A Sincere Question for the “We Owe It to Ourselves” Camp
David Stockman links to this old Krugman column on debt burdens. Here’s the key part of the article:
Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing. They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments.
This is, however, a really bad analogy in at least two ways.
First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base…
Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.
This was clearly true of the debt incurred to win World War II. Taxpayers were on the hook for a debt that was significantly bigger, as a percentage of G.D.P., than debt today; but that debt was also owned by taxpayers, such as all the people who bought savings bonds. So the debt didn’t make postwar America poorer.
Now some of you–I’m especially thinking of Daniel Kuehn and “Lord Keynes” if he swoops in–think this is great stuff, and that Krugman is making a very important point here that clarifies the typical discussions of fiscal policy. So my question: Why do governments issue savings bonds to their own citizens during wars?
To be sure, a Krugmanite would totally understand why a government in a wartime crisis would issue bonds to foreign capitalists in order to suck outside real resources into the country. But why–using the “we owe it to ourselves” mentality–would a government decide to finance a war through bonds issued to its own citizens, rather than levying higher taxes? Either way, the people alive “pay for” the war effort, right? The next generation as a whole is totally indifferent to whether they inherit $0 in government bonds or $1 trillion in government bonds, right? The level of the debt they inherit just affects the volume of the transfer payments among them, but can’t make the next generation poorer, right?
So to repeat, explain to me in a Krugmanite framework why governments historically resort to debt financing when they’re in a major war, even among their own citizens.
I think the most plausible reason is that when the government collects money through higher taxes, many of the people giving it money are reluctant to do so. When it issues savings bonds, it gets money from people who are *willing* to fund it. I think a libertarian ought to prefer this method of funding!
OK, but I think that’s only half an answer.
If the state simply wishes to fund War X, what difference does it make *in the Keynesian analysis* if it comes from taxes or bonds? *Why* would it matter to the state if the funding came from “voluntary” contributions? An argument can be made that the “guaranteed” revenue from coercion (taxes) would be preferred to the bureaucrats, cronies, and assorted knuckleheads who agitate for war.
But to me, it’s that it’s *easier* to get money this way – effectively kicking the can down the road. Because for those bonds to be repaid there must be revenue to the state – so unless those bombs being dropped are literal seeds for some magical return on the “investment” toward war destruction, the bonds are effectively promises to tax future generations and, of course, inflate. And what Keynesian worth his salt doesn’t think pulling the inflation lever is the curative to all ailments? Just offset the bond with the printing press! And to further address the Keynesian framework aspect: taxes are relatively immediate and bonds are “in the long-run” and as Keynes said: “this long run is a misleading guide to current affairs. In the long run we are all dead.”
Gene Callahan,
And what is more Mises himself strongly supported bond issues as fairer and better than punitive and excessive taxation:
“But Mises raised a …. point in favor of certain benefits to debt financing for the government’s war expenditures. Many who would not have the liquid assets to pay lump-sum wartime taxes would either have to sell off less liquid properties to pay their tax obligation, or would have to borrow the required sum to pay the tax. In the first case, a sizeable number of citizens might have to liquidate properties more or less all at the same time to improve their cash positions, which would put exceptional downward pressure on the market prices of those assets. This would impose a financial loss on those forced to sell these properties and assets to the benefit of those who were able to buy them at prices that would not have been so abnormally low if not for the war and the need for ready cash to pay the tax obligation.
Secondly, to the extent that some citizens would need to borrow to cover their wartime tax payments, the private individual’s creditworthiness undoubtedly would be much lower than that of the government’s. As a consequence, the rates of interest these private individual’s would have to pay would be noticeably higher than the rate at which the government could finance its borrowing. Thus, the interest burden from government borrowing that would have to be paid for out of future taxes would be less for the citizenry than the financial cost from them having to borrow the money in the present to cover all the costs of war through current taxation. Hence, it was both patriotic and cost-efficient, Mises said to those listening to his lecture, to buy war bonds in support of the war effort.”
Ebeling, Richard M. 2010. “The ‘Other’ Ludwig von Mises: Economic-Policy Advocate in an Interventionist World,” Mises Daily, March 26
http://mises.org/library/other-ludwig-von-mises-economic-policy-advocate-interventionist-world
Full discussion:
http://socialdemocracy21stcentury.blogspot.com/2015/02/mises-answers-robert-murphy-on-war-debt.html
Callahan wrote:
“I think the most plausible reason is that when the government collects money through higher taxes, many of the people giving it money are reluctant to do so. When it issues savings bonds, it gets money from people who are *willing* to fund it. I think a libertarian ought to prefer this method of funding!”
Don’t look now Murphy, but Callahan just admitted borrowing burdens future generations.
If there is more reluctance and resistance with taxation, and less reluctance and resistance with borrowing, then that is an argument that borrowing burdens future generations because it delays the burdensome taxation to the future.
“When it issues savings bonds, it gets money from people who are *willing* to fund it. I think a libertarian ought to prefer this method of funding!”
This is really an extremely cheap shot, don’t you think? Or are you really not understanding that it is not legitimate to burden third parties with contracts, which is what really happens with those kinds of bonds?
There is an important difference between paying taxes and funding government-bonds. The latter has nothing to do with paying, which is why you find people *willing* to do it.
http://moneymorning.com/2012/01/09/paul-krugman-is-dead-wrong-debt-matters/
I hope this helps
http://socialdemocracy21stcentury.blogspot.com/2015/02/mises-answers-robert-murphy-on-war-debt.html
Well, let that notorious socialist and statist, progressive fanatic Ludwig von Mises provide a provisional answer:
“A good case can be made out for short-term government debts under special conditions. Of course, the popular justification of war loans is nonsensical. All the materials needed for the conduct of a war must be provided by restriction of civilian consumption, by using up a part of the capital available and by working harder. The whole burden of warring falls upon the living generation. The coming generations are only affected to the extent to which, on account of the war expenditure, they will inherit less from those now living than they would have if no war had been fought. Financing a war through loans does not shift the burden to the sons and grandsons. It is merely a method of distributing the burden among the citizens. If the whole expenditure had to be provided by taxes, only those who have liquid funds could be approached. The rest of the people would not contribute adequately. Short-term loans can be instrumental in removing such inequalities, as they allow for a fair assessment on the owners of fixed capital.” (Mises 1998: 213).
Ah, Kristjan, that’s actually what set me down this path! It’s because I read that passage in Mises, that I wrote up this section in my Lessons for the Young Economist. (I obviously hadn’t been studying Abba Lerner.)
Good I’m glad you found that, I hadn’t been able to find it myself when this issue struck in 2011/12.
Full answers here in which even Ludwig von Mises answers you:
http://socialdemocracy21stcentury.blogspot.com/2015/02/mises-answers-robert-murphy-on-war-debt.html
“First of all, note how Mises clearly rejects the idea that government debt per se to finance war impoverishes future generations …”
Mises is saying that “short-term” debt is paid for by the same generation that incurs it. Longer term debt would burden future generations by taxing them.
One other points:
In the context of short-term debt, it’s not the “current generation” that is burdened. It’s particular individuals who are burdened by others who want to have the war fought. It’s cronyism.
(Aside: if future generations can’t be burdened by government debt, *can* they be burdened by a return to a “barberous” gold coin standard? If burdens can’t be shifted to future generations, and all …)
“Mises is saying that “short-term” debt is paid for by the same generation that incurs it”
And it is merely a transfer of wealth from some people to others.
And those from which it is transfered are, in fact, burdened. Otherwise, you wouldn’t have to tax the money back to repay the bonds.
But since no-one made the statement that nobody is ever burdened by taxation, that is a risible straw man.
You must accept that war bonds result in the imposition of taxation to pay back the bond plus interest.
Isn’t that what I just said? The point is: taxed income here will be redistributed to someone else there. You can’t send real resources back in time. Later generations were not burdened by bonds in the way naive Austrians think.
That isn’t what Austrians think. That is a straw man. No Austrian is claiming real resources are traveling through time.
“Later generations were not burdened by bonds in the way naive Austrians think.”
That’s only true of short-term bonds where only those who were alive at the time will be taxed to repay the bonds.
For bonds that mature after the next generation has begun to work, you’re taking from the next generation to pay off the older generation.
(And just to repeat, “generations” can’t be burdened; Only individuals can – and are in the case of governmet bonds the repayment of which comes from taxes [or a reduction of government expeditures elsewhere].)
Not quite sure why you used the word ‘merely’ here.
“Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.”
Ergo the way to solve your household debt is to marry your creditor’s sister!
Something tells me that if I were to break into Krugman’s cat-infested condo and relieve him of his complete set of Magic the Gathering alpha moxes, he would not accept my explanation that we are simply redistributing wealth among ourselves. I’m beginning to suspect that the “we/ourselves” line of reasoning–which is pretty old at this point–is some elaborate, meta-Kaufman-esque ruse.
In the spirit of the question, the whole point of debt financing is to spread the costs of a project over time and, in the case of government projects, over future generations (who allegedly benefit). Of course, if the money is blown on current consumption, those future taxpayers get nothing but higher debt and possibly higher taxes to show for it.
Moreover, isn’t the reason why governments don’t repay their debts, and so go (for as long as possible) continuously deeper into debt, is that the last generation knows it is a screw job? Thus, debts get rolled over and new debt is undertaken… repeat repeat repeat…
Bob, do you think that if we lived in a world with no overlapping generations (for instance, a world where everyone is infinitely long-lived), then governments would have no reason to use deficit financing? Or do you believe that there are other aspects to the debt issue apart from the OLG models you keep making?
Assume the apple economy from Bob’s post yeterday
In period 1 the govt issues interest-bearing bonds to the Young Al to pay for a war. The interest rate is exactly enough to marginally increase his lifetime utility over what it would be without the bonds,
In period 2 they tax young Bob to pay Old Al back
In period 2 Bob is worse off because he has to pay the tax. Al is not better off becasue he is merely being compensated for his thrift in period 1.
So in period 2, using Bob’s utility assumption, total utility is lower than without the bond issue.
If in period 1 a tax on Al had been used to finance the war then Al would have been worse of, but no future generation would have suffered.
So: You can create a story where a bond issue impoverishes a future generation
But:
The govt in period 2 could default on the bond , and make Al worse off and not Bob. So its still decisions made in period 2 that are the ultimate cause of the utility loss.
(Note you can also easily change this story to show that Bob benefits from the war costs, so actually has higher utility in period 2 even if he is taxed to pay for the war, while Al deserves his extra apples as he actually fought the war !)
They can raise more money with bonds.
DK:
“They can raise more money with bonds.”
Why would that be, if not because taxation now is more burdensome than borrowing now and taxing later?
Ah if only Keynesians integrated time preference into their models. This “debate” would have been over eons ago.
I have to be quick, but thanks for chiming in guys. And LK, for real, thanks for those Mises quotes! I love it when I see he anticipated this stuff decades before I was born…
(1) Yes, of course the main reason the government does it, is that it will meet less resistance in raising (say) $1 trillion through bond issue, rather than explicit taxation. If the government taxes $1,000 from you personally, you are out $1,000 and benefit (or not) from whatever they spend the money on (like fighting Nazis let’s say, which depending on your views of military history is either great or a disaster). But if instead you buy a $1,000 savings bond, then you now have a financial asset that will pay (say) $1,100 in a few years, plus you still get the benefits of the $1,000 in current spending.
(2) In terms of the current generation as a whole, does this just rest on pure irrationality? Are people so dumb that they are thinking, “I don’t want to get taxed $1,000 to pay for the war. I’d rather lend them $1,000 today, so that in five years they can tax me pro rata $1,100 and then pay me off $1,100 at that time for the matured bond” ? (If they are Modern Monetary Theorists that is indeed how irrational they are, but I’m being generous to the American citizenry.)
(3) Keshav and LK, you’re right that there are issues of liquidity and imperfect capital markets (in mainstream definition), that would make debt finance make sense even for a generation that lives long enough to retire the bonds.
(4) However, I want you guys to think through this logic. Yes, if it doesn’t feel like a trap, first do it in the case of the citizens in 1943 living for the next century, with no new people being born, and see why deficit finance with gradual paydown might make sense even in that setting.
(5) I think you will conclude that an accurate way of explaining it is to say, “It would be too much of a financial burden to make everybody pay *today* for the war effort, in 1943, through explicit taxation. If instead we borrow it, then we allow the citizens to *gradually* pay for the war effort over the next century. Just like a family whose house burns down (with no insurance) would take out a mortgage to buy a new house, here too the citizens collectively would find it easier to foot the bill to fight the Nazis if they had a century to pay it off.”
(6) But if you see how point (5) works, now you’ve conceded that there is a legitimate sense in which deficit financing today allows the “true burden” of gov’t spending to be deferred decades into the future.
(7) Once you admit that, now you see how *unborn taxpayers* decades from now can enter the scene in 1970, and also help pay for the war effort against the Nazis.
(1) and it is likely to provide a boost to aggregate demand in the future when poorer people, middle class people or businesses draw down savings accumulated and spend it.
(2) “I’d rather lend them $1,000 today, so that in five years they can tax me pro rata $1,100 and then pay me off $1,100 at that time for the matured bond” ?
Depends on how rich they are and how progressive the tax system is. No, poorer people and middle class people — who bought bonds indirectly because their banks and financial institutions bought bonds — are likely to not be much concerned with tax issues, since they pay a lower rate. Also, apparently patriotism does not figure into your view of “rational” people. E.g., people who think: I did my duty and bought bonds in the war, and who cares if they tax back some it later. I get plenty in return from Uncle Sam.
(5) and (6): all you seem to be saying is: people who pay tax have income taken away and this is a burden per se. So what? The lost income to taxpayers is someone else’s income. Society as a whole sees a redistribution of wealth — just as it always does under any system of taxation and government spending.
LK:
“So what? The lost income to taxpayers is someone else’s income. Society as a whole sees a redistribution of wealth — just as it always does under any system of taxation and government spending.”
That is not true LK. It is impossible for the lost income to taxpayers be exactly made up for by the debt holders’ income, even if we restrict our analysis to an abstracted government bond with a face value (purchase value) of $1000 and a future value (principle plus interest) of $1100.
You are ignoring the sunk costs and the opportunity costs involved in bringing about the bond and tax redistribution.
For the sunk costs: In order for A, who is a taxpayer, and B, who is a bondholder, to be involved in a “mere” transfer of the $1100 at the time of the maturity of the bond, where A is taxed $1100 and B receives $1100, there has to be a G who introduces “redistribution” costs on BOTH A and B. These “redistribution” costs are borne by both A and B. These costs do not show up in the abstracted $1100 of money that is “merely” transferred. If the government instead taxed previous generations of the $1100, those redistribution costs would not otherwise exist today. In this way, government debt does indeed “burden” the future generation of A and B. Past governments incur costs on future generations by making a future government necessary on the unborne in order to ensure that A is taxed and B the bondholder is made good (and B is taxed as well).
Then there are the opportunity costs that differ between taxation and borrowing. Taxation and government borrowing have different opportunity costs. Any given $1.00 of taxation and government spending as a rule comes out of both savings associated income and consumption associated income. However, $1.00 of government borrowing and spending as a rule comes out of savings. A government that only spends what it borrows would have a different effect on capital accumulation, and thus a different “burden” on future generations, compared to a government that spends the same amount but borrows less and taxes the difference.
Unfortunately the Keynesian analysis only considers the comparison between two abstracted cash flows, the present “resdistributive” taxation of $1100 without borrowing, versus the future “redistributive” taxation of $1100 with previous borrowing.
———-
The above is fully sufficient to refuting the “borrowing only changes the redistribution of cash flows” Krugmanite ideology.
But there is another, very easy to understand refutation that puts the burden on full display. Suppose that future generations of people are in sufficient number and self-empowerment that anarcho-capitalism will soon arise. Suppose that they then have to ask the question of what to do about the $10 trillion of government debt that is let us suppose FULLY owned by American citizens.
If the debt holders are to be made good, then that future generation would be burdened with having to put up with an institution which will redistribute money by way of taxation.
If the debt holders are not to be made good, because the coercive institution of taxation is not tolerated, then that future generation would not be so burdened, but the debt holders will incur a loss because of an absence of expected redistribution, and those who would have been taxed, are not taxed, and so they do not incur any loss from redistribution.
Now of course there would be opportunity costs involved with anarcho-capitalism. These costs would be what otherwise could have been produced in an absence of anarcho-capitalism. But these opportunity costs would be by definition chosen by individuals all together, and not just by governments and those who support it. The opportunity costs here would reflect what individuals are willing to give up, and since individual action is by nature gain seeking and loss avoiding, the opportunity costs would be worth the gains achieved for individuals all together.
What government borrowing does is burden future generations with government.
Keynesians, and those other statists they criticize, do not see this burden because they take government for granted.
If an anarchist said government borrowing burdens future generations, then then the ideas of Keynesians and their statist critics would clearly be exposed as false. This is why both sides choose their terms to be narrowed down to abstracted cash flows that ignore the opportunity costs and sunk costs of statism itself.
LK:
To explicate more on the redistribution costs that can be made a burden on future generations:
It is quite possible for B as bondholder who will receive $1100 to himself be burdened by the redistribution away from A, in addition to the costs of supporting G.
This burden can arise if B is better off if A is not taxed of $1100 and given to B, but rather if A is able to save and invest in the production of goods that would otherwise not exist for B to benefit.
It is like choosing between being a millionaire in the year 10,000 BC versus making minimum wage today. Materially speaking, it is better to spend less money today than more money in 10,000 BC.
The same principle can apply to redistribution at gunpoint. I may very well be better off if $1100 was not taken from Tim Cook and given to me. I know I would be better off working for $1 million than being given a stolen $1 million. I would be better off because of my values towards working versus stealing.
Keynesians in their persistent “mechanized” view of human life fail to see this. They just look at the mechanical movements of dollars.
Patriotism would apply just as much to paying tax in the first place. No special justification for a bond then.
“I get plenty in return from Uncle Sam.”
Uncle Neighbor.
“(2) In terms of the current generation as a whole, does this just rest on pure irrationality? Are people so dumb that they are thinking, “I don’t want to get taxed $1,000 to pay for the war. I’d rather lend them $1,000 today, so that in five years they can tax me pro rata $1,100 and then pay me off $1,100 at that time for the matured bond” ? (If they are Modern Monetary Theorists that is indeed how irrational they are, but I’m being generous to the American citizenry.)”
I think this would be EXACTLY Krugman’s position. We SHOULD be indifferent between the two, but brainwashed idiots who watch Fox News and don’t understand economics stupidly believe that higher taxes are worse than higher debt, therefore, since the general public has a preference (even if it’s irrational), then the government has to have a preference too for political reasons.
“Keshav and LK, you’re right that there are issues of liquidity and imperfect capital markets (in mainstream definition), that would make debt finance make sense even for a generation that lives long enough to retire the bonds.” Bob, you’re giving me way too much credit. I haven’t even heard of the issues you’re talking about. I was just asking a question out of curiosity.
“(2) In terms of the current generation as a whole, does this just rest on pure irrationality? Are people so dumb that they are thinking, “I don’t want to get taxed $1,000 to pay for the war. I’d rather lend them $1,000 today, so that in five years they can tax me pro rata $1,100 and then pay me off $1,100 at that time for the matured bond” ? (If they are Modern Monetary Theorists that is indeed how irrational they are, but I’m being generous to the American citizenry.) ”
I don ‘t want to sound like a smart ass Bob but I think It is just misunderstanding on your part what the lending and paying means. Think about government spending freshly printed money or fresly printed T-Bills into the economy. Think about what is the difference? If there is no difference other than maturity for example, so why are you making It sound like there is a difference? And so huge that people are assumed to be irrational if they accept government bonds? The bonds are provided to offer interest to investors higher than zero. I remember you had a discussion about this with Mosler (I’ve seen the video) where he was talking about subway tokens and he asked you that what interest rate do the subway tokens have if the issuer doesn’t offer any. It seems that in your comment you want to get the answers from MMT-ers, but at the same time you completely ignore what they say.
Then why not just borrow to spend? Why does the federal government tax at all?
Yancey I think there are two main reasons:
(1) The government likes the taxing power to show who’s boss. It’s not merely about raising revenue.
(2) If the government never taxed but only borrowed more to pay off existing bondholders, that would truly be a Ponzi scheme and might freak people out, even when Krugman assures them it’s awesome and they need to read Samuelson (1958).
(1) taxes are major way to control aggregate demand.
(2) taxes can free up resources and allow a space for government purchasing of those resources, especially at full employment.
(3) taxes can control demand-side inflation, although admitted this is a grossly overrated source of inflation in modern capitalist economies.
(4) taxation is a vital tool to address income inequality
Why do you hate me so much?
He doesn’t hate you, he just hates your uniqueness, your individuality.
He only recognizes and respects you as an abstracted “man”, and to be a real man, a real person that is, you ought think and act in accordance with LK’s own Platonic ideal conception of man. You ought to obey LK ideal government, abide by LK ideal morality, and believe in LK ideal economy.
You are not permitted by LK to use your own body and homesteaded/traded property the way YOU deem fit for yourself. Individuals together are not permitted by LK to use their bodies and property they way they deem fit for themselves.
Your individuality is hated by LK. He hates individuals improving their own lives the way they see fit. Such a thought is repulsive to his Platonic sensibilities. Your individuality is an evil to him, which is why he does not tolerate you expressing yourself fully. Full individual expression to LK would entail a release of inner demons and evil spirits.
Now I wonder where that belief comes from. It must be something other than his own self. Must be. Right?
You shall be made obedient to LK’s self-fear and anxiety.
Impressive trolling.
Impressive solipsism.
Not every comment is directed towards you personally LK. That comment was for Grane Peer.
If you feel trolled by a comment not even directed at you, then clearly you are quite loose and sloppy with the words you choose to use. That is inexcusible for academic debates.
LK has committed a solepsism for giving a wry two-word response to a comment which mentions him nine times and gives a description of his opinions and emotions that no reasonable person could deduce from anything he has written in the blogosphere? Your entire comment was wild speculation, probably based on projection, and suggestive of a minor personality disorder.
Thank you Major, but, I fear your assessment may be far more charitable than is due.
Nonsense, LK. Borrowing accomplishes all of those items you listed- in other words, they are not an argument against borrowing instead of taxing. And if one is worried about the future return of that deferred demand (or, unequal consumption), then borrow again to control those items.
The ability to tax is the only real collateral a government has to borrow against. All bonds (plus interest) eventually must become taxes… end of story, no way out.
Once people realize the government cannot tax (e.g. Greece) sufficient to pay back their bonds, they stop buying those bonds and it’s game over for government borrowing. And yes I understand that for some governments (not Greece) money printing is a fallback option, but even money printing depends on tax (else the fiat paper becomes worthless), and anyway inflation is to all intents and purposes a type of tax.
That a country might use inflationary finance instead of taxing doesn’t really change your argument, I think. Just change the phrasing to “Once people realize the government must inflate to pay back their bonds, they stop buying those bonds and it’s game over for government borrowing.”
Inflationary finance could only work if the bond buyers didn’t see it coming, but even then it would work once and it would probably take generations for the government to have credit again.
Yeah, the bond buyer should rightly factor the tax and/or inflation against future returns (or at least, attempt to do so). If inflation looks likely to undermine the bond value, then discount the purchase price as appropriate.
Mind you, the choice of not buying the bond is to hold a physical asset instead and thus be vulnerable to the “hold up problem” as people discovered when Roosevelt snatched their gold, or in the modern world Capital Gains Tax does the same job.
You are right, it does all come back to tax farming as the only real collateral on those bonds. Inflation can at best serve to misguide some buyers, perhaps catch a few of them by surprise.
Mind you, all fiat currency consists of IOU notes, but what are government bonds? They are IOU notes for other IOU notes. The only difference is liquidity… how long you intend to hold those notes. What I’m saying is that anyone who deals with fiat currency in any way has already become a lender to government, buy the bond market just provides an avenue to multiply this up one step further.
Anyway, I’m getting off the track a bit, the original example was apples.
Well, my question is rhetorical, afterall, but it would have been better if LK had been the one to actually answer it. He will disagree with your comment, if he bothers to acknowledge it at all.
From above, Tel:
LK:
So I think he has agreed with me that bonds ultimately wash out as tax sooner or later. He also did answer you above with four other points which seem to me like (1), (2) and (3) are ways to say the same thing in a “Gruber” style that it seems to be a different thing to someone unaware of the equivalence. Point (4) make of that what you will.
The bond purchase might be voluntary but the tax that necessarily comes as a consequence is larger (because of interest payments) and not voluntary. Thus, it is disingenuous to pretent the war is ever really financed voluntarily. Only the moment of involuntary payment is delayed and the distribution is shuffled, that’s all.
I think it’s a question of getting people invested in your victory. The people to whom you owe debt will want you to win the war, or they won’t get their money back (plus interest).
In the case of war, you have to consider that for once, like a person, the government can die and leave it’s obligations unpaid.
If the government engages in taxation funding of the war effort, on the other hand, the people feel like they had no choice but to fund the war, and have nothing necessarily to gain from the government winning the war, since they’ve already lost the tax money and will not receive it back.
Of course, back in the debt funded war scenario, those who don’t buy bonds from the government, will have even more reason to resent the war and their fellow citizens who are imposing future taxation on them. But as long those who expect to gain from the war out number those who expect to lose from it, during the war itself, the pro-war government creditors have the political dominance the government needs to ensure the public support needed to win the war.
Then again, my explanation really only works if people expect losing the war to mean dissolution of the government as presently constituted. So it only works for existential threats to the government’s existence.
Even then, depending upon the enemy, the conquering government may honor the old government’s debt obligations. But they don’t have to do so, so there’s a risk there.
Aggregate demand was made more important than economic calculation by the Keynesians not because it is important to individual lives, but because the government monopolizes money. Keynesianism is a technocratic political advocacy to maintain state power for its own sake.
Bob, I think that a careful reading of your book “The Great Depression and the New Deal” would suggest an entirely non-economic reason for war bonds: to give the country an ownership in the war, much like rationing gave a sense of shared suffering. (Somewhat along the lines of your response to Yancey, above.)
Government borrowing burdens future generations with coercive redistributions, whereas government taxation burdens present generations with coercive redistributions.
Coercive redistributions are a burden on whole populations. Government borrowing today, if the claims are to be made good, burdens future generations by requiring internal conflicts of exploiters and exploitees. It is asking future generations to bear the burden of requiring theft to pay back the debt.
It is extremist and an exaggeration to claim that taxation is voluntary and not theft.
Bob: in a world of Barro-Ricardo equivalence, where the choice between tax-finance vs bond-finance has no effect on which generation pays for the war (because the old bequeath their bonds to their kids as a freebie), there is one good argument for bond-finance: it minimises the present value of the excess burden of taxation due to distorting taxes. The best policy is to smooth tax rates over time, rather than have them be expected to jump up and down.
But yes, I doubt that many Keynesians would be using that argument.
And a major war, when government spending is very high, so aggregate demand is very high, is normally the time when keynesian governments would want to use tax-finance, rather than bond-finance, in order to reduce aggregate demand.
“And a major war, when government spending is very high, so aggregate demand is very high, is normally the time when keynesian governments would want to use tax-finance, rather than bond-finance, in order to reduce aggregate demand.”
Taxes that are spent do not reduce aggregate demand.
I think Nick means, to increase AD less than would be the case, if one increased G by the same amount without increasing tax revenue by an equal amount.
I’ll buy that. But with the caveat that we have to assume that even during periods of “High aggregate demand”, the spending that results from the government borrowing exceeds the spending that otherwise would have taken place by those savings not being borrowed by the government.
Yet Keynesian theory proper does not assume that to always be the case. It contains the possibility that no additional borrowing and spending is needed to increase AD during certain circumstances, namely, during those times when all savings are invested by market actors.
“And a major war, when government spending is very high, so aggregate demand is very high, is normally the time when keynesian governments would want to use tax-finance, rather than bond-finance, in order to reduce aggregate demand.”
Yes, but they’d be wrong. A war like World War II represents an adverse shock to the real supply of consumer goods. Increased taxation would only make that worse. The excess nominal demand needs to be allowed to lead to higher prices, under such circumstances.
Of course, we actually didn’t let that happen during WW II either, instead the Government instituted extensive price controls, again exacerbating the adverse effects of the war on the real supply of consumer goods.
And all that is putting completely aside the fact that the war spending mostly displaced private investment, with relatively little net (but not no) effect on nominal demand.
Don’t mention the “Wartime Austerity”.
I slipped up once or twice but I think I got away with it.
“So to repeat, explain to me in a Krugmanite framework why governments historically resort to debt financing when they’re in a major war, even among their own citizens.”
Because if people were directly taxed for war, people would vehemently protest war. War bonds have nothing to do with your position on war. You purchase the bond because you thing you will earn interest for yourself.
Really no different than current deficit spending. The Fed purchased from the treasure, the government spends without direct taxation. IF peoples paycheck reflected the real tax rate, people would protest.
The Fed and its mandrake mechanism is a statist dream. Grow government exponentially while never having to gain voter approval.
War bonds are a bribe, I cant be any more succinct.
“We owe it to ourselves” is really just aggregation taken to its logical extreme.
One step further than the “99% vs 1%” crap.
“We are the 100%!”
The other big problem is theory vs practice. The national debt keeps growing… Nobody is getting paid back using the keynesian aggragate homogeneous blob theory.
If money lent today to an institution that robs future generation sub-group A to pay future generation sub-group B is an example of “ourselves paying ourselves what we owe”, then so would civil asset forfeiture laws be an example of ourselves paying ourselves. The cops stealing your money and your car, without you ever being charged with a crime, let alone committing an actual crime, would, because the cops are ” us” as well, be an example of ourselves paying ourselves.