You guys think you’ve got me all figured out. Well you’re wrong. In my current EconLib essay, instead of focusing on Krugman, I design two thought experiments of war financing to show that even Ludwig von Mises missed something crucial in the “debt and future generations” argument. The intro:
Critics of government debt often argue that deficits are irresponsible and cowardly because the present generation is foisting the bill onto future generations, many of whom have no say in the political decision. This perspective resonates with the man on the street, but many professional economists—such as Paul Krugman and Dean Baker—believe that such thinking is completely fallacious because it confuses an individual household with the economy as a whole.1 According to these economists, today’s government spending is “paid for” by the present generation, period, and any talk of burdening our grandchildren is nonsense.
However, some economists—notably James Buchanan and those following his lead—have challenged this dismissal.2 They argue that when we account for the fact that generations overlap, there really is a legitimate sense in which government debt allows people today to enjoy higher government spending that is partially paid for by reducing the standard of living of taxpayers who have not even been born. In this article, I lay out the respective positions with a numerical example involving a hypothetical war. I use the example of war because that has a been a traditional cause of government debt. But the same analysis applies whether the government debt is to finance war or to finance anything else that government spends money on. I also show that this dispute is not simply an ideological one: I contrast Buchanan’s view with that of Ludwig von Mises, a champion of the free market and no apologist for government budget deficits. Even Mises, in his writings about financing war, overlooked the subtleties that Buchanan (decades later) would emphasize.
Incidentally, this is a very subtle matter. Krugman, Dean Baker, and (I believe) Abba Lerner all relied on the “we owe it to ourselves” notion in order to show that the public shouldn’t worry about big government deficits, and certainly shouldn’t view them as analogous to household or corporate debt.
Now, when I say that I used to subscribe to a version of this view, and so did Mises, of course I am just talking about the very narrow issue of whether the existence of a higher government debt, with the required taxation to pay interest, can directly burden future generations. I used to think this was impossible, that such payments were merely a transfer within the future generations. But after the great debate a few years ago, I now see that there is something else we have to keep in mind.
By bringing Mises into this debate, I am trying to defuse the ideological reactions. I want to show that there is a technical confusion here, beyond the fallout for policy.
In conclusion, and to avoid any confusion: Mises explicitly rejected the “we owe it to ourselves” argument for the BENIGNITY of deficits, and so did I back in 2006. But my point with this EconLib article is to show that even Mises missed the “overlapping generations” point that Buchanan (and then Nick Rowe and Don Boudreaux) nailed.