When the nutty Irishmen continue to roll their eyes at Nick Rowe on the debt burden stuff, it would be nice if they didn’t keep committing the same fallacy that Krugman did on Day One of this debate. (Here’s Gene telling Nick that the debt can’t burden future generations because they will inherit the bonds–meaning at that moment, there had been literally zero progress in the debate, even though Gene continues to assure us that he totally gets the obvious little point Nick keeps making.)
The other culprit is Kevin Donoghue, who also assures us he totally gets the obvious overlapping generations stuff, and says that Krugman gets it too–it’s too stupid to even bother mentioning out loud, which is why Krugman has ignored Nick all these years.
And yet, in another of Nick’s posts, Kevin writes this:
Nick, I just took another look at SWL’s “Redistribution between generations” post (link below). I don’t believe Krugman would dispute anything there, or that anything he’s ever written was meant to imply that government debt never involves redistribution between generations. But what comes through very clearly in that SWL post is that there must be a *change* in transfers between the old and the young if that latter are to be ripped off. The level of debt is irrelevant in that context.
Krugman is mostly concerned with refuting people who think that even a closed economy with $10k of debt per person must be more heavily burdened than one with $1k debt, even if the debt is rolled over. It’s quite a different topic.
OK, I am going to now give a simple numerical example–of the same flavor that Nick and I have been cranking out for three years now–to show that the above is totally wrong. Here goes, with my explanation following:
In the model above, there are always 200 apples harvested every period; real GDP is always 200 apples. Taxes do not impose any deadweight losses. It is a pure endowment economy; there is no physical investment or depreciation of capital. Each person has a lifetime utility function of SQRT(c1) + SQRT (c2), that is, you take the square root of the apples consumed in the first period and add the square root of the apples consumed in the second period. There is no discount on future utility per se.
Now what happens in the above scenario is that in period 1, the government borrows 50 apples from Bob and makes a transfer payment to Al. There are no taxes, so the deficit is 50 apples and the government’s debt goes from 0 to 50 apples.
Then from periods 2 through 8, the government rolls over the bonds. It taxes the public just enough each period to cover the interest on the debt, which stays fixed at 50 apples, i.e. 25% of GDP.
You can check that (a) Dave through George are worse off compared to a situation in which they consumed 100,100 and (b) Dave through George voluntarily lend the government 50 apples when young in order to get 100 apples paid back when old. Make sure you realize that each individual thinks his future tax burden is given, and then he voluntarily decides whether to lend to the government at a 100% real interest rate.
Thus, Dave through George are hurt, relative to a no-debt scenario, even though the debt is rolled over during these years. Obviously, if the original deficit had only been 1 apple, the burden on them from carrying it would have been lower. I encourage you to go re-read Kevin’s comments quoted at the beginning of this post. It sure seems like he is definitively saying that if we are in years where the debt is merely rolled over, then the people in those years aren’t affected (in the aggregate) by the level of the debt. The example above shows that that isn’t true.
Now at this point, it wouldn’t surprise me if Kevin or Gene or Daniel Kuehn said, “Right Bob, that’s what we’ve been saying for years” but somehow their comments keep suggesting otherwise. At the very least, someone who just read Krugman on this stuff would have absolutely no idea that the above scenario was physically possible.