The Arrogant American Makes a Wager on the Debt Stuff
After spending yet another hour of my life trying to enlighten those of you who still don’t see the debt stuff, what do I get? Gene Callahan still “explaining” why I’m wrong by claiming things about my model that aren’t true.
And, as a special treat, here was the first comment by Daniel Kuehn after my last effort at elucidation:
I still don’t see how you are saying anything more than what Krugman initially said here:
“talking about leaving a burden to our children is especially nonsensical; what we are leaving behind is promises that some of our children will pay money to other children”.
This is the cost and the benefit that you’ve shown – costs and benefits on individual children, if you add up their whole lifetime income.
But within each period you don’t have a transfer of resources.
Isn’t this the Krugman position?: winners and losers but no additional burden on any particular future time period?
That’s exactly what your model shows, and what Steve, Gene and I have been trying to point out. Gene was exactly right to point out that your model shows what we’ve been saying all along.
If you look at future income levels, that remains unchanged.
If you look at individuals in the future, obviously some of them win and some of them lose – but that’s what Krugman said, from the very beginning, was “a different kettle of fish”. That’s why I’ve been saying from the very beginning that Nick Rowe (and now you) are saying what Krugman said.
At this point, I am done trying to free you guys from your blindness–now I want to profit from it. So here’s my wager:
Let’s work with my 9-period OLG framework. But let’s be more specific. Assume each person has the utility function of U = sqrt(a1) + sqrt(a2), where a1 is the number of apples the person eats in the first period of life, and a2 is the number eaten when old. (Of course, Old Al has utility function sqrt(a), and same thing for Young John, since they are only alive for one period.)
Now then, I claim that I can construct a scenario in which the following conditions are true. Obviously I am not here spelling out everything about the scenario, but I claim that a scenario exists in which the following are all true statements describing it:
==> The government runs a deficit in period 1 by borrowing from Young Bob to make a transfer payment to Old Al.
==> Al, Bob, Christy, Dave, and Eddy all get more utility in this scenario than they would in the endowment scenario (where everybody consumes 100 each period).
==> Frank, George, Hank, Iris, and John all get less utility in this scenario than they would in the endowment scenario.
==> I am just restating the previous two conditions, but let me do it this way so people understand the relevance: In this scenario, anybody who is alive in periods 1, 2, 3, or 4 strictly benefits from the new arrangement, while anybody who is alive in periods 6, 7, 8, or 9 strictly loses from the new arrangement, relative to the endowment scenario.
==> Anybody who lends money to the government does so voluntarily, taking government tax policies as fixed. (I.e. everyone is best-responding to the government’s lump-sum taxing amounts levied in each time period.)
==> The government doesn’t destroy apples; 200 apples are consumed by the two people collectively, in each period.
==> There is certainty; everybody knows the whole model, including all future tax levies, and knows the government won’t default.
==> The government retires its debt by period 9, so that we have a closed system.
If I understand what Daniel is saying above–and what he claims Krugman’s position is–then he must think I am bluffing. After all, the government can make some grandkids poorer, and some richer, but there is no way that deficit financing and lump sum tax transfers within a given time period can make the first five people benefit at the expense of the last five people, right? That’s crazy! I mean, how in the world could it possibly be the case that everyone in the later generations loses, while everyone in the earlier generations gains? There’s not a time machine for crying out loud!! All the government can do is take apples from one guy and hand them to another guy!!
My offer: If Daniel takes me up, then I have one week to convince Steve Landsburg that I have come up with a model that satisfies the above conditions. It’s OK for me if I send him an attempt, and he says, “Nope, you screwed up the interest rate in period 2, your math doesn’t work.” I am allowed to revise the numbers until Landsburg signs off on it. If I do that within one week of Daniel accepting the wager, then Daniel mails me a check for $250.
On the other hand, if a full week goes by and I can’t come up with a model that Landsburg agrees satisfies the above conditions, then I mail Daniel a check for $500.
(If for some reason Steve doesn’t have the time to play these games, I’ll just post it on my blog [assuming I can find such an example] and we’ll hope that the community will be able to tell if I’ve succeeded or not, within the week time limit. I mean, this will basically be a math problem, and just a matter of checking to make sure the apples add up to 200 each time period, that sqrt(a1)+sqrt(a2) is more than 20 for Bob but less than 20 for Iris, etc.)
To keep transaction costs manageable, I’m not opening the wager up to others. It’s Daniel or nothing. However, if Daniel wants to hedge by going in 50% or whatever with some of you, that’s fine; but I’m paying Daniel if I lose, and he’s paying me if I win.
Last thing: If some of you on your own find the solution, I encourage you not to post it before Daniel has accepted the wager. At this point, there needs to be a penalty applied for making me take up so much of my time trying to explain to him why Krugman is totally utterly wrong on his handling of this issue.
So what do you think, Daniel? Am I bluffing?
Did you not see my blog post this morning?
I explained about how exactly this happens in yours (earlier people benefit, later people lose), and how if you switch the way the transfer is set up you can reverse it (later people benefit, earlier people lose).
Why would I take this wager? Of course you can do that.
I think this whole thing became an issue because people confused what each other meant by things like “our children” or “the future” or “future generations” or “future periods” bearing a burden or not bearing a burden.
I have nothing but high praise for your OLG models. I agree with you on what they show.
What we don’t agree on is how to apply it to what Krugman said.
Daniel:
(A) No I didn’t get a chance to check your blog yet.
(B) You’re saying that Krugman is admitting that EVERYONE ALIVE TODAY make ourselves richer, and ALL of our grandkids poorer, using deficit financing and future tax charges that won’t be levied for 100 years?
Is anyone else as surprised as I am by this?
I’m glad we agree on what I can do in the model, but I am surprised you still think this is the kind of thing Krugman was telling his readers could happen.
But the point is the same thing can be done with tax policy, without deficit financing!
What I’ve seen as the issue all along is not, “Can the present generation impoverish future generations?”
Yes, it can, as Landsburg, Kuehn, and I have all acknowledged. It is not surprising that you can devise a debt model in which this can happen.
The issue as I see it is, “Does deficit financing permit this in some special way that some combination of taxes and transfers does not?”
And you seem to have acknowledged that we have shown taxes and transfers can duplicate your debt models. So here is my counter-offer:
Would you bet that I cannot duplicate the results of the model you devise with taxes and transfer payments?
Gene wrote:
But the point is the same thing can be done with tax policy, without deficit financing!
Gene, do you agree that all of the things I quoted from Krugman, Baker, Yglesias in the previous post, have absolutely no bearing on this then? You agree with me that to say things like, “The government debt is just an IOU” and “They will owe it to themselves” are non sequiturs?
‘You agree with me that to say things like, “The government debt is just an IOU” and “They will owe it to themselves” are non sequiturs?”
No, of course I don’t. Because it’s not the debt that matters, *it’s the transfers*! Again, you just completely, utterly misunderstand the position you think you are arguing against. (And I feel OK using that “completely, utterly” language since you use it vis-a-vis Krugman.
Gene wrote:
Would you bet that I cannot duplicate the results of the model you devise with taxes and transfer payments?
Nope, I wouldn’t take that bet.
Forgive me if I have messed everybody up, but I thought Krugman et al. were saying a lot more than that. The stuff about “we can pass down 1000 trillion dollars of government debt to our grandkids, and that will just make some of them poor and some of them rich” seemed to be ruling out the scenario that I am telling Daniel I can construct.
“The stuff about “we can pass down 1000 trillion dollars of government debt to our grandkids, and that will just make some of them poor and some of them rich” seemed to be ruling out the scenario that I am telling Daniel I can construct.”
No, of course it doesn’t. Krugman says, “Debt is not necessarily a problem in and of itself,” and you “refute” him by showing, “Ah, but I can devise a scenario in which debt *is* a problem!”
I.e., Krugman says “Mammals don’t imply rabies,” and you “refute” him by finding a rabid opposum somewhere.
The fact that taxation can be a problem that same way as debt can be a problem, such that you can construct a scenario where the money flows are nominally equal, that is NOT a refutation of the argument that debt imposes a burden on future generations.
You remain confused because you want to believe that because debt isn’t the only way that innocent people can be harmed in a certain way, that somehow debt is not a problem. But that doesn’t follow.
If I argue that beheading someone will kill them, it’s not an argument against this to say “It’s not the beheading that is the problem. Since I can mimic his becoming braindead by choking him and stopping blood flow to his brain, it’s not the beheading that is the problem, it’s the loss of blood to the head. Of course if you “model” someone dying BECAUSE of their beheading, then of course his death follows. But it’s not unique, so beheading itself isn’t why the person died.”
This is arguing over something that Krugman isn’t saying. Krugman is saying that beheading people isn’t a problem for future generations, because if there are going to be people having their heads removed, there must be others who will gain an extra head as a result, since “everyone owes heads to themselves”, and thus beheading people is a wash for future generations collectively, and those silly laymen who say beheading people will generate a net loss aren’t sophisticated enough to understand the nature of beheading.”
Are you going to support Krugman’s assertion on the basis that it’s not the beheading itself that is the problem, it’s the loss of blood to the brain that is the problem, because after all, we can “mimic” scenarios of losses of blood to people’s brains in different ways?
But the point is the same thing can be done with tax policy, without deficit financing!
I thought the point was that Krugman said something like Murphy’s possible future can’t happen, because if some people lose in the future due to the debt being paid back, then it must be matched by others gaining at their expense, which means “collectively” there is no net loss.
Now you’re saying that the point all along was that government debt and deficits is not the only method that can produce the nominal results Murphy constructed in his example? BOLLOCKS. That wasn’t the point of this whole debate at all. The whole point of this debate was that Krugman said government debt is a wash for future generations. Murphy and Rowe showed THAT to be wrong.
Sometimes I wonder if pro-Mises folks are going as out of their way as you guys are with Krugman et al, when Mises scholars say something goofy. This is truly a sight to behold let me tell you. Kuehn finally conceded but is now trying to make it as though Krugman didn’t say what he said.
Wait, now it makes sense. I think the reason is that Mises scholars tend to be non-sneaky and direct, which means pro-Mises folks don’t need to jump through hoops and confuse themselves trying to promote their intellectual role models’ arguments and statements.
“I thought the point was that Krugman said something like Murphy’s possible future can’t happen…”
The idea that Krugman said that the impoverishment of future generations is impossible when government debt is issued is stupid beyond belief.
No it’s not stupid beyond belief. It’s what he said. When Krugman said “future generations”, he was NOT referring to only those people who will lose, or gain for that matter. He was referring to everyone collectively. He claimed that if some people lose in the future, then others must gain at their expense, which means there is no net loss “collectively.”
You’re hopelessly confused because you are using the phrase “future generations” differently from the way Krugman used it.
Krugman did in fact make the claim that it is impossible for “everyone collectively” to lose. He said that only SOME people can lose, and when that happens, others must gain at their expense, since “we owe it to ourselves.”
You are clearly now in a state of denial.
And just to be perfectly clear, by eating all the seed corn, as it were, the present generation can absolutely screw over subsequent ones. The issue is, “Does government debt allow this to be done in a way that cannot be done otherwise?”
How is this an argument against the “layman’s” understanding of debt?
It’s like if the layman said “If you shoot him in the head then he will die”, you reply “Surely there are other ways that a bullet can kill him, no? I mean, if I can construct an example where a bullet doesn’t enter his head, and I “mimic” murdering him in some other way, then obviously the layman’s understanding is wrong.”
Gene, what are you talking about? Krugman et al are *talking* about debt. They want to show that issuing debt has property B. Bob is showing that it has property not(B). Whether or not a transfer-based, no-debt system also has property not(B) is interesting, and maybe even enlightening. But it is certainly no objection to Bob’s argument.
“They want to show that issuing debt has property B. Bob is showing that it has property not(B).”
Absolutely incorrect. They want to show that issuing debt does not *necessarily* have the property B. And what Bob has shown is that issuing debt sometimes has the property not(B). And showing that government debt sometimes impoverishes future generations is useless for demonstrating that it necessarily impoverishes future generations. Especially when Landsburg and I have shown you can construct the exact same structure of transfers can always be constructed with taxation.
“Especially when Landsburg and I have shown you can construct the exact same structure of transfers can always be constructed with taxation.”
Oops: “Especially when Landsburg and I have shown you can construct the exact same structure of transfers with taxation.”
> They want to show that issuing debt does not *necessarily* have the property B. And what Bob has shown is that issuing debt sometimes has the property not(B).
The sometimes vs. not-necessarily questions are addressed by Ricardian equivalence. Bob and Nick have not ignored this, but RE requires that the debt and money are GIVEN, rather than SOLD to subsequent generations.
Not sure why you think the B vs. not(B) point is “absolutely incorrect.” I made it about the Landsburg-Callahan dance, not about the Krugman view. What you and Landsburg have done is try to create a non-debt-based system which also has property not(B). Good job, but not a valid objection to Bob.
Daniel, let me quote what you wrote and then show why I thought you’d want to take my wager.
DK: “Isn’t this the Krugman position?: winners and losers but no additional burden on any particular future time period?”
OK so I’m showing that EVERYONE who is alive in time period 6, 7, 8, and 9 ALL are made poorer by the deficit and tax scenario, relative to the no-deficit-no-tax scenario. I took you in the above to be saying that Krugman said sure, some people in 100 years might be worse off, but there would be somebody else in 100 years (give or take, because the generations overlap by a year) who benefits. And that is clearly not true, if my example can be constructed like I say it can.
If you look at individuals in the future, obviously some of them win and some of them lose – but that’s what Krugman said, from the very beginning, was “a different kettle of fish”.
No, Daniel, it’s not merely not “obvious,” it is false. I am claiming that EVERYBODY from period 6 onward loses. So what do you mean when you say, “If you look at individuals in the future, obviously some of them win and some of them lose.”? If you believe that, you should take my bet and win $500, right?
If what you just said is true–and you said it was “obviously” true–then I must be wrong when I say I can construct a scenario in which the first five people gain, while the last five people lose. Do you just mean, if we look at people “in the future” from the vantage point of the beginning of time?
“OK so I’m showing that EVERYONE who is alive in time period 6, 7, 8, and 9 ALL are made poorer by the deficit and tax scenario, relative to the no-deficit-no-tax scenario.”
Right, Bob. So you have “won” by addressing a totally different issue than Krugman was talking about. Very good. Krugman was talking about taxation versus debt, while you have shown that “taxation and debt” is different than “no taxation and no debt.”
What an accomplishment!
‘Anybody who lends money to the government does so voluntarily, taking government tax policies as fixed. ‘ This assumption gives rise to ‘bond illusion’ (like ‘money illusion’ which arises because people think all other prices remain fixed when the price of their factor of production goes up) and permits your model to work. However, the element of impredicativity The Rational Expectations so
sorry, hit the wrong key
That last sentence should read ‘however, the impredicative element in the model- whereby lumpsum taxes are determined by how much of a bond issue was bought- means the Rational Expectations solution would be no one buying bonds they will themselves be taxed to retire.
I’m not saying ‘bond illusion’ doesn’t exist- the danger of the Krugman approach is that it will lead to a stagflation similar to the 70’s arising out of the signal-extraction problem, increased uncertainty, lower social cohesion, etc.
See the second table in my blog post this morning, more specifically.
I demonstrate exactly what you’re asking me to bet against.
Why would I do that?
This shouldn’t be a food fight, after all. This isn’t a normative question – it’s a positive question.
With all this arguing the first thing that should pop into peoples’ heads is “is this a semantic issue”. I’ve maintained from the beginning that most of the disagreement is just that.
Daniel, which numerical example on your blog demonstrates that everybody from a certain time period on, is made poorer? Really, I am sorry if you have been saying that all along, but I really thought you were arguing that if we pick a future time period T, then every “generation” from t>T on net is unaffected (relative to endowment status quo). I thought you were saying sure, some individuals who are alive at time t>T might lose, but that there would necessarily be other people alive at time t>T who would gain.
You’re NOT trying to say that? You agree that it’s possible that every single person in the first x generations can all be made richer, while every single person in the last y generations can all be made poorer?
Like I say, if you’ve known that all along, then truly I apologize for wasting your time. I wouldn’t have thought that, and I still think 99% of the people who enjoyed Krugman’s article on debt don’t know it. But if you knew it all along, I’m prepared to believe Krugman knew it.
“Gene Callahan still “explaining” why I’m wrong by claiming things about my model that aren’t true.”
OK, I have posted an update concerning what you have now told me about your model. (I admit I missed the point that the actors in the model have perfect foresight, but who could possibly be reading everything everyone is saying on this topic? I also note that I have searched this blog for the word “foresight,” and can’t find it in any of the posts on this topic, and, in re-reading each of the posts, I can’t see where Bob says this in different words, so perhaps Bob did not state this as clearly as he meant to do.)
Here it is (in the “Update” section at the bottom):
http://gene-callahan.blogspot.com/2012/01/how-murphy-is-achieving-his-result.html
Talking of “freeing minds”, most of “these” people are so inert, so hopelessly dependent on the system that they would fight (or should I say die) to defend it.
Just posted this to Gene’s site:
Suppose we have a population of person A and Person B (same apple economy as Nick’s). The govt want to give some money to A. They have two options.
1. Tax: They tax both A and B. They give the money to A. A clearly gains and B clearly loses.
2. Debt.
Period1 : They borrow half from A and half from B (via bonds) and give the money to A.
A is clearly better off. B must be worse off because the govt favored A with a gift that meant he consumed less than A.
A and B die and their descendants C and D inherit the bonds.
Period 2: They tax both C and D to pay off the debt (to themselves).
Over the 2 periods:
A clearly does the best
B the worst
C and D break even
Does this show that the transfer is the issue not the debt?
Please ignore this post – I now see that in period 2 both C and D lose out by the government taxing them to pay off money they are due on the bonds (and B in period1 was not in fact losing out).
“There is certainty; everybody knows the whole model, including all future tax levies, and knows the government won’t default.”
OK, now, in this post, you state the perfect foresight condition. But you really didn’t expect me to know you meant this before you spelled it out, did you?
Perfect foresight was not an original assumption. However it can be added to eliminate any possible tangential misunderstandings, without loss of core argument.
But Major, Bob *said* it was an initial assumption!
Hmmm…I don’t think so.
This post is, as far as I can tell, the first post where Murphy elucidated the model for the first time, and I don’t see “perfect foresight” there.
Verily, verily, I say unto you: heaven and earth will pass away, but this controversy will never pass away.
nicely done
Look, if you are going to construct a model to disprove Krugman, you should at least use the parameters he sets up on how the debt works. Quoting his original article:
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. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.
and
Taxes must be levied to pay the interest
So, do something where the A) the goverment does not retire the debt via taxation and B) Interest on the debt is not rolled over into the next bond, but paid via taxes
Murphy doesn’t need to do B), since that is what his example contains.
He doesn’t need to do A), because that would contradict Krugman’s assumption, that you quoted mind you, that “Taxes must be levied to pay the interest.”
The mere presence of taxes is enough.
No, Murphy is rolling the interest in the debt into the next period. So the first loan of 10 apples is repaid to Old Bob with 11 apples, and the government finances the repayment with a 11 apples bond with a new bond that repays 13, etc. This is rolling the interest of the debt into the next bond. And, of course this is unsustainable, as eventually you will consume all the resources of the world.
My point is that Krugman says taxes must be paid on interest, (his second point) but the underlying debt may be rolled over. That is how the debt is never ‘paid back’ (his first point), meaning it is always rolled over and on the books.
So, imagine that there is a 1 apple flat tax on the old and young alike. In the first period, Al and Bob grow 100 apples. The government imposes its apple tax, so they each now have 99 apples. Old people like apples, and Al really wants 110 apples – so the government gives him 2 (from taxes), and borrows 9 from Bob with the promise to pay him 10 next period. It gives the 11 apples to Al (2 from the taxes, 9 from the bond). Al dies, end of period 1.
Now comes period 2. Bob and Christy are taxed 1 apple. Old Bob has an IOU for 10 apples. He currently has his post-taxes 99 apples, and he wants 110 apples. To retire the IOU, the government borrows 9 apples from Christy with the promise to pay 10 later. It throws in one apple from tax revenue and gives 10 to Old Bob, who now is consuming 109 apples. It throws the other apple in from taxation to get him to 110. Period 2 ends, Bob dies, Christy has an IOU for 10 apples next period.
Now, we are in an equilibrium state. The young person always has a bond that he buys for 9 apples and always gets 10 apples. Because of inevitable taxation, this bond makes sense to buy. Furthermore, debt/GDP remains the same.
Assuming the 1 apple flat tax (which makes everybody poorer), the inter-generational lending arguably makes both old and young better off. The young get to defer apple consumption to old age (with interest!) and the old get to eat more apples.
Ben, if the debt interest wasn’t rolled over in the next period by way of a larger debt issuance, then his 9 period model would collapse into a 2 period model, and what is true now in period 9 in the current model, would be true for period 2 in the new model you are proposing.
Not really, because in period 9 Old Iris gets taxed for sixty-something apples. In my model, no taxes are used to retire the bond except the 1 apple flat tax.
As long as old people prefer more apples to fewer, and young people prefer increased future consumption over present day consumtion, there is no reason why my scenario would not go on forever. There is no need to enter the “Old Iris” scenario where someone gets stiffed on their IOU
Old Iris gets taxed in period 9 because taxation to finance debt is the context that EVERYONE is assuming. If everyone is assuming that context, but they disagree, then it is not necessary to relax that context. The problems are elsewhere.
When you say
“As long as old people prefer more apples to fewer, and young people prefer increased future consumption over present day consumtion, there is no reason why my scenario would not go on forever.”
You are contradicting the rules that both Team Krugman and Team Murphy have already agreed to abide by.
You’re saying that we should construct a scenario where the amount lent to government will always exceed the amount owed by government. You’re basically saying we should include a Ponzi scheme scenario that can go on forever. But that’s Samuelson’s #4 scenario that nobody is presuming.
OK, Daniel Kuehn (as always) surprised me by his response here. (In case you guys wonder, the reason I spend so much time on Daniel is that I can’t predict him.) I was certain he believed that if I pick some distant period T, then people after t “on average” can’t be harmed by deficit financing today and the resulting debt that we pass down, and the need to tax people in the future to pay for the debt service. Sure, some people in time t>T would be hurt, but there would necessarily other people who would gain.
That’s what I thought Daniel was saying, and that’s why I thought he’d want to take my wager.
But, since he said no, I thought, “Gosh, maybe I’ve been a jerk this whole time?!”
Nope. Go look at Dean Baker’s comments (and read the original, to see the context), and then read this one post by Krugman (which is more enlightening than his op ed). Baker and Krugman are clearly relying on arguments that, if correct, would mean that I shouldn’t be able to win my proposed wager with Daniel.
So it’s possible Daniel has seen all of this (like Landsburg and maybe Gene too) from the beginning, and I’m late to the party, but I don’t think Krugman or Baker even know we’re having a party.
Bob you’re not crazy. Kuehn DID IN FACT say what you corrected Krugman about
Just look at what Kuehn said about your charts:
“talking about leaving a burden to our children is especially nonsensical; what we are leaving behind is promises that some of our children will pay money to other children”.
There is NO OTHER WAY to take Kuehn’s argument
“talking about leaving a burden to our children is especially nonsensical; what we are leaving behind is promises that some of our children will pay money to other children”
to be anything other than
“talking about future generations being burdened on net due to government debt is especially nonsensical, because the ONLY thing we could leave to our children are promises that children from group A will give money to children in group B, which means collectively there cannot be a net loss. The “burden” on some children that you silly anti-debt people are talking about is an equivalent “asset” to other children, so some will get poorer yes, but others will get equivalently richer.”
Kuehn insisted at that time that your charts just showed exactly what Krugman was claiming the whole time, which Kuehn said was “right” on more than one occasion, that debt does NOT impoverish generations, that debt can can only ever impoverish certain individuals while benefiting other individuals.
You’re not late to the party. You didn’t misconstrue Kuehn. He’s a slithering chameleon whose only intention is to defend Keynesianism. He’ll only concede to you if he thinks it’s not a threat to Keynesianism. His track record is clear.
Just another thought:
Murphy, I recommend that you and Rowe write a formal economics paper for the Quarterly journal of Austrian economics on this. I think the time and effort will be worth it, because I think you guys stumbled across a strong theoretical criticism AGAINST Keynesian stimulus.
For anytime anti-economics pundits like Krugman say something like:
“Don’t worry parents, grandparents and great grandparents, what I advocate can’t make make everyone in the future worse off. By encouraging and expanding government debt financed stimulus now to reduce unemployment, the worst thing that could happen is that some of our descendants will be worse off while others will be better off. To guard against this, I further recommend that you all buy government debt and bequeath them unto your children so that your children can be on the “winning” side, as opposed to those selfish unamericans who won’t lend Uncle Sam their fair share.”
…my children and grandchildren can cite your paper and say “WRONG!”
Murphy, it is not an understatement to say that you and Rowe have, as far as I can see, contributed the beginnings of ideas that have the potential to reduce the suffering of untold millions if not billions of people who are TODAY suffering because of PAST debt financed government “stimulus.” For that I tip my hat to you and even though I am an atheist, I will still say God bless to you.
Oops, meant “it is not an exaggeration to say.”
“Murphy, I recommend that you and Rowe write a formal economics paper for the Quarterly journal of Austrian economics on this.”
It would greatly damage Rowe’s CV to have one of his papers appear in the QJAE. (I found that out when a friendly adviser told me, “Take all of those QJAE and JLS papers off of your CV: they are not pluses, but serious minuses.” And this was a libertarian telling me this.)
Good for that “LINO.” He isn’t dictator for everyone else.
I just think it should be published, and I suspect that such a thing won’t be accepted by the sociopaths currently editing the “mainstream” journals, so QJAE is another opportunity.
Personally, if I had to choose between coddling and reinforcing my contemporary’s existing convictions, or helping my children and grandchildren and everyone else’s children and grandchildren live better lives, I’d choose the latter.
You might have values different from that.
Thats right! If a Libertarian tells the truth about how a journal is likely to be regarded on some other persons CV he’s obviously not a real libertarian.
Wait a minute, Major_dingdong, he could also hold:
1) Publishing in the QJAE is is likely to hurt your chances of getting work; but
2) Its still worth publishing in because they do worthwhile work.
But nah telling the truth about how a journal looks on your CV is a clear indicator of an evil person who suffers from false consciousness.
Except both Murphy and Callahan have already published in QJAE.
They don’t need to put it on their CV.
“I was certain he believed that if I pick some distant period T, then people after t “on average” can’t be harmed by deficit financing today and the resulting debt that we pass down, and the need to tax people in the future to pay for the debt service.”
Well, Bob, the fact you found this surprising shows what you have misunderstood in this argument. Me, Krugman, Kuehn, Landsburg: I don’t think any of us have ever said you *can’t* use debt to impoverish future generations. What we have kept saying (at least me, Kuehn, and Landsburg) is that its not the debt that is the issue, it’s the transfers, and that whatever you can do with debt we can duplicate with taxes and transfers. And you keep conceding that we can duplicate all of your models with taxes and transfers, and then insisting we “don’t get” what you are saying!
There seems to be a lot of confusion about the difference between transfers from tax and transfers from borrowing. A tax that is enforced by the the government is a burden. Borrowing that is entered into voluntarily. is not. Just because you can build a model where the transfer amounts from tax are equivalent to the transfers due to borrowing doesn’t make them the same.thing.
A tax funded pension scheme “burdens” the young immediately by taxing them to pay for the old. A debt-funded transfer that is rolled over for many generations is a burden on no one until the government enforces a tax to pay it back. In this way the government is able to use borrowing to defer the use of enforced taxation until later generations and that is the key point of this discussion.for me.
Yep. And that the later generations cannot vote against the initial government program of the past, they are stuck with the bill if they want it or not, since as recourses also votes cannot be sent back in time.
With direct taxation you at least have the chance to make your voice heard.
What also comes to mind is that yes as long as the economy grows as fast or faster than the debt you can keep this going, but when your doctrine in curing recessions/depressions says that you need heavy government borrowing during a time period of a stagnating or contracting economy even when you already have a high debt level then you’d better hope that you are right…
By the way is there a debt level where Keynesian would say?: Oh no we should not try to spend our way out of this recession because with a debt level of say 160% to GDP we would either risk a debt crises or extreme inflation before the deficit spending even had a chance to work. This time we only can reduce the interest rate to zero percent and prey that the market extremists are right…
Sorry, I meant “pray” not prey” here:
“and prey that the market extremists are right…”
“There seems to be a lot of confusion about the difference between transfers from tax and transfers from borrowing. A tax that is enforced by the the government is a burden. Borrowing that is entered into voluntarily. is not. Just because you can build a model where the transfer amounts from tax are equivalent to the transfers due to borrowing doesn’t make them the same.thing.”
Rob, Bob has already said that this is *not* what he is basing his argument upon (in responding to my ex ante / ex post post).
So in defending Bob’s claim by pointing to this distinction between voluntary and involuntary transfers, you are defending his position using something he has very explicitly denied is part of his position!
Perhaps the way I am thinking about this indeed is different from Bob’s but for me the role of the voluntary purchase of bonds is important because it ensures that it is possible to defer consumption without loss of utility (you get higher lifetime consumption by deferring consumption into period 2),
I agree that Bob explicitly states that apple consumption is the sole measure of utility and that presumably lifetime consumption of apples is the only measure used to decide winners v losers. I also note that he uses hokey looking interest rates to derive some of the results (He uses a high rate of interest to effect increasing levels of nter-generation transfers)
I still think a more elegant model is one where in the first period we get a winner but no loser, in the last period a loser but no winners and voluntary bond sales and transfers carry the debt through time (I think that may be what happened in Nick’s original model). For this model you do indeed need to distinguish between tax and bonds as a means of transfer but I think that is a strength not a weakness.
I just checked and Nick’s original post does indeed make use of the interest rate on bonds to equalize the present value of their total consumption of apples.
http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/12/debt-is-too-a-burden-on-our-children-unless-you-believe-in-ricardian-equivalence.html
Bob, I think that much of the confusion around this comes from the fact that we need to mix two concepts of time. We need to consider the concept of young and old living in the SAME period. We also need to reason through a multi-period scenario. When we talk about an older generation burdening younger generations, we’re talking about _old people_ consuming resources in a period P rather than young people consuming those resources in P.
*Everything* depends on how assets are transferred from one generation to the next: whether you give them away (have Ricardian equivalence) or not. Once people see that, they will understand your tables much more easily.
Let’s say each person lives for two periods. Al will live for P1, P2. Bob will live P2, P3.
In P2, the government sells a $110-in-P3 bond. Bob buys it for $100. The government then gives the $100 to Al. Come P3, Al is dead. The issue is whether this bond issue has created a burden for future generations can be broken into two sub-questions. Does anyone younger than Al lose money as a result of the bond issue? Does anyone younger lose resources?
The degenerate Ricardian equivalence (RE) case is to have Al, rather than spend the $100 in P2, _give_ the $100 to Bob in P2. In P3, the government taxes Bob $110 and pays it back to Bob. The whole bond issue is a wash. No one gains. No one loses.
The losses start once we break away from RE. Suppose Al is not so generous. Suppose he takes the $100 in P2 and uses it to buy a good from Bob. This scenario is almost _identical_ to the wash-out-scenario above. Bob gets his $100 back in P2. However, he LOSES the real good he sold Al! Thanks to the bond issue, Al consumes a real good that he would otherwise not have been able to consume. Bob has been made _worse off_ by the whole bond issue.
Krugman’s “redistribution among kids” point is misleading. That is a question of whether Bob is taxed to pay off the bond in P3 or whether someone else is taxed. That money transfer will net to zero across all generations alive in P3. It’s the resource which is “lost” in P2 which you and Nick are trying to point out. It was consumed by the older Al rather than the younger Bob. This is a simple example of “burdening the young.”
Tracking the interest on the debt is more complicated. I think you first need to decide how to model Al’s $100. Does this amount “grow” into a $110 by the next period? If so, then Al can bequest the $100 in P2 and the recipient can be taxed $110 in P4. The recipient does not lose.
If the $100 does not grow, then we may be able to reason about “higher tax revenues” in future generations, although it would even out once those revenues are spent (paid off the bond).
“We need to consider the concept of young and old living in the SAME period.”
That’s right. And it is transfers in that SAME period, and not debt, that generates the impoverishment of future generations.
It’s NOT a “transfer” from some to others in period 9. Why are you not seeing Murphy’s example? Iris is being compelled to make a “transfer” to herself. John is not gaining what Iris loses.
If the government doesn’t take money from Iris to pay back Iris, the government will default on Iris, and Iris will lose that way. In other words, once the debt is established, it’s game over, which means debt IS in fact a burden on “future generations.”
Not quite. The “transfers matter, debt does not matter” view is appropriate for AL’s generation, because he is not part of the debt holder chain. Debt is inseparable from the analysis of subsequent generations. It is the MEANS by which the “right to receive future transfer payments” is sold from one generation to the next.
Suppose rather than a $110-in-P3 bond, the debt holder can defer repayment. The holder can claim $110 in P3. Or he can claim $121 in P4, $133.10 in P5, etc.
In this rolling scenario, Bob can defer his claim in P3. He won’t be around in P4 to collect, but he can transfer the claim to someone else. Here, we must face Ricardian equivalence once more. He can choose to GIVE the claim to Christy in P3 (RE) or SELL the claim to Christy in P3 (non-RE).
In a perfect RE scenario, both the debt and the original transfer (Al’s money) will be handed down to Christy’s generation. For example, Al bequeaths the money to Bob, who bequeaths it to Christy. Similarly, Bob bequeaths his bond to Christy. [There is a subtle variation on this where Bob sells the bond to Christy, but then bequeaths the sale money to her].
In non-RE scenarios, the money and the debt are sold for GOODS which are consumed by the former money and debt holders. For example, even if Al bequeaths his original transfer payment to Bob, Bob need not bequeath the money to Christy. He can buy goods and consume then in P3. Further, Bob can defer payment on the bond in P3. He can sell the bond to Christy in P3 and use the money to buy and consume more goods in P3. Bob wins. Christy loses. All in P3.
It’s repeated applications of non-RE decisions which Bob and Nick use to make their point.
Bob – here’s a potential Krugman Kontradiction for you. On July 22, 2011 he wrote:
Between 1993 and 2001, federal debt held by the public fell from 49.2 percent of GDP to 32.5 percent of GDP. What stopped the paydown of debt wasn’t liberal big spending; it was demands from conservatives that the surplus be used to cut taxes. George Bush said that a surplus means that the government is collecting too much money; Alan Greenspan warned that we were paying off our debt too fast.
Oh, and I was very much against those tax cuts, arguing that we should pay down the debt to prepare for future needs. As a reward, I now get accused of inconsistency, for saying that deficits were bad under Bush but good now.
http://krugman.blogs.nytimes.com/2011/07/22/debt-and-forgetfulness
So I would ask him – if we don’t pay down the debt to prepare for “future needs”, does this mean that unless we pay it down, “future needs” will somehow go unmet? Advocating to pay down the debt at any point, but advocating now that the debt is not a problem, sounds like a contradiction to me.
Ben I think you’re right, but the problem is Krugman could say, “I never denied that debt could be a problem–I just said it couldn’t be a problem for the reasons that the average Heritage Foundation staffer believes.”
In other words, you think Ben is wrong, as you have just stated exactly what Krugman always thought.
Look, if Rowe and Murphy still haven’t convinced you that a future generation bears the burden of deficit financing today, just go to period 9 in Murphy’s example and ask yourself this question:
If the problem is just a distributional one, what has to happen to make Iris’s total consumption over her lifetime 200 apples?
If one is going to claim the future debts are going to be a “wash” because some Americans owe it to other Americans, what does one mean when he writes that? To me this is the specific claim- that the future can choose to wash the debt out and leave no burden on any cohort. Murphy’s and Rowe’s examples show this isn’t even possible by any tax transfer in the future.
I have a question for all:
James Buchanan wrote a titanic 1958 paper concerning public debt held internally vs public debt held externally. This is from a Nobel Prize winning economist, and became a classic journal paper.
I spent about a month several years ago studying this paper, but while possessing more than adequate mathematical firepower to delve into Buchanan’s argument, it was a hard one for me to grasp fully due to Buchanan’s implicit assumption that readers were economists (which I am not). At the time, I thought I saw Buchanan’s argument, but it might be very helpful for several of the economics PhD holding participants to critique this paper point by point.
In all respect to Bob and Nick, Instead of arguing about their own formulated scenarios, why has not this disussion simply been focused on the specific arguments put forth in the original Buchanan paper? The Nobel rightly or wrongly likely keeps Buchanan from being dismissed so easily by some mainstreamers, but if Buchanan is wrong, I would be interested in knowing precisely where he goes astray.
Back on December 22 on Coordination Problem in a discussion of public debt, I challenged Daniel Kuehn to tell me where he thought Buchanan err’d in his original paper. I never heard a response back from Daniel. I continue to challenge him and others to offer a point by point critique of Buchanan’s original arguments.
K Sralla: “In all respect to Bob and Nick, Instead of arguing about their own formulated scenarios, why has not this disussion simply been focused on the specific arguments put forth in the original Buchanan paper?”
Two reasons:
1. It was ages ago I read Buchanan. Sometimes it’s simpler just to reinvent the wheel than go back to the original source. Especially since the audience of economists we are speaking to today may be very different from the economists Buchanan was speaking to.
2. Since Buchanan, economists have developed Overlapping Generations Models, and most economists have been taught OLG models, and it’s easier to reformulate Buchanan’s insight within the familiar context of a simple OLG model.
One more point: This argument is a classic example of institutional rules that are held tacitly, that are very hard to strictly rationalize. This is exactly the type of thing Hayek discusses; ie complex information that is held tacitly in form of group rules, and enforced as informal norms and institutional rules, even though if asked, most human beings are at a lost to provide a rational explanation or mathematical proof. A linear-type calculation of the problem is likely ill-posed, and represents a type of knowledge problem that is difficult if impossible to know or explain rationally. To try to actually answer a problem like this with the kind of examples we are discussing is a form of hubris. About all that Buchanan, and now Bob has shown definitively, is that the problem is not straightforward, and on this point they win. The other side charges those that hold the classical view to be simpletons. As Buchanan before, and now Bob shows, such a charge is disingenuous intellectual snobbery at its height.
Just look at what has happened in this discussion. Some ultra-rational PhD follks have sincerely dissected this problem, and a solution that everyone can plainly see defies a straightforward answer. Yet, the old-time fiscal religion held tacitly by both the public and intellectuals since before Adam Smith up to the days of Keynes, held that transfer payments, even on public debt held internally, do indeed impoverish the future generations while lightening the load on the current profligate generation.
My bet is with the old time religion.
Layman here, hoping to paraphrase arguments of Murphy and marris in the way that it “clicked” for me.
Krugman, Kuehn, et al. are arguing that future generations aren’t impoverished because for each period 1-9 (in Bob’s model), 200 apples are always consumed.
Bob is essentially saying that is not the correct way to measure impoverishment.of a future generation. Instead, we must consider the lifetime utility of each individual alive at a given time. If an aggregate utility function existed, it would be a function of apple consumption over two periods, not just one.
In this model, it is inevitable that some individual(s) in the future are going to suffer the disutility of consuming fewer apples, or that of unsmooth apple consumption.
I think Jefferson had it right:
“I sincerely believe… that the principle of spending money to be paid by posterity under the name of
funding is but swindling futurity on a large scale.” –Thomas Jefferson to John Taylor, 1816.
And he didn’t need a PhD in econ to figure it out.
Future generations will not be impoverished by the government debt burden as much as by the older (current) generations wasting so much time in this kind of sterile never ending debates about government debt and other stupid economics nonsense, instead of doing something useful to future generations like working on cold fusion, or bringing mammoths back to life so my offspring will feel less lonely.
I would come up with a nice model to show it, but I need to pack because I’m going to scratch my parts at the beach for a couple of weeks.