19 Oct 2012

Debt Burdens: How Deep the Rabbit Hole Goes

Daniel Kuehn, Debt, Krugman, Nick Rowe 73 Comments

You guys aren’t going to believe it, but I have had another epiphany. The debt and future generations issue is like this:

At first I was deeply troubled, because I realized that I had said at least two false things in my arguments with Ken B. today, and that I had unfairly dismissed a point that “stickman” and Daniel Kuehn had brought up.

But now that I have achieved a higher level of consciousness, I don’t care. All of God’s children have added something to this fascinating issue. I need to let it sink in over the weekend. Next week I will have lots of pretty Excel examples to illustrate everything.

I know, some of you would go insane if I left you hanging for three days in agony. Here’s a hint, a comment I left at Nick Rowe’s blog:

Lord, I agree with you that it’s not just the servicing of the debt, but paying the debt down, that is the crucial thing.

Nick, you aren’t going to believe this, but I’m taking a giant step toward the MMT camp on this. Before, I thought the issue was future generations being taxed to service the debt, but now I’m thinking the only way you make them poorer on net is if the taxes to deal with the debt are higher than the interest payments to the debtholders. So that means, only if the debt is shrinking. In the examples I cooked up–and I think you too?–the way you make everybody alive in period X poorer, is you have net debt reduction. I think if middle generations just floated the debt without moving it up or down, then they break even collectively.

Gasp, dare I say it, they break even because they are paying the interest to themselves? Real GDP is unaffected so total income is unaffected?

I am not going to do a formal post until Monday, Nick, so if you think I’m being seduced by the Dark Side you have the weekend to save me…

Four last points for now:

==(1)==> If I’m thinking about this correctly (a big if, since I was doing this in my head while getting ripped at the gym), it really is the creation of new government debt that allows the present generation to enrich itself at the expense of “people in the future” collectively, but if you never pay down the debt, then that impoverishment is indefinitely postponed.

==(2)==> Those of you who have been telling me, “Bob, what the )#(*%$39 is your problem, stop doing flow analyses, do it in terms of balance sheets! Then it’s obvious that government debt PER SE makes future generations poorer,”… all I can say is, at least I admit when I should have listened to you sooner.

==(3)==> Once you get your head wrapped around the above, take it even further and ask yourself: Why wouldn’t the immediate generation automatically push itself to the debt limit? Why might it, for example, even run a budget surplus and hand that down to its descendants? (Here’s a hint: Suppose we still have an apple endowment economy, but the harvests are really good some years and awful other years. Throw in a modicum of altruism for the next generation. Now ask yourself whether Krugman has been “basically right” on this…)

==(4)==> You guys work on this with the TA until I get back. I have to go to the karaoke bar and practice for Tatianna’s visit in two weeks…

73 Responses to “Debt Burdens: How Deep the Rabbit Hole Goes”

  1. Nick Rowe says:

    And here’s the reply I left:

    Bob: “…but now I’m thinking the only way you make them poorer on net is if the taxes to deal with the debt are higher than the interest payments to the debtholders.”

    Nope. If taxes = interest receipts, then lifetime *consumption* is unchanged, but lifetime *utility* is lower. You can see that from your own examples, or mine, with U=log(C when young) + [1/(1+n)]log(C when old).

    Think about it: if I persuade you to postpone some of your consumption by offering you interest, and then take that interest away, you are worse off.

    Or, think about it: if paying taxes made an individual better off, you wouldn’t need the IRS.

    (Actually, you could really upset Daniel here, if you wanted, by showing that utility *in any given year* is also lower in this case, even though aggregate consumption in that same year is the same.)

    (And that wouldn’t be turning MMT anyway. When I see you mumbling “apples bought = apples sold” to yourself, then I will know you’ve turned MMT. You were much closer to MMT one year ago, when you belived, like they do, in Abba Lerner’s Functional Finance view on the non-burden of the debt.)

    Join me in a Scotch, Bob.

    • Bob Murphy says:

      Well, looks like I’m the TA and the real professor just walked into the classroom.

      But, I am better at explaining than you are, Nick. 🙂 I have lots of Excel charts to make…

      • Nick Rowe says:

        Actually Bob, you *are* better at explaining it than me. I thought the thing you did for the general populace was very clear.

        Hmmm. Tatianna is cute. How many miles from Ottawa are you?

        • guest says:

          If I put some pressure on my closed eye, eventually I see something like that Mandelbrot Set video.

    • anon says:

      You guys with your utility functions keep ignoring that people buying government bonds can’t seem to find anywhere else to put their money and that they should already be pricing that risk, that they’d be taxed to pay their own interest, into their purchase. If they expect low (future) growth the rate should fall and if they expect high (future) growth the rate should rise. You guys seem to think the opposite.

      • Major_Freedom says:

        Ricardian equivalence was already conceded by both Rowe and murphy as kryptonite to the OLG model.

        But realistically, Ricardian equivalence can be assumed to not hold, since there exiss bondholders who do not take future taxation into account when buying government bonds.

        • anon says:

          I didn’t say anything about Ricardian equivalence.

          The government sets the rate of interest to target inflation and/or unemployment. Bond buyers will demand higher prices when times look good because they’re expecting higher inflation and/or they think they can get better returns on the market. When times look bad they’ll be looking to offload risk, while doing better than stuffing their money in a mattress.

          If the government is setting the price of bonds too low it’s giving bond buyers a free lunch.

          I imagine you’re right that bond buyers don’t care that they might be taxed in today’s world (because the risk is spread out), but I’ve suggested a bond sales tax based on the difference between r and g and depending on debt service as a share of GDP. (This way bond buyers could still win and lose, just not too much, which should not be burdensome in the limit. Although long-run efficiency would take a hit maybe.)

          • Major_Freedom says:

            I didn’t say anything about Ricardian equivalence.

            Not directly.

            But you did say that Murphy was ignoring this possibility:

            they should already be pricing that risk, that they’d be taxed to pay their own interest, into their purchase. If they expect low (future) growth the rate should fall and if they expect high (future) growth the rate should rise

            That’s Ricardian Equivalence.

        • anon says:

          Oh, but it doesn’t matter that they don’t take future taxation into account, it’s nonetheless true that they could be taxed.

          In fact if they don’t take it into account the government can charge higher prices.

    • Charlie says:

      Here are my counter-examples to Nick’s taxes are always a burden bit. Will someone consider these cases?

      “You can have positive taxes that aren’t a burden in the growth case. Here is an example, where I augmented Nick’s original example. I held the debt at

      For g = 10%, r = 5%, Debt = 100, Taxes = 5

      Generation 1: consumes 300 (as opposed to a 200 endowment)
      Generation 2: consumes 215 (old (110+100+5) young =0 + as opposed to 210)
      Generation 3: consumes 226 (old (121+100+5) young = 5 as opposed to 221)

      The third generation gets 110 when young, but transfers 105 to pay and service the debt. Then when old they get endowed with 121 and receive 105.

      I haven’t tried solving for prices with concave utility, though, but it should be possible since consumption is increasing across generations. It would require a smaller initial transfer though.”

      Here is an example with no growth.

      “Just don’t let all the old get the benefit spread it out over generations.

      For example:

      Year 1 transfer (debt) 50
      Year 2 transfer (debt+interest) 75
      Year 3 transfer (debt +interest) 87.5

      Government has a debt of 50 to give the first generation. Next generation there is a tax of 25 to pay the interest, then issue 50 of debt to repay principle, but the interest rate increases over time. It starts at 50%, then 75%, then 87.5%… Keep it going indefinitely…

      • Nick Rowe says:

        Charlie: OK, I think I get your example.

        If r is less than growth rate, then we know that a debt will make all cohorts better off, and still be sustainable, even with no taxes. Now put on a small tax. The tax makes them worse off than with no tax. But provided the tax is small enough (less than the interest on the debt), they are still better off than they would be with no debt.

        • Charlie says:


          Yes, I agree. If your baseline is the case with no debt, then debt/taxes can make everyone better off. Also, it may not be optimal to have the max debt possible. Think of your Co*Cy case. If you maximize lifetime consumption for all generations by always passing the entire wealth of the young, then all generations would get zero utility.

          • Nick Rowe says:

            Charlie: I think you would want to increase the size of the debt until the rate of interest rises to just equal the growth rate, and don’t let it get bigger than that (i.e. let it grow at the same rate as the economy, so debt/GDP stays the same).

            • Charlie says:

              You can grow the debt. You just have to grow it asymptoticaaly towards the “golden rule.” Otherwise, if it grows to fast then taxes become a burden and it ceases to be a counter example.

      • Charlie says:

        Oops, generation three needs to transfer 105 when young and get 110 when old. The next generation transfers 110 and gets 115. I’ll try to get clearer about the interest rate path that supports that. Maybe it is just 5%, 10%, 15%…

    • Grant says:

      As it happens, I completely agree with Nick on the lower utility level.

      HOWEVER, this is entirely a function of relative incomes in each period, as well the form that our utility function takes. I hold that this is a quite separate issue from our chosen mode of financing (tax vs debt). I say this because taxing and running deficits are effectively equivalent if g = r.

      Let me put it this way, if g = r, then we can effectively collapse everything into a one period problem. Does that mean that it is good to “tax” people?

      Well, quite obviously, that depends on their relative incomes and utility functions. Let’s assume that everyone gets 100 apples in each period and has a logarithmic utility function where u(c) = ln(c). In this case, any form of redistribution will be bad. That is because a logarithmic utility function describes someone that, at any given income level, values losing a certain amount of money more than they value gaining that amount. Using our example of 100 apples: deltaU(100-x) |>| deltaU(100+x).

      So, let’s say that (Old) Al and (Young) Bob live in the same period and both have an endowment of 100 apples. If I take 3 applies from Bob to give to Al, then Bob’s utility loss is greater than Al’s utility gain. This is a direct result of our logarithmic utility function, which defines a decreasing gain in utility from additional units of consumption!

      To summarize (and maintaining the other assumptions of our pure endowment economy):

      If taxing in the current period doesn’t lower aggregate utility and g >= r, then deficit financing won’t lower overall utility either.

      • Grant says:

        It is, of course, very standard to assume a utility function that describes diminishing returns to consumption. The logarithmic utility function — u(c) = ln(c) — is simply the most commonly used.

        In that case, some of you may be wondering under what circumstances a transfer from one person to another could actually improve overall utility. Well, the most obvious answer is one where you take money from a rich person and give it to a poor person.

        Using our previous example, imagine if Young Bob had 100 apples, but now Old Al only has 50 apples. (A reasonable assumption you might grant, since people typically “earn” less during retirement). If I now take three apples from Bob and give them to Al, then the latter’s utility gain is greater than the former’s utility loss!

        ln(100) – ln(97) < ln(53) – ln(50)

      • Grant says:

        If taxing in the current period doesn’t lower aggregate utility and g >= r, then deficit financing won’t lower overall utility either.

        I’ve actually come to question this statement. At the least, it needs to be heavily qualified.

        Indeed, depending on the exact utility function under consideration, having g > r could inevitably lower utility relative to the non-intervention case. This is because DMU increasingly “punishes” transfers to future generations… which are growing ever wealthier due to the high g.

        See here for a more in-depth discussion.

    • guest says:

      The misallocated resources are a form of the postponing you’re talking about.

      The assessment of future wealth in terms of fiat money is what’s throwing him off, I think.

      Here, watch this video:

      Smashing Myths and Restoring Sound Money | Thomas E. Woods, Jr.

  2. Nick Rowe says:

    1. “……but if you never pay down the debt, then that impoverishment is indefinitely postponed.”

    Nope. That should read: “……but if you never *increase taxes*, then that impoverishment is indefinitely postponed.”

    2. Nope. Stuff the balance sheets. It’s utility that matters.

    3. Sure. It’s called “insurance”. Certainly we should enrich ourselves at the expense of a future generation, if they are going to be richer than we are. And we should enrich them at our expense, if they are going to be poorer than we are. You haven’t turned MMT Bob, but you might be turning socialist 😉

    4. Hey guys, I’ve just done your assignment for you!

    • Beefcake the Mighty says:

      Your argument is a piece of shit. And so is your face.

      • Nick Rowe says:

        I really love GWAR! Those guys are such sweeties!

        • Beefcake the Mighty says:

          +1.5 for getting the GWAR! reference (remembering the exclamation point is an added bonus), but you’re still the intellectual equivalent of a Seattle burrito:


          • Major_Freedom says:

            How exactly can there be an intellectual equivalence there? How can one’s intellect be related to such an act?

            • Beefcake the Mighty says:

              Major_Freedom is the intellectual equivalent of a Cleveland steamer:


              • Major_Freedom says:

                Same questions.

                How exactly can there be an intellectual equivalence there? How can one’s intellect be related to such an act?

              • guest says:

                I think he’s using “Cleveland steamer” metonymically.

              • Major_Freedom says:

                Ok, that’s the form, but It still needs content.

            • Major_Freedom says:

              How is one’s intellectual output “akin” to taking a shit on someone?

              What is the connection?

              • guest says:

                He means it metonymically.

                It’s not the act itself he’s comparing, but the connotations of the act.

              • Major_Freedom says:

                I still don’t get the connotation.

                He cited a sexual act, which presumably implies all parties are deriving some benefit.

                So if Fruitcake says someone is the “intellectual equivalent” of that sexual act, wouldn’t he be complimenting that person?

          • guest says:

            That iPhone site was the other part of the joke you all weren’t getting.

            That’s why I posted it.

            Oh well.

          • Tel says:


        • Bob Murphy says:

          Normally I delete everything Beefcake posts, but since Nick seems to get the reference, I will let it stand this time…

          • Nick Rowe says:

            Yep. If you get the GWAR! reference (but not otherwise), it’s sort of funny once. But only sort of, and only once.

          • Grant says:

            Let’s be honest, even if I did get enjoyment from seeing Beefcake make the same joke for the 100th time, he could troll this website far more effectively using this.

            (Bob, I warn you… What you are about to see will make you *really* mad.)

    • anon says:

      Regarding point 3: Not everyone benefits equally (in one generation) from “pushing the debt” to its limits. (This may be because you’ve equated bondholders (a subset of a generation) with an entire generation and assumed everyone (in that generation) would benefit from equally from the “extra” spending.

      Plus, Nick has made a big deal about uncertainty of future g and r, but there’s uncertainty of future t as well. Many of the same people running up the debt will be the same people paying taxes on it later. (Or at least they can’t know for sure that they won’t be.)

    • Bob Murphy says:

      Nick, you may be right. I need to play with Excel spreadsheets a bit…

  3. Daniel Kuehn says:

    I think my brain is fried and I’m not exactly following where this is headed… but if I said something that you treated unfairly I guess that’s good news for me.

    re: “All of God’s children have added something to this fascinating issue.”

    Save the preachin for Sunday, Murphy 😉

    Enjoy karaoke.

  4. Nick Rowe says:

    Some blogger (sorry, I’ve forgotten who) posted a long quote from Buchanan just a day or two back. It’s very relevant here.

    The debt itself just gives future generations another savings vehicle, which they can use if they want, so it can’t make them worse off. But any taxes to service that debt (if needed, and they will be if r ever gets > than the growth rate) will make whoever pays those taxes worse off. It doesn’t matter if those taxes are for interest only, or interest+principal.

    • skylien says:

      This argument assumes that the reference point for the comparison of “worse” and “better” is the same physical output as in the past. However ultimately if the economy grows with or without government debt equally, then on relative terms future generations are always worse of as soon as there is only 1 dollar interest to pay compared to the scenario in which no government debt was issued in the past.

      Put differently: For government debt not to burden future generations it must by definition be invested in successful productive investments that allow the economy to grow more in the future deducted by the interest to service the debt than in the scenario without government debt.

      It’s two separate issues if the government debt stays stable/sustainable because of enough growth in the economy and if future generations ultimately are burdened by government debt. To answer the latter you would need to answer, where did the growth come from.

      • anon says:

        skylien, the latter question works both ways, though. The future cohorts could be worse off in the “stable/sustainable” sense, but still be better off overall.

        • Major_Freedom says:

          How can one be better off overall, but not in the sustainibility sense? Wouldn’t better off overall include in the sustainable sense too?

          I mean, if I was borrowing and spending at such a high rate that in 6 months I’ll go bankrupt, I don’t think it makes sense to say I am still better off overall.

    • anon says:

      I disagree, the debt is more like an investment vehicle for the people buying bonds in the present.

      No taxes have to be issued at all as there could be an outright default.

      I’ve posted this elsewhere but to see the absurdity of saying the debt is a burden on future generations: in the 200 GDP apple model: in period one the government could borrow 50 apples at 4000 percent. In period 2: the government owes them 2050 apples. Over a thousand percent of GDP.

      Can the future generation ever pay this off? No. So in any one period not only is possible for the people currently alive to default: totally sparing future generations, but it’s possible for the debt to be impossible to pay off: therefore impossible to pass down.

      • Major_Freedom says:

        Suppose there are taxes.

      • skylien says:

        I just don’t see how any of this contradicts what I said. Yes of course the government can default. That doesn’t change that a whole generation might be worse off. And of course if they default completely or repay completely the debt then future generations from this point on are freed from any additional burden.

        However the generation who had to repay OR suffer the default will be worse off compared to the generation who started the debt cycle.

  5. The Existential Christian says:

    By the looks of that video you seem to have found someone’s stash.

  6. Joseph Fetz says:

    I don’t know that I can even conceive of economic topics while experiencing the acid flashback caused by this video.

  7. Bob Murphy says:

    I rocked in karaoke. Had several compliments, one kid said I had “the best song of the night,” and pretty hot waitress was squeezing my shoulders when she had to walk behind me. Much better than debating Ken B., I must say.

    • skylien says:

      What if Ken B. in reality is a pretty hot waitress?

      • Bob Murphy says:

        “Ken” is short for “Kendra”!

        • Ken B says:

          I knew a Kendra once. She was 6’4″ and gorgeous. Now I under stand that going ‘weak in the knees’ is not a metaphor!

          • Major_Freedom says:


  8. Tel says:

    … but if you never pay down the debt, then that impoverishment is indefinitely postponed.

    Hmmm, we don’t need to know how far the rabbit hole goes, to know that the depth is not infinite. The debt only works if you can keep rolling it over, and sooner or later a generation will come along who is not interested in taking on that debt (for whatever reason). At that point there’s no room for manoeuvring… by your own calculation, at that point you MUST pass the debt on or else hit deleveraging.

    The whole thing about debt is that it grows some times and shrinks at other times, it is adaptive to circumstance. Trying to plan for a steady state debt that constantly juggles down a chain of fragile trust in a changeable world — it might be theoretical possible, but you will never encounter that in any real situation.

  9. Grant says:

    Since I might not get the chance to do so again, let me just say that Nick Rowe’s comment above points to the other thing that bothered me about Bob’s original model: His choice of interest rate (r) is internally inconsistent with his chosen utility function. (I didn’t mention this in my original “critique” because I wanted to focus on the issue of bequests and r > g).

    The way I see it, the only thing affecting the interest rate in Bob’s endowment economy must be pure time preference (p). I say this because both economic growth and population are static. Thus, r = p.[*]

    However, no discounting enters his utility function: U=sqrt(A1)+sqrt(A2). As Bob’s says: “there’s no time preference” in this utility model. Clearly, this can’t be the case… at least assuming that I haven’t overlooked something in the previous paragraph!

    Given this utility function, I don’t understand why government would even have to borrow at 100% in the first place. After all, consumers are indifferent as to whether they consume in the current period, or the next. The problem would effectively collapse into one of intra-generational transfers (r = p = 0).

    Did I miss something?
    [*] You could even think of things in terms of the Ramsey equation: r = p + n*g … where “n” is the elasticity of the marginal utility for consumption and “g” is per capita growth. We know that g = 0, so that implies r = p.

    • Bob Murphy says:

      Grant you have to make the lenders benefit from lending money to the government. So there had to be a positive interest rate, because of DMU even with no explicit time preference. You were asking people to consume a little as Young and a lot as Old. Because of the sqrt you needed to pay them interest to make it worthwhile.

      I picked 100% just for an easy round number.

      • Grant says:

        Ah, yes. That sounds reasonable to me.

      • anon says:

        Bob, in the real world you have uncertainty, inflation, and income inequality so that people will buy bonds as a way to either save or hoard money even at zero real interest.

        People aren’t Monty Brewster all the time, sometimes they’re Scrooge McDuck.

        • Major_Freedom says:

          I agree, it makes no sense to make the universal claim that debt can NEVER burden all individuals after a certain point in the future.

          There are too many variables being ignored.

  10. DMS says:

    A humble attempt at overall reconciliation:

    1. Krugman is “right” in that productive output is not altered in any given time period by virtue of government borrowing (this is actually more akin to Modigliani-Miller than Ricardian Equivalence), assuming no market distortions from said borrowing (an absolutely huge throwaway assumption, but not the point of debate for this particular issue of temporality).

    2. Murphy is “right” in that the nature of bond financing allows for the “redistribution only” concept of Krugman to exist across time, i.e. taking from a future generation for the benefit of a current generation. This is simply re-framing Krugman’s notion of a closed system to include the variable of time, i.e. while all that can be done is redistribution in the closed economic system (Y may be worse of than X when Y is taxed to pay back X’s bonds, but the whole economy is unchanged), the closed system can include a time vector per Murphy’s illustration, so that Y may come many generations after X. In this sense, a burden can be imposed on Y without Y’s consent through the operations of the bond market, still consistent with Krugman’s correct assertion that no economic change has occurred in any given time period.

    3. Rowe is “right” to reconcile these notions by highlighting the silliness of a bequest of bonds between generations, i.e. Krugman’s semi-explicit assumption/explanation. As he noted, this is a twist on Ricardian Equivalence, and is manifestly NOT how actual capital markets operate – the bonds are purchased inter-
    generationally, not bequeathed, without question.

    4. Murphy-Prime is “right” to observe that the debt can rollover indefinitely, and that the future burden may never be realized by future generations. That does not mean, however, that there is no burden in existence, or that prior generations haven’t taken net transfers from future generations – it only means that the burden can be theoretically postponed forever by each succeeding generation. Perhaps this is the Mandelbrot mindblower – I cannot say – but in Krugman’s defense he has stated this point explicitly as a reason not to be concerned about the debt. He is right about the rollover concept, but wrong about the lack of concern (see below).

    5. So can this be reconciled in a digestible manner? I think easily, if one thinks more like a financier and less like an academic economist. That is, in order to compare financial apples to oranges, an investor attempts to cobble together a financial instrument that mimics, or exactly replicates if possible, the financial behavior of a complicated sequence of financial events. The investor can then compare this hypothetical or synthetic instrument with other costs/benefits directly to identify a preference. In our case, the Murphy-Prime rollover scenario is known as a Perpetual Bond, which requires no principal payment, only interest payments in perpetuity. There is a price for such an instrument, and it will have a higher interest rate than a term bond (just think of a typical yield curve rising with time). This is precisely the point. The US government does not fund its debt with Perpetual Bonds (though it could in theory), and instead finances itself with term debt and perpetual rollover. The spreads between the interest charges of a true Perpetual Bond, and those actually paid by the US Treasury, are the effective annual “costs” or burden of the inter-generational transfer that Krugman says does not exist, but that Murphy, Rowe and Murphy-Prime correctly have noted must exist. But if it exists only notionally, why care at all? Well, while this annual cost (which I very roughly estimate at $600 billion per year, using a 400 bps spread on a Perpetual Bond to the Treasury’s actual borrowing costs, on $15T of debt) is quite real in the sense of an implicit risk in the system. By choosing to finance with short-duration term bonds, and then seeking to roll them over in perpetuity, the US Treasury is assuming risk that is hidden in the system – the risk that one day the market won’t rollover and the burden will become due through taxation (also the risk of interest rates rising, but that can be ignored for our purposes here). That will make the generation at the end of the line manifestly worse off (see Murphy’s construct), and the annual price of that risk is roughly $600 billion annually. We could absolutely choose (in theory) to remove that Sword of Damocles for future generations by re-issuing all $15T as Perpetual Bonds, and taking on the costs today. One could debate the merits of either choice. But whether you choose the side of taking on the cost now, or the side of taking on the risk instead, the Sword of Damocles does in fact exist, and in that sense Krugman’s position of no burden for future generations is untenable.

    • Bob Murphy says:

      Pretty good summary DMS. (Not saying I endorse every piece of it.) The mind-blowing thing for me was that now I think the earlier generations benefit when they make the debt increase, and the later generations lose when they make the debt decrease. So I’m thinking that it fundamentally is the debt, not the taxation, in terms of wealth, and the taxation is just the manifestation of what the debt already “is.”

      Perhaps it is just the balance sheet vs. flow approach. I’m saying the issuance of government debt PER SE is a claim on “future taxpayers.” So how in the world is that not a prima facie burden on them? Now when are those resources actually extracted from them? Well, when the government taxes them of course. And in so doing, the outstanding government debt shrinks.

      So, the existing stock of government debt is the “stock” concept representing the present value of all future screwing of Americans, while the actual taxes that will occur on them in the future is the “flow” of them being screwed.

      • DMS says:

        Yes, taxation is not the issue, it is the debt itself, i.e. the mechanics of bond financing that allow for inter-generational wealth transfer. If/when rollover stops, it doesn’t matter whether taxes are raised to pay off the debt, or whether money is printed to retire the debt by seigniorage, or whether assets are sold to generate funds to pay off the debt, or whether default occurs. Any retirement of the debt in the future, which all of the above represent, represents the endgame of kicking-the-can and the final realization of the wealth transfer that started generations ago.

    • DavidZ says:

      “Murphy-Prime is “right” to observe that the debt can rollover indefinitely, and that the future burden may never be realized by future generations. That does not mean, however, that there is no burden in existence”

      Suppose a government finances a $6 trillion odd war with Iraq through 10-year bonds or 30-year bonds. Assuming the war brings no real benefits to the people, then how can it NOT represent a massive burden even if the debt is rolled over forever?

      For that $6 trillion war expenditure to occur, massive amounts of resources (labor, capital, equipment) had to be diverted away from wealth-producing investments – e.g. (usefully-productive) factories that would have been built in the US, HAD TO go un-built, because that money was diverted to sending hundreds of thousands of people overseas to go blow stuff up.

      That represents a major malinvestment or malexpenditure of capital, that would take a long time to correct. It most certainly has to impose a massive burden on both the immediate and subsequent generations.

    • DavidZ says:

      “Y may be worse of than X when Y is taxed to pay back X’s bonds, but the whole economy is unchanged”

      It’s impossible to know to what extent the ‘whole economy’ would be changed because you don’t know what people would have done with their money before it was seized from them.

      Someone being taxed today to pay off a previous generation’s loan (for e.g. fighting wars), might instead have used that money to invest in medical research that might have cured cancer in a parallel universe where he wasn’t bonded to the loan, but now in our universe that research never happened, the person who would have cured cancer got blown up in Iraq, and we still sit with cancer as a problem.

      Economic systems are far too chaotic to make claims about ‘overall’ better-off-or-not, even if one could set aside the obvious moral problems with government bonds (which one can’t).

      The answer to these questions though lie in the moral arguments.

      • DMS says:

        I agree wholeheartedly with the sentiments, but those are separate issues from the very narrow question of inter-generational wealth transfer owing to government debt financing. For example, suppose the borrowed money is not used per your example, but rather was “well-spent” by the government. That would still not mean that no transfer from future generations has occurred, which is what Krugman et al seem to argue, but rather that the transfer was “desirable”. The desirability is a very different point of debate, and arguably much more important, but different nonetheless.

        I admit I haven’t followed all the various threads and blogs on this topic, but it is this part of the discussion that I find so galling from professional economists, and it was this narrow point I was attempting to clarify in my post. Few of these economists seem to debate whether the borrowing/transferring is a positive event or not (what I take to be your point), but instead ignore that debate entirely by the obfuscation that “we owe it to ourselves” and therefore no costs are incurred when governments fund current spending with debt. Instead, the essential point of all this sturm und drang is as follows: ANY increase in debt, under the rollover financing construct that obtains in the real world, for whatever purpose (good or ill), directly represents a forced taking of a future generation’s wealth for the benefits of the current generation, either through a future repayment/retirement of that debt or through the imposition of uninsured system risk as the debt is rolled in perpetuity.

        In my opinion, the morality and desirability of that merits serious debate, as does your important point on the use of funds, but as I said, Krugman’s point that there is no burden at all is simply untenable, and seems to forestall the proper discussions taking place.

  11. Bob Murphy says:

    Nick, if you’re still reading, OK duh I realized what I did wrong last night. What happened (like I warned in the post) was that I was doing apple scenarios in my head while lifting weights.

    Here’s my current stance: Paying down the debt really *is* the key, just like I said. But, if interest rates are positive, then the debt would grow. So by the middle generations just floating the debt, they *are* actually paying it down every period, relative to what it otherwise would have been.

    Thus I have reconciled our positions. I’m still saying it’s best to think of the burden on future taxpayers as the existing stock of government debt right now, and that it’s painful for future generations to knock down that stock. You want to say, “No Bob, even if the debt isn’t paid down, the taxes to pay interest are painful,” and that’s right. But it’s because at positive interest rates, they actually are paying down the debt every period; it wants to rise and they knock it back down to the previous year’s value.

    You like?

  12. K Sralla says:

    Bob, this is a complex issue, but you and others have overcomplicated the issue in my view:

    1) Assume a government begins with no taxation, and issues debt which is all purchased internally. To make good on their promise to repay, they must raise taxes before the bonds mature. We all agree. They can raise taxes and inflate at the same time, but they must raise taxes to meet the promise to repay.
    2) A bond market and a stock market operate within our simple model world.
    3) Since investors who purchase the debt now might have chosen to purchase private equities, there is no present burden on anyone now. Nobody forced them to buy the bonds, and if they would not have chosen to buy the bonds, they would have likely purchased stocks instead. It would be perverse to hold that since they chose government bonds, that they absorb any present *burden* related to the debt issue.
    4) The folks owning no bonds (left holding the bag) at the time taxes are raised in the future absorb *all* of the potential debt burden. If the taxes are raised in the future, then the potential debt burden has been shifted *forward* in time, just like a hot potato. These unfortunate folks not owning the government bonds at the time of tax increases are the only people in our model who might possibly be *burdened* by the past debt issue. The caveat is that they might also recieve a benefit if the past debt issue might possibly lead to an economy which has caused their incomes to grow faster than they would have under no debt issue.

    Conclusion: Certainly Krugman is wrong in saying the debt burden cannot be shifted forward in time. It must be at least conceptually conceded that it is possible in our simplified model. It takes no excel spreadsheets to demonstrate this.

    ONE HUGE CAVIAT: Our model world is *NOT* the real world. BIG QUESTION: Should we analyse real world debt issue conceptually like we see it in this simplistic model? my view: YES

    WHY? Because it is the only way we can untangle the conceptual complexity which is our real world, where new debt is issue occurs over the backdrop of old debt issue, and we have current taxes due. We also have souls which are entering and leaving our world everyday.

    I think all new debt issued must be conceptually viewed as in our simple model world, where the government begins with no taxation. Accounting wise, there is no good way to keep accurate books of all of this, and part of the analysis of whether the debt issue has been good or bad involves a counterfactual (ie, whether under an alternative scenario of no debt issue, the economy might have grown faster).

    But just ask yourself this question: If you were a benevolent king of the world and were not all-knowing, and wanted to create the most prosperous society possible, which would you choose? a) To use the public’s money to invest in projects which *you figure* will improve the economy most, or b) let the millions of potential individual investors decide for themselves where they will get the best returns on their investments?

    In the end, this entire scheme is little different than the socialist calculation debate. By saying that we have the power to levy taxes, the government does not force anyone to buy the bonds, but it provides provide great incentive when it says I will tax, and the only way to protect yourself for sure is to loan me (the government) that I want to invest. What it does not advertize is that it can also tax via inflation.

    The modern mainstream view of public finance arose during the era of intellectual enchantment with central planning, and it is this “crank” view of public finance which has plagued the economics profession ever since. Even you are having trouble getting untangled from it.

    Bob, as Festus said to Paul: “Your great learning has driven you out of your mind.”

  13. K Sralla says:

    “These unfortunate folks not owning the government bonds at the time of tax increases are the only people in our model who might possibly be *burdened* by the past debt issue”

    Yes, I know that this is not completely right, but go with it for the sake of my illustration. Certainly if the econommy is made worse in the future as a result of the debt issue, everyone (no just the non-bondholders) have been hurt.

  14. K Sralla says:

    My post was written hastily, and has all sorts of typos and mis-spellings after I re-read it. Forgive me, and try to cut through this to try to understand the point. Addtionally, I know it is a simplistic illustration, but try to understand the logic behind it, before pointing out all the loopholes.

    It is only meant to point out that certainly it is possible to easily contruct a model defined by conditions where the burden of debt issue *is* shifted forward in time, without the use of any apple juggling.

    Adam Smith called this a juggling trick.

  15. DavidZ says:

    “Here’s a hint: Suppose we still have an apple endowment economy, but the harvests are really good some years and awful other years”

    Because if the young generation dies of starvation you sure aren’t going to be collecting on your slav-, I mean, debt payments from them?

    Any good farmer desires to keep his cattle healthy and maximize the production of his investment in his cattle stock.

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