Abba Lerner’s Article on Debt Burdens
Gene Callahan has done an important thing for our never-ending debate by bringing in Abba Lerner’s 1961 statement on the issue. It is almost eery how similar his arguments were to the exposition I gave here. In particular, we both saw the rhetorical usefulness of stressing how there isn’t a time machine; he even capitalized the phrase. Some quick reactions:
==> Here is the specific quotation from President Eisenhower’s 1960 State of the Union address that Lerner thought was evidence that he was a dunce: “Personally, I do not feel that any amount can be properly called a surplus as long as the nation is in debt. I prefer to think of such an item as a reduction on our children’s inherited mortgage.”
==> Like the other economists to whom Lerner is responding (Bowen, Davis, Kopf, and James Buchanan), I want to say that I Like Ike. There is nothing wrong with his statement.
==> So do economists have nothing to say on this? Of course they do! I’m not saying Eisenhower did a 10-period OLG apple model before giving his speech, to make sure it made sense. Of course Eisenhower never even thought about, “Wait a second… How can we be consuming at the expense of our grandchildren without a time machine? I don’t want to start funding a time machine…the private corporations would never allow future presidents to axe the program.”
==> Lerner’s central thesis–that all present production comes out of present resources–is essential and an important insight. Indeed, Ludwig von Mises made the same point, when talking about “paying for” a war. It was Mises who actually sent me down this path. Of course, the genius Mises didn’t take a wrong turn with that correct insight; he knew that that observation didn’t therefore imply, “So we can’t burden our grandkids with debt, since they’ll owe it to themselves.”
== Last point. I have a genuine question for the Lerner lovers. He concludes with this:
There is even a clear and present danger that because of a baseless fear of impoverishing future generations by leaving them with a larger internal debt (which they will owe to themselves), we may fail to protect them from nuclear war and/or totalitarian domination; the confusion sown by Bowen et al. tends to increase that danger. It is to be hoped that these authors will tell the President that they were using a special language of their own and didn’t mean what they seemed to be saying…
So I’m confused. How can it possibly be that the “baseless fear” sown by Bowen et al. can prevent vital federal government expenditures? I mean, Lerner has spent the whole article explaining that whether it’s financed through taxes or deficits, it’s the present generation who pay for the expenditure. It’s not like we can pass off that burden to people living in the future.
So, if Lerner agrees that these expenditures would go through with deficit financing, then why can’t the government implement them with tax-financing?
Once you answer that, you will see why Lerner, Callahan, and Krugman are so wrong, and President Eisenhower’s man-on-the-street remarks are perfectly sensible.
Brilliant question at the end.
Having read only the Lerner quoted here and at Callahan’s … I think that Lerner’s meaning in the block quote above is clear enough: “we shouldn’t let confusion or misunderstanding about debt prevent this necessary expenditure”.
I am not saying anything about Lerner being right or wrong about debt and confusion, just pointing out he can talk about ‘baseless fear’ easily enough if he thinks Bob’s argument is baseless, and that internal debt is not to be feared.
But Ken, there is no “baseless confusion” over taxation. Everybody gets how that works. So the government should just pay for whatever it wants by direct taxation. Lerner isn’t making a Keynesian stimulus argument here; he’s talking about government spending money for geopolitical reasons.
I mean, he almost makes it sound like he’s saying, “If we have a big bill, it’s easier to finance it through debt, rather than paying for it all this year.” But of course he can’t mean that. He spent 3 pages ripping the crap out of anybody who talks like that.
“If you find that we cannot pay for it with current cash reserves don’t let fear of borrowing dissuade you from this expenditure beacuse …”
Again, I’m not saying Lerner is RIGHT just that in constrast to what you seem to be saying, what he says is easy to understand and consistent with his earlier position. You are wrong to be confused here. He hasn’t contradicted himself.
Sure he can, if the difficulties in raising the taxes are informational, jusrisdictional, or political. Consider an example of each
1. For some reason no-one knows who has taxable funds. This historically (Henry VII) is realistic. But bond sales can succeed.
2. There is no income tax and funds are needed pronto. 1861.
3. Bush I decides to honor ‘read my lips’ and borrows instead (OK, this one’s a fantasy).
Lerner is advocating a policy with the argument ‘how you pay for it not that important. Don’t let these concerns dissuade you.’
OK Ken give me a reason that would actually be true in 1961.
Nope. That would be addressing the question of whether Lerner is right. I’m only discussing if it’s clear and sensible!
(PLus I know nothing about public finance in 1961 :> )
Ken, what Lerner wrote, makes no sense in 1961, when he wrote it. You are arguing that we can imagine an alternative universe in which his statements don’t contradict. OK great. I wasn’t claiming that there are no such universes. I was saying his statement made no sense in the real world of 1961 when he wrote it.
He is right that taking deficit finance off the table would constrain the government, and the reason he was right is that people would rather lend to the government than be taxed. Why? Because if they lend, then the next generation bears some of the brunt. Just like Ike warned us.
I finally get your point, Murphy, and I think I get why there is disagreement.
Ken and myself are thinking what Lerner COULD have meant, and in response to this post, Ken would probably agree with me when I say that people could also be more in favor of lending than being taxed simply because they prefer to have the choice on whether to give money to the state or not.
You’re talking about whether or not Lerner’s 1961 statement (which Ken and I are taking at face value, because we’re shallow on this one…) makes sense when put in the context of 1961 public finance. To this extent, I don’t know how to put his quote in the context of 1961. I am thinking in terms of principles, and so it is difficult for me to see how 1961 would be different from today, when it comes to deficit versus taxation financing and which is easier for the state to do. I am tending towards thinking it is universally true that individuals prefer to give the state money in exchange for interest and principle, rather than threats of being thrown in a cage if individuals don’t pay.
You are also weighing Ike et al’s position that debt can burden future generations, as against Lerner’s claim that it doesn’t matter because it’s all paid for by the present generation. To THAT extent, I think we’re all in agreement.
Bob, tax revenues rise and fall with the state of the economy. Debt allows the government to use funds voluntarily given rather than taking them.
The people who lend the money apparently either have low utility for the money or are risk averse (like today with negative rates).
Also, not everyone agrees with the notion that everyone understands how taxes work. (Don’t MMTers get their ideas about taxes from Lerner?)
I think Ken’s right about what Lerner wrote, and I got there by pretending to think like a central planner, which is a tactic I just adopted a few weeks ago.
MF so which of those 3 things was he right about? They didn’t have an income tax in 1961? They didn’t know how to raise revenue with a tax hike?
I was actually just referring to these two points (and please correct me if I am misunderstanding you):
1. In that quote from Lerner you posted, I don’t get from that quote that Lerner himself thought that there is a difference between taxes and deficits when it comes to present resource usage. I think he was just being a political strategist: The state would be less able to spend in the present in the face of “misguided” fear about debt burdens. The “clear and present danger” is a political lack of will to spend in the present due to that “misguided” fear.
So when you said “I mean, Lerner has spent the whole article explaining that whether it’s financed through taxes or deficits, it’s the present generation who pay for the expenditure”, that to me meant that you thought Lerner was disputing who pays what and when in the technical sense.
2. The quote you made: “If we have a big bill, it’s easier to finance it through debt, rather than paying for it all this year.” But of course he can’t mean that. He spent 3 pages ripping the crap out of anybody who talks like that.”
I agree with Ken that he could have meant that, because of political strategy considerations (it is typically easier to finance spending by debt than through taxation), rather than any pure mechanics of financing considerations. It looks like you are thinking Lerner believes that because it doesn’t matter in the technical sense whether or not it is taxes or debt that finances spending, when it comes to who pays for it, that Lerner is obligated to say that both deficit and taxation financed spending are equally politically palatable. I don’t think that follows.
If I say a bullet to a person’s head and a guilletine to their necks are equally effective in ending that person’s life, I am not obligated to say that both are equally easy to put into use in the political strategy sense. One may be easier to implement than the other, despite the fact that they both are exactly the same in terms of who dies and who presses the button in the present.
I think Ken’s 3 reasons are only hypotheticals that show possible reasons for why one form of financing is easier or more difficult than other forms, despite the fact that they all are paid for in the present in the technical sense.
Not that I am saying I agree that these “facts” are actually true, I am just interpreting what Lerner wrote. I am thinking like a central planner, using Lerner as a conduit.
“So, if Lerner agrees that these expenditures would go through with deficit financing, then why can’t the government implement them with tax-financing?”
As OLG models prove that tax can push the burden onto future generations just as much as debt can then this is a good question.
,” it’s the present generation who pay for the expenditure”
Sure it is the present generation who “pays” for the current debt issue through bond purchases, but that does not mean that the “burden” of the debt issue falls on them? The folks who loan the government money would have invested in something else had the bonds not gone on sale. These folks likely do not defer current consuption one bit *more* than they otherwise would have without the debt issue. Now if the government passed a law and said everyone must purchase the bonds, or if taxes are raised immediately to finance the expenditure, then we can truly say the burden is taken on by the present generation.
The actual “burden” (in any true sense of the word) comes later when taxes or raised.
These folks likely do not defer current consuption one bit *more* than they otherwise would have without the debt issue. Now if the government passed a law and said everyone must purchase the bonds, or if taxes are raised immediately to finance the expenditure, then we can truly say the burden is taken on by the present generation.
K Sralla, by saying this, you just agreed with Lerner, Dean Baker, and Paul Krugman. That doesn’t mean you’re wrong, I just want you to be clear that you’re agreeing with them, and disagreeing with me. E.g. you just agreed that in Nick Rowe and my apple worlds, there is no sense in which the burden can be passed to people in the future.
UPDATE: Actually maybe you aren’t agreeing with them. Not sure, because you said if “everyone must purchase the bonds.” But if just some people do, and if they do it 100% by reducing present consumption, then it sounds like you are saying Krugman et al. would be right. If so, then they are just right, period, because they were ruling out “crowding out” from the get-go. They acknowledged that reduced private investment could make future generations poorer, if the gov’t didn’t invest the money wisely.
K Sralla, suppose I wrote a note to you that said:
“To the bearer of this note, if you kill my dreaded enemy Baron Danglars, then you will receive the treasure of Spada, worth approximately 2.4 million crowns. Signed, Sinbad the Sailor.”
Suppose that you are in possession of this note, and suppose you had a bad day, and you chose to kill Danglars. Suppose you then receive the treasure.
Am I in any way responsible for the death of Danglars? Or are my actions immune from ethical prosecution?
See, this is why I made it a point to mention Krugman’s issuing of bonds within Murphy’s apple world.
Bonds are essentially fiat money in the apple world, where the production/consumption ratio is 1:1.
The bonds in that world are fraudulent, exceeding the supply of apples available to make good on the bonds UNLESS they are taxed away from future generations.
If the bonds are not repayed while the holder is alive, then the holder has died having been robbed by the government.
The fact that you can trick me into investing in a ponzi scheme doesn’t change the fact that I am left poorer.
Why was Bernie Madoff sent to jail? He didn’t defraud anyone, in your view. His clients willingly invested through him.
Right if you can’t burden future generations with bonds, then what is the point in using them in the first place? You could not even spread the costs over several generations if you wanted to invest in super durable infrastructure… But if you can do it with infrastructure then you can do it with all things that are financed with government IOUs whatever form they have “bonds” or “social security”…
No, I can’t accept this.
We statists demand Eisenhower back. You can’t have him. He built the roads, after all!
Because public roads did not exist prior to 1953….?
No, none at all.
We also were not paid wages until the minimum wage was passed.
I am told doctors did not exist before Medicare.
I do want to come clean – that last one may not be true.
I love it when uber-sarcasm begets Poe’s Law, which begets arguments that often go against the writer’s own views, which begets a source of neat one liners to use against said writer in the future, thus completing a circle.
Ike didn’t actually build any roads. I actually did build roads.
http://www.flickr.com/photos/bob_roddis/3518487963/in/set-72157600948975202/
Bob Roddis, recipient of stolen money.
I just listened to Walter Block. Is that so wrong?
Of course, I love to drive on those roads too. Whatever happened to Mam-mouth?
I’ve been thinking over Mam’s argument about the stolen oil. In a physical sense I agree that my nation (Australia) had no business sending troops into the Middle East.
However, from an economic point of view, I’m pretty sure that if my government just concentrated on defence and keeping troops at home, then just paid free market prices for the oil, most likely the same oil would be cheaper. Iraqi production was shut down for a decade, and now Iranian production is being blocked from the market. It’s almost like the design of the thing is to keep gas prices as high as possible. On top of that, my government taxes the bejesus out of the oil industry so about half what I pay at the pump is tax in one form or another (tax that goes to pay for expensive military campaigns).
In economic terms, this “theft” of oil is ripping me off as much as it is ripping off the oil producers. Every vehicle owner is a victim too.
I just wish I could get my fellow countrymen to use their votes more wisely…
MF wrote this:
I agree with Ken that he could have meant that, because of political strategy considerations (it is typically easier to finance spending by debt than through taxation)
I cannot believe how exhausting this debate is. Guys, WHY is it politically easier to deficit spend than to raise taxes?
When you answer that, you will see why Lerner, Krugman, and Callahan have been so wrong on this issue.
I’m in agreement with you on this issue, it blows my mind people are still arguing with you and Nick about it, but couldn’t Abba Lerner just say it is politically easier because the man on the street is stupid and thinks that deficit spending burdens the future generations instead of them?
I’ve only skimmed the Abba Lerner stuff so correct me if I’m leaving something out that he said that would eliminate that escape hatch.
but couldn’t Abba Lerner just say it is politically easier because the man on the street is stupid and thinks that deficit spending burdens the future generations instead of them?
But that intuition is not stupid Dan, because the OLG model shows why!
I’m not sure if you are just making a joke or not, but I already said I agree with Murphy and Rowe on this issue. I was saying that Lerner obviously thinks those people are stupid for believing that, and he could use that belief as his reason for thinking it is more politically acceptable to deficit spend rather than tax.
Oh I see, you’re going two levels, whereas I only took what you said at the surface level.
They way you wrote what you said COULD, at face value, be taken to mean you actually agree with Lerner about the man on the street being stupid for thinking deficit spending burdens future generations.
Yeah, I didn’t write that very clearly.
This seems to be the theme of this post.
Seems a lot of people are saying correct things, but not presenting them clearly, thus leading to apparent disagreements, but are really not.
Just one of those days…
Now, I’m thinking Murphy has been right all along. I didn’t notice how what Lerner had said eliminated the defense I provided for him at first but now I do.
Yes, I am also thinking Murphy has been right all along, for the specific argument he actually intended to make, rather than the argument that he seemed to have made, which I think Ken and I saw as the same thing and responded to that.
I think Murphy’s initial few posts in the comments were ALSO the result of responding to arguments he thought we were making, rather than the arguments we intended to make.
I think both “sides” on this post are making valid points, they’re just not getting through because both sides are responding to arguments the other side is not intending to make, even though at face value they do seem to be making those points.
I think what happened is that Murphy saw me say I think Ken is right, which then APPEARED as me agreeing with the content of what Lerner said, which then made it appear that we are disagreeing over whether or not debt burdens future generations.
I think we’re all in agreement that debt COULD burden future generations, but Murphy is saying that Lerner’s statement makes no sense when put into the context of 1961 public finance. I guess that is where I am unable to figure out things…
No, that’s not what I meant. I would’ve agreed with your statement about 20 minutes ago, but now I think it makes no sense for Lerner to say it is more politically acceptable to deficit spend based on his previous statements.
Sorry, I didn’t intend to convey that this is what you personally meant. I should have put “for the specific argument he actually intended to make, rather than the argument that he seemed to have made” in bold, or italics, or something to show that while I too think he is right all along, I have my own take on what.
I know you said below that you think what Lerner said makes no sense, but what do you think of this response?
I can think of several reasons why this can be the case.
1. The coalition of yea sayers will be different from the coalition of nay sayers. When by hypothesis the current coalition of yea sayers isn’t enough, because they are balking at current taxes, this can only make success more likely. So just by probabilities, sometimes it will.
2. With debt financing it can be easier to disguise who will pay. (This can work in reverse too. I had a boss who voted for Ontario’s socialists as they would raise taxes on ‘the rich’. He was shocked later to learn they considered him rich! That election was a case when taxing was easier than borrowing btw. But the logic was the same: imperfect information.) So yea sayers may mistakenly believe they are making off lkie bandits.
3. Debt financing can shift the burden from older to younger, and 12 year olds don’t vote. This is not the question we debated earlier. But it does explain why deficit fiancing can appeal.
4. Much debt financing is FOREIGN borrowing. Surely the appeal of unwise binging needs no explanation.
3. Debt financing can shift the burden from older to younger, and 12 year olds don’t vote.
Wait, so 12-year-olds are the ones lending the money to the government?
I’m going to stop now. You guys are moving in circles. What you mean by “bearing the burden” keeps switching, to make sure you never contradict yourselves. Sometimes you mean “the group of people who are alive when real resources are expended” and other times you mean “the people who will pay the taxes down the road.” Make up your mind.
Ken wrote:
You wrote (facetiously):
Wait, so 12-year-olds are the ones lending the money to the government?
But Murphy, doesn’t the OLG model show just what Ken said, that debt financing can shift the burden from older to younger?
Why is Ken’s statement being rejected?
I think we’re talking past each other. I am certainly not trying to change what I mean to avoid contradicting myself.
All I wanted to say was that I think Ken’s interpretation of what Lerner said is right. That he could have been weary that “misguided” fears over debt burdens may prevent the state from having the will to spend more, AND he can also say that one form of financing is easier than the other and he is not obligated to say that because both forms are paid for by the current generation, that both must be equally politically palatable.
“Why is Ken’s statement being rejected?”
Some questions answer themselves M_F. You are asking Murphy after all.
Yeah, like you never perpetually disagree with Murphy (j/k, but not really)
Taxes are not popular and govt bond issues allows the requirement for taxes to be pushed into the future so obviously politicians will favor them.
However the requirement for taxes and the inter generational distributional effects of govt actions are two different things. All Bobs model are really about inter generational transfers (that always happen to be via bonds in his examples). OLG models show that bonds and taxes can be used interchangeably for carrying out these inter-generational transfers.
I cannot believe how exhausting this debate is. Guys, WHY is it politically easier to deficit spend than to raise taxes?
For the same reason current cohorts like to consume more in their lifetimes and pass the costs down to future generations who consume less in their lifetimes?
Wasn’t this a core implication of the OLG model? Instead of politicians raising taxes on the current cohort, and leave it to future politicians to increase taxes on future cohorts?
All I wanted to argue is that I think Lerner can say that one form of financing is politically easier than the other, without contradicting his other claim that both are nevertheless “paid for” by the current generation.
Yes.
+1
And it should not have to be mentioned (although I will anyway) that this does not mean one has to AGREE that both forms of financing are indeed always, without question, going to be paid for by the current generation. The OLG model is a valid counter-example.
MF,
I agree that this is what he might have thought. But if he truly believes that even with bonds all is PAID for by the current generation and this does not have an effect on the wealth of future cohorts then why use bond financing in the first place? What is the difference between bonds and taxes in his world? What is the advantage?
These are good questions skylien, because I think they clarify the point Murphy is actually making (which initially went way over my head but I think is slowly becoming more clear as this discussion continues, at the risk of annoying Murphy).
Lerner found himself in a position of having to explain why there would be a problem with current government expenditures, despite Lerner (seemingly) believing that it doesn’t matter which form of financing is taken, because both forms are (according to Lerner) paid for by the current generation.
For if Lerner really did think that debt and taxation financed spending were paid for by the current generation, then why would he worry about those who fear monger that debt will burden the future? Wouldn’t he just say “Pshaw, I don’t care if the rabble remove all but one possible form of financing government spending from the table, because they’re all the same to me anyway! Anyone who can’t see that the current generation pays for every form are morons, who should not be catered to intellectually, let alone listened to politically which could led to reduced government spending in the present.”
I think this is where I disagree with what Murphy SEEMED to have initially argued, which is that Lerner is not logically allowed to worry over the fear mongers, because to him, if all forms are equally paid for by the present generation, then all forms of spending are equally possible politically.
Bob,
The money is given voluntarily and at least in a recession would probably not be spent otherwise. (Taxes may cause some current spending and investment plans to get cancelled by not distinguishing between those likely to spend or not.)
Here’s a related question.
My view is that its going to tip faster than people realize.
The generation that thinks the state will pay out, will find the state can’t. Not won’t, can’t.
They will try taxing to get the cash, but when that doesn’t happen, it they will try increasing taxation, and the Laffer curve kicks in.
Greece is a great example of this. It’s not that the state is in a mess because people haven’t. pay tax. The state is in a mess so people won’t pay tax. They know that the are being asked to pay for a fraud over which they have had no control, nor have they been told what is going on. Why pay taxes when you get no services? If you’re Greek, you’re not going to .You would be mad to pay.
That’s why its interesting as a foretaster. The Greeks have been reserved. I suspect in the UK and France its going to be far more violent.
You’re forgetting about inflation and growth.
The only reason we would not be able to pay, at all, would be if the debt owed, not outstanding, was greater than 100% of GDP.
Greece doesn’t have there own currency and so have faced deflation, which causes the debt to grow larger, not smaller. No Keynesian thinks trying to pay down debt in a depression, by raising taxes, is a good idea.Greece is not comparable to the United States which has its own currency.
Let me try it this way, MF, since you’re usually big on looking at rights-vioalations: Why is it that “the present generation” will voluntarily pay for all of Lerner’s programs to defeat the bad guys, if they lend the resources to the government, but “the present generation” will not vote for a politician who is going to tax them to do it?
To put it another way, if you have to contribute $10,000 of your savings to fund the Navy, why would you prefer to be given a government bond, rather than nothing?
That is just how simple this is, folks. If you lend to the government (rather than being taxed), you are much happier about the whole thing, because you know in the future the government will take money at gunpoint from young workers and hand it over to you. Some of these young people might not even be alive right now.
So how in the world is this not a good illustration of deficit finance allowing us to foist the burden of our spending decisions today, on future generations? If “we” are paying for it either way, then we should be indifferent between taxation and deficit finance. But we’re not. It’s better from our narrow POV to pay for it via borrowing, because then we’ll get compensated by kids who aren’t even alive yet.
That is, for a while, an example of how I can pass costs to your son. But that’s not what has been at issue these past 175 posts. Your some loses but mine gains. That’s the point.
Let’s look at some of the choices for funding the navy now.
1. Dun Bob 10 K nothing from Ken B. Bob Jr inherits 10K less.
2. Dun Ken B 10 nothing from Bob. Ken B Jr inherits 10 K less.
Say that Bob has the political muscle to evade the tax but I have some clout too. so we end up with
3. Ken B buys a 10K bond. Ken B Jr inherits a bond and Bob Jr inherits a debt.
Let’s look at winners and losers.
In case 3 Ken B and Bob Jr are the screwees. In case 1 the screwees are Bob abd Bob Jr. In case 2 the screwees are Ken B and Ken B Jr.
In all cases some Jr is screwed. The bond changes the screwee but does not create the screwee.
Waht is seen and what is not seen. Bob is not seeing the benefit to Ken B Jr.
I am honestly confused at what you are trying to say. When you write this:
My answer…is almost verbatim of what you wrote…in the same post:
That is exactly why (to answer your question above) I think it is typically easier to deficit finance than tax finance.
I AGREE that this is, to quote you, “a good illustration of deficit finance allowing us to foist the burden of our spending decisions today, on future generations”.
I thought you were saying Lerner said that because he thinks one is more politically easier than the other, that Lerner is obligated to say that one is paid for by a different group of people than the other.
Yeah, I think we are on the same page on this point. Lerner could also say, it would seem to me, that if everyone believed as he does, that deficit spending would not be more politically acceptable.
Lerner could also say, it would seem to me, that if everyone believed as he does, that deficit spending would not be more politically acceptable.
I think even if everyone did believe as Lerner does, that regardless of the form of financing, “this” generation here pays for it, that deficit spending would STILL be more palatable.
Suppose there is going to be $1 trillion in government spending this quarter. Suppose that everyone knew that whatever form the financing takes (borrowing, spending), “this” generation is going to pay for it.
Even if that were so, the argument can be made that, ceteris paribus, more people would be more willing to give money to the state as long as principle is repaid along with interest (lend), than having a gun pointed at them, their money taken, with no principle or interest repayment (taxed).
There is still the question of incentives, even with full knowledge.
If everybody believed as Lerner did, then I don’t see how getting paid interest would make a difference. Where does the interest come from? More taxes.
For example, say they needed to spend $1 trillion on a war. They could either tax the $1 trillion outright or borrow it. If they borrow it then the cost of the war is now $1 trillion plus interest, and if everyone believed as Lerner did, then they would believe they are paying more for the war than is necessary. Obviously, those who lent the government money would pay a lower tax bill, but anyone who didn’t would pay more. So the only way I could see it being more politically acceptable, under this scenario, is if the lenders to the government out numbered the people who didn’t lend. Otherwise the people would not want to pay more for the war.
If everybody believed as Lerner did, then I don’t see how getting paid interest would make a difference. Where does the interest come from? More taxes.
Not from the same person. Taxes are spread out to everyone. Only a few people however lend to the state.
If the state were to levy taxes that pay back interest on ONLY lenders, then I can see your point.
I’m not sure I understand your point. Since we agree only a few lend the government the money, then that means the majority are paying more than they otherwise would have because of the interest. I can understand why the lender would favor deficit spending, they get a lower overall tax bill, but they are the minority. It would seem like the majority would not favor this arrangement if they thought along the same lines as Lerner.
A majority, even one that believes what Lerner believes, can veto tax increases, and pass the burden of debt onto future generations by borrowing more to pay off the old interest.
MF wrote:
A majority, even one that believes what Lerner believes, can veto tax increases, and pass the burden of debt onto future generations by borrowing more to pay off the old interest.
OK, so MF you just explained how Lerner hasn’t contradicted himself, by the fact that people can “pass the burden of debt on future generations.” This really is the Twilight Zone.
MF wrote:
Not from the same person. Taxes are spread out to everyone. Only a few people however lend to the state.
Careful, MF. You’re about to fall into Nick Rowe’s clutches…
So you admit that it’s less burdensome on the lenders right now when they are “paying for” the war if we spread the burden around in the future on other people. Do you not see how that is fatal to Lerner’s position?
For your interpretation to work, the government needs to borrow the money on Monday 9am and tax people (not necessarily the lenders) by 5pm to pay it off. If this is politically acceptable, why isn’t just taxing those same people on Monday morning acceptable?
Once you allow for the fact that people lend today, and aren’t paid back via taxes on others until the future, then Lerner is dead.
Hold on, isn’t Lerner saying that it is impossible to pass the buck to future generations? If he agrees that you can pass the buck to future generations then what was his beef with Ike?
So you admit that it’s less burdensome on the lenders right now when they are “paying for” the war if we spread the burden around in the future on other people. Do you not see how that is fatal to Lerner’s position?
Yes, I agree with you that Lerner is wrong about debt not burdening future generations. I was always with you on that score.
My only argument has been that I don’t see a problem with the quote you posted from Lerner. Why can’t Lerner be a political strategist who knows that deficit spending is easier for the state to implement than direction taxation, while at the same time believing that both forms are nevertheless paid for by the current generation?
There is a difference between $100 billion voluntarily paid, and $100 billion coercively confiscated.
I do not understand this passage:
For your interpretation to work, the government needs to borrow the money on Monday 9am and tax everybody on by 5pm to pay it off. If this is politically acceptable, why isn’t just taxing everybody on Monday morning acceptable?
Why does my interpretation require such a quick turnaround between borrowing and taxing? Why can’t there be decades, generations between the two?
Once you allow for the fact that people lend today, and aren’t paid back via taxes on others until the future, then Lerner is dead.
I agree, but I don’t see how that refutes the specific quote you posted from Lerner, that’s all.
Maybe I’m just too slow.
OK, so MF you just explained how Lerner hasn’t contradicted himself, by the fact that people can “pass the burden of debt on future generations.” This really is the Twilight Zone.
Sorry, I didn’t intend to convey that the people actually BELIEVE they will burden the future, only that they will behave as if they do.
If I am convinced that debt will not burden future generations, I can still want others to be taxed instead of me, which is me behaving AS IF I want a burden to be foisted on a future generation.
In other words, in my mind, I want others to pay for my borrowing. Whether or not you can convince me that those “others” constitutes an entire future generation, or if it’s all just word games, and society as a whole nets to zero, is a different question, IMO.
MF I was a little hasty in my “Twilight Zone” remark; you weren’t doing what I was accusing you of.
All right I suppose if we pushed Lerner, he’s not contradicting himself, because he could say something like this:
“The present generation is going to pay for our ICBMs whether through taxes or deficit finance. However, they don’t want to pay for it with taxes. Fortunately, most of them are dunces just like Ike, and think that if they pay for it with deficit financing, even though they are just as poor as with direct taxation, they are so stupid they don’t realize it. So they will support deficit financing of these projects that I know are worth it, even though a majority of voters wouldn’t want to pay higher taxes for them. So, I am mad at Buchanan et al. for reassuring Ike that deficits can indeed pass burdens to the future. If they would stop doing that, then Ike would know to use deficits, because I am persuasive enough to get Ike to change his mind, but I’m not so persuasive as to get the American people to stop thinking deficits can pass the burden. After all, if not just Ike but even the voters realized the truth, then we would be back to square one and they wouldn’t let him spend the money defeating the Soviets.”
Does everybody see what I’m saying here? Lerner’s position is absurd, and yet he doesn’t realize it.
In other words, a world full of Lerners can both believe that borrowing does not burden future generations on net, AND they can all be self-interested lenders and want to divert the taxation to others in the future, who would presumably constitute only a portion of a given “generation”, since it’s all a wash, right?
So you admit that it’s less burdensome on the lenders right now when they are “paying for” the war if we spread the burden around in the future on other people.
The counterargument is that it’s still a choice where the burden falls as long both generations are still living (or working).
It *could be* “spread around” but doesn’t have to be.
For your interpretation to work, the government needs to borrow the money on Monday 9am and tax people (not necessarily the lenders) by 5pm to pay it off. If this is politically acceptable, why isn’t just taxing those same people on Monday morning acceptable?
Because you’re not allowing for the scenario where g is greater than r, and assuming that people who buy bonds die off rather quickly. In the event the economy stopped growing (and improving) this would, no doubt, become a major issue, but for the time being the debt being a burden seems a marginal concern. (With progressive taxation (and negative income taxes) and taxes that don’t target labor, this would be even less of an issue, I think.)
“Sorry, I didn’t intend to convey that the people actually BELIEVE they will burden the future, only that they will behave as if they do.
If I am convinced that debt will not burden future generations, I can still want others to be taxed instead of me, which is me behaving AS IF I want a burden to be foisted on a future generation.
In other words, in my mind, I want others to pay for my borrowing. Whether or not you can convince me that those “others” constitutes an entire future generation, or if it’s all just word games, and society as a whole nets to zero, is a different question, IMO.”
I’m actually in agreement with MF here (scary), but would just add, that I think some of the confusion still comes from the nature of bondholders.
When they lend, and the economy doesn’t grow to offset their lowered consumption then it “seems like” a burden is imposed on them, but really their burden has already occurred, in the past, when they chose to lower present consumption. Their future consumption is not limited in any way by their past decision, and if they try to tax future generations to make up for their past choices that’s a tax policy burden, not a necessary result of the debt.
How the government spent the money in the past is a separate issue as well. If the government hands off this money to the old who use it for consumption (and the young don’t respond with higher prices), then this is probably a bad policy (by a corrupt or irresponsible government), but this has no bearing on “the future” insofar as it does not require a burden be placed on a future generation, since it can only harm the young in the present and their chances of having the growth (or improvements) of the future offset their lowered consumption today.
anon:
People’s future consumption is always limited by their past actions. If it weren’t so constrained, everyone should be able to increase their standard of living by never having invested in the past.
It has no bearing on the future insofar as….it has no bearing on the future?
Dr. Murphy, it is possible to use that as an escape, but I highly doubt that was his thinking. Unless someone can come up with a more plausible explanation, I’m going with he contradicted himself.
Bob Murphy:
I realize what you are saying, and the way you understood Lerner, I agree, such a position doesn’t make any sense.
All I can say is that the way I understand Lerner is that he is likely worried about whether the money will be spent at all, and that if deficits are for practical reasons the only way to finance government spending, due to the public being dunces and whatnot, then the last thing needed is for Buchanan et al to be going around fear mongering about debt burdening the future generations, and possibly persuading Ike to refrain from the deficit financing and hence the spending Lerner wanted.
Maybe I have to do some more reading of Lerner to get a better idea, because it seems like all we have is a short paper that he wrote on debt, and now we’re interpreting what he wrote, and not all of us have the same interpretation.
MF wrote:
All I can say is that the way I understand Lerner is that he is likely worried about whether the money will be spent at all, and that if deficits are for practical reasons the only way to finance government spending, due to the public being dunces and whatnot, then the last thing needed is for Buchanan et al to be going around fear mongering about debt burdening the future generations, and possibly persuading Ike to refrain from the deficit financing and hence the spending Lerner wanted.
Oh, I totally agree with you MF that that’s what he was thinking. But it’s a very weird scenario.
I guess it would be analogous to a situation where a group of travelers is freezing in the mountains, and the only thing they have to burn is a giant voodoo doll of somebody’s kid who’s back in the village. The leader of the group and all except two Western anthropologists, are very superstitious. The leader doesn’t want to burn the voodoo doll, because even though it will provide them warmth, he thinks it’s wrong to hurt the kid. The Westerner knows this is a baseless fear. However, the rest of the villagers for some weird reason *want* to all die, yet they hate that kid even more than they loathe themselves. So they want the chief to throw the doll in the fire, because they want to hurt that kid.
So one Western anthropologist starts saying, “Well, there *has* been some research on this, and maybe there’s something to this vodoo thing. If the villagers really believe it has the power to do it, maybe it’s a self-fulfilling prophecy. When these people get back to the village, if they are all convinced the kid is going to die, maybe the kid will believe it too and actually die. So I agree with you, chief, don’t burn that for our sakes and risk that kid’s life.”
The other anthropologist is furious. “You idiot! You know vodoo doesn’t work. Keep your mouth shut. Let’s let these villagers demand that he throw the doll in the fire, because they believe vodoo will work.”
Do you see how insane this is?
MF, how is what you wrote there different from what Murphy just wrote? It seems like you just gave the same possible interpretation for Lerner that Murphy just did.
I ask because you said it, indeed, would be absurd for Lerner to hold the position that Murphy just came up with for him, and then it seemed like you were trying to give a different interpretation for Lerner, but for me it seems the same. I’m not asking to be antagonistic, I’m just trying to see if there is a difference that I’m just missing.
Dan:
Yes, they do seem the exact same. But there was one small point that Murphy’s example had that, I think, my example did not (because it sounded strange to me):
“Fortunately, most of them are dunces just like Ike, and think that if they pay for it with deficit financing, even though they are just as poor as with direct taxation”
I didn’t think that was right, because in the OLG model, the initial few individuals actually did consume more per person in their lifetimes. They really are richer, not poorer (even though cross sectionally there is no change to consumption).
That’s why I personally thought Murphy’s conceptual paraphrasing of Lerner did not make any sense to me.
What do you think?
For example, say they needed to spend $1 trillion on a war. They could either tax the $1 trillion outright or borrow it. If they borrow it then the cost of the war is now $1 trillion plus interest, and if everyone believed as Lerner did, then they would believe they are paying more for the war than is necessary. Obviously, those who lent the government money would pay a lower tax bill, but anyone who didn’t would pay more.
Dan, if you follow MMT arguments they say we should not use bonds to finance spending for exactly this reason.
OK, and what is your point? Are you agreeing with my position or disagreeing, and why?
This is also why Dean Baker, etc. say that government debt can create distributional issues within generations. (Like if Bill Gates kids end up owning all the debt.)
People’s future consumption is always limited by their past actions. If it weren’t so constrained, everyone should be able to increase their standard of living by never having invested in the past.
I’m just saying it’s not (necessarily) limited *in the future*, *because of the debt*. Of course, they could have invested their money elsewhere *in the past*, that’s my point: they chose not to, but this does not change what they can do when the future becomes the present.
It’s like putting money in the stock market and when stocks crash saying the stock market is a burden on the future because you won’t be able to consume as much if they’d gone up.
It has no bearing on the future insofar as….it has no bearing on the future?
I’m saying two things. 1. It’s not a burden on “future generations” since the entire “burden” can fall on the older bondholders or people who bought bonds. (Some people may say “future generations” means a generation today “in the future,” I’m defining future generations as a generation not yet born or working.)
2. The same thing I said above. If a past investment doesn’t pan out, it’s incorrect to say investments “are a burden” on the future. Yes, buying bonds today, affects your future, but that is something that should be known ahead of time.
Murphy,
Do you hold that Lerner is in an inconsistent position to both worry about the “misguided” fears of deficit financing that could lead to a lack of political will to spend more in the present, while at the same time holding that both forms of financing are nevertheless “paid for” by the current generation?
If so, why is it inconsistent?
If not, then we’re all in agreement with that quote you cited from Lerner.
Bob, Bill Clinton raised taxes in 1993, before the Republicans took power, which contrary to “gridlock” arguments, combined with a strong economy to push America into a balanced budget (and eventual surplus) by the end of the decade.
Warren Buffet is asking to pay his fair share of taxes and historically prior to Reagan taxes have been much, much higher than they are today.
I think you’re confusing a “starve the beast” strategy with a no one will vote for higher taxes. Really, I don’t think most people, outside Washington and libertarian circles, were clamoring for lower taxes when the Bush tax cuts were passed.
This is all mostly a straw-man anyway as no one (besides some MMT-leaning people) wants to increase deficit spending (as the best policy option) when were not at the zero-lower bound.
Most people (outside maybe WWII) don’t buy bonds directly. And these same people (because of their low incomes) will not be paying most, if any, taxes on those bonds. (At least if tax policy were saner, and didn’t target labor so much.)
Anon, what relevance do you think your comments here have to the point of the post? What do you think is the point of the post?
Dan, Bob suggested people will not vote for higher taxes. I was trying to show why I don’t think this is true.
This is beyond the fact that *in a recession* is not the time to raise taxes anyway (at least if you’ll accept for the sake of argument Keynesian assumptions). Sure there is a “balanced budget multiplier,” but this is most likely to be smaller than deficit spending because with deficit finance at the zero lower bound, those lending to the government are not likely to be spending money anyway, so you get less crowding out. (At least this is my understanding, currently. I am not an economist and am trying to figure this out as I go.)
No, anon, the post was not about whether people would vote for higher taxes. I figured you must be mistakenly interpreting the meaning of the post because your responses weren’t even attempting to address what the rest of us were talking about.
WHY is it politically easier to deficit spend than to raise taxes?
The whole point of both Keynesian monetary and “fiscal” policy is to hide the theft of resources and purchasing power in the present and over time from “we” by and to “ourselves”. If “we” ever start to get suspicious and complain, “ourselves” informs us that we are too dumb to understand the complex counter-intuitive quantum mechanics-like nature of Keynesianism.
No, the “whole point” is to keep the economy running smoothly and to prevent a viscous downward cycle. Most people won’t care that there nominal purchasing power has improved when there is nothing left to buy and no prospect to ever earn more money. Most people actually want to work and spend money, not worship piles of green paper.
The whole idea of hoarding cash runs counter to the idea of a market economy where specialization of trade results in mutual (and improving) gains over time. Otherwise the rational response would be for everyone to be a self-sufficient farmer, for fear that the system ever breaks down.
The “solution” you almost certainly have in mind that you believe prevent “vicious downward cycles”, is the very thing that causes that which leads to vicious downward cycles in the first place.
Hoarding cash is an integral part of healthy economic activity. You do it every time you earn a paycheck. You hold money for future use.
If you don’t use your money, then the money remaining in circulation increases in value, and can purchase more at lower prices.
If you don’t use your money, then the money remaining in circulation increases in value, and can purchase more at lower prices.
I think you’re ignoring how interconnected the economy is and if everyone holds on to their funds at the same time (not one person with a paycheck as you suggest) then this will cause major disruptions.
Though, I’m not opposed to deflation, in principle, I just don’t know how it could work well in practice.
Again there is nothing wrong with saving money. It’s when you have a general price level fall not related to productivity increases that’s worrying. (I posted that in a hurry before the debate and allowed my rhetoric to go overboard.)
Just to explain where I’m coming from, if people expect deflation in the short term, then they will hold their money, which may cause even more deflation, so they holder their money longer, and on and on. (I’m suggesting the only rational response to such a world is to be totally self-sufficient–therefore immune to economic shocks.) Which I don’t think is such a bad thing, either, just wonder, also, if it’s possible in practice.)
It’s possible however that technological advances will change the nature of our economy in such a way that people are self-sufficient. I just don’t think we live in that world today.
How do you explain the computer industry with that view of deflation?
I think there is a difference between deflation from productivity improvements (like technological advancements in computers) and price competition and deflation from recessions.
Why is there a difference, in your opinion?
To be fair, if we were all subsistence farmers, who specialized on the side that doesn’t sound so bad, (to me at least), although I imagine that there would be other problems, like resource constraints.
We can now add another addition to the infinite list of non-Austrians who have never heard of the concept of economic calculation.
I don’t know what your talking about. And I have heard of the calculation problem. That’s about communist systems, not about Keynesian or mixed economic policies.
(I know you might say they’re the same, so later I’ll try to Google later to find out why you might think that.)
There is no basis in fact, history or theory for the unsupported Keynesian assertion that the market fails and/or requires Keynesian “stimulus”. For example, our very own Daniel Kuehn [inadvertently] demonstrated that the depression of 1920 was caused by the government via WWI and the Federal Reserve, not “market failure”.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1591030
Suppose we begin with a model world where there is no public debt issued. The public’s investments in equities as a percentage of income year after year is found to be X. Certainly X indeed represents a deferral of present consumption to sometime in the future. *But* unless the public for some reason chooses to increase its investments as a percentage of its income, no further burden has been added. Income available for consumption remains unaffected.
Now suddenly, the government decides to sell bonds. The question now becomes whether this bond sale represents a burden on the present generation beyond X. In other words, if after the bond issue, we find that total investment goes from X to X+1, then indeed we might say that the present generation has taken on some additional burden. In other words, the bond sale has reduced present consumption beyond what it would have been.
But…. if following the sale of bonds, investments as a percentage of total income are still X, what do we find? We must conclude that investors simply diversified their portfolio with bonds. They did not grow the relative size of their investment deferrals, but simply chose another investment vehicle.
Buchanan makes the case that the debt issue in this circumstance cannot rightly be considered a “burden” in any real sense of the word. Investors simply diversified. Giving them another menu option does not add any burden to them. So in this way, we see that the debt issue represents no increased burden, so therefore X+0=X. If no additional reduction in consuption occurs at the time of debt issue, the debt issue is the big 0 in our equation. There is not present burden.
Now lets make the very simplistic assumption that bonds are simply passed down in families (not true, but stay with me for a second). This means that the families owning investment portfolio will recieve income from the bonds. But what about those people who own no investments in their portfolio? If taxes need to be raised in the future to service the pubic debt or pay it down, it is these poor folks who recieve the full burden of the debt issue. Nobody else could rightly be said to have been burdened.
Emphasising the obvious, if no public debt was issued, and investors would have purchased equities as investments, then certainly the future generation of non-investors are in no way burdened by these past investments. But with public debt issue, the folks living in the future who own no government bonds are on the hook. Therefore, we can clearly see that the only burden from the debt issue has been shifted forward in time, and falls diproportionately on those owning no bonds.
Suppose we begin with a model world where there is no public debt issued. The public’s investments in equities as a percentage of income year after year is found to be X. Certainly X indeed represents a deferral of present consumption to sometime in the future. *But* unless the public for some reason chooses to increase its investments as a percentage of its income, no further burden has been added. Income available for consumption remains unaffected.
Murphy and Rowe have already conceded that Ricardian Equivalence is the kryptonite to the OLG model. The assumption it does not hold is not a strong assumption.
As you pointed out below.
Please note that this example does not prove that *no* present burden is able to be taken on by the present generation. If they decrease their present consumption as a result of the debt issue, then certainly they are *able* to that extent.
The illustration simply shows that it is *possible* (and probable) that a portion (probably significant) of the burden of the public debt issue can in fact be shifted forward in time onto future generations.
“That is just how simple this is, folks. If you lend to the government (rather than being taxed), you are much happier about the whole thing, because you know in the future the government will take money at gunpoint from young workers and hand it over to you. Some of these young people might not even be alive right now.”
Exactly. Who will say that a wise investor who buys these bonds has taken on any present burden, especially if he simply sells down some of his equities to buy the bonds?
We are certainly on the same side here, and it does not seem we are that far apart in how we are seeing things.
He might have sold his equities anyway, like in the panic and volatility of a financial crisis. That he put it in bonds instead of under the mattress shouldn’t matter so much, should it? The more people want to buy bonds the higher a price the government can charge for them. (At least this is what it should do.) No one thinks government borrowing is a good idea in boom (unless it passes some cost/benefit threshold) or (I think) a high interest rate environment.
Ok, now that I reread the quote from Lerner I’m not so sure about my previous comments. He says he is worried that people will believe the Nick Rowe and Robert Murphy line of thought on deficit spending, and that this thinking increases the chances that people will reject deficit spending. By saying that it eliminates the defense that I provided for him above.
If he believes that more people thinking deficit spending creates a danger that they will not go for it, then he can’t also believe that the reason people favor deficit spending over taxes because they think the debt will be passed down on future generations. Since he thinks it is dangerous for people to believe deficit spending is a burden on future generations then his view that it is more politically viable makes no sense.
As usual, Murphy is playing chess and while we are playing checkers.
He’s stealing pawns from future opponents.
It’s more like he just used the en passant rule with people who have never heard of that before.
Dan,
If he believes that more people thinking deficit spending creates a danger that they will not go for it, then he can’t also believe that the reason people favor deficit spending over taxes [is] because they think the debt will be passed down on future generations. Since he thinks it is dangerous for people to believe deficit spending is a burden on future generations then his view that it is more politically viable makes no sense.
Where did Lerner say he believed that bolded part? How do you know that Lerner believed that the reason people favor deficits over taxes is because of burdening the future generations? Why can’t it be strictly a self-interest issue?
I’m not saying he did. I was saying that could be a defense he could have used for thinking it is more politically acceptable, but his statement that Murphy quoted in the post eliminates that as a possible defense.
I was initially trying to come up with reasons for why it would make sense for Lerner to believe it is more politically acceptable to deficit spend. That part you bolded was my escape hatch for him. Now that I no longer see that as a possibility for him to use, I think his view makes no sense.
Why can’t he still use it? There is a difference between what is politically palatable, and what is economically or accounting-wise true.
I could legitimately think that YOU believe debt will burden future generations, and so politically rabble rouse to get what you want, AND I could, at the same time, think to myself that I believe debt will NOT burden future generations.
In other words, why does what Lerner think about the rabble have to apply to himself? If he wants more government spending in the present, and he sees a barrier, he’ll attack it, even if it means he doesn’t agree with WHY the barrier should even be there in the first place.
I think this quote from Murphy best explains why I think Lerner is making no sense.
“He is right that taking deficit finance off the table would constrain the government, and the reason he was right is that people would rather lend to the government than be taxed. Why? Because if they lend, then the next generation bears some of the brunt. Just like Ike warned us.”
Why else would people allow the government to borrow if they didnt believe that the next generation would bear some of the brunt? To me, it seems contradictory to believe the future generation can’t be burdened, and to worry that people will believe that they can be burdened, causing them to not want to allow the government to borrow.
If you can come up with a plausible explanation why people would want to allow the government to borrow AND think by doing so that it doesn’t burden the next generation at all, then I will agree that Lerner is not contradicting himself.
Bob, off topic (although he does mention OLG models!), but have you seen this post by Krugman?
http://krugman.blogs.nytimes.com/2012/10/22/things-that-arent-bubbles/
He argues that fiat money is not a bubble. I’d be interested to hear what your thoughts on this are.
Bob, this is what I found by googling “lerner taxes mmt”:
“For a monetarily sovereign government, taxes and fees instead serve to decrease Aggregate Demand from the non-government sector, allowing the government spend on resources without causing inflation. Therefore, taxing is seen as a policy tool for regulating nominal aggregate demand by withdrawing non-government net financial assets instead of a fiscal operation for funding government operations and other expenditure. Taxes and fines are also used to discourage negative externality, which is also separate from funding. On the other hand, taxation is required to generate revenue for governments that are currency users rather than currency issuers.”
http://mmtwiki.org/wiki/Abba_Lerner_and_the_Principles_of_Functional_Finance#The_role_of_taxes_and_issuance_of_government_securities
So, I don’t think it’s quite fair to say everyone agrees about how taxes work. (I think some MMTers are against bond financing too and think we should just print money in a recession to build roads, schools, etc.)
Do we care that Lerner proposed an almost totalitarian scheme of price controls two years before he died?
David Colander, a co-author of a 1980 book with Lerner (author of “The Economics of Control”) wrote that Lerner wanted to make it illegal to change prices without a permit in order to control inflation:
Initially he [Lerner] toyed with various administrative wage and price control policies, but he found those lacking and soon gave them up. He replaced them, first, with a tax based incomes policy and ultimately, a market based incomes policy in which property rights in prices are set and individuals have to buy the right to change prices from others who change their price in the opposite direction. It was this idea that formed the basis of our market anti inflation (MAP) book. (Lerner and Colander 1980) Under MAP, rights in value added prices would be tradable so that any firm wanting to change its nominal price would have to make a trade with another firm that wanted to change its nominal price in the opposite direction. Thus, by law, the average price level would be constant but relative prices would be free to change. [page 12]
ftp://ftp.repec.org/opt/ReDIF/RePEc/mdl/ancoec/0234.pdf
Wasn’t Lerner a student of Hayek’s? Lerner must have been high or playing hookey the day Hayek explained economic calculation.
This sounds like a market in price changes like cap and trade so it would still have price signals.
That does not mean it would work or is a good idea (I don’t know).
Nothing like a red herring to refute the idea that government debt doesn’t burden future generations!
It follows that if Mises praised fascism, then therefore every economic argument Mises ever made must be wrong!
“That he put it in bonds instead of under the mattress shouldn’t matter so much, should it?”
No, not in the least. But the entire argument is simply this. Can the burden of debt issue be shifted forward in time?
Even granting the greatest generosity to the Krugman crowd, a “burden” might only concievably be defined as such if someone gives up current consumption to buy government bonds. (FYI, I do not think this is right, but I am granting them that for the sake of showing that even this concession does not help them much).
But… if present consumption does not fall when the debt is issued, then the “burden” (even under their definition) of the debt issue has essentially been 0. Nobody living at the moment of debt issue has taken on *any* increased burden as a result of the bond sale. In my view, this is devastating to their argument, since it demonstrates that it is certainly possible to do what they say is impossible, namely to shift the burden forward in time. Certainly if taxes are raised on non-bondholders in the future to service or repay past debt, then they will be forced to reduce consumption to pay their increased taxes.
Personally, I think there is a case to be made that the debt issue can *not* be considered a present burden unless folks are forced by the government to purchase it. But I am trying to get around any disagreement on this point, but granting the Lerner/Krugman crowd their marbles, then beating them with their own marbles.