Why Dean Baker and Paul Krugman Were Wrong on the Debt Burden for At Least 11 Months
By this point, those of you who have been reading Free Advice should understand exactly what Don Boudreaux and Nick Rowe were saying, when Dean Baker and then Paul Krugman last year first started up the Great Debt Debate. What is still extremely interesting to me personally, is how many economics bloggers have concluded that Krugman was essentially right all along. No, he wasn’t, and that’s what I’m going to demonstrate in this post.
Before embarking on this thankless task, a disclaimer: This isn’t merely because I’m out to get Krugman, though I must admit that’s probably part of the impetus. Rather, since so many people to this day can’t see how clearly and obviously Krugman’s writing on this–from the get-go and including his latest post–is based on a fundamental mistake, it makes me suspect that these people never really understood the controversy. Therefore it’s worthwhile, I hope, to walk through this stuff at least once more from first principles, to get you guys to see the specific argument Baker and Krugman were making–their essential “insight” into why the federal debt can’t burden future Americans–so that you will then more fully appreciate why Nick Rowe picked the specific counterexample that he did. (Inconceivably, we still have critics complaining that our counterexamples are “totally rigged to show a burden.” Yes my friend, that’s how counterexamples work! You deliberately calibrate them to show your opponent has made a false general statement. My goodness this debate has been exhausting.)
First off, Krugman and Baker both admit that there is a sense in which private debt can burden a household in the future. They are simply denying that this “micro” insight can be aggregated to the macroeconomy as a whole. In other words, they claim there is a fallacy of composition going on. Just to make sure you believe me, here is Krugman on December 28, 2011:
People think 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 money you have to pay to someone else. But that’s all wrong; the debt we create is basically money we owe to ourselves, and the burden it imposes does not involve a real transfer of resources.
And just to make sure you believe me when I say Krugman’s position has not budged one iota in this entire debate, here is Krugman on October 12, 2012 (after he explicitly acknowledged Nick Rowe’s role in 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….
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?
OK, does every see this? Krugman admits that for an individual household, yes of course debt can impose a burden in the future–the household has to make interest payments that “go out the door.” But this micro logic breaks down, Krugman believes, when you aggregate it to the country as a whole. This is because one American household’s interest payment on the federal debt, goes into the pocket of some other American household that is holding the Treasury bond. So the wealth stays within the household, when “the household” is the USA.
Now that you see this is the essential “insight” that Krugman and Baker were making, you can understand why they laid so much stress upon whether Americans versus foreigners would be holding the debt in (say) the year 2100. Look guys: Krugman made the title of his inaugural blog post “Debt Is (Mostly) Money We Owe to Ourselves.”
Why did Krugman and Baker lay so much emphasis on Americans vs. foreigners owning the government debt–why did they in fact base their entire case on it? They did so because their argument for the non-burden of debt totally breaks down if our grandkids have to make interest payments to foreigners in 2100. But so long as the American taxpayers in 2100 are making interest payments to American Treasury holders in 2100, they think it’s a wash, and that we can’t possibly be burdening them. As Baker himself said on December 27, 2011, in the post that set the blogosphere on fire:
As a country we cannot impose huge debt burdens on our children. It is impossible, at least if we are referring to government debt. The reason is simple: at one point we will all be dead. That means that the ownership of our debt will be passed on to our children. If we have some huge thousand trillion dollar debt that is owed to our children, then how have we imposed a burden on them? There is a distributional issue — Bill Gates’ children may own all the debt — but that is within generations, not between generations…
One can make the point that much of the debt is owned by foreigners, but this is a result of our trade deficit, which is in turn caused by the over-valued dollar.[Emphasis in original.]
So now you see the power of Nick Rowe’s original counterexample (and my elaboration with purdy pictures). We are showing that this “insight”–that private debt can be a burden, since you are making payments that leave the household, while public debt can’t possibly be a burden, since Americans are just paying other Americans–is wrong. In our little models, there are no foreigners; the debt is always “owed to ourselves” in that little economy, and yet clearly the future taxes needed to pay down the debt impose a net burden per capita on everybody alive at that time. It’s not a wash, a mere hurting off one grandkid with a simultaneous and equal helping of another grandkid, at least not in the way Krugman and Baker have been leading their readers to believe.
One last major point here: Notice how my interpretation of Krugman and Baker’s position, can explain all of their writings throughout this debate. I can explain why they concede private debt is burdensome, while public debt is not, so long as Americans in the future end up holding the Treasury bonds. In contrast:
==> Steve Landsburg says Krugman is right in one respect, but wrong because (Landsburg claims) Krugman forgot to make the point that it’s irrelevant whether Chinese or Americans hold the bonds. No, Steve, as Krugman’s very post title indicates, Krugman thinks it does matter. He didn’t forget to make what you consider to be the essential point; Krugman doesn’t see the essential point.
==> Gene Callahan is wrong for thinking Krugman has merely been talking about the net transfer payments being the burden. If that were the case, Gene, then Krugman would think even private debt isn’t burdensome. After all, whatever the guy in the street thinks about “my credit card debt imposes a burden on me next month,” I can reproduce exactly the same thing by having someone mug the guy next month. Nope, if Krugman were exonerating public debt for the reason Gene claims, then Krugman wouldn’t have said public debt is fundamentally different from private debt.
==> Daniel Kuehn is wrong for thinking Krugman was only talking about real GDP, and not about future Americans. Private debt doesn’t lower my marginal productivity and paychecks in the future, either. So again, Krugman’s distinction between public and private debt would make no sense, if Kuehn is right.
==> Scott Sumner is wrong for thinking Krugman finally gets it with his discussion of Rowe. Nope: Krugman italicizes in the passage Scott quotes, the alleged importance of two generations being alive at the same time. That is clearly not needed in Rowe-type models, as my canonical example illustrates. Every single person alive in 2012, can enrich himself at the expense of every single person alive in 2112, using deficit finance and taxes levied for bond retirement in 2112. Krugman clearly doesn’t get it. If Sumner were right, Krugman wouldn’t have put in (and italicized!) the clause about the two generations needing to be alive at the same time for Nick’s “magic trick” to work.
In conclusion, my interpretation of Baker and Krugman perfectly explains their every move in this entire debate. In contrast, for Landsburg, Callahan, Kuehn, and Sumner:
I sympathize with you, but the ones you are trying to correct will never, and I repeat, never admit they were wrong.
Yancey,
Even if you’re right, people like me who have been following the debate and trying to understand who’s right will gain. I think I’m coming to Bob Murphy’s position. But to be sure, I’ll sit down one night and spend an hour on it. Bob has helped lay out a road map for that.
I hope David when you think it through you will be able to clarify my main sticking point and why I still think Bob is wrong here. In none of the exampes or scenarios presented have I seen one where the future populace, after all of those alive now have died, are unable to completely undo the supposed ill effects via a transfer scheme. How can there be a net burden if a simple transfer amongst the inhabitants gets us back to where we would have been absent the debt?
Ken take the people alive in period 8 in my model. Show me what they can do, so that everybody alive in periods 8 and 9 have lifetime utility of 20, as in the status quo. They can default in period 8, sparing Iris and John, but then Hank is irrevocably screwed. Once you set the debt in motion, passing it down through the generations, each period the voters can either default on it (hurting the people who are at that point holding the bonds) or you can tax somebody to service the debt (hurting the people being taxed). There’s no way to undo the community “as a whole” being made worse off, once earlier generations have enriched themselves “as a whole” and are dead.
See my comment below, where I concede on period 8, but raise an issue.
Couldn’t they borrow 15 from Hank to pay off Hank (that is rollover his loan), who then gives the bonds to Iris, rather than taxing him as in this model ?
They then likewise persuade Iris (by paying a high enough IR) to rollover her loan which she gives to John.
All the participant in period 8 and 9 only engage in voluntary activities and so can be assumed to have utility .>= 20.
Of course some of their utility is derived from providing for future generations but that doesn’t seem an unreasonable assumption.
Couldn’t they borrow 15 from Hank to pay off Hank (that is rollover his loan), who then gives the bonds to Iris, rather than taxing him as in this model ?
Then Hank dies without having consumed as many apples as in the status quo, so he’s worse off.
It may violate one of your assumptions (perhaps the utility function) but wouldn’t the fact that he had voluntarily agreed to the loan and the bequest so that Iris can have higher utility in her lifetime not mean that he also had to have at least matched his alternative utility to have agreed to it ?
Rob, then he is agreeing to a situation that is the best alternative, but the situation he is in caused this agreement. If he had the choice between this and the normal number of apples, he would not make it.
Further, it just kicks the can down the road. Now we have the same situation in a later period with other participants.
If he had received his 20 apples in period he would have maximum utility. If he then voluntarily agrees to lend that money again and give the bonds to iris this must be because altruistically increases his utility.
As long as the govt offers a high enough interest rate to induce the elders of each stage to do that this could continue foe ever
To rewrite that in proper English…
If Hank had received the 20 apples owed to him in period 8 then he would have achieved maximum utility. If he then voluntarily agrees to lend that money again and give the bonds to Iris this must be because this (altruistically) increases his utility beyond that.
As long as the govt offers a high enough interest rate to induce the elders in each period to roll over their debts , and bequeath the bonds to the younger generation when they die then this process could continue for ever with no generation losing out.
Where did this can opener come from?
Take a look at Frank. It is quite apparent over his lifetime that he ends up with less apples (162) than he would had if the gov’t had not interfered (200). That is a net burden on him of 38 apples. it is not possible to bring Frank to 200+ apples without causing George and/or Eddie to end up with less than 200 apples in their lifetime. So on and so forth. Case closed.
Right, if this helps, we don’t even need diminishing marginal utility in the preferences. I.e. we can have the person’s lifetime utility just be Apple(t1) + Apple(t2). Then the physical and utility outcomes are the same; we just want to see how many total apples a person eats during his lifetime, to see if he is hurt or helped by the whole operation.
So you would think if total apple production is forever fixed at 200 apples per period, that what Old Al and Young Bob do in period 1 couldn’t possibly have any ramifications on Hank and Iris. But we see there is an important sense in which it does.
The reason I used sqrt is I wanted to have plausible utility functions, and it’s standard for economists to assume DMU and thus a desire for consumption smoothing over time. Without that, I am pretty sure I can just have a 0% interest rate on the government loans to get people to be indifferent to lending or not lending to the government.
(I’m not checking these statements, just winging it, but I’m pretty sure what I’m writing here is correct.)
Yep, that’s basically how I broke it down for myself. Makes sense that you used a formal utility function for the reasons you stated, though.
Ken,
In one of the previous threads, you made the exact same claim where Old Hank is taxed to give to Young Iris, and you claimed this redistribution makes everyone whole. However, as I pointed out, Hank is made worse off overall because he was already under-consuming his endowment. In other words, all you did was reassign the payment of the debts, you didn’t rectify it.
Ken_B, let’s say, for the sake of argument, that in one period, someone chops down an apple tree. How do you set up transfer payments in later periods to reverse the change in apple consumption from baseline?
An apple tree is capital. Are you saying you can’t achieve similar “capital consumption” through debt-funded consumption in the present period somehow?
This is a rather startling thing to hear said of me, since the last four years of my writing largely consist of me saying I was wrong the previous eight!
Foreshadowing?
This post is very well presented to the layperson (me). Very nicely done.
Let’s say in the distant future we establish first contact with an alien species that live on a nearby planet. I wonder if Krugman-Brain-In-A-Jar would contend that we, as Earthlings, could indebt ourselves to infinity on Earth and it doesn’t really matter because, relative to the aliens, we would not be economically burdening ourselves.
You can’t make it much more obvious than you actually do. You and Rowe win totally.
How hard can it be to admit a mistake?
“How hard can it be to admit a mistake?”
Dunno. Ask Bob about John 8.
Why should I ask Bob, wasn’t it you that conceded finally? And it seemed to be quite hard for you. But maybe this is only my impression..
Is Ken B wrong for noticing that in your carefully crafted example the net number of apples is constant and so the borrowing had no net burden on the inhabits of the island?
All the borrowing did in your scheme is change the split in the apples from 100 each to 10 +- x for some x between 0 and 100. That is not a net burden on the future generation.
Your dismissal of Gene Callahan is wrong too. The private burden on household A is a private boon for household B. Looking at A and B together there is no burden. You are ignoring a systemwide accounting constraint. It’s like entropy. Entropy can go down in cells or regions; that does not count as a counter example to the second law. It counts as ignoring something important.
Same with your dismissal of Landsburg, who stipulates that the Chinese paid for the debt they bought. You are ignoring what we got from the Chinese to cause the debt.
I’m only answering this Ken B. for newcomers. You should know better by now. You wrote:
Is Ken B wrong for noticing that in your carefully crafted example the net number of apples is constant and so the borrowing had no net burden on the inhabits of the island?
Yes of course you are wrong. I have shown with a specific numerical example that there was a net burden on every single person on the island after period 6.
All the borrowing did in your scheme is change the split in the apples from 100 each to 10 +- x for some x between 0 and 100. That is not a net burden on the future generation.
Yes it is a net burden, in the sense that every single person on the island is poorer (after-tax). If that’s not a “net burden” what would be? Your observation about the moving around of a constant number of apples each period is correct; you, Krugman, and Dean Baker are wrong in jumping from this premise to the conclusion that people on the island can’t be impoverished because of this technological fact. Yes, they can, as I showed with numbers. Not sure what more I can do. Calculate the utility of the islanders. It’s 20 in the status quo, and less than 20 for every single person after period 6. What more do you need?
Same with your dismissal of Landsburg, who stipulates that the Chinese paid for the debt they bought. You are ignoring what we got from the Chinese to cause the debt.
But then private, household debt doesn’t make a family poorer, either. So Landsburg has an argument to show why public debt is no burden, and his same insight would show that private debt isn’t a burden. Thus this is clearly not what Krugman had in mind.
“You should know better by now.” That I still read your religion posts Bob shows I never learn …
OK, I think I see what you mean now in your comment about period 8. I cannot, you are right, all have lost utility compared to the 100 each period chart. So yes I agree you have shown that a change in the equal distribution of apples causes a rippling utility loss in the full set of conditions you stipulated.
Of course the intial conditions you fix are perfect egalitarianism, the optimum already for your utility function. So any deviation will be a utility loss. What if we change that? If we have the rule in place for laissez faire that when young you get 110 and when old you get 90 then I think the redistribution actually boosts later generations’ utility, because the borrowing and paying back smooth the distribution. Public debt as a boon?
Ken B. wrote:
Public debt as a boon?
Ken, your back must be sore from continually moving the goalposts.
If Krugman says, “A hammer can’t possibly hurt someone, because it’s a tool,” I would say, “But what if I smash your head in with a hammer?”
You don’t then get to say, after 11 months of saying I’m an idiot, “OK yeah I guess I see that Bob. But hey, if I tweak your example and use a hammer to build a deck, then it’s useful. You didn’t see that coming, did you Murphy?”
Or rather, if you try to say that, I will then bash your head in with a hammer.
Bob, I conceded the point in your counter-example. You might have missed it because of my slippery wording, where I said “you are right” and “I agree [with your claim]”. I should have been clearer.
I raised a new point about how special your example is. See my recent exchange with DK for why. That’s not moving the goalposts, it’s trying to see how your example is relevant to the original debate.
Do I take it Bob that you are agreeing that with the 110-90 or some such rule the redistribution can be a benefit?
Do I take it Bob that you are agreeing that with the 110-90 or some such rule the redistribution can be a benefit?
I agree that if the government taxes Old Al in order to lend to Young Bob, so on and so forth, and then at some point begins making transfer payments out of the incoming interest payments, then the first 5 generations can be hurt and the last 5 generations can be helped. But notice in this example, the “debt” is negative; the government is running a budget surplus and investing it in the community. So that’s not surprising to me at all: If you reverse what I’m talking about, then you get the opposite result.
Ken B. wrote:
I raised a new point about how special your example is. See my recent exchange with DK for why. That’s not moving the goalposts, it’s trying to see how your example is relevant to the original debate.
It’s relevant because Dean Baker and Paul Krugman made a general claim, and Nick Rowe and I have provided counterexamples. See “math” in Wikipedia.
Pfft. Who trusts Wikipedia.
Yes, you have proven Krugman’s claim does not apply in all circumstances.
Or are you denying that your carefully constructed example is an example of professional skill in being so carefully constructed?
🙂
You haven’t shown it does not apply under realistic ones or that the cost is likely to be high. In other words, in terms of real world policies not special cases, Krugman’s argument still looks pretty good.
You haven’t shown it does not apply under realistic ones or that the cost is likely to be high. In other words, in terms of real world policies not special cases, Krugman’s argument still looks pretty good.
OK, I am going to start a blog series entitled, “Bowling balls fall faster than feathers because they’re heavier.” Sure, some physicists might come up with carefully constructed counterexamples, and claim that I’m “misleading my readers” etc. etc., but in the real world my argument will look pretty good.
Ken, Krugman’s argument looks false. Plain and simple. If you want to make things more relevant to the real world then just read Murphy’s explanation why government debt is never good for the economy. Krugman is wrong from all angles.
@Ken B: But Krugman does not qualify his statement that it is not true in all circumstances. It is apparent that he considers that claim an infallible premise upon which he makes his other arguments. That’s why a simple “special case” served hot and steaming from Rowe and Murphy is sufficient as a counterexample.
If Krugman offered some kind of economic model that he said showed current public debt does not burden future generations, his claim could be appropriately tested. As it stands, you give Krugman the benefit of the doubt that his claim matches the real world, but then dismiss Murphy’s counterexample to Krugman’s claim as a “special case.”
There are a few ways to read Krugman’s post.
1. No burden, bite me deficit hawks. This is a reasonable reading. Bob has shown this is wrong.
2. Debt is not such a big thing, so implicitly we shouldn’t worry about Obama’s deficit. This also is a reasonable reading. Bob has not shown this is wrong.
3. Debt is no worse than an arbitrary tax scheme such as that doorknob Santorum might think up. Nos usch a big deal. Bob has not refuted this either.
4. PK said “poorer”. Look and see. He didn’t say lower utility etc. He did say “total income isn’t changed” and “It has distributional effects, but it does not in any direct sense make the country poorer”. He could just be talking about the total number of apples. This is also a reasonable interpretation. Actually it’s the msot reasonable one. And in Bob’s example Krugman is right about this.
@Ken: If you can’t even decide or figure out what the debate is about, perhaps you should refrain from commenting on how wrong one side is.
FYI, the debate is only about #1, and you’ve clearly conceded the argument to Murphy. Well done.
@Ken: If you can’t even decide or figure out what the debate is about, perhaps you should refrain from commenting on how wrong one side is.
Can we etch this in a stone tablet?
@Bob: I relinquish all rights to you. I’d recommend you make it an inline background image on your site that persists in the same spot when you scroll, and blinks.
As Bob pointed out in his post (did you read the whole thing?), counterexamples don’t work like that. One does not get to make a blanket statement like “the debt we create is basically money we owe to ourselves, and the burden it imposes does not involve a real transfer of resources,” and then get to complain when a theoretical example shows that the statement is not always true. It only takes one counterexample to prove that a statement regarding a theoretical absolute of some kind is false.
It is true that the utility function that describes the world’s economic operations is not the sqrt(A1)+sqrt(A2) and its GDP is not fixed at 200 apples. But Krugman does not offer a utility function and say “see, according to this model that I believe accurately describes economic activity, current debt does not burden future generations.” He did not give a context under which his claim can be checked against. He basically said ipso facto, debt we would owe ourselves (as Americans) does not burden future Americans, regardless of any other factors.
“If we have the rule in place for laissez faire that when young you get 110 and when old you get 90 then I think the redistribution actually boosts later generations’ utility, because the borrowing and paying back smooth the distribution.”
Do the math as Murphy has done with the initial distribution being young = 110 and old = 90. The result will be similar. Some people will get more than 200 apples over their lifetime, and others will get less. In fact, each person would get the same amount of lifetime apples as before, with a smoother distribution.
The only way this would be more acceptable is whether a smoother distribution over time is desired. However, with time preference in reality, this would not be desired – having the apples sooner is desired over having a smooth distribution, and no one would rationally delay consumption to obtain fewer apples (i.e. as Hank would in Period 7 delay consuming 10 apples to be paid back only 5 additional apples in Period 8 – the rest being “made up” through taxing himself.)
re: “Yes of course you are wrong. I have shown with a specific numerical example that there was a net burden on every single person on the island after period 6.”
No, you are not wrong, if that is the question you are interested in (and a lot of us are). If the question you are interested in is the question that Bob is interested in, then yes you are wrong.
Yeah I think this puts it well DK. If the question is, tax now vs borrow then Krugburg and Landsman are right. I expect in the real world they are right too. But I must admit that in Bob’s carefully constructed example I missed a trick.
And, if you want to actually make practical applications of Bob’s model (like assuming pre-transfer old age poverty and utility discounting) Bob’s point can be wrong even from the angle that he is choosing to look at the question.
That’s important if some day someone dredges up memories of these discussions to inform their policy views on Social Security (which isn’t even funded by debt anyway!).
DK wrote:
And, if you want to actually make practical applications of Bob’s model (like assuming pre-transfer old age poverty and utility discounting) Bob’s point can be wrong…
How can “my point” be wrong when all I have ever done, is show that Krugman and Dean Baker were making an invalid argument?
Nick Rowe was right to title one of his recent posts, “What part of counter-example don’t you understand?”
“How can “my point” be wrong when all I have ever done, is show that Krugman and Dean Baker were making an invalid argument?”
Still waiting for that one (although I’ve already somewhat disowned some of Baker’s mushier language… I think he and Krugman and me are on the same page on what we’re thinking of).
Ken B. wrote:
But I must admit that in Bob’s carefully constructed example I missed a trick.
Again, everyone, just want to bring your attention to something inconceivable: I am again being chastised for “carefully constructing” my counterexample. And this coming from a guy who is an expert at math.
You keep using that word ‘chastisement’. I do not think it means what you think it means.
That’s not chastisement Bob. That’s conceding you win a point without conceding that, in the context of the wider debate, you are winning the argument. The wider context is whether paying for govt with borrowing imposes a burden that paying with taxes does not. I think you have proven that under some special conditions it can. I think my 110-90 tweak proves in some conditions the reverse will be true. Neither is dispositive for the wider debate.
The point you are conceding IS the argument.
If you want to go on and make new arguments, fine, but that has no bearing on argument Nick and Bob were making.
Ken B, this “wider context” you speak of is consists of Krugman making a claim he believes is always true and Bob/Nick providing a simple counterexample to show his claim is not always true. As Dan said, you’ve already conceded the argument.
The people who you interpret as chastising you are to a large extent accusing you of moving the goalposts rather than anything specifically wrong with the example.
But then private, household debt doesn’t make a family poorer, either. So Landsburg has an argument to show why public debt is no burden, and his same insight would show that private debt isn’t a burden. Thus this is clearly not what Krugman had in mind.
Bob,
Krugman is probably comparing the public debt to a single household. I’ve seen him make the same “it all cancels out” argument when talking about private debt in aggregate.
He then will say the problem with private debt is about relative “propensities” or “desires” to spend or something.
Oh, one thing I might add: As far as I can tell, Brad DeLong never said anything false in this entire debate. He sat out the first round back in early 2012, and then this time around, he was saying things like “…if we assume such-and-such, and I see no reason not to do so, then Dean’s point is correct…” So he was carefully stepping around the landmines that Nick Rowe had laid, landmines that blew up Baker and Krugman who were not nearly as nuanced as DeLong.
Thus, I hope by me saying this, people will see I am not simply “bashing the Keynesians.” I am paying very careful attention to who has said what in this entire debate. Gene, Landsburg, DeLong, and others have given plausible arguments for why it’s not right to say “our debt today will make our grandkids poorer.” But their arguments are NOT what Dean Baker and Paul Krugman have rested their entire case on. Nope, Baker and Krugman built their house on quicksand.
Perhaps he sat out the first round because he recognized that both sides were essentially right given the particular questions they were interested in.
Maybe. I think either he was busy or he saw that Krugman was getting his *ss handed to him. But then DeLong couldn’t remain silent when Nick Rowe (this time around) specifically said, “DeLong’s silence last time proves I am right.”
Yes, that was pretty fantastic bait. Props to Nick for that one.
I was 85% confident it would not turn out how he expected, but it got ol’ Brad into the discussion.
I was 85% confident it would not turn out how he expected, but it got ol’ Brad into the discussion.
Oh, I was 99% confident DeLong wouldn’t say, “Krugman and Dean are wrong on this.” What was not obvious was whether DeLong would fall into the trap they had. He didn’t.
OK – let’s make one thing clear – I never once said that your examples were “totally rigged to show a burden”. What are you even talking about here, Bob? [DK later admits that I am talking about the guy who specifically said this, at the hyperlink I provided.–RPM]
Throughout this debate you’ve seemed to consistently be under the impression that I have been trying to convince people that everything you and Nick say isn’t true. That’s not been my series of claims at all. I’ve tried to make a point that Nick IS RIGHT given some of the specific sorts of questions he’s interested in.
My point has been that debt has no impact on future GDP (we’re all abstracting away from wasteful governments or financial crashes or that sort of thing). Your models clearly show that.
In the post you link, my point was that the burden on future cohorts (the possibility of which from the beginning I’ve agreed with you and Nick on) is contingent on assumptions you make about whether old or young people are higher income and the specification of your utility function.
Are you denying that?
If not, then don’t frame me as making a different point then the point that I’m making. Agree with me.
I see – the link goes to Rosnick’s comment specifically. I searched for “totally rigged to show a burden” on my blog’s search function and didn’t find it, so I figured you were paraphrasing me. My apologies.
I’m not sure Rosnick is intending that as harshly as you are interpreting it – he may be meaning essentially what I’m trying to say when he says that for all I know.
Anyway – again – I stand by everything said in the last comment except blaming your for that line.
The one thing we seem to disagree on is what Krugman has in his head. I contend he’s stuck on thinking about GDP. That seemed confirmed when he pointed out that thinking about “generations” can change things (as your tables have shown).
I don’t get this point you are making about private and public debt. Private debt should have the same effect on GDP (again, barring financial crises etc.). Does Krugman ever deny this? Where?
The things you quote are a micro/macro distinction, not a private/public distinction.
If he does say it somewhere that I’ve missed, then I obviously disagree with Krugman on that.
If he just says something like “private debt is more likely to lead to a financial crisis because of what Minsky said” and that’s the argument, then I’m probably back to agreeing with Krugman.
Daniel, the quotes you seek are right here in this post. Krugman is saying, in two separate spots from his first and (2nd) last post, that government debt isn’t like household debt. See that?
I saw that.
Household debt is not private debt.
Maybe I’m wrong, but I interpreted him to be making a micro/macro distinction. That’s almost always how household behavior is invoked in these discussions. It’s the same as pointing out that just because it is sensible for families – from their perspective – to tighten their belts in a recession does not mean that it is sensible from a macro perspective.
As far as I know Krugman has never said that the aggregate debt contracted by private parties and the aggregate debt contracted by public parties impact things differently. That certainly doesn’t seem to be in your quotes.
OK sorry Daniel I get what you’re saying. Right, Krugman is making a micro/macro distinction (I used that terminology myself in the blog post). He’s saying that an individual household is obviously made poorer in a man-on-the-street sense when they run up a debt, but he’s saying it’s a fallacy of composition to conclude that government debt works the same way. And yes, you’re right, Krugman elsewhere would argue that even with private debt in the whole economy, it’s not making us poorer, because one American’s credit card payment is another American’s income (the shareholder of the credit card company).
Sorry for being snippy on this point.
“Sorry for being snippy on this point.”
You are the funniest econ blogger Bob.
I am nothing if not precise.
“But that’s all wrong; the debt we create is basically money we owe to ourselves, and the burden it imposes does not involve a real transfer of resources.”
Although the central issue of this debate is whether or not current debt can impose a liability on future generations, there is a related issue that bothers me. This notion that “we owe it to ourselves” seems entirely simplistic and misleading. “We” are not some faceless, homogeneous Borg collective. The populace of the country is actually composed of many disparate groups and individuals with various competing and sometimes highly antagonistic economic interests. What if “we” are actually composed of net taxpayers versus net tax consumers. As an example, I have a close relative who became fabulously rich by marriage (lucky bastard). Does a lifelong welfare recipient owe any of the debt to him, or is it the other way around? How is it legitimate to characterize the intra-generational debt burden as if the left hand were just loaning money to the right hand?
See, Bob. I was right.
I just thought a little Rothbard may be in order here:
“The useful collective term “we” has enabled an ideological camouflage to be thrown over the reality of political life. If “we are the government,” then anything a government does to an individual is not only just and untyrannical but also “voluntary” on the part of the individual concerned. If the government has incurred a huge public debt which must be paid by taxing one group for the benefit of another, this reality of burden is obscured by saying that “we owe it to ourselves..
Having used force and violence to obtain its revenue, the State generally goes on to regulate and dictate the other actions of its individual subjects. One would think that simple observation of all States through history and over the globe would be proof enough of this assertion; but the miasma of myth has lain so long over State activity that elaboration is necessary.”
Anatomy of the State
***
Keep up the wonderful work, Bob!
“No, he wasn’t, and that’s what I’m going to demonstrate in this post.”
Did you forget the demonstration part?
Gene wrote:
Did you forget the demonstration part?
Is this some kind of sick joke? If you want to say you disagree that I demonstrated it, OK, but you’re saying you don’t even see where I make a prima facie argument that Krugman is wrong?! Like, you kept waiting to hear my argument about what was wrong with Krugman all along, and oops the blog post ended before I got around to it?
OK Gene, here it is from scratch:
1) I claim that Krugman and Baker were saying, “If the US federal debt is owed entirely to Americans, then ‘Americans in the year 2100’ can’t collectively be made richer or poorer by the level of federal debt at that time. The higher the debt, the greater the interest payments to service it, but this will mean taking money from one subset of Americans and giving it to another subset of Americans. On net, America-in-2100 will be unaffected. So deficit hawks are speaking nonsense when they claim that our deficits today can somehow make our grandkids poorer. It’s true that a *household* can be made poorer in the future by running up debt today, because the interest payments leave the household. But this micro thinking breaks down at the macro level, when a debtor’s payment is a creditor’s income.”
2) This claim is clearly wrong, as Nick Rowe and I have developed numerous examples where the debt is owed entirely to people in the little toy economy, and yet every single person in the economy from some future date X and forward is made poorer because of taxation needed to finance the government debt.
So which is it Gene? Do you disagree with 1) or 2)?
(Incidentally, if you want to see someone spelling out point (1) clearly, go look at Lord Keynes in the “Quotable Quote” thread. He is repeating exactly the position that I am here attributing to Krugman and Baker, so you know I’m not setting up a strawman. It’s amazing that he can make his claims, apparently impervious to this 11-month debate. I’m going to call him Bubble Boy from now on.)
Bob,
I wrote this on Rowe’s latest post, but given Noah’s post, one way to look at this is that everyone who buys bonds buys them voluntarily.
Since the entire burden, in any time period, even after the people who benefited are dead, then does it really make since to call it a burden because of the debt? Does the debt impose burdens because of freely chosen risk? Aren’t we really talking about the burden of protecting wealthy bondholders?
Even if it is the burden of wealthy bondholders, if they freely bought bonds in one period, they apparently were able to live without however much they paid, and because GDP is constant, no one would ever have to consume less than the amount the initial lender thought they could live on. How is that a burden in any reasonable sense?
That was supposed to say: “Since the entire burden, in any time period, even after the people who benefited are dead, *can be imposed on the bondholder*, does it really make sense to call it a burden because of the debt?”
In other words: when people buy bonds they take on risk. Imposing a burden on someone who did not take that risk is therefore always a policy choice.
Forget it Bob. You rock…
Best.
Post.
Ever.
Since I see the debt debate is continuing here, let me throw out my more recent piece on the topic for those who may be interested.
http://www.cepr.net/index.php/blogs/beat-the-press/final-thoughts-on-the-baker-rowe-delong-krugman-deficit-debate
Yep thanks Dr. Baker. (I linked to it in a different post, but not this one.) I intend to respond; I’ll send you the link when I do, if I can find your email. I am glad you acknowledged the theoretical possibility of what Nick Rowe has been talking about, and now we’re just arguing empirical relevance.