Callahan’s Unsustainable Attacks on Nick Rowe
Gene has been annoying me in the debate on a topic that shall no longer be mentioned on this blog (for calendar 2012 at least), with post titles suggesting that Nick Rowe is unfamiliar with the history of economic thought. Then in this post Gene accused Rowe of “arrogantly insisting” on the importance of his counterexamples.
In this context, I found it ironic to see Gene write:
Now, the intuition that I think is driving the use of this model is “But look: If Young Bob didn’t think he could get his apples back plus more, the thing couldn’t get rolling. And he has to convince Christy of the same!” Well, of course Ponzi schemes are (by definition) unsustainable, and of course if this debt financing has been sold to citizens as a Ponzi scheme, there will be trouble down the road. (If the economy grows faster than the debt re-payments, per Samuelson, then the debt financing is not a Ponzi scheme at all, or, perhaps, per Rowe, is a “sustainable Ponzi scheme.”)
Gene might be interested to read the history of economic thought chapter on Paul Samuelson, who wrote:
The beauty of social insurance is that it is actuarially unsound. [italics in original] Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in. And exceed his payments by more than ten times (or five times counting employer payments)!
How is it possible? It stems from the fact that the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see. Always there are more youths than old folks in a growing population. More important, with real income going up at 3% per year, the taxable base on which benefits rest is always much greater than the taxes paid historically by the generation now retired…
Social Security is squarely based on what has been called the eight wonder of the world — compound interest. A growing nation is the greatest Ponzi game ever contrived. And that is a fact, not a paradox.
Aren’t Rowe and Samuelson both describing a “sustainable Ponzi scheme” and therefore using the term differently to the common definition by which a Ponzi scheme is unsustainable? Rowe I suspect is using the term ironically.
“Sustainable” is not a pure quality of the scheme’s design, but of the stability of its inputs. If the inputs (ie, demographics) are not stable, it becomes unsustainable.
So the question becomes, are the inputs stable? With terms like “baby boom” in common parlance, I think the answer to that should not be hiding itself too deeply.
Bob Murphy in this post of yore channeled George H.W. Bush….literally:
read my lips: No New Debt Blog Posts.
Ha.
Did Bush preface his pledge with: “Unless a blogger of at least as much notoriety as Brad DeLong revisits this topic…” This was dead until Dean Baker reopened it. And it’s good he did! Now I’m thinking about it much more clearly, and I know that Callahan cannot be trusted.
I suspected you’d come back with that. I just thought it was funny.
Callahan’s entire position can be summed up as follows:
1. He sees a person claim that X caused Y.
2. He believes that if he can bring forth Y not via X but via W, then the person cannot claim X caused Y.
In other words, Callahan is just (repeatedly, since day one) committing the fallacy of denying the antecedent.
Formally,
What Gene is doing,
Some other examples:
or
Actually, Callahan’s intellectual permissiveness goes even deeper.
Denying the antecedent is but a road sign on the road to transcending logical constraints and entering unbridled egoism. Refusing to obey the laws of first order logic is praxeologically possible, and is the core of Callahan’s actual position.
Callahan cited the Lewis Carroll essay “What the Tortoise said to Achilles” to emphasize his main point about the OLG model.
This essay is extremely interesting, because it shows that whatever logical force an argument may have, an individual egoist is not intellectually forced to accept it, because logic is but a tool of the egoist that can be rejected if desired. This is a fact of reality. It is a fact of reality that logic can be intellectually rejected. Therefore, at root, models can never fully explain reality.
In every logical syllogism, there is always an unstated premise (what Carroll was referring to by the term “Hypothetical”) that must be assumed as true and yet can never be firmly held, for once it is thought to be held, the same problem presents itself (what I think is egoism transcending all logical “laws”).
This connects to Godel’s incompleteness theorems. Godel showed that any effectively generated theory (e.g. OLG model) capable of expressing elementary arithmetic (e.g. if debt, then burden) cannot be both consistent and complete.
It’s this part that Callahan is relating to when he refuses to “obey” the inherent logical plea of Rowe’s OLG model that of course is not itself a part of Rowe’s model. While Callahan believes Rowe’s model is internally consistent, while Callahan believes the conclusion is right as stated, he still holds that there is an unstated, unexplainable premise, namely:
If we accept all the premises, then we are forced to make the pleaded conclusion.
This latter unstated premise is the “Hypothetical” Carroll alluded to in his essay, and is the “leakage” that Godel exploited to show that all mathematical models cannot be both consistent and complete. It is what I allude to when I hold that egoism can destroy first order logic if desired, and hence first order logic can never be an exhaustive model of a reality that contains egoists. It is not surprising that this philosophy has been revealed in an economics discussion about debt, since economics is the study of us humans. A model ALONE will never be able to intellectually force an egoist to accept it.
This is precisely why Callahan stated:
“No model can contain its own interpretation, since things the model contains are internal components of the model, and thus cannot be interpretations of it: as components of the model, they themselves will need their own particular interpretations within the framework of interpreting the model as a whole.”
Quite right. Interpretations, and framework of interpreting the model as a whole, is to Carroll the infinite regress of “Hypotheses”, to Godel an impossibility of both consistency and completeness, and to me, Egoism manifesting itself in a transcendence of first order logic and thus rejection of first order logic as a NECESSARY component to ALL of reality, including egoists who are capable of rejecting it in reality.
After all, if egoists can reject first order logic as an absolute concept, under which everyone must obey, then clearly first order logic is not able to explain all of reality, because reality contains egoists!
Callahan is just saying he is not intellectually forced to make any conclusion he doesn’t want to make, because he can always point to an another unstated premise every time his interlocutor includes those unstated premises every time they are made. Hence the Carrollian infinite regress:
If A and B, then Z……. = C
If A and B and C, then Z……. = D
If A and B and C and D, then Z……. = E
If A and B and C and D and E, then Z……. = F
etc
I hate to say this to you Murphy, but you are Rowe thought all along you were dealing with someone (Callahan) who would be willing to accept the unstated premise that one must necessarily be intellectually forced to obey first order logic when presented with it. Callahan never agreed to that unstated premise, so the entire approach you took with Callahan was in vain. THAT is why you are so frustrated with him. You didn’t realize that it wasn’t a question of adding just a few more explanations, premises, to the OLG model, before Callahan would accept it. There are an infinite number of premises that Callahan requires (which you will never succeed in offering) before he would in principle be in agreement with it.
You have to approach Callahan as an egoist, because that is what he is, whether he realizes it or not.
Your ideas are intriguing to me and I wish to subscribe to your newsletter.
(Beautiful.)
“It is a fact of reality that logic can be intellectually rejected. Therefore, at root, models can never fully explain reality.”
The rejection of logic does not have bearing on reality. I can reject the logical argument that the Earth is round, and presume it flat. That doesn’t make it so.
“In every logical syllogism, there is always an unstated premise that must be assumed as true and yet can never be firmly held”
Which is? What premise cannot be “firmly held”? (What does that even mean?)
” Godel showed that any effectively generated theory (e.g. OLG model) capable of expressing elementary arithmetic (e.g. if debt, then burden) cannot be both consistent and complete. ”
Three things. One – that isn’t what Godel showed. Incompleteness means that there is a true (mathematical) statement that cannot be proven from the premises. But no theory contends to explain every true statement ever.
Two, if X, then Y is not mathematics. Mathematical logic is only a subset of logical formulation.
Three, incompleteness and inconsistency do not apply to theories based in reality. Godel was working as a mathematician in abstract mathematical statements. His demonstration that, in abstract math, different premises lead to different true conclusions is irrelevant to the real world. There are statements like “if the world was flat, you could sail off the edge” which are true, but only using premises that contradict reality. It is this ability to derive premises from reality, and ignore other untrue premises, that voids Godel’s theorems when dealing with theories of reality. Whereas with abstract math, one can assume structures and systems with different properties that have different premises.
“the unstated premise that one must necessarily be intellectually forced to obey first order logic when presented with it”
No, they took the unstated premise that first order logic – “obeyed” when presented with it or not – describes reality. You can reject this principle, but it does not have any infinite regress, and you would be rejecting reality itself. Egoism, as you have described it, is meaningless. Nihilism with fancy terms. Logically void.
Matt,
That the Earth is round is not a logical argument. It is an empirical proposition.
At any rate, I understand what you are saying, but my argument is something different. I am not saying that the content of one’s logical rejection has to match reality external to the ego. Rather, the fact that first order logic can be rejected by the ego means that first order logic cannot exhaust ALL of reality, which means not only the non-ego, but the ego as well.
I thought I explained that. To repeat, it is the “hypothesis” of Carroll. The infinite regress.
Actually, that is what Godel showed. It’s his first theorem.
That is the same thing in different words. If you focus on the premises rather than an as yet unprovable statement, then it is true that the premises cannot be both consistent and complete.
Agreed.
Agreed.
Agreed.
No, they took the unstated premise that one is necessarily intellectually forced to,accept it. The OLG model is not a model of reality as it is. It is a logical framework designed to show that government debt can be a burden.
To be clear, it is not rejecting reality itself, it is rejecting the non-ego. It is the ego that is DOING the rejection, so it makes no sense to say that an action of the ego is not a part of reality.
Agreed. It cannot be described using terms that are necessarily associated with comparisons among entities in the non-ego. It is nihilism. Logic cannot exhaust it. Logic can only reveal parts of the egoist. Logic is a tool of the ego.
If I am capable of rejecting logic, then logic cannot exhaustively describe reality that includes the ego.
Therefore demonstrating that a burden exists does not imply that debt was the cause of that.
Having said that, I wonder if Gene can think of a way to pay back the debt without raising taxes? We have through all of Murphy’s examples presumed that tax is the only way to pay the debt… if another way existed then I’d reconsider (for example, if the government did manage to successfully pick a winner and recoup great gains on their investment, admittedly unlikely but not entirely impossible).
“I wonder if Gene can think of a way to pay back the debt without raising taxes? ”
I just posted an example on the’ Last word’ thread where you can do it. Talking realism in toy models is a bit iffy, but all I need is a desire to have more when you are old.
Ken B,
I answered you there. You made a weird assumption, that the government from some point on can borrow at zero percent interest forever…
And I pointed out that it can be done just as easily with part taxes part borrowing at the same rate.
So let me point out another way. If you tweak Bob’s U function just a tiny bit so people prefer to consume in their second half then people will WANT to lend at 0 interest. So it’s quite consistent with the parameters of the example. Check the math, you’ll see.
Bob is not tweaking the U function as he needs it. He tries to keep it realistic. You need to make it unrealistic to make your example work..
Are you arguing that only one U function can be used? Bob picked his U fiunction carefully to construct his example. I select a different U function. And I do it once up front, I do not change it midstream.
Plus we’re not talking about increasing or decreasing utility but apples. All I need is a regime to put in place those transfers. Taxes or loans will serve, as they serve Bob. I like Bob am constructing an example.
No I say that the U function is changing normally depending on individual preferences. Yet there are certain U functions that are really unrealistic as you need them. Here is a quote when Bob set the stage for this stuff:
“==> People have standard preferences: They just care about how many apples they eat, they want to smooth consumption over time, etc. There is no altruism and no envy. “No funny stuff.”
Also People will resist this kind of taxation you want.
The problem in trying to make this work with taxes is that people say no if they aren’t promised a certain return later in life. And as soon as the government makes a promise about this return in the future it is not taxation but then it is debt.
Debt=A promise to pay later!
Without this promise you cannot start this scheme.
“==> If people so choose, they can lend apples to the government, to be repaid the next period (with the revenues coming from either taxation or from borrowing again). However, these bond deals with the government are purely voluntary; a given individual will only do it, if s/he prefers the revised consumption flow to the original endowment flow.”
Your examples do not meet this conditions.
Link:
http://consultingbyrpm.com/blog/2012/01/we-will-not-solve-the-debt-issue-during-this-generation.html
Therefore demonstrating that a burden exists does not imply that debt was the cause of that.
Indeed, however Gene’s syllogistic response is not sufficient to ruling out debt as able to cause a burden. The OLG model doesn’t argue that if there is a burden, that only debt can be the cause. It is only showing a burden among many, with debt as the cause.
Consider the last syllogism in the list of examples:
For these two premises, are they sufficient to ruling out the argument that shooting to the head can cause someone’s death? I would argue no.
The OLG model only proves that debt can be the cause of a burden under a certain set of assumptions. In particular it assumes that government will tax more in future so they can pay off the debt. If this assumption is not true, then the conclusion of the model is not true either.
Consider this example: you have a powerful king who taxes his people and spends the tax on personal consumption for himself and his extended family (i.e. a dead loss for the nation as a whole). The king is intelligent enough to optimize against the Laffer curve and extract the maximum possible tax from his subjects such that attempting to extract any more will actually cause the economy as a whole to start going backwards and thus result in the kind consuming less.
Now this king goes into debt… has the debt caused a burden on the people? I would say, no. The king is already causing the maximum possible burden without systemic collapse and the debt doesn’t change that.
Suppose the king finds he cannot repay the debt, and his creditors raise an army, depose the debtor king and replace him with another new king who taxes the people just like the old one did. The people are no better off, nor are they any worse off.
You are probably going to say my example is extreme and too simplistic, but Murphy’s apple tree example is also simplistic. I presumes that government will sensibly only tax what needs to be taxed under the circumstances; never waste the money on useless, stupid things; never raise tax unnecessarily. You would be hard pressed to find any empirical example of such a situation.
The OLG model only proves that debt can be the cause of a burden under a certain set of assumptions.
That is all it was intended to show. That’s how counter-examples to universal claims works.
I understand the rest of your post and agree with it.
You have put your finger on why I don’t like debt financing: it’s addictive. Once you start on debt you never stop. Soon you’ve lost all discretion and it’s all about the debt.
🙂
They have the choice of defaulting on their bonds (possibly a soft default by currency devaluation as the USA is doing, or a hard default like Greece has done).
I was actually ironically talking about debt financing posts and comments …
Samuelson: “It stems from the fact that the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see.”
When Samuelson says “national product” he refers to the production of the people who will be around in say 30 years to support SS benefits for the then retired.
If Samuelson had said that coumpound interest would produce enough wealth from the savings of each person to support retirement, then he would be referring to the “eighth wonder of compound interest”. But, he didn’t.
He is actually referring to the miracle of taking more money from a growing population which is also producing more per-person because of the capital (machines and innovation) paid for by that growing population. It is the miracle of stealing more and more from each generation to forcibly pay to their parents, or someone else’s parents. Each generation which pays in is given permission in turn to take from the next generation.
This is a policy of enslaving the young by promising them the right, in turn, to enslave their young. This a Ponzi scheme with forced contribution. The scheme comes to an end leaving millions without their own money and unable to steal their retirement from the wized-up young.
Who benefits? Of course, those early in the scheme who collect 5 times their contribution. The most important beneficiaries are the politicians who preside in glory and graft over the “free” benefits which they have arranged. And don’t forget their pliable and enriched economists, like Samuelson, who bless the arrangement as being economically sound, predicted to last forever, as long as an ever expanding group of people are there to steal from.