other Excel tables…
LANDSBURG: Hey! I told you upfront that that was silly. But other than that non sequitur, everything else those Keynesians told you was perfectly true.
DAVID BROOKS: Well, right, now that you mention it, I do remember you saying that their focus on keeping the apples within the Excel table–in the hands of our descendants–was irrelevant. But it’s not like it was a casual aside of their case; they based their whole argument on that “insight” which you said was wrong. And by making me focus on physical apples, they convinced me that it was literally impossible for us to enrich ourselves at the expense of people in, say, period 9, because we only had 200 apples today, and no matter what, Iris and John were going to split up 200 apples then.
LANDSBURG: Hang on a second. Do you honestly mean to tell me you weren’t aware of how debt financing and overlapping generations work? You haven’t read Samuelson’s paper on Social Security?! And now you’re mad at Krugman and me, for not pointing this out to you before? Gee whiz, do you want us to lay your clothes out too in the mornings? You’re dumber than I thought. Maybe you shouldn’t be having more sex.
DAVID BROOKS: (hanging head in shame, cannot withstand Landsburg’s withering criticism any longer and turns to another, inebriated economist) What do you think?
GENE CALLAHAN: Yeah, Steve is right, and Murphy has just been saying one goofy thing after another. Look, we could have achieved the same outcome in terms of everybody’s utils, without using deficit finance at all. Instead, the government could have taxed Young Bobs 3 apples in period 1, then it could have taxed the Young Christys 6 apples in period 2, and so on. So none of this debate was really about whether we could impoverish our great-grandkids; of course we can! The issue has always been, is the debt the thing to blame. What conversation have you been in?
DAVID BROOKS: HUH?!? You’re telling me I missed the whole point of this debate?! The very thing I was worried would happen–that if we didn’t tax the Young Bobs in period 1, but instead paid for the transfer with a deficit, we would foist that burden onto our descendants–is exactly what happened! And I let Dean Baker and all those guys convince me I was stupid!
STEVE LANDSBURG: (aside) You are.
DAVID BROOKS: (turns to a grad student) OK, maybe a younger guy can help me out here. My head is spinning at this point.
DANIEL KUEHN: Well, I’m not really sure why you were surprised by the outcome. Didn’t Krugman let you know that this could happen? I mean, when he said “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 apples to other children,” how could that not have tipped you off that the above scenario was possible?
This is the cost and the benefit that Murphy was talking about – 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? 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”.
DAVID BROOKS: (entire body is now shaking) How in the world are you describing what just happened?! Looking at the individuals from period 6 onward, it’s not true that “obviously some of them win and some of them lose.” THEY ALL LOST. Every single person who lived from period 6 onward was worse off, because of what we set in motion in period 1. No matter what those poor saps did, we and the next few generations had ensured that they collectively were going to be poorer than if we had just paid for Old Bob’s apples with a tax. And the way the government decided to handle this collective burden, in practice it wasn’t just that some of our descendants (like George and Iris) were worse off, but that others (like Hank and John) counterbalanced it by being better off. No, they were ALL hurt in this scenario. And yet Krugman et al. had convinced me that such an outcome was physically impossible.
DANIEL KUEHN: Ah, the problem here is that you’re mixing up terminology. Krugman has established, quite correctly, that the government in our world could make specific individuals in the future poorer, but not that it could make the country as a whole poorer in the future.
DAVID BROOKS: (pauses for several moments, as saliva begins to hang from his lower lip) Daniel, the country as a whole was poorer from periods 6 through 9.
DANIEL KUEHN: (sighs) No it wasn’t. What was national income in period 6?
DAVID BROOKS: Huh?
DANIEL KUEHN: In terms of apples, what was the sum of everybody’s income in period 6?
DAVID BROOKS: 200.
DANIEL KUEHN: Right. And if you guys in period 1 hadn’t started your deficit scheme, what would national income have been in period 6?
DAVID BROOKS: (reluctantly) 200.
DANIEL KUEHN: Uh-huh. See what I mean? Krugman et al. were totally right–you guys in Period 1 didn’t make the nation poorer in period 6 or 7 or whatever. That’s physically impossible; national income in every period is always 200 apples.
DAVID BROOKS: But…but…even so, every single person from period 6 onward was made poorer by this whole thing.
DANIEL KUEHN: Yep, just like Krugman told you could happen.
DAVID BROOKS: (beginning to sob) No he didn’t Daniel… I, I, I don’t even understand what is happening at this point. I need to sit down. (sits in chair)
DANIEL KUEHN: There, there. The problem is, you keep switching in mid-argument between “the nation” and “people in the nation.” Sure, specific descendants at any future date could have been hurt by you guys in period 1, but not your descendants considered as a collective.
DAVID BROOKS: So, just to be clear: You agree with me that Krugman and the other Keynesians were telling me that the nation as a whole couldn’t be made poorer in periods 6 through 9. You agree with me, that they said that was impossible?
DANIEL KUEHN: Yep.
DAVID BROOKS: (breathes a sigh of relief) OK, good, because Landsburg really had me doubting my sanity there for a moment. So–and I realize I have to do this in baby steps because this stuff is so hard for me to get–you agree with me, that Krugman misled me by claiming that the nation as a whole couldn’t be made poorer in periods 6 through 9.
DANIEL KUEHN: No! What the heck is wrong with you? Krugman is right! The nation can’t be made poorer in periods 6 through 9!! National income is 200 apples, with or without debt. C’mon man, I’ve got a wife to entertain. I can’t be here all day.
DAVID BROOKS: (resumes sobbing) But Daniel, how can it be that Frank, George, Hank, Iris, and John were all made poorer? I just can’t understand how all this is possible. (blows nose)
DANIEL KUEHN: I told you before: You’re confusing the nation with the individuals making up the nation.
DAVID BROOKS: So when Krugman convinced me that it was physically impossible to make the “nation as a whole” poorer from periods 6 through 9, I was wrong to infer that it was physically impossible to make every single member of the nation poorer from periods 6 through 9?
DANIEL KUEHN: (shocked) Yeah, what the heck would make you infer that? When Krugman told you that the “nation as a whole” would have the same income from periods 6 through 9, you didn’t realize that this outcome was consistent with “every single person alive” in periods 6 through 9 being poorer? You honestly thought “the nation as a whole in period 6” was the same thing as “every person alive in period 6”? Boy Landsburg called it–you’re not too quick on the uptake, are you?
David Brooks throws a noose around a ceiling rafter. Then he stands on the chair.
DANIEL KUEHN: Hey! Get down from there. This is subtle stuff. Don’t be so hard on yourself.
DAVID BROOKS: (relents and steps down from chair) Yeah, I guess you’re right. I mean, if smart guys like Nick Rowe and Murphy could disagree with Krugman on this stuff, I shouldn’t be disappointed that I kept getting confused.
DANIEL KUEHN: Huh? What disagreement? Krugman, Rowe, and Murphy have all been saying the same thing all along.
DAVID BROOKS: (screaming) Aggggghhhhhhhh!!!!
Scene ends with Brooks in a straitjacket, being loaded into an ambulance while muttering about economists and apples. Ambulance driver turns and says to Brooks, “Sounds like a confusing story. Hey, wanna see something reeeaaaally confusing…?”
Screen shifts to a sharp man with a cigarette. He begins to speak. “Picture a world, where people only eat apples. A man consults alleged experts on government deficits, and is taken on a journey that ultimately shatters his mind–a journey that ends, in the Economist Zone.”
Spooky theme music begins playing as screen fades out.
Interview With the Director
When I first wrote the above, it was mostly intended to be humorous. However, even the act of writing it has shed new insights for me on this fiendishly subtle controversy.
Let me just say that what has happened here isn’t that “these guys were right” or “these guys were wrong.” The amazing thing is that–if we forgive people for slips of the tongue and missteps that don’t hurt their overall position–every viewpoint I’ve incorporated above, had a germ of validity. And yet, as I tried to show with the exasperated “David Brooks,” it seemed that these economists were contradicting each other.
If I were still a college professor, I would honestly invent a course just to have an excuse to play with that OLG model for hours on end, introducing more features like investment in future trees, altruism between generations, private bond markets, etc. I am still in slight shock from the possibilities that this debate has brought to my attention.
Let me close with one observation, just to make sure all of you understand why I think this is such a big deal: Krugman et al. can correctly argue that today’s deficit financing can’t reduce the sum of individual incomes earned in the years 2013, 2014, 2015…until the end of time, subject to all the caveats about incentive effects and so forth. And yet, James Buchanan et al. can correctly argue that today’s deficit financing can reduce the (after-tax) incomes earned by every individual who is alive in the years 2013, 2014, 2015…until the end of time. At first glance it seems that one of these camps must be wrong, but actually they are both right. But because those statements appear to be contradictory, people on both sides have been quite sure that the other guys were idiots or liars.
UPDATE: I just double checked my intuition on something, and yep it works. So let me report it, since it really helps in tying all of this together and getting a handle on what the #%)(#)($* happened in the numerical example above. Recall that I have Steve Landsburg in the script saying that the government in period 1 is giving Old Al 3 apples, and that it could have either taxed Young Bob at the time, or taxed future people. Now the thing is, the interest rate on government bonds in this world is 100%. So if the government wants to tax somebody 86 apples in period 6, for example, then in period 1 that future tax revenue only has a present-discounted value of about 2.69 apples. (That’s 86*(1/2)^5.) If you go through and calculate the PDV of the future tax levies from the perspective of period 1–discounting by 100% per time period–you will see that the future levies add up exactly to 3 apples. So the words I put in Landsburg’s mouth are totally correct, and that’s a very useful way to think about it, in my opinion. The overlapping generations and bond markets allow the present generation to fund transfer payments out of taxes that won’t be imposed for hundreds of years!