Gene Callahan has done an important thing for our never-ending debate by bringing in Abba Lerner’s 1961 statement on the issue. It is almost eery how similar his arguments were to the exposition I gave here. In particular, we both saw the rhetorical usefulness of stressing how there isn’t a time machine; he even capitalized the phrase. Some quick reactions:
==> Here is the specific quotation from President Eisenhower’s 1960 State of the Union address that Lerner thought was evidence that he was a dunce: “Personally, I do not feel that any amount can be properly called a surplus as long as the nation is in debt. I prefer to think of such an item as a reduction on our children’s inherited mortgage.”
==> Like the other economists to whom Lerner is responding (Bowen, Davis, Kopf, and James Buchanan), I want to say that I Like Ike. There is nothing wrong with his statement.
==> So do economists have nothing to say on this? Of course they do! I’m not saying Eisenhower did a 10-period OLG apple model before giving his speech, to make sure it made sense. Of course Eisenhower never even thought about, “Wait a second… How can we be consuming at the expense of our grandchildren without a time machine? I don’t want to start funding a time machine…the private corporations would never allow future presidents to axe the program.”
==> Lerner’s central thesis–that all present production comes out of present resources–is essential and an important insight. Indeed, Ludwig von Mises made the same point, when talking about “paying for” a war. It was Mises who actually sent me down this path. Of course, the genius Mises didn’t take a wrong turn with that correct insight; he knew that that observation didn’t therefore imply, “So we can’t burden our grandkids with debt, since they’ll owe it to themselves.”
== Last point. I have a genuine question for the Lerner lovers. He concludes with this:
There is even a clear and present danger that because of a baseless fear of impoverishing future generations by leaving them with a larger internal debt (which they will owe to themselves), we may fail to protect them from nuclear war and/or totalitarian domination; the confusion sown by Bowen et al. tends to increase that danger. It is to be hoped that these authors will tell the President that they were using a special language of their own and didn’t mean what they seemed to be saying…
So I’m confused. How can it possibly be that the “baseless fear” sown by Bowen et al. can prevent vital federal government expenditures? I mean, Lerner has spent the whole article explaining that whether it’s financed through taxes or deficits, it’s the present generation who pay for the expenditure. It’s not like we can pass off that burden to people living in the future.
So, if Lerner agrees that these expenditures would go through with deficit financing, then why can’t the government implement them with tax-financing?
Once you answer that, you will see why Lerner, Callahan, and Krugman are so wrong, and President Eisenhower’s man-on-the-street remarks are perfectly sensible.