A Challenge on the Great Debt Debate
Here’s a challenge I gave to Daniel Kuehn in his comments:
==> Do you agree that Krugman said there is a sense in which debt makes a household or a family poorer? But that he denied this truth for the individual family could be aggregated to the USA as a whole?
==> If you agree with the above, give me a specific numerical example of what it means for a family to be made poorer in the future by running up a debt today. Then, defy me to show you in my apple examples what this would look like, at the USA level. In other words tell me what it would mean if Krugman were wrong, and that the USA *could* be made poorer in the future because of running up the debt today, in the same way that Krugman agrees could happen with an individual family. So then you tell me, “Bob, if Krugman were wrong, then you would be able to construct an apple scenario showing such-and-such. But it impossible for you to do so. If you *could* do so, I would agree you have been right and Krugman’s narrow point is wrong, and we need other arguments to justify deficits today.”
As is his wont, Daniel denied that Krugman said debt could make a family poorer in the future. To bolster my understanding that Krugman thinks debt *does* make an individual family poorer in the future, here are two quotes from him:
People think of debt’s role in the economy as if it were the same as what debt means for an individual: there’s a lot of money you have to pay to someone else. But that’s all wrong; the debt we create is basically money we owe to ourselves, and the burden it imposes does not involve a real transfer of resources.
And for the coup de grace:
But that’s not what people mean when they speak about the burden of the debt on future generations; what they mean is that America as a whole will be poorer, just as a family that runs up debt is poorer thereafter. Does this make any sense?
OK everybody? So I want you all to show me a specific numerical example in which you agree that a family *does* make itself poorer in the future, because it ran up a debt today. Then, tell me specifically what it would look like in my apple model, for “the nation” to do the same thing, and why it would be impossible for me to actually construct such an example.
I hope this is apply enough… I’m not opening excel or color coding.
I’m also not assuming discounting of the future, growth, etc – because you didn’t assume any of those:
Period 1: Family earns 15 and borrows 10 at 10% interest to consume 25.
Period 2: Family earns 15 and pays 11 back, and consumes 4.
Total consumption with debt: 29. Total without: 30.
Indeed, this is exactly the sort of “poorer” in your tables.
And the whole point is that that’s not a useful way of thinking about debt for the macroeconomy. The point is this is one debtor’s view. You shouldn’t take a debtor’s view when you think about the impact of debt on GDP.
You’re right, btw – I wasn’t sure he ever used the word “poorer”, but it appears he did.
I’m not sure I understand your second question (how to do it for “the nation”). The whole point is that it doesn’t make sense to do it for the nation because when you do it for the nation you have a lender in addition to a borrower. It nets out. Assuming both earn 15 in each period, you have total consumption of 30 in both periods (25 for the debtor and 5 for the lender in the first period and 4 for the debtor and 26 for the lender in the second period).
But when you write that up, it’s not the same as looking at it from the perspective of the family, which is the whole point.
DK wrote:
I’m not sure I understand your second question (how to do it for “the nation”).
What do you mean? You just said in the first comment that the type of “poorer” that applies to the family is the same type of “poorer” I demonstrate in my tables. QED, I win, Krugman loses.
Get out a piece of paper. Write on it, I owe Dan 1 million. Sign it. Dan
There you are Dan, you’ve got a valuable asset. You’re a millionaire. What’s the problem?
The problem isn’t ‘debt’. The problem is the difference between debt and assets.
If you use debt to buy an asset that generates more income that the cost of servicing the debt, then in my view, its an acceptable thing to do.
If you buy an asset that appreciates faster than the accumulated debt, its acceptable.
However, if your asset doesn’t generate the income to cover the debt, or falls in price, you are bankrupt.
That applies to government as well as people.
Ah, but governments can always print. That will fix it. Apart from the moral issue of ripping people off, if those debts are linked to inflation, it doesn’t work. The debt goes up in line with inflation. See the tests above.
The problems with governments is that debts and assets aren’t connected. They will try. They will start booking citizens as assets. After all they already run the stud book like slave owners of the past, it doesn’t take much of step to ‘owning people’
Bob, bondholders and only bondholders ever have to take a hit. Never does anyone who did not lend money voluntarily ever have to be burdened. So any decision to *transfer* some of the burden from a bondholder to the next cohort will *always* be a policy choice, not a fact of the debt.
What’s more: since the bondholder will always be still alive at the time of the transfer, Krugman is, at least in his latest post, right: consumption can be transferred from one still alive group to another, but never to some future group.
This whole “counterexample” is built on creditor bias. Bondholders have *chosen* to lend money and so have voluntarily taken on risk. Lending money carries risk: such as debtor default. Any reasonable loan, the housing bubble is example, should be based on the ability to pay. It’s simply crazy that bondholders should extract high returns from a stagnant economy.
So no, the debt does not create a burden on future generations except by some crazy logic of people voluntarily, or by policy, choose to burden themselves or others.
I should point out that in my example “future generations” are not the debtor to the bondholders. The debtor is the government or the economy as a whole.
Given a growth rate of zero a bondholder should not expect a rate of interest greater than zero. If they desire higher returns they should put their money into private investment.
Government bonds are a flight from risk. They earn a higher return than putting the money in the mattress. Sometimes they may earn a little more, sometimes a little less, but on average they should even out. If they didn’t the cost of borrowing would be too high.
Imagine if bondholders today were demanding high interest rates (from what I understand the real interest rate is negative)? No, bondholders are saying they’re worried that if they invest in the private market they would not just earn low or even slightly negative real returns but they’d lose *all* of their money.
That interest rates never exceed the growth rate over the long term is entirely plausible. The interest rate only rises in relation to inflation. Bondholders will only demand rates relatively consistent will inflation: slightly negative returns can still be better than stuffing the mattress. Slightly positive returns may not be harmful in the limit.
anon, you violated the rules of this post. You have to first specify in what sense debt *does* make a family poorer in the future. If you did that, then you would see you couldn’t write this:
So no, the debt does not create a burden on future generations except by some crazy logic of people voluntarily, or by policy, choose to burden themselves or others.
A family only enters debt voluntarily, too. So you just “saved” Krugman by proving that debt can’t make a family poorer in the future. Thus, this clearly wasn’t Krugman’s argument, since he was saying the way in which debt hurts an individual family, cannot hurt future generations.
Bob, debt can make bondholders poorer and make (single not aggregate) families poorer, but it can’t make future generations poorer except by policy choice.
Bondholders can’t force the next generation to buy their bonds, and at that point it becomes a matter of tax policy.
I won’t presume to know what’s in Krugman’s mind, as he may not have been aware of Rowe’s argument, but nonetheless it’s true. (As Daniel has said, Baker has perhaps made stronger statements that more resemble Ricardian equivalence.)
Dekrugman said that taxes can only result in a net zero gain/loss.
“Bob, bondholders and only bondholders ever have to take a hit. Never does anyone who did not lend money voluntarily ever have to be burdened.”
That’s such a blatant lie. The entire point of, and entire structure of, government bonds, is precisely that other innocent taxpayers who aren’t party to the loan agreement will be forced to pay it.
And if you add them up over time its 60 units of consumption over two periods with and without debt.
See what you and Nick have been doing is adding it up over time but not cross-sectionally, and then acted like you’re saying something about debt’s impact on “the nation’s” income.
DK wrote:
See what you and Nick have been doing is adding it up over time…
Right. We’ve been adopting the wacky convention by which “every single American who will be born after the year 2013” could plausibly be interpreted as “future generations of Americans considered collectively.”
If you’re conceding that the result depends completely on whether we are talking about “the nation” or a birth cohort I would be happy with that.
“Future generation” is wishy washy language. Baker’s posts are full of it, but it’s also slipped into Krugman’s posts.
If you want to talk about birth cohorts, that’s fine. But I don’t see why you’re so quick to bash Krugman. It seems to me Krugman is right. Then you and Nick come along and you oughta just say “Krugman you’re exactly right. ‘Future generations’ is wishy washy language, though. Let’s say we think in terms of birth cohorts. That gives you a different answer.”
I don’t understand why you didn’t say this. I don’t understand why your interest with birth cohorts makes Krugman wrong just because you could shoe-horn both “the nation” and “birth cohort” into the phrase “future generations”.
btw – I’m still commenting in pre-Grant/stickman. I’m not even sure you and Nick were right about birth cohorts anymore.
“Future generation” is wishy washy language.
Debt can’t be a burden on future generations, as there is no such thing as a future generation.
Yeah, that’s the ticket.
How did you get “there is no such thing as a future generation” from me saying that there are at least two good definitions and we should consider both?
See this today Blackadder? http://www.dailymail.co.uk/news/article-2219385/Rowan-Atkinson-attacks-new-rules-outlaw-insulting-words-behaviour.html?ITO=1490
Bravo.
The people living from 2100 to 2200 is a future generation of people.
The people living from 2100 to 2200 is a future generation of people.
Speak for yourself. I’m having my body cryopreserved. No way I’m going to let you d*** over that generation, since I’ll be (clinically) living it, and THEY BETTER HAVE ENOUGH DRILL PRESSES to revive me when the technology’s ready.
Not saying there can’t be overlap, Mr. Disney.
But you’re going to need a LOT of bitcoin generating PCs to accumulate enough cash to finance your cryopreservation.
It isn’t really “a” birth cohort. It’s all of them.
Every individual in the model is worse off after generation 5, despite the fact that there is no change in wealth “cross-sectionally.”
When people say that they are worried that debt will burden future generations, and Krugman says they are ignorantly talking about how debt burdens a family and that this family logic cannot be used for the nation as a whole, Krugman has opened himself up to being a denier of the logic that people are in fact using when they say debt burdens future generations.
Remember, most people when they think of debt burdening future people, use family level logic. Well, family level logic is based on valued individuals, within the family. These people are worried that each member of the family will be worse off in the future.
Well, THAT logic, the logic that is based on worrying about individuals, as in a family, CAN IN FACT be used to worry about debt for the nation as a whole. Each individual in the future for the nation as a whole will be individually worse off, despite the fact that we can identify an equivalent cross-sectional nominal gain for each loss.
The key is that each equivalent cross sectional gain is insufficient for offsetting the losses that each and every individual experiences over their lifetimes. It’s hard to see this, but that’s what is happening.
The fundamental core of the dispute between the two main sides here is, like most debates, philosophical collectivism versus philosophical individualism.
No matter what either side says, when you are a philosophical collectivist or individualist, you will interpret each side as saying X, when in fact they may be saying Y, since one’s own philosophy shapes one’s perception and understanding of the same words, such as “future generations.”
When a collectivist reads “future generations”, they think groups cross sectionally abstracted from time. When an individualist reads “future generations”, they think individuals across time abstracted from cross sectional groups.
Krugman and DeLong are Keynesians, which is based on philosophical collectivism, so it’s not surprising that they abstract away from time and only look at aggregates cross sectionally.
If we adopt philosophical collectivism, then Krugman’s point about debt follows, because the center of perception is not individuals, but the group.
If we adopt philosophical individualism, then Murphy’s point follows, because the center of perception is not the group, but individuals over time.
Individuals can all lose over their lifetimes if the losses to each individual are not made up for by equivalent gains to those same individuals, even if there is no drop in “collective” wealth cross-sectionally abstracted from time.
If I am going to consider future debt, and how it will affect future generations of people, I as a philosophical individualist will consider “future generations” to mean future individuals over their lifetimes.
If I can identify a scenario where every single individual loses over their entire lifetimes, due to past generations of individuals incurring debt that will be financed by future taxation, then I think that is a very strong argument against the claim that it is IMPOSSIBLE for debt to burden “future generations.”
““Future generation” is wishy washy language.”
No, it isn’t. It clearly means “people born in the future”.
And the arithmetic Murhpy has done clearly demonstrates that if you run up a debt, that every single individual born after a certain point will be worse off than the normal lifetime consumption they otherwise would have had, until that debt is liquidated.
“people born in the future” is also wishy washy.
Having a definition does not make a thing non-wishy washy if it has a bunch of competing definitions.
As for your last paragraph, it doesn’t show that at all. See Grant McDermott’s most recent post.
Which post? He’s kind of obscure and not easily searchable.
Hey, don’t stop there! The very concept of “time” is wishy-washy, and we should instead be using models based on Julian Barbour’s timeless physics, and thus replace every reference to a “time interval” with a reference to a metric on the invariant “Machian distinguished simplifier” across points in amplitude-weighted configuration space.
Now that’s rigor!
I used to think it showed that too and agreed with Bob on that point.
And the arithmetic Murhpy has done clearly demonstrates that if you run up a debt, that every single individual born after a certain point will be worse off…
Not quite. I showed that if you run up a debt, then every single individual after some point *could* be worse off. If some people aren’t ever taxed, then they’re not hurt by it.
Well I could have shown that.
If you run up a debt, every single person born after 2050 could be hit by a bus at age 63 while crossing the street to say hi to their grandson.
There. Every single person born after a certain point COULD be made worse off by debt. I have provided a counter-example.
What?
You’re concerned it’s somewhat unconnected to the debt itself?
Yes, I agree.
If you want to just list ways we could run up debt that would be bad I don’t think Baker and Krugman would disagree with you. The government could theoretically borrow 50 trillion at 100% interest. I am guessing both Baker and Krugman would agree that would be bad.
The point is that’s getting into questions of sustainability and not questions about the nature of debt itself. The same with your assumption that if you tax people in the future, those people could be poorer.
It’s not really relevant that YOU could have shown that.
It is relevant to the statement DeKrugman made that it is impossible, because to them, debt can only burden people via a transfer mechanism. Rowe and Murphy showed that EVERYONE at some point in the future can end up losing, and no matter what term you want to use to describe this, “future generations”, “future cohorts”, when you have a situation where EVERYONE at some point in the future loses, then NO interpretation of what DeKrugman said can rescue it from its fallaciousness.
MF I don’t know if you are new to the discussion (I honestly gloss over your comments most of the time) but what they’ve demonstrated is highly contingent on sticking to birth cohorts and not the nation at a point in time…
and Grant has shown they didn’t even manage to prove that.
DK:
MF I don’t know if you are new to the discussion (I honestly gloss over your comments most of the time) but what they’ve demonstrated is highly contingent on sticking to birth cohorts and not the nation at a point in time…
and Grant has shown they didn’t even manage to prove that.
Desperate patronizations aside, which article from Grant are you referring to? I have been keeping up with this debate, and yet this Grant person is out of nowhere. It is unfair to accuse me of not keeping up with every obscure hat that was tossed into the ring.
Please post a link to this alleged “Grant post” that shows the OLG model doesn’t show what Rowe and Murphy say it shows.
If you meant this post:
http://stickmanscorral.blogspot.ca/2012/10/debt-and-inheritance.html
I already read that, and Grant is conflating bequeathing with selling. He hasn’t shown the math doesn’t add up.
MF wrote:
It’s not really relevant that YOU could have shown that.
Wanna know what’s really funny, MF? Go look at Daniel’s blog. Gene Callahan was making this point, and Daniel didn’t get it. So Daniel really is saying here, “I couldn’t have made this point, until yesterday, when Gene spelled it out for me.”
(In fairness, Daniel, you knew the point back in January when we were all making it. But then I guess you forgot it until yesterday!)
Maybe I was too confrontational towards DK, and that influenced him to believe this was about him, but I thought the context of this whole debt debate was crystal clear, which is a counter-example in the face of a universal claim, and whether or not this counter-example is sufficient.
If only everyone put all their intellectual focus on that one small point, then there would be less talking past each other.
Maybe it’s a question of everyone peeing to declare their territory or something…
Well, I’m probably to blame for many of the repeated points, since I just jumped on this debate right at the end and made arguments that others have doubtless covered before.
That said, I’m not sure that the bequest vs sale distinction matters particularly. E.g. In principle, why couldn’t future generations simply sell their own bonds to the generations that follow them, ad infinitum? Ultimately, I think that the bad outcomes of Bob’s model are an inherent (and entirely expected) characteristic of any model that makes debt financing unsustainable by default. That is, by imposing a higher interest rate than GDP growth rate. I’ve tried to elaborate on this issue in more depth in a follow-up post.
“Unsustainable” may not be the best phrasing, since you could of course nip things in the bud with a shift from deficit financing to tax financing.
Let’s rather say that the model assumptions — r > g — make it impossible to ever fully recover the losses implied by deficit financing (under any circumstances, I might add).
Grant, if the debt is rolled over ad infinitum, then the Rowe-Murphy model does not apply, because that model assumes taxes are levied (due to whatever constraints present themselves that requires taxation in order to avoid default).
It is fruitless to seek a way to alter the model so that the conclusion of the model does not follow, because the only point of the model is to present a possible, logically consistent scenario where every individual loses past a certain point of time. The reason the model is designed this way is to act as a counter-example to the universal claim that government debt cannot, under any circumstances, lead to a decline in everyone’s consumption.
DK wrote:
I hope this is apply enough… I’m not opening excel or color coding.
I’m also not assuming discounting of the future, growth, etc – because you didn’t assume any of those:
Period 1: Family earns 15 and borrows 10 at 10% interest to consume 25.
Period 2: Family earns 15 and pays 11 back, and consumes 4.
Total consumption with debt: 29. Total without: 30.
Indeed, this is exactly the sort of “poorer” in your tables.
OK Daniel, so if I’m understanding you here, you are agreeing that my apple model shows future generations being impoverished by deficit finance, in *exactly the same sense* in which an individual family could be impoverished by deficit finance?
Thus, if I could convince you that Krugman was denying that debt for a family is the same type of thing as debt for future generations as a whole, then you would agree that Krugman was wrong and that my apple model shows why?
Right, this has been my point all along I thought. If you are talking about future generations/cohorts you and Nick are right. If you are talking about national income Krugman is right. I’ve been trying to be very clear about this but maybe it’s clearer to my own ears than it is to others.
If you turn up Krugman saying “by future generation I mean a single cohort of people, excluding everything else going on in the period that that cohort is alive” then I’ll have to agree that you and Nick did not move the goal posts and Krugman is wrong.
But I really think you guys have been talking about different things, and I don’t think it’s particularly important if different people care about different things so long as we’re clear on what we know and don’t know.
But I don’t see how that definition (that I have italicized above) could be attributed to Krugman because that’s pretty much the same as the “family” which is what he’s saying is not analogous!
But DK, if that italicized part is what people have in mind when they say future generations are burdened, which is probably the case since most people use family level logic when considering debt, even national debt, then Krugman can’t say that their logic is wrong by pointing to non-family logic!
I think most people think in terms of family analogies. I don’t think most people think in terms of birth cohorts.
Pointing out that birth cohorts are sort of the aggregate analogy of families is no way to counter Krugman’s point that we shouldn’t be thinking in terms of families in the first place.
But the cohorts logic is family based logic. It is considering individuals over their lifetimes, rather than worrying if cross sectionally there is at any given time, a net loss.
How can you say we shouldn’t be using family logic, when you have already conceded that the cohort logic does show every individual can be made worse off due to debt?
The main point of Krugman is not that we shouldn’t use family logic to understand national debt (although he did make that case), but rather, his main point, to which Rowe and Murphy responded, is that it is wrong to say that it is IMPOSSIBLE for debt to burden future generations of PEOPLE, cross sectional wealth statistics notwithstanding.
Your model does not allow inheritance, so it’s not clear who can be owed what. Allowing promisory notes to be inherited then:
Looking at the top chart, imagine Young Hank suddenly owes 1 apple to Old George who deeds the debt to Young Iris. Next period Hank pays Iris and is 1 apple worse off. The island is not, because Iris is plus 1.
Imagine that the nation, Hank and George each owed Neptune lord of the sea one apple. Iris inehrits the debt and Hank and Iris each pay an apple — toss them into the waves — to retire it. The island is worse off by 2 apples.
If all creditors live on the island this cannot hapen and shifting apples between islanders cannot reduce the crop.
No no no Ken B, in this thread you are not allowed to speak unless you first give a NUMERICAL EXAMPLE showing that an individual family is made poorer in the future, by running up a debt today.
I did Bob. Hank is one apple worse off. So I don’t get your objection.
But in order to show that a family in the future can be made worse off by having a debt, the debt must be heritable right?
This is how I read this whole “future generations” thing.
Imagine you come home to your wife late one night and when she asks where you’ve been you say “Oh I just went out with my friend Joe”.
Now “went out with” is wishy washy language. A whole lot of people use it to mean “have a romantic rendezvous”, but it can also mean “do something socially but non-romantically with someone”.
Would it make sense for your wife to go into a flying rage at your homosexual infidelities because if polled without context most people would probably first think of the first interpretation? No, of course not. It would make sense for her to gather from context that you just hung out with a friend and forgot to call.
I feel like peoples’ obsession with Krugman is causing them to fly into a rage over this.
I think it makes much more sense to just talk about what we know about debt. And if we do that I think we’ve all learned a lot.
If we can identify future generations of INDIVIDUALS losing due to debt, then the rage is justified, because it is wrong to sacrifice one’s own descendants for the sake of Krugman making a point about something no individual cares about anyway. It’s not worth it.
I feel like people’s obsession with protecting Krugman is causing them to advocate for policies that can be shown as possibly harming every single individual in the future.
I mean, should anyone really care that there is an unchanged 60 units of total consumption over the two period (borrowing from your numerical example), when it will be accompanied by every individual in the future losing over their own lifetimes?
If each individual is worse off, who cares about what happens to some aggregate statistic? Shouldn’t the focus be on individuals, who feel pain and pleasure, rather than some abstract aggregate concept that feels nothing?
Proof by counter example. It’s the new, new thing.
Sadly enough Laissez Faire can *also* ” be shown as possibly harming every single individual in the future”.
Sadly enough Laissez Faire can *also* ” be shown as possibly harming every single individual in the future”.
Ken B., if I announced in a debate with Scott Sumner, “Using a market money such as gold is better than fiat Fed money because yellow is pretty,” MF would criticize me. He wouldn’t spend 11 months justifying my nonsense argument for a conclusion he believed. Say what you will about MF, but he wouldn’t be botching the use of counterexamples and the rules of argumentation.
He jsut did Bob. He cited your counter example — whicjh you to DK explictly denied was making an argument — as a positive refutation of Krugman’s policies. Because they could *possibly* — that’s the counterexample part — be harmful to everyone in the future. But that’s going to be true of pretty much any policy including laissez faire. For pretty much any policy you can construct a model where it will be a bad one.
But Krugman was saying it is IMPOSSIBLE for future generations to be burdened by debt. All that is needed is one counter-example to refute that.
Now, you say that this is true for ALL universal claims, in that even laissez faire can POSSIBLY be shown to harm every single individual in the future.
You have claimed this twice now, but without actually showing an example.
Bad response Ken. How can laissez faire be shown to harm every individual in the future? There would be no government that is forcefully expropriating funds and individual property from the individuals who rendered it for themselves. The question to be asked is why are the future generations harmed? It is so because government has to extract by force the monies necessary to pay back the debt to its borrowers. Force is the key word here. In a free society all people would be making voluntary choices, thus their costs or losses would be due to their own personal choices. If anything, individuals would gain and prosper much more so, and societies (since there is no expropriating central planner) would also benefit due to the free innovations and contributions of individuals pursuing their own rational self-interests. Force is detrimental, the absence or minimal existence of it is only helpful to society. In a system of central planning or government (state), force is omnipresent. This is where Murphy has made is case so clear cut. Krugman begins with the idea of pure force in tact. Murphy crushes it.
Its astounding to me that you would pay MF this kind of homage. Do you read any of his responses to me? I wouldn’t normally dedicate a comment to badmouthing a guy. I’m just shocked that of all your commenters you shower MF with that kind of praise.
Consider it a by-product of the “Ken B must be wrong” reflex and move on.
I guess.
Next thing you know Gene will honoring Bob Roddis.
It is not really astounding to me that you would experience smoke coming out of your ears should anyone even hint at praising my arguments, since you and I adhere to such different philosophy, but the way you are preaching from your soapbox is an insult to Murphy’s intelligence and independent mind.
If I see someone praising your posts, I wouldn’t feel compelled to charging against them, even if I disagree with you and them. I wouldn’t insult their independence and ability to think for themselves.
Your agenda is crystal cleat, and it is unfortunate that you would devote a post to talking trash like that.
Neither you nor Ken B have shown substantive premises for your rather antagonistic posts.
Ken B asserted that laissez faire can POSSIBLY make every single individual worse off, without substantiation.
You asserted that my posts do not deserve praise, because of what I said to you on this thread, but you did not substantiate that either.
Ken B:
You mean like the by-product of your “Murphy must be wrong” reflex that made you side with DK after he attacked Murphy for what he said about my posts?
DK, I know you are the type of person who needs praise from his superiors, and so you would act very jealous if your ideological enemies got praise from those you desire praise from, but this behavior is rather petty.
I mean, really, just look at what you said. You must feel very threatened by what I say for you to respond with such dejection.
You don’t see me badmouthing Murphy for occasionally praising your posts, despite the fact that I think you’re wrong 90% of the time.
Maybe it’s time to put petty personal vendettas aside, and grow up a little?
I astounded and shocked you with one comment! Damn I’m smooth…
(For reparations Daniel, I will do a post tonight about this generations vs. GDP thing, because I agree it’s crucial. Needless to say, you aren’t going to like my take.)
“Ken B asserted that laissez faire can POSSIBLY make every single individual worse off, without substantiation”
Read what I said. I tweaked Bob’s example in a way that would do that. And I can tweak it agfain with a systematic change in the utility function to do what Bos cleverly did in his counter example, amke the amx of the U function match the resulting distribution of status quo X where X is not laissez faire. Implausible? of couirse. *Possible*? Yes.
See my answer below for why your scenario doesn’t work.
Show me an example where laissez-faire could POSSIBLY harm every single individual in the future.
I did but I’ll repeat it. Take Bob’s laissez fair chart. Make the utility function take its max when Young Y gets 110 and old Y gets 90. Make the status quo a tax of 10 on old folks to pay young folks. Laissez faire is worse for everyone.
Is that really a sensible argument against laissez faire?
It’s not even internally consistent, let alone a possible empirical scenario that shows laissez faire makes everyone worse off.
Your scenario is internally inconsistent because if everyone really did have a utility function that is maximized when Young Y gets 110 and Old Y gets 90, then the laissez faire BASELINE would not even be 100 per period in the first place.
The error you made is assuming that the laissez faire set up in Bob’s chart is somehow both what people would voluntarily choose (i.e. the utility function assumed in Bob’s chart) AND what they would not volutarily choose (i.e. your utility function that differs from the one in Bob’s chart).
People can only have one utility function at a time. If people’s utility function is as you say they could be (max utility when Young Y gets 110 and Old Y gets 90), then that is what the laissez faire baseline must be assumed to be, since if people are free to consume 110 when young, and 90 when old, then that is what they will tend to do!
Since this attempt at showing how laissez faire can make everyone worse off has failed, maybe you can try another example, or, if you would rather not fail a million times, I suggest you concede that you were wrong to claim it is possible.
“Shouldn’t the focus be on individuals, who feel pain and pleasure, rather than some abstract aggregate concept that feels nothing?”
Not if you are a Keynesian or a monetarist. Aggregates are all important there, not individuals. Haven’t you heard? Methodological individualism is dead. As Mark Blaug put it, “In effect, it would rule out all macroeconomic propositions that cannot be reduced to microeconomic ones, … this amounts to saying goodbye to almost the whole of received macroeconomics. There must be something wrong with a methodological principle that has such devastating implications.”
Modern macroeconomics is wrong, and methodological individualism demonstrates why. So we must dispense with it, and focus solely on meaningless aggregates.
Well, considering how the wikipedia’s entry on methodological individualism has only one criticism, by…..Mark Blaug(who?)…I think it is safe to say that it has no real criticisms.
Blaug doesn’t seem to grasp knowledge or history. Many times throughout history, “the whole of received opinion” was radically changed, where “good-bye” was said to the old, and “hello” was said to the new.
How this pathetic criticism against M.I. is in any way valid is amusing, to say the least…
Only what the world markets are doing anyhow.
You don’t even need debt to demonstrate the concept. Consider an example where the islanders produce 100 apples per cycle. They consume those apples as it suits them and they are happy about it.
Along comes a government that says, “Saturday and Sunday must be days of fasting where everyone contemplates their beneficent government. Anyone caught eating any apples on Saturday or Sunday will be flogged.” So the people go hungry and miserable for two days of every week and try to catch it up by overeating on the other 5 days. They are not happy about it.
Now, from Krugman’s point of view GDP is exactly and numerically the same as it always was: 100 apples per cycle. There is no debt so therefore he concludes that the nation is exactly the same as it always was because his aggregates are the same.
From the point of view of every single citizen on the island they are worse off.
It’s not really an argument over debt here… it is an argument over whether aggregate GDP is the appropriate measure of national well being.
Point being that Krugman and other Progressives use exactly this argument when it comes to wealth redistribution: the rich don’t really need it and the poor do need it and thus we conclude that wealth redistribution by force makes the nation as a whole better off. If he is going to conclude that some forms of redistribution make people better off, he must at least accept the possibility that redistribution (across time) can also make people worse off. This implies that Krugman and his Progressive buddies have already accepted that GDP is not the ultimate metric.
But in that case it doesn’t matter if the wealth is distributed or not. In fact, if ALL wealth was concentrated into the hand of 0.1% of people and they consumed every last scrap of it, the total amount of consumption would remain constant in aggregate, and therefore there wouldn’t be a problem…
When Krugman is arguing for wealth distribution he uses a diminishing marginal value utility function… so it is a problem, under that particular point of view.
Of course, Krugman also depends on making a global tradeoff of one man’s utility against another, which works for Keynesians, but not for Austrians, but that’s just a basic axiom, and you can’t really argue axioms, you just accept them or you don’t.
I’m starting to notice this Daniel Kuehn guy is not very smart, or he is in huge denial. His pretexts keep going in circles just like Scott SUmner, whom he swears he is different than. Statist are always making the same mistake. I’m so surprised everybody that is arguing with your argument does not notice how you just crushed Krugman and his followers in one fine sweep of excel superiority. Now Kuehn is trying to make fun of the fact that you can use his mathematical models better than him……hahaha. This is too much fun. Keep at it Murphy, they keep sticking their feet in their mouths, or should I say in each other’s mouths.
Here’s a numerical example of a family and debt, without requiring any external transfers.
Let’s say we have a family of apple pickers: Adam, Bob, Cathy, and Old Uncle Deuce. So Adam and Cathy are married and always work as a pair to produce 50 apples per cycle. Uncle Deuce works alone, and works hard and he cranks out 50 apples per cycle by himself. Bob is young and a bit lazy and will generate between 0 and 20 apples per cycle depending on how much he feels like it.
Now Bob and Deuce like to play cards. Deuce always wins, but Bob doesn’t want to give up easily, so he keeps coming back. When Bob has no more apples to gamble with, Deuce says, “Oh I have plenty, you can borrow some off me.” In addition, Bob borrows apples from both his parents and since he has enough apples to live on, he doesn’t do any work either. Interest rates are zero because it is forbidden by their religion (they happen to worship a divine apple which is round like a zero, thus all loans are at zero interest).
Numbers for the first cycle:
Adam & Cathy pick 50 apples between them, consume 40 and lend 10 to Bob.
Bob picks no apples, borrows 10 from Adam & Cathy, borrows a further 30 from Deuce and loses 20 apples gambling, consumes the remaining 20 apples.
Deuce picks 50 apples, lends 30 to Bob, wins 20 back from Bob, consumes 40 apples like the big man he is.
Balance sheet after first cycle: Bob owes 40 apples (twice his maximum produce).
Second cycle, Deuce decides to retire, and asks Bob to pay him back the 30 apples to fund his retirement. Bob stops gambling and starts working and picks 20 apples, which is not enough to pay his debts, so he borrows a further 20 from his parents, and consumes only 10 apples this cycle.
Old Deuce does no work, consumes 30 apples, then dies at the end of the cycle.
Adam & Cathy pick 50 apples between them, consume 30 and lend 20 to Bob.
Last cycle is going to be rough now, because Adam & Cathy can’t retire on just Bob’s income, and if Bob makes a serious effort to pay them back he will have nothing at all to eat!
You can see where I’m going with this… because Bob was able to borrow in the early years, two things happened: Bob worked less in the early years, AND Deuce retired early and stopped work, based on a rational entitlement to get paid back the loan. If there had been no loans and no transfers then each would have worked and total production would have been higher. Thus the family as a whole is worse off.
Yes this uses a different mechanism to earlier examples, but I think it is still a valid mechanism.
Bob: this is slightly off-topic, but.
Notice that the utility of consumption in future years (not future generations) will be lower, even when consumption is unchanged in those future years, even though lifetime utility will still be higher for cohorts who buy the bonds but who do not pay higher taxes.
I think that’s right, if r > g.
Nick I don’t get exactly what you’re saying. Utility to whom? I don’t like adding up utilities across people, if that’s what you’re doing. Even though I stooped to an OLG model with cardinal utility functions, I still am an Austrian deep down.
Bob, what I would really like to see is you provide a model where these bad outcomes arise when g >= r.
As long as GDP growth (g) is at least equal to (r), I simply don’t see how this is possible… And that includes scenarios where no bequests are left by the old generation. That is, bonds can only be sold to the younger generation, or extinguished in cases where these youngsters refuse to buy the bonds from the old timers. (In the latter case, Government can easily enforce transfer of assets from young to old by switching to tax financing.)