10 Jan 2012

From the Comments: Callahan Joins the CPR Effort on Krugman’s Position

Economics, Financial Economics 9 Comments

It is amazing to behold people denying that Krugman et al. thought it was literally impossible for us to impoverish future generations. Here is Gene Callahan from the comments:

[I]n other words, does depicting a scenario in which government debt is used to impoverish future generations prove Krugman wrong? I say it does not, since (as Landsburg and I have demonstrated) we can always duplicate your debt scenarios with taxes and transfers. If that is so, then Krugman is correct: it is not government debt in and of itself that is the problem, but rather that seniors may suck resources from the juniors, which they can do via debt issuance, or via other routes.

My response to Gene:

No way, Gene. You show me one sentence fragment from everything Krugman has written on this, where he even hinted to his readers that the present generation could impoverish future generations through deficit finance, but that it wasn’t the debt “per se” doing the impoverishing. He absolutely did not spell out that second part of your and Landsburg’s claim.

Like I have maintained all along, I think the reason Landsburg (and now you) don’t see this, is that you guys never fell for the fallacy. But I did, and that’s exactly why I can tell it is what held (holds?) Dean Baker, Krugman, and Yglesias in its grip.

Look Gene, don’t you see the apparently unbeatable logic behind someone claiming: “Huh? How in the world can Old Bob and Young Al in period 1 do anything that would make people poorer in period 7? No matter what we do in period 1, the people in period 7 earn 200 apples in real income. The government at that time can only take apples from one person and give it to another. It is nonsense to say we can in any way impose a burden on them. All we can do is hand down pieces of paper instructing the government at that time–when we are all long dead–to take apples from one person to give to another. But it’s not like we can make both people in period 7 poorer? How the heck could we do that, without a time machine to suck away their apples so we can eat them now?”

Don’t you guys see the superficial appeal of that type of argument? That is what Krugman et al. were thinking, and not because they’re evil Keynesians, but because it seems right and would be right if there weren’t overlapping generations.

Maybe that will do it, Gene? Do you see how if you are thinking of my apple world without overlapping generations–where everybody just lives one period or everybody lives two periods but at any given time, both people are young or old–then we can’t get this result? In that world, Krugman et al. would be right.

And since nobody even thought this quirk mattered until Boudreaux and Rowe entered the debate, we would still all be thinking through the intuition in terms of “We’re all alive right now, in 50 years we’ll all be dead and our kids will be on the scene, in another 50 years they’ll be dead and our grandkids will be on the scene…”

Does everybody get this yet? I had to use an overlapping generations model to get this freaky result. That’s how it can be possible that the following two claims are simultaneously true:

CLAIM 1: No matter what people in period 1 do with government deficits, the people in period 6 earn a total real income of 200 apples between them. The government at that time can reduce one person’s apple income, to be sure, but only by raising the apple income of the other person alive at that time. Between the two of them, their total real income is fixed by the productivity of the apple trees, not by pieces of paper we leave behind when we die.

CLAIM 2: By running a deficit in period 1, and giving Young Bob an interest income that makes him achieve higher lifetime utility so long as the government doesn’t default, then the government in period 1 and period 2 can ensure that the total lifetime real income of everyone who lives from Christy onward will be lower. The government can, during those future periods, redistribute apples and make the burden hit some people versus others, but the burden is real–Al and Bob have reduced the apple income, collectively, of everyone who comes after them.

At first glance, the above claims seem contradictory. So I wasn’t stupid for not realizing Claim 2 was possible when I wrote my section this in my two books, and Krugman et al. weren’t stupid for missing it a few weeks ago.

Last thing: You guys can settle this quite easily. Ask Krugman very nicely to do a quick blog post telling his readers, “Just to avoid any misunderstanding, by running government deficits today to fund transfers to old people, obviously we can all have a higher standard of living, and impose a lower standard of living, on every single American who will be born in 2013 or later. So sure, in that technical sense, we’d be hurting future generations. You all knew that, right?”

And you guys are telling me in the comments, everyone is going to say, “Duh! Why not tell us the sun rises in the east, Dr. Krugman? Who the heck didn’t know that when you and Dean Baker were saying that the very concept of government debt ‘imposing a burden on our children is especially nonsensical’?”

9 Responses to “From the Comments: Callahan Joins the CPR Effort on Krugman’s Position”

  1. Boris says:

    I think another way to put it is this: in a free market without government, saving and the issuance of debt would only occur between people and only for 1 period at max. If you reduce your consumption and buy the debt (or promise) from somebody such that he can consume more now, you would make sure that the guy is around in the next period. It is clearly legally impossible for the debtor to make a promise which would burden even his own, let alone third parties. In this case debt issued now (i.e. private debt) would not impoverish future generations, since the debtor and only the debtor can be made to repay and has to reduce consumption accordingly. And for Krugmanites: the debtor and the saver would only do this in order to optimize their intertemporal utility function..NEVER their income.
    Thank you for your great effort!

  2. Rob says:


    I think claim 2 is true not only if the govt does not default on it debt but also if it used further debt-financing to pay off the debt. If it used taxes in period 2 to pay of Bob then Christy would be worse off but everyone else would be either better off or the same.

    • Bob Murphy says:

      Rob look more closely at Claim 2. I said “collectively” it reduces the real apple income of Christy on down.

      • Rob says:

        Ok i get it now

        The way that the model is set up is that as soon as the govt does anything with debt it is guaranteed that someone in the future will have an average of less than 20 utils as a direct result of that debt even if its just one person in the next period. (Interestingly that is true whether its tax or default).

        Can’t argue with that.

        What if Krugman countered by saying “In the real world the young always have higher income than the old and in that case it is always possible to construct a model showing that debt is a benefit in maximizing average utils ?”

  3. Major_Freedom says:

    Murphy, I think when Callahan said:

    “If that is so, then Krugman is correct: it is not government debt in and of itself that is the problem, but rather that seniors may suck resources from the juniors, which they can do via debt issuance, or via other routes.”

    The “it is not government debt in and of itself that is the problem” is the only part attributed to Krugman.

    The “but rather…” is Callahan’s reasoning.

    In the very next sentence, Callahan writes “I.e., what I read Krugman as saying is that it is incorrect to view the mere existence of government debt as a burden on future generations.”

    So in my mind Callahan wasn’t saying that Krugman’s REASONING is the “but rather…” part. He was just saying Krugman is right to say that the debt in and of itself is not the problem.

    Now, as you and Rowe have shown, the debt is a problem for future generations. Callahan is wrong to say that because he can duplicate the cash flows of debt via taxes and transfers only, that debt per se isn’t a problem.

    One can “duplicate” the EFFECT of someone getting shot in the head by using something other than guns and bullets. But that isn’t showing that shooting people in the head is not “in and of themselves the problem.”

    The flaw in Callahan and Landsburg’s thinking, and why they both find affinity with Krugman’s thinking, is that all three of them are thinking of the economy in a mechanistic manner, “cross sectionally”, and so they cannot help but be focused on the physicality of cash flows, treating those transfers as “instant” as a cross sectional framework requires. They perceive no “collective” loss on the basis of cash “instantly” changing hands, say at 9:35 AM on Tuesday, January 10th, 2025.

    They aren’t seeing what you’re observing because they have not yet moved away from the mechanistic timeless way of thinking. When the economy is viewed mechanistically, then it’s easy to focus on the physical cash flows only. It’s why Krugman said debt isn’t a problem, because he focuses on the fact that future physical cash flows will just go from some people to other people, by force. It’s why Callahan and Landsburg said debt isn’t a problem, because they focus on the fact that future physical cash flows that result from debt can always be replicated mechanistically, by force.

    As long as the cash flows that result from real productivity can be replicated mechanistically by force of government, then the way Callahan, Landsburg and Krugman think of the economy will prevent them from seeing the REAL losses that you and Rowe have shown can happen IF, what they believe are innocuous physical money flows, are in fact a reflection of real losses being incurred.

    At the end of the day, it’s because you’re a libertarian who understands individual values, gains, and losses, that explains why you can see this and they can’t. You and Rowe observe losses where they can’t see because they have economic blinders on. If you’ll excuse me and if you’ll pardon the following as purely an analogy and in no way reflective of their actual values, they remind me of the way German professors in WW2 couldn’t see the pain and suffering of those victimized by the Nazi regime, because the way they viewed the world prevented them from doing so. To them, gains and losses were defined totally apart from individual gains and losses.

    It’s the same sort of thing happening here. They don’t see how government debt can burden future generations because the way they view the economy is through mechanistic cash flows only. As long as the cash flows remain the same, or as long as total cash flows remain the same, they are unable to see real losses being incurred. Like you said, it’s so easy to overlook this because it SEEMS so obvious that government debt can only ever generate a cross sectional redistribution of cash flows.

    They can come around to see what you can observe, but they have to change the whole foundation of their economic worldview. They must stop looking at the economy mechanistically, and they must take into account PEOPLE. They can only see money flows and time periods. You and Rowe’s generational model is a great way to introduce the people element into this, because no longer are people just vassals of utility and one dimensional holders of cash and instantaneous exchangers of cash, but beings who exist through time

    Neither Callahan, Landsburg, nor Krugman are viewing the economy as through the acting man lens. You are Rowe are. That’s why you can identify the losses through government debt in and of itself, but they can’t.

    It’s like an artist trying to use human romance to attract the attention of robots.

    • Yancey Ward says:

      If I understood this, then I think this is exactly right.

      I thought we had Kuehn pinned down earlier when he acknowledged that Iris in the model could not ever be made whole. He seemed to finally understand that the flow of income in an instant of time (in the future) could not be sent backwards in time to make Iris whole over her lifetime- it could only be redirected to her at that present time, or over the rest of period 9, but if it improves her utility in period 9, it must decrease the utility of someone else in period 9 or later who did not benefit from the debt. However, he weaseled out by claiming that Iris is just an individual etc.

      I think the key to understanding the OLG model Murphy and Rowe offered is that any time instant in the future (where debt assets are defaulted on, or taxed) will contain events that are in that future’s past, but are in our present’s future. I think this is why people like Krugman and possibly Kuehn are misunderstanding this so colossally- they don’t conceive that the future’s past is part of our future. This is why they focus on time periods, and it is why Rowe’s slogan was so apt.

  4. Rob says:

    “the government in period 1 and period 2 can ensure that the total lifetime real income of everyone who lives from Christy onward will be lower”

    The govt can do this but can also choose not to.just by shifting the tax burden even with no default. It can also (as Gene’s say’s) make everyone have less than 20 utils via tax alone.

    The way the model is set up is that as soon as the govt does anything it is guaranteed that sometime in the present or the future will have utils less than 20. I contend that it has control over who that person or persons is/are and there will never be a situation where it is compelled by the logic of the model to make both people who are living at the same time have lifetime utils of less than 20, but it can always do so if it wants to.

    • Rob says:

      Type in last paragraph “sometime” should say “someone”

    • Yancey Ward says:


      The model only assumes that the bonds are retired/paid off with a tax, or are defaulted (Murphy uses a tax). Under these conditions, someone in the future must pay the cost of the initial borrowing propagated with interest down through time until that point. This is unavoidable. All that can be done is to spread that future burden over more people, or concentrate it narrowly, but it must be realized.

      The only condition that could say otherwise is that the debt is rolled continuously, and without end. From a purely practical point of view, nothing is infinite on the Earth.

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