20 Oct 2012

Gene Callahan and Abba Lerner Insist on Plain English in the Debt Debate

Debt 101 Comments

After my Rodney King-ish post trying to say we’ve all been groping around this complex issue, Gene Callahan announces that Abba Lerner was right all along, and that Nick Rowe has just been playing a verbal trick. Lerner says that if we use plain English, it is obvious that government debt can’t burden future generations.

In light of this new post, and Gene’s statement of his overall stance on this issue, I went to the local mafia boss near Gene’s place in Brooklyn. I grew out my beard, and got a fake driver’s license that said “Gene Callahan.” Then I took $15,000 from the mafia boss, and signed an official affidavit saying, “I, Gene Callahan, grant the holder of this note authority to take ownership of my car.”

After blowing the $15 grand at the casino, I swung by Gene’s apartment. The following conversation ensued:

GENE: You did what?!

BOB: Not sure why you’re getting so upset. I haven’t hurt you in any way, shape, or form, unless you adopt some weird definition of “hurt.”

GENE: You just enjoyed a rip-roaring binge at the casino by issuing a claim on my property, without even consulting me.

BOB: What’s your point? I’m not following you here. I had a great time. You don’t like me to have fun?

GENE: Tony and Luigi are coming here right now to take my car!!

BOB: Yep, that will probably suck.

GENE: It’s your fault they’re coming!

BOB: What are you talking about? All I did was sign a piece of paper and take their money. They’re the ones who are going to physically take your car.

GENE: Because of you!!

BOB: I can see you’re not a philosopher. My signing that paper and taking their money was neither necessary nor sufficient for you to lose your car. It wasn’t sufficient, because maybe you can talk them into just eating that $15,000 they gave me, and tearing up the note I signed. And it wasn’t necessary, because if they heard the things you say about Italians, they would’ve taken your car just for that, with no note from me. And anyway, maybe they’ll use your car to take you to the hospital when you fall and break your neck. You wouldn’t have been able to drive yourself in that scenario, and you’ll be really glad they took possession of your car at that point. Anyway, I really don’t see why you keep telling everybody, “Bob imposed a burden on me.” I didn’t do a thing to make you poorer, at least not if we’re using plain English. Go ask your Brooklyn buddies. They’ll surely agree with me that you are directing your ire at the wrong person.

101 Responses to “Gene Callahan and Abba Lerner Insist on Plain English in the Debt Debate”

  1. The Existential Christian says:

    You do snarky well.

    • Bob Murphy says:

      I have a gift.

      • Major_Freedom says:

        This is an awesome post. You just “proved” that it’s not the debt claim per se that burdens people in the future, but rather it is the future money confiscation that is the burden.

        Callahan can’t blame you for what you did, not only because you are not the one who took his money, but also because I and three of my friends supported your actions, so you have democratic authority in our sovereign 4 person nation.

      • Adrian Gabriel says:

        Bob is a genius….enough said

  2. Rob says:

    In this example Bob makes an agreement with the mafia that results in them taking a car worth $15000 from Gene.

    A different example could have the mafia deciding they like Bob and will give him $15000 and don’t like Gene so take his car,

    In both cases Gene is down a car and it would not be unreasonable to say “Gene is down a car because the mafia has transferred it away from him”. If someone has a theory to the effect that economists making deals with the mafia could not lead to other economists losing their cars then this example would prove this theory wrong.

    But it also would not stop a theory that says “its not really economists making deals with the mafia that makes other people poorer – if one looks deeper its actually the involvement of the mafia in distributional activities that lead to them losing utility that is the root cause” from being more fundamentally interesting.

    • Bob Murphy says:

      Yes Rob, I’m glad that you agree with me on this. Gene has no business complaining about what I did here.

      • Dan says:

        Hahaha. You crack me up.

      • Rob says:

        ” people who are not yet alive but will be, starting next year and going until the end of time” will consume fewer apples”

        One can easily build a model using taxation to achieve this (just introduce a tax from the young to the old in period 1 and then reduce this tax in every future generations , and every-one after the elder from period 1 consumes less than200 in their lifetime)

        However you cannot do this with debt alone – you need debt combined with either taxation or default to actually reduce the bond-buyers lifetime consumption. If one makes the (to me reasonable) assumption that people will not buy bonds that cannot physically be payed-off (in this model this would be bonds due in the next period where the principal plus interest is less than 100) then the govt will always have the the option of actually paying what is owed and leaving the bonds holders with their full lifetime endowment plus interest. Taxing the old to pay off their own debt or defaulting on part of the loan will always bbe optional for the govt . This strengthens my view that it is the taxes or the default rather than the debt (that could always in theory actually be paid) that causes the loss of utility.

        I guess one could allow bonds that could not be paid off without debt or default into the model (say a bond for 60 apples at 100%). But this seems to make an assumption that debt buyers are irrational.

        If one

        • Rob says:

          please delete above comment – its in the wrong place.

    • anon says:

      Rob, in this example I think Bob is the government and the mafia are bondholders. (Although, Bob, the economist, seems to be conflating bondholders and tax collectors. I think this is misleading.)

      I would still note that the mafia gave Bob money voluntarily, and that Bob should check his strength, because he probably has the power to take the money without the note.

      I also would not favor a “car tax,” and would like to Gene to have had to sell his car if someone wanted it. This way Gene (if he smelt something fishy) could have raised his price offsetting his “burden.” (Also, the mafia would have to either sell the note to Gene (at which time he could bid down the price) or cash it back in with Bob, and at either time Bob could take as large a cut of the note’s value as he’d like. He could also, go back to the mafia, rip up the note and laugh in their faces.)

      • Rob says:

        Perhaps Bob should sell the film-rights to this post. He could be played by Leonardo DiCaprio in the resulting movie and Gene by Bard Pitt. Krugman could have a cameo role playing himself.

  3. Rob says:

    Relating this back to the real issue of debt:

    I think you have shown that debt that is used to increase one groups utility in the present can (if one chooses one assumption appropriately) lead to another group losing utility in the future. If anyone was denying this was theoretically possible then you have won that argument.

    However I find the fact that all the transfers involved in the initial debt creation, debt rollover and subsequent taxation (or default) can be simulated exactly with a model that uses taxation only to be very interesting. In addition I find it interesting that It would be possible for currently living generations to consciously enrich themselves at the expense of future generations purely via the use of taxation to effect transfers from the young to the old. For me this means that the effects of inter-generational transfers on welfare is what we should really be discussing when we use OLG models, rather than the narrower (though evidently much more loaded) issue of debt.

    • Bob Murphy says:

      Rob wrote:

      However I find the fact that all the transfers involved in the initial debt creation, debt rollover and subsequent taxation (or default) can be simulated exactly with a model that uses taxation only to be very interesting.

      Yes, Gene finds it interesting too. That’s why he can’t possibly say that what I did in our fable “burdened him,” because those mob guys could take his car for all sorts of reasons–not just the little incidental thing of me signing a claim on his property and getting cash for it.

      • Rob says:

        ” those mob guys could take his car for all sorts of reasons–not just the little incidental thing of me signing a claim on his property and getting cash for it.”

        So he would be entitled to be upset with you when you had used his car as collateral on a loan, and less entitled when the mafia gave him $15000 and in addition took his car for reasons unrelated to you. This would make a great paper on “reasons when its valid for Gene to be upset with Bob” that might be used in an ethics discussion.

        Economists however might be more interested in the question “what are the effects of wealth transfers between Gene and Bob” of which the bit on “ways in these transfers can be carried out” would just be a small section.

        • Major_Freedom says:

          Economists value.

      • Major_Freedom says:

        He also can’t be upset with the fact that cross sectionally there was no change to physical wealth. Instead of Callahan having the car, the mob has it. GDP is unchanged.

        Also, as you showed, since the debt you signed on Callahan’s behalf could just as easily been “replicated” by the mob just taking his car outright in the present, without your “assistance”, it means the debt claim you signed is not the actual thing that burdens Callahan. It’s the mob taking his car that did it.

        It’s not you that harmed Callahan with the club you hit him with. It’s the club, the movement of which could have been “replicated” by many other causes.

        It’s not you that made Callahan’s argument look absurd, it’s your words, which could have been made by anyone, including me. (OK, this last one was wishful thinking, I just wanted to type it out).

      • Ken B says:

        No. What he can’t say is that you burdened him more than a pure ‘transfer’ would have done.

        • Bob Murphy says:

          And in your nitpicking, you just threw Callahan under the bus. Gene wasn’t saying government debt burdens people, but no more than a pure transfer would have done. He was saying it DIDN’T BURDEN people, period. Look at his trenchcoat analogy.

          • Ken B says:

            Bob, if Gene were under bus I’d be using first and reverse a lot …

            🙂

            • Major_Freedom says:

              I am laughing out loud, but that is not nice.

  4. ABT says:

    well played, Bob. You know someone has lost the debate when they start the word “technically” too much.

    But technically I didn’t post this comment. My computer did.

  5. guest says:

    … Metonymically speaking.

  6. Tel says:

    Do we consider personal identity to be private property?

    • guest says:

      It would depend on what you meant by identity. If you mean “your identity as percieved by others”, then no. But if someone steals something physical that happens to identify you, then the crime would simply be theft.

      Here’s a couple videos that explain this, indirectly (but fully, in my opinion; by way of analogy):

      Defending the Undefendable (Chapter 7: The Slanderer and Libeler) by Walter Block
      http://www.youtube.com/watch?v=j3vQQBe_02s

      Defending the Undefendable (Chapter 6: The Blackmailer) by Walter Block
      http://www.youtube.com/watch?v=Gi1wf-OeUys

  7. lqz says:

    Nice.

  8. Max.H says:

    Hey Bob,

    not new to this blog, but this post was so good that I had to comment it! That dialog was priceless!

  9. Lord Keynes says:

    When you argue that “government debt can burden future generations” all you appear to mean so that taxes at that future time will transfer income from some people then to others then.

    You have not proven:

    (1) that the aggregate level of private investment or consumption in the future will be reduced by deficit spending now;
    (2) that the capital stock in the future will be reduced by government deficits now, or
    (3) that present generations are somehow “robbing” future generations.

    • Chris B says:

      (1) This may not be the case, but in any event why is it more efficient that government invest the money? Look at the shape they’re in now, they can’t even profitably run an Amtrak snack bar without losing 85 billion.

      (2) If capital consumption follows, which it most often does in times of zero interest, capital tends to diminish.

      (3) If i took out loans against your property I would be robbing you. Adding a temporal aspect does not change this fact.

      I’m surprised at the enormous lack of common sense that flows from such arguments. Also I should point out Keynes didn’t really place heavy stock, if any, on morality. So arguing the ‘robbery’ point is not effective.

      • Lord Keynes says:

        (2) More severe capital loss happens by allowing a recession/depression to continue without intervention or allowing an economy with high unemployment to continue without driving it to full employment.

        And an Austrian liquidationist solution that would devastate an economy for years on end will also permanently reduce the potential level of future wealth and capital stock.

        (3) You would be robbing me, but, in contrast to your simple analogy, I get significant benefits from taxation, have a direct voice in its level/rate by voting, and as I have pointed before the empirical fact is that most people do not regard taxes as theft, but as a civil duty, for which they get state services or public goods in return.

        And an actual moral justification for taxes can easily be provided by anyone who thinks that they can defend a consequentualist ethics, Kantian ethics, or Rawl’s ethics and a number of other objective ethical theories: the argument then just becomes a debate on higher level philosophy of ethics.

        Murphy’s example above is again just a tired question begging fallacy. It does not follow that taxes are theft, just by constructing an imaginary scenario as above.

        It does not follow that taxes in the future mean present generations “rob” future ones, nor that the aggregate level of private investment or consumption in the future will be diminished.

        • Richie says:

          and as I have pointed before the empirical fact is that most people do not regard taxes as theft…

          Argumentum ad populum.

        • Richie says:

          It does not follow that taxes are theft, just by constructing an imaginary scenario as above.

          It does not follow that taxes are NOT theft just because, empirically, most people do not regard taxes as theft.

          • Lord Keynes says:

            Correct.

            That’s why I do not say that they are morally justified simply because most people support them. I am merely pointing out above that this is an empirical fact: most people support them, and that makes them qualitatively different from Murphy’s example where opposition to borrowing in Callahan’s name is opposed by Callahan and is a fundamental part of the argument. If Callahan’s consented to the borrowing, Murphy’s whole argument would collapse.

            I have made it clear above that I regard the actual moral justification for taxes to lie in a defensible moral theory.

            • guest says:

              Slight of hand still makes people poorer.

              It becomes theft when people become aware of the trick and government uses coercion to enforce such taxes.

              (The slight of hand is that government is perceived as necessary.)

            • Major_Freedom says:

              I have made it clear above that I regard the actual moral justification for taxes to lie in a defensible moral theory.

              Indefensible when the standard is something other than naked aggression.

              When the standard is rationality, then taxation is indefensible.

            • Major_Freedom says:

              I am merely pointing out above that this is an empirical fact: most people support them, and that makes them qualitatively different from Murphy’s example where opposition to borrowing in Callahan’s name is opposed by Callahan and is a fundamental part of the argument.

              You’re equivocating between one person and a majority of people.

              If in our society there exists those who do not consent to taxation, then it is illogical to demand that Murphy provide an example where there is 100% consent.

            • guest says:

              *sleight

        • Major_Freedom says:

          And an Austrian liquidationist solution that would devastate an economy for years on end will also permanently reduce the potential level of future wealth and capital stock.

          The Austrian liquidationist solution that would devastate an economy for a short period and permanently eliminate future reductions of wealth and capital stock due to state intervention.

          And an actual moral justification for taxes can easily be provided by anyone who thinks that they can defend a consequentualist ethics, Kantian ethics, or Rawl’s ethics and a number of other objective ethical theories: the argument then just becomes a debate on higher level philosophy of ethics.

          Consequentialism is praxeologically impossible.

        • guest says:

          (2) Recessions are a cure for misallocated resources caused by artificial credit expansion. The parts of the economy that relied, in some way, on artificial credit, have to be contracted for there to be a sustainable recovery.

          Further, in a recession, people don’t WANT to spend, so injecting artificial stimulus and implementing price controls are a form of theft on the part of government.

          • anon says:

            guest, you could make a case that people lending the government money is them wanting the government to spend money on their behalf. If they didn’t, they could hoard their money in a mattress.

            • guest says:

              Well, all that the government could offer is paper money. On a gold standard, such a presumption of government (to engage in economic planning) would be very short lived – barring the debasement of coins and the creation of legal tender laws, of course.

              Government bonds give the illusion of wealth by pricing them in increasingly worthless paper notes, and by threatening us if we try to use something other than those notes.

              By the way, here’s a good libertarian video about why hoarding doesn’t hurt anyone:

              Defending the Undefendable (Chapter 15: The Miser) by Walter Block
              http://www.youtube.com/watch?v=x4XSEVJLrdY

        • lqz says:

          “It does not follow that taxes are theft”

          You have a point here, better to call it what it is extortion.

          • Major_Freedom says:

            But if I want to pay money to agent X, and I want you to pay money to agent X, then it cannot possibly be extortion or theft.

            After all, I am the ultimate standard and final authority for all things political. If I say 10 people have a right to have a “vote” and then harm an 11th, it’s justified. There are many ethics that justify this behavior, therefore you cannot say I’m wrong.

            • anon says:

              Marjor_Freedom, whether something is right or wrong doesn’t mean it isn’t possible.

              • Major_Freedom says:

                Sarcasm dude…

        • Chris B says:

          My Lord,

          I see you do not disagree with point (1) that government can’t efficiently run a snack bar. Good job.

          (2) Recovery i quicker if market is allowed to function without further interventions thus that is not true. Empirically this s the case as well.

          Also during this depression does all of this capital disappear? No. Take GM, they could have been bought out for a discount by a willing private party and things could have turned around much quicker – and profitably.

          (3) You have a direct voice in taxation? I don’t think that’s the case. I think you have the illusion of a direct voice. Unless you can draft the legislation, take part in it’s negotiations, etc. you have no direct say. Instead you can settle with choosing between plans that have been crafted without your consent nor opinion. A third party, without your consultation, determines how much of your labor value you are entitled to.

    • Bob Murphy says:

      LK wrote:

      You have not proven:

      (1) that the aggregate level of private investment or consumption in the future will be reduced by deficit spending now;
      (2) that the capital stock in the future will be reduced by government deficits now, or
      (3) that present generations are somehow “robbing” future generations.

      Well, I’ve shown that the people alive now can consume more apples, and the group “people who are not yet alive but will be, starting next year and going until the end of time” will consume fewer apples. Some might suggest that that is “the present generations are somehow ‘robbing’ future generations.”

      • Lord Keynes says:

        “Well, I’ve shown that the people alive now can consume more apples, and the group “people who are not yet alive but will be, starting next year and going until the end of time” will consume fewer apples.”

        Isn’t that precisely what your critics are disputing?

        • Major_Freedom says:

          Actually that is what the critics concede, and are, interestingly enough, trying to persuade everyone that this is what Krugman et al did not ever intend to deny, that Krugman et al only wanted to insist that GDP cross sectionally does not change (which of course Murphy always conceded, but was not the reason for the point Rowe and Murphy raised).

        • Bob Murphy says:

          LK wrote:

          Isn’t that precisely what your critics are disputing?

          Yes, but I can’t help it if they (and you) can’t count. I’m not even being a wiseguy here; at this point we are literally arguing over whether a certain number is higher or lower than 200 per person.

          Next week I will have some more Excel tables to make this clearer.

      • Rob says:

        ” people who are not yet alive but will be, starting next year and going until the end of time” will consume fewer apples”

        One can easily build a model using taxation to achieve this (just introduce a tax from the young to the old in period 1 and then reduce this tax in every future generations , and every-one after the elder from period 1 consumes less than200 in their lifetime)

        However you cannot do this with debt alone – you need debt combined with either taxation or default to actually reduce the bond-buyers lifetime consumption. If one makes the (to me reasonable) assumption that people will not buy bonds that cannot physically be payed-off (in this model this would be bonds due in the next period where the principal plus interest is less than 100) then the govt will always have the the option of actually paying what is owed and leaving the bonds holders with their full lifetime endowment plus interest. Taxing the old to pay off their own debt or defaulting on part of the loan will always bbe optional for the govt . This strengthens my view that it is the taxes or the default rather than the debt (that could always in theory actually be paid) that causes the loss of utility.

        I guess one could allow bonds that could not be paid off without debt or default into the model (say a bond for 60 apples at 100%). But this seems to make an assumption that debt buyers are irrational.

        (REPOSTED IN CORRECT PLACE IN THREAD

      • anon says:

        Bob, you’ve shown that, but you’ve not shown that it’s necessarily so. (A one time default means lowered consumption is all in the past.)

        In most cases bondholders can be taxed to pay for their entire bonds. (The trick here is you and Rowe trying to say that their lowered consumption was not in the past, but in the future.)

        Again, why not make the interest 10,000% in period one?

        • Bob Murphy says:

          Bob, you’ve shown that, but you’ve not shown that it’s necessarily so.

          Guys guys guys. Krugman/Baker/Lerner haven’t been arguing, “We can imagine a scenario in which today’s deficits don’t burden future generations.” No, they said *necessarily* today’s deficits WON’T burden future generations. To show they are wrong, I need one counterexample. You just admitted I gave one. Boom, we’re done.

          • anon says:

            Bob, I’m saying it’s always a choice whether there’s a burden, not that there is a scenario where there must be a burden, but that there never has to be a burden in any scenario. (You’re creating a scenario where there *could be* a burden and making it so. This is important, but still a choice)

            • Major_Freedom says:

              A “could” scenario is sufficient for the purposes of the primary debate.

              • Major_Freedom says:

                And since nobody alive today can DIRECT future generations of people on what to do, then should the current generation of politicians incur debt, that “could” scenario of everyone losing becomes even more important.

              • anon says:

                Krugman has said that the government can impose a burden on a generation in the period when more than one generation is still alive.

                Dean Baker has used stronger language that can be criticized so I’m not saying Bob and Nick don’t have a point, just that their point is somewhat more limited (or at least controversial) than they’ve let on. (I don’t agree that apples can “travel back in time” in any sense, except possibly at the margin between the time when a bond is paid (and consumed) and the economy doesn’t grow.)

                (The margin includes any time after the bond has been consume and the consumer is still working. In this period an imposed burden can be “reversed” still.)

              • Major_Freedom says:

                The “when more than one generation is still alive” comment is STILL not getting the Rowe-Murphy point about ALL INDIVIDUALS past generation 5 consuming less in their lifetimes, as compared to the baseline of no debt and no taxation.

                You say their point is “more limited than they’ve let on.”

                Well, they only let on, the entire time, that their point was only a counter-example, a possible outcome, a single scenario that refutes the universal claim that government debt CAN NEVER burden future generations.

                Is it so hard for you to look at the arguments, and say yes, this scenario is possible, and yes, it does reduce every single individual’s lifetime consumption past a certain point?

                You keep judging the Row-Murphy model as if it has been advertised to show more than its own authors have claimed it shows!

                STOP QUIBBLING OVER NOTHING!

          • Rob says:

            You’re also claiming that debt in the present generations can reduce lifetime consumption of every person born in 2013 and beyond even if GDP remains the same. You haven’t proved that yet and I’m not seeing how that can be done without the govt either 1) issuing a debt it could not possibly repay or 2) defaulting or using a tax on the bond-holders to repay a debt that actually it could repay by issuing more debt.

            • Bob Murphy says:

              Rob look again at this example. It’s not even just in utils. Look at straight-up lifetime physical apple consumption. Al through Eddie strictly gain, and of the last 5 generations, 4 of them have fewer apples, while George has the same. However, you can see that’s just a quirk. I could jiggle the numbers so that George consumes 199 apples lifetime too.

              So each of the first 5 people literally consumed more apples lifetime, and if we jiggle that example just a tad you can see how the last 5 people literally consume fewer apples.

              If that’s not an example of the present generations taking real resources away from later generations, but is just “future people rearranging apples,” then I think it’s clearly Lerner, Krugman, and Callahan playing wordgames. In Krugman’s defense, I think he just didn’t realize this possibility. I want to see the article Lerner was responding to; perhaps he was only dealing with a 3-period illustration and didn’t “see” it, either.

              But Gene Callahan has absolutely no excuse. He is defending the position when even Dean Baker has backed off and tried to now make it empirical, rather than a principled point.

              • Bob Murphy says:

                Oh Rob: In case you “got” that old example, but didn’t think I could rearrange the numbers to make it first period people vs. posterity: Just have the first people period run up a big debt, and then pay it down really slowly for the rest of time. Every period the debt is reduced, at least one person in that period is going to have lower lifetime apple consumption. (I think that’s the rule, don’t quote me.) So if you want me to make the 2nd through Nth person worse off, I just have the government pay down 1/Nth of the debt run up in the first period. Then not only are the “future generations” hurt in utility (which they are), every single person among them literally gets to consume fewer than 200 apples lifetime.

                This is one of the things I will illustrate next week, but it shouldn’t shock you that it can happen, since you can see the general principle with the one I just linked to. If you think what I’m saying is impossible, you should think it’s also impossible for the people in period 10 to both have lower lifetime apple consumption. And yet they do.

              • Rob says:

                I agree you have proved the general point about debt.

                I’m questioning the specific scenario of a bond issue in period 1 leading to every individual born after period 1 consuming less than 200 apples in your endowment model.

                I can see how this could work with tax. Just have a tax in period 1 from youngers to olders and then reduce the amount of that tax every year for ever and everyone apart from the older in period 1 consumes less than 200 apples over their lifetime.

                However to do the same with debt seems to involve the govt either using tax (or default) against the bond-holders when they could in fact issue new bonds to pay-off the bond holders, or issuing bond that they never could pay off (because the interest + repayment is greater than 100, which is the available income of non-holders in the next generation ) and so having no choice but to tax or default in the next period. Both scenarios seem invalid to me.

                However I could be wrong so look forward to your example.

              • Bob Murphy says:

                If they don’t pay down the debt, but just let it roll over forever while still making interest payments, then yes I think you’re right Rob, it just hurts them in utility terms but not physical apple consumption.

              • Rob says:

                Should say “:every individual living after period 1″ not :”every individual born after period 1”

              • guest says:

                Aren’t we assuming too much by maintaining a constant level of apple output after period 1, given the altered incentives created by government interventions?

                People are making 100 apples in period 1 for a reason, right?

                Just a thought.

              • Major_Freedom says:

                The model is not intended to be a prediction.

                Constant output was assumed in order to isolate the effect of government debt and taxation on individual consumption.

              • guest says:

                Seems to me that if future generations aren’t taxed, then all the loss is born by some, for the benefit of others, in Period 1.

                Further, when those who had their apples redistributed in Period 1 die, there’s no reason to tax future generations.

              • skylien says:

                Guest,

                Read this (hilariously funny) post. There it becomes clear why just normal taxation isn’t chosen in period 1, and instead bonds are used with which the burden can be passed on.

                http://consultingbyrpm.com/blog/2012/01/the-economist-zone.html

              • Major_Freedom says:

                guest:

                Seems to me that if future generations aren’t taxed, then all the loss is born by some, for the benefit of others, in Period 1.

                Suppose they are taxed.

                Further, when those who had their apples redistributed in Period 1 die, there’s no reason to tax future generations.

                Suppose they’re still alive.

              • Rob says:

                I was thinking about this some more.

                When the govt issues debt at an interest rate higher than the GDP growth rate (which will always be the case in an endowment economy) then eventually they will reach a point where they cannot pay the debt by voluntary actions (ie by selling bonds to the young to pay of the debt from the previous period.
                )

                The govt will then need to use either default or tax to eliminate the debt. If it uses tax it can choose whether it taxes the young or the old.

                Because it has this control it can always ensure (if it chooses to) that

                1. No-one ever has a lifetime consumption of less than 200 apples (though they can affect the distribution between the 2 periods and hence lifetime utility)

                2. It can avoid if it chooses a situation where “everyone alive at a certain time is worse off as a result of debt”

                Both these things can only occur as a result of govt tax policy, and it could achieve them without the use of debt at all.

                The only thing we can say for sure about debt is that if the interest rate is lower than growth then at least one generation in the future will have a distribution of apples between periods that they did not choose , and therefore has probably lost lifetime utility.

                Everything beyond that will be the result of govt tax policy

              • Rob says:

                last bit is wrong: Unless the govt chooses to use tax to esnure that all future generations consume 200 but unequally between periods then it has to tax at least one generations so they have less that 200 lifetime consumption.

              • guest says:

                Skylien,

                Thanks for the link. I read a big chunk of it.

                In the story, Krugman prints up new bonds, which is essentially fiat money. More on that in a bit.

                In the model, no one produces any more apples than he would have consumed himself absent his belief that the government was functioning as a bank.

                Everyone buying bonds expects to earn profit; But with no extra production, this is physically impossible.

                It’s a ponzi scheme.

                UNLESS we’re speaking in terms of the fiat money, i mentioned earlier – THEN it’s a government misallocation of resources resulting in the boom/bust cycle; and in the false boom, capital is consumed.

                Further, when Krugman says that the debt didn’t make the Excel table poorer, isn’t he also saying that it didn’t make it richer?

                I mean, if the Excel table was no poorer or richer after the issuing of bonds, then why bother issuing them in the first place?

                We would expect the Keynesian to respond by attempting to justify a redistribution of wealth from one SUBDIVISION of the Excel table to another.

                And that’s the REAL issue – not the Excel table as a whole.

                The Keynesians appeal to the Excel table as a whole to cover up a ponzi scheme.

              • guest says:

                Major Freedom:

                “Suppose they are taxed.”

                If future generations are taxed, then the loss gets spread out over several generations; but there is still a loss.

                “Suppose they’re still alive.”

                If the original bondholder is still alive, then he is still owed his apples plus interest

                (excusing, for the moment, the fact that it’s impossible to make good on the bond, given the model’s production/consumption ratio absent the bond [1:1], without making someone else poorer;

                (And unless the bondholder gets a return, nobody will have an incentive to invest in the future; which means the government would have to try to tax future generations to make good on the bonds).

      • anon says:

        Put a rule in the model so that all income above 100 apples is given to anyone whose income is below a 100 apples starting with the lowest income level first chosen by lottery. Is there still a debt burden?

        • guest says:

          That’s a graduated income tax.

          It stifles production, because the whole point of doing business with people is for both parties of a transaction to benefit from the division of labor.

          Less division of labor = less wealth creation. Everyone is worse off.

          • anon says:

            Note that in the model GDP is held constant and that Krugman has already mentioned the problems taxation can cause, but if you allow GDP to fall you have to also allow if to rise. The point is any future damage the debt can cause can always be undone, as it were.

            I’ve also suggested a bond sales tax based on the relationship of r and g and total interest payments as a percent of GDP as an alternative to an income tax. (A negative income tax is another option.)

            • guest says:

              We should allow the free market to affect GDP anyway it wants, since wealth is not a national product.

              But the reason we should allow prices to fall in a recession is because they were artificially bid up by central planning, to begin with.

    • Matt Tanous says:

      “that the aggregate level of private investment or consumption in the future will be reduced by deficit spending now”

      Aggregates are nonsense.

      “that present generations are somehow “robbing” future generations”

      Did you just get here? Are you not aware of Murphy’s apple economy Excel analysis demonstrating that *just this* can occur? That every individual born before a certain point can consume “extra” apples over their life, while every individual born after will be stuck with less lifetime apple consumption?

  10. Christopher says:

    If it was possible to live on the expense of future generation, shouldn’t we be able to enjoy infinite wealth right now just by transferring future wealth into the present, assuming that time is infinite?
    That just doesn’t seem to work.

    • Christopher says:

      Just to clarify what I mean before you dismiss my argument.

      You are saying the layman is right when he says that future generations will face a lower standard of living because they will have to pay down the debt for our standard of living first.
      If this really was the case, wouldn’t we expect someone to take advantage of it? And as there doesn’t seem to be any limit to it, how do you explain that politicians seem to stop short of using this to please everyone. Maybe in the US you can say that there is a debt ceiling. But there are other countries and some of them have pretty irresponsible leaders. Why aren’t those countries rich like hell on the expense of their future generations?

      As a matter of fact, there are constraints on the level of your debt. But if debt is a function of future wealth as opposed to current production I don’t see why those constraints exist.

    • anon says:

      This is the same point I was trying to make by suggesting “why not make interest 10,000 percent in period 1?.”

    • Tel says:

      There’s an intrinsic limit in the overlap of generations. You can only push the imbalance so far and then one or other generation hits negative consumption (which is impossible) or essentially just stops producing completely (i.e. total breakdown).

  11. DavidZ says:

    Ah but, ah but, that $15K is just enough to now allow the casino owner’s daughter to attend med school, and she then goes on to CURE CANCER!!!1! But, but, but ..

    This whole argument boils down to “Can you do good things with stolen money?”

    It’s all entirely irrelevant and tangential to the fact that THE MONEY IS F’ING STOLEN. Don’t these guys get it? It’s not theirs to do anything with, and the ONLY moral thing to do is give it back to its rightful owner. No matter how these others guys try dress it in fluffy economic ‘utilitarian’ arguments, STEALING money is still wrong, and arguments for justifying stealing money from anyone, need to be made on moral grounds, not “economic” ones.

    If we’re going to argue that it’s OK to steal and enslave as long as ‘most people generally overall benefit’ on utilitarian grounds, it would certainly open a can of worms, as we would have to re-write and re-think ALL our laws on property and theft – every last of these laws would have to be rewritten TODAY, because many different forms of stealing would suddenly be justifiable. Because if stealing and slavery are positive if the government does it, then most certainly they can be good if others do it too.

    The way modern government debt works it basically inherently binds third parties to be forced to pay. Government bonds are IMMORAL. I will never own a government bond because it is committing an immoral act of slavery and theft against third parties who aren’t party to the sale of the bond – even against those too young to enter a contract to have their property taken from you by force.

    • anon says:

      DavidZ, bondholders can be made to bear the entire cost of their own bond, either through taxation or default.

  12. DavidZ says:

    PS, Bob, your representation is a fairly accurate analogy of how modern government bonds do actually work.

    And most the money is getting blown casino-style.

    What gets me is the so-called “educated” economists who actually sit and make blatantly immoral arguments in favor of this mafia-style stealing (and it is 100% mafia-style, because if the next generation being enslaved refuse to pay up, they get violently arrested and thrown in a cage with other dangerous people). There are only two explanations why “educated” economists might be arguing in favor of this so strongly:
    1. They’re sociopaths, who want to privately benefit from the system, or
    2. They’re caught up in what amounts to a religion or cult., and can’t see it’s wrong because ‘everyone is doing it’.

  13. DavidZ says:

    If anyone ever tried to implement EXACTLY what government bonds do, but in the private sector, they would be completely laughed out of the courts. There wouldn’t even be a debate .. everyone would magically suddenly agree it cannot be.

    Imagine I entered into an agreement with a corporation to lend them money (let’s say even a corporation who is doing good work, like trying to cure cancer), and written right into the loan agreement it states that the way the corporation will pay me back, is to forcibly take money from other people who had nothing to do with the agreement (and some of whom might be only 8 years old now). (If those people refuse to pay, the corporation will lock them up in a cage.)

    Anyone who thinks this exact same arrangement makes sense because “the government does it”, is either a sociopath or deranged. The only thing the above actually describes is the mafia, and the government.

    • anon says:

      One thing: even if you or the “corporation” can take their money it can’t “take” their goods and services, it has to purchase them. If they feel they are being ripped off they could raise their prices. Also, they can band together and elect a new board of directors. (I know that it could probably take their goods and make them slaves if it wanted to too, but I’m just trying to put things into perspective.)

      • Major_Freedom says:

        What about those in the minority? They are legally banned from “banding together” and “electing new board members”.

        • anon says:

          They could always go Galt, right? Take up arms? Vote with their feet? I don’t know what your alternative is to democracy.

          • Major_Freedom says:

            Alternative to democracy? I haven’t the foggiest darn clue…LOL

            • guest says:

              Well, implied in the concept a republic (we’re a republic) is the right of secession.

              And since there’s no such thing as “public property”, this would mean that those who secede get to keep their property and trade freely with others.

              They would simply not get to vote in their former republic or have access to their courts, etc.

              • anon says:

                I agree that self-determination and consent of the governed are important and necessary (and know that America’s democracy is in the form of Republic: that’s why I said they could elect new “board members”), but it’s probably a fact of life that independence and secession must be fought for (not necessarily physical combat) like anything else. An “implied” right is probably an illusion that can be taken away.

  14. Tel says:

    FWIW, this is my best spreadsheet jocky effort on the generational debt calculator.

    It offers three big columns for the generations with a rolling interleave so that only two generations are active at any one time (I find it easier to clearly see what’s going on that way).

    Also, each generation is calculated as 6 separate working decades and all bonds mature in 1 decade, but people buy more bonds to keep rolling the debt. Thus, the government always clears all debts in one decade but the actual lifespan of the debt is much longer.

    If government collects more money than they need to pay the matured bonds then the disburse the remainder equally across the generations as vote buying.

    If government finds itself short in any given cycle, they raise taxes equally across the generations (thus, younger generations who decide NOT to buy bonds, will be greeted with higher tax to pay for the maturing bonds, but the people with the bonds maturing are also hit with a share of that tax).

    http://lnx-bsp.net/Bonds_2012-10-21.xls

    This is hearby offered to the public domain in the interests of better understanding of debt.

  15. Chris B says:

    Whence we arrive at this unexpected conclusion: “Society loses the value of things which are uselessly destroyed;” and we must assent to a maxim which will make the hair of protectionists stand on end—To break, to spoil, to waste, is not to encourage national labor; or, more briefly, “destruction is not profit.”

    -Bastiat

    There is so much useless complication being put to this issue with spreadsheets etc.

    When people have the ‘insurance’ of being able to borrow from future generations it’s kind of like having an FDIC. First off the only real borrowing is the borrowing of real wealth, not inflation. How can we borrow wealth that has not been created. Also the only way to ‘borrow’ would be to enter into a voluntary and contractual exchange with a party in the present with the agreement that they give you goods in the present for repayment in the future. Putting the cart before the horse and making the future pay rather than be repaid does not entitle this to a concept of borrow from the future. It’s theft. Not theft in the sense that we are stealing their wealth in the present but we are going to issue them the bill for any costs incurred on our behalf. There is no way this cannot make them poorer.

    Back to my ‘insurance’ claim. When we feel we can magically borrow this ‘wealth’ from the ‘future’ it encourages moral hazard in the form of riskier behavior, it’s okay cause the future will pay for it. It’s really not that hard to follow. There is no risk free nor cost-less living.

    • Tel says:

      There is no way this cannot make them poorer.

      They can just refuse to pay, but rapidly that opens the potential for conflict.

      • Chris B says:

        Which is what I’m saying. Either way the future generation is poorer.

  16. Ken B says:

    Alas, and I say this in sympathy for both Bob and Gene, Bob and Gene know each other. That means they are alive at the same time. That means Gene is not part of the ‘future generations’ as Krugman meant it, and it means that if Gene is part of the ‘future economy’ then so is the mafia that has Gene’s car.

    So Bob has not addressed Gene’s claims at all.

    • Bob Murphy says:

      So Bob has not addressed Gene’s claims at all.

      Ken if you’re going to be that willfully blind, then do it more quickly: Point out that there are no politicians in my example either. So clearly this has nothing to do with Gene’s argument.

      • Ken B says:

        I knew the Rodney King phase couldn’t last.

        But I’m not being blind here Bob. Gene’s car in your example really is still part of the wider economy. You need more that that to answer Gene’s point.

        • JSR08 says:

          So this sentence:

          Then I took $15,000 from the mafia boss, and signed an official affidavit saying, “I, Gene Callahan, grant the holder of this note authority to take ownership of my car.”

          Changes to this:

          Then I took $15,000 from the mafia boss, and signed an official affidavit saying, “I, Gene Callahan, grant the holder of this note authority to take ownership of future unborn son’s car 20 years from now.”

          Happy now? Do you see how your little tap dance doesn’t change the fundamental point of Bob’s post? This is getting downright pathetic.

          • JSR08 says:

            *my future unborn son’s car

  17. Ken B says:

    David R Henderson suggested he would have a think about this issue. Did we hear back from David? I for one would like to hear his views, if he’s inclined.

Leave a Reply