Yes, I have much more to say on the debt debate, not least because Dean Baker chimed in on a previous post (linking to his latest). I am waiting for clarification on his attempt to ballpark the empirical significance of the Nick Rowe Effect, and once I’m sure what Baker is saying, I will either pat him on the back or pounce. (My hunch is, I will pounce.)
For right now, just another quick clarification. Daniel Kuehn has been the champion of this view, but I think others believe it too, and going over it will in any event (I hope) make things easier for everyone who still cares…
Daniel has claimed all along that Krugman was *merely* claiming that government debt can’t reduce future GDP. Daniel thinks that Nick Rowe and I “moved the goalposts” by talking about future Americans, and that there is mushiness in the term “future generations.” Some of my thoughts:
==(1)==> Neither Nick nor I ever claimed that government debt (if we rule out the disincentives from taxes, crowding out, etc.) per se would make real output lower in the year 2100. Indeed, we deliberately constructed our examples to have a constant GDP, just to make sure that issue wasn’t throwing anybody.
==(2)==> What Nick and I *did* claim was that Paul Krugman and Dean Baker were leaping from this correct proposition, to the FALSE conclusion that “Americans in the future” couldn’t be made poorer because of government debt. After all, this is an easy thing to conflate. Look at this:
TRUE STATEMENT: Government debt (under the conditions we take for granted in this debate) can’t reduce the total after-tax income that Americans earn in the year 2080 and beyond.
FALSE STATEMENT: Government debt (under the conditions we take for granted in this debate) can’t reduce the total lifetime after-tax income earned by Americans living in the year 2080 and beyond.
==(3)==> If it is pointed out to any pundit or American voter who is interested in this debate, that our deficits today might make every single American born after 2013 poorer, but that US real GDP from 2013 onward will remain unaffected, then 99.9% of the people hearing this will agree that the former effect is the relevant one for our policy debate. Nobody cares about future GDP per se, except insofar as it has relevance for Americans who will be alive in the future. (Well, Scott Sumner might care about future GDP more than future human beings, but that’s about it.)
==(4)==> Daniel surely thought he had a smoking gun in his favor when Paul Krugman recently wrote this:
[L]et me suggest that the phrasing in terms of “future generations” can easily become a trap. It’s quite possible that debt can raise the consumption of one generation and reduce the consumption of the next generation during the period when members of both generations are still alive. Suppose that after the 2016 election President Santorum tries to buy senior support by giving every American over 65 a gift of newly printed government bonds; then the over-65 generation will be made richer, and everyone under 65 will be made poorer (duh).
But that’s not what people mean when they speak about the burden of the debt on future generations; what they mean is that America as a whole will be poorer, just as a family that runs up debt is poorer thereafter. Does this make any sense? [Emphasis in ORIGINAL.]
Now I bet Daniel saw that and said, “Aha! I knew it! Krugman is here saying in crystal clear language that he knew all along that every single American born in 2013 and later, could be made poorer by our deficits today. All Krugman was telling his readers was that the important thing was that real GDP would still be OK, from 2013 onward. It’s hard work being so awesome.”
Nope Daniel (if that’s what you thought), that’s not what just happened there. Here’s what happened:
Krugman all along has thought that “Americans collectively in the future” was interchangeable with “real output in the future.” So yes, he phrased some of his arguments in terms of real GDP, not because he thought real GDP was more important than our grandkids, but rather because he thought our grandkids couldn’t possibly be hurt so long as real GDP was the same as it otherwise would have been, during every single year in which our grandkids are alive. I mean re-read what I just typed out: This is a very natural thing to believe. Only with the screwy overlapping generations thing, does this “shortcut” fall apart.
So now, Krugman is bothered by this Nick Rowe guy, a little Canadian gnat who won’t go away. Krugman ignored him back in January 2012, but man this guy just keeps buzzing around his ear, so Krugman finally breaks down and quickly skims some of this deficit-phobe’s posts.
Now because Nick for some inexplicable reason prefers to type out 4 dense paragraphs of text describing an apple economy involving *only* 3 generations–rather than just reproducing my beautiful Excel table showing the phenomenon over 10 generations, where the first 5 all gain and the last 5 all lose–Krugman didn’t see the big picture. Instead, Krugman thought Nick was truly playing a trick with the word “generation.”
Remember, Krugman all along has been thinking that since real GDP in the year 2080 can’t be reduced, then it can’t possibly be the case that Americans “as a whole” alive in 2080 can be hurt. Sure, if the government takes a billion from some Americans in 2080 those Americans will be poorer, but then when the government gives it to some OTHER Americans in 2080, those Americans will be that much richer, dollar-for-dollar, and the whole thing is a wash. Thus, since real GDP in 2080 is unaffected, Krugman thinks interest payments on debt can’t possibly make “America as a whole” poorer in 2080. One way Krugman describes this, is to say the debt can’t make “future generations as a whole” poorer.
Ah, but now this little stinker Nick Rowe comes along. To repeat, Krugman skims Nick’s posts, and then thinks this is the trick: Nick is simply showing that one generation can make “the next generation” poorer if the impoverishment happens while they’re both alive.
So, Krugman thinks, “Oh my gosh this is so stupid. I know real GDP in 2080 can’t be reduced by debt. So as a shortcut I have said, ‘Future generations of Americans can’t be hurt by debt.’ But now this hustler Nick Rowe is pointing out that it’s theoretically possible in the year 2080 that all of our grandkids could extract a trillion dollar interest payment from all of our great-grandkids, who are alive in 2080 too. So in that sense, Nick thinks he just showed that a future generation–namely, all of our great-grandkids–were made poorer by the scheme. But give me a break, it’s still true, as I’ve always said, that the group ‘Americans alive in 2080’ are just as well off as if the debt were $0. Somebody shoot this guy.”
Does everybody see that? Go read Krugman’s quotation above about the “trap.” See how my interpretation perfectly explains what he’s writing here, whereas Scott Sumner’s interpretation makes no sense?
Last point I want to make to all of you who have been defending Krugman, and I especially include Daniel Kuehn, who thinks Krugman is today’s Bastiat: Isn’t it odd that Paul Krugman, who is normally so crystal clear in his writing, keeps going off on total non sequiturs, and keeps leaving it up to you guys to explain “what he’s really been trying to say” on this debt stuff? Isn’t the more plausible explanation that my interpretation of his position is correct, since every point coming out of his blog fits my interpretation perfectly?
In other words, if Krugman is thinking about it the way I claim he is, then he has been writing crystal clearly on this thing all along. However, if Krugman has merely been trying to say that it’s transfer payments that make future generations poorer (like Gene Callahan said), or that Krugman agrees that debt owed to foreigners is benign (like Landsburg said), or that debt can make all future Americans poorer but not future GDP (like Daniel says)…then he has been unbelievably unclear all along. Why doesn’t he just come out and say those things? Why rely on thought experiments about presidents suddenly issuing bonds etc., that make absolutely no sense if his position all along has been what you guys claim?