19 Oct 2012

Generations vs. GDP

Debt, Krugman 57 Comments

Yes, I have much more to say on the debt debate, not least because Dean Baker chimed in on a previous post (linking to his latest). I am waiting for clarification on his attempt to ballpark the empirical significance of the Nick Rowe Effect, and once I’m sure what Baker is saying, I will either pat him on the back or pounce. (My hunch is, I will pounce.)

For right now, just another quick clarification. Daniel Kuehn has been the champion of this view, but I think others believe it too, and going over it will in any event (I hope) make things easier for everyone who still cares…

Daniel has claimed all along that Krugman was *merely* claiming that government debt can’t reduce future GDP. Daniel thinks that Nick Rowe and I “moved the goalposts” by talking about future Americans, and that there is mushiness in the term “future generations.” Some of my thoughts:

==(1)==> Neither Nick nor I ever claimed that government debt (if we rule out the disincentives from taxes, crowding out, etc.) per se would make real output lower in the year 2100. Indeed, we deliberately constructed our examples to have a constant GDP, just to make sure that issue wasn’t throwing anybody.

==(2)==> What Nick and I *did* claim was that Paul Krugman and Dean Baker were leaping from this correct proposition, to the FALSE conclusion that “Americans in the future” couldn’t be made poorer because of government debt. After all, this is an easy thing to conflate. Look at this:

TRUE STATEMENT: Government debt (under the conditions we take for granted in this debate) can’t reduce the total after-tax income that Americans earn in the year 2080 and beyond.

FALSE STATEMENT: Government debt (under the conditions we take for granted in this debate) can’t reduce the total lifetime after-tax income earned by Americans living in the year 2080 and beyond.

==(3)==> If it is pointed out to any pundit or American voter who is interested in this debate, that our deficits today might make every single American born after 2013 poorer, but that US real GDP from 2013 onward will remain unaffected, then 99.9% of the people hearing this will agree that the former effect is the relevant one for our policy debate. Nobody cares about future GDP per se, except insofar as it has relevance for Americans who will be alive in the future. (Well, Scott Sumner might care about future GDP more than future human beings, but that’s about it.)

==(4)==> Daniel surely thought he had a smoking gun in his favor when Paul Krugman recently wrote this:

[L]et me suggest that the phrasing in terms of “future generations” can easily become a trap. It’s quite possible that debt can raise the consumption of one generation and reduce the consumption of the next generation during the period when members of both generations are still alive. Suppose that after the 2016 election President Santorum tries to buy senior support by giving every American over 65 a gift of newly printed government bonds; then the over-65 generation will be made richer, and everyone under 65 will be made poorer (duh).

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? [Emphasis in ORIGINAL.]

Now I bet Daniel saw that and said, “Aha! I knew it! Krugman is here saying in crystal clear language that he knew all along that every single American born in 2013 and later, could be made poorer by our deficits today. All Krugman was telling his readers was that the important thing was that real GDP would still be OK, from 2013 onward. It’s hard work being so awesome.”

Nope Daniel (if that’s what you thought), that’s not what just happened there. Here’s what happened:

Krugman all along has thought that “Americans collectively in the future” was interchangeable with “real output in the future.” So yes, he phrased some of his arguments in terms of real GDP, not because he thought real GDP was more important than our grandkids, but rather because he thought our grandkids couldn’t possibly be hurt so long as real GDP was the same as it otherwise would have been, during every single year in which our grandkids are alive. I mean re-read what I just typed out: This is a very natural thing to believe. Only with the screwy overlapping generations thing, does this “shortcut” fall apart.

So now, Krugman is bothered by this Nick Rowe guy, a little Canadian gnat who won’t go away. Krugman ignored him back in January 2012, but man this guy just keeps buzzing around his ear, so Krugman finally breaks down and quickly skims some of this deficit-phobe’s posts.

Now because Nick for some inexplicable reason prefers to type out 4 dense paragraphs of text describing an apple economy involving *only* 3 generations–rather than just reproducing my beautiful Excel table showing the phenomenon over 10 generations, where the first 5 all gain and the last 5 all lose–Krugman didn’t see the big picture. Instead, Krugman thought Nick was truly playing a trick with the word “generation.”

Remember, Krugman all along has been thinking that since real GDP in the year 2080 can’t be reduced, then it can’t possibly be the case that Americans “as a whole” alive in 2080 can be hurt. Sure, if the government takes a billion from some Americans in 2080 those Americans will be poorer, but then when the government gives it to some OTHER Americans in 2080, those Americans will be that much richer, dollar-for-dollar, and the whole thing is a wash. Thus, since real GDP in 2080 is unaffected, Krugman thinks interest payments on debt can’t possibly make “America as a whole” poorer in 2080. One way Krugman describes this, is to say the debt can’t make “future generations as a whole” poorer.

Ah, but now this little stinker Nick Rowe comes along. To repeat, Krugman skims Nick’s posts, and then thinks this is the trick: Nick is simply showing that one generation can make “the next generation” poorer if the impoverishment happens while they’re both alive.

So, Krugman thinks, “Oh my gosh this is so stupid. I know real GDP in 2080 can’t be reduced by debt. So as a shortcut I have said, ‘Future generations of Americans can’t be hurt by debt.’ But now this hustler Nick Rowe is pointing out that it’s theoretically possible in the year 2080 that all of our grandkids could extract a trillion dollar interest payment from all of our great-grandkids, who are alive in 2080 too. So in that sense, Nick thinks he just showed that a future generation–namely, all of our great-grandkids–were made poorer by the scheme. But give me a break, it’s still true, as I’ve always said, that the group ‘Americans alive in 2080’ are just as well off as if the debt were $0. Somebody shoot this guy.”

Does everybody see that? Go read Krugman’s quotation above about the “trap.” See how my interpretation perfectly explains what he’s writing here, whereas Scott Sumner’s interpretation makes no sense?

Last point I want to make to all of you who have been defending Krugman, and I especially include Daniel Kuehn, who thinks Krugman is today’s Bastiat: Isn’t it odd that Paul Krugman, who is normally so crystal clear in his writing, keeps going off on total non sequiturs, and keeps leaving it up to you guys to explain “what he’s really been trying to say” on this debt stuff? Isn’t the more plausible explanation that my interpretation of his position is correct, since every point coming out of his blog fits my interpretation perfectly?

In other words, if Krugman is thinking about it the way I claim he is, then he has been writing crystal clearly on this thing all along. However, if Krugman has merely been trying to say that it’s transfer payments that make future generations poorer (like Gene Callahan said), or that Krugman agrees that debt owed to foreigners is benign (like Landsburg said), or that debt can make all future Americans poorer but not future GDP (like Daniel says)…then he has been unbelievably unclear all along. Why doesn’t he just come out and say those things? Why rely on thought experiments about presidents suddenly issuing bonds etc., that make absolutely no sense if his position all along has been what you guys claim?

57 Responses to “Generations vs. GDP”

  1. Major_Freedom says:

    “OK, fine, Krugman is wrong. Government debt COULD make every individual in the future worse off.”

    On page 453 of the book “Things Krugman followers cannot admit.”

  2. Major_Freedom says:

    Krugman all along has thought that “Americans collectively in the future” was interchangeable with “real output in the future.” So yes, he phrased some of his arguments in terms of real GDP, not because he thought real GDP was more important than our grandkids, but rather because he thought our grandkids couldn’t possibly be hurt so long as real GDP was the same as it otherwise would have been, during every single year in which our grandkids are alive

    That’s it right there.

    Isn’t it odd that Paul Krugman, who is normally so crystal clear in his writing, keeps going off on total non sequiturs, and keeps leaving it up to you guys to explain “what he’s really been trying to say” on this debt stuff? Isn’t the more plausible explanation that my interpretation of his position is correct, since every point coming out of his blog fits my interpretation perfectly?

    Is that meant to be a facetious comment, or a serious one?

    • Bob Murphy says:

      MF wrote:

      Is that meant to be a facetious comment, or a serious one?

      It’s a serious as government debt. Look, Krugman isn’t wishy washy. When he wants to stress that government deficits right now would stimulate the economy, and he wants us to realize the type of investment is irrelevant, he talks about fending off a bogus Martian invasion, knowing full well right-wingers would mock him.

      If Krugman thinks a housing bubble is needed to replace the collpasing Nasdaq bubble to snap the economy out of recession, he will say that. (Later he’ll backtrack about it, but at the time he’ll say it.)

      Krugman originally thought ABCT was the phlogiston theory of fire. Then he saw my numerical sushi example, and said, “OK it’s theoretically possible, like what happened under Mao. But it’s not empirically applicable, because XYZ…”

      And so in this debate, if Krugman actually saw that there was confusion in the debate, and that the correct view was that real GDP wouldn’t go down but lifetime consumption for every single American in the future could go down, then he would have come up with a little thought experiment making that distinction. Then, like Dean Baker, he would have argued that empirically this isn’t a big deal, and hey we have idle resources right now so deficits rule.

      Krugman would not continue to make false and/or irrelevant statements if he had seen my Excel file. I speak truly, MF, this latest post from Krugman convinced me that Krugman doesn’t read my blog. Krugman and Nick Rowe are about the 2 people on Earth who would absorb that Excel table in 8 seconds upon a first viewing and see its full ramifications.

      • anon says:

        Bob, on the Krugman “advocated a housing bubble” meme. Two weeks later he warned about a possible housing bubble by citing Dean Baker’s paper which said there was a housing bubble: http://www.nytimes.com/2002/08/16/opinion/mind-the-gap.html?scp=1&sq=krugman+housing+bubble&st=nyt

        • Major_Freedom says:

          George Bush warned of Iraqi soldiers shooting at American soldiers…after he sent American troops to Iraq.

          So he’s not intellectually or in any other way responsible for American soldiers getting shot at in Iraq.

          • anon says:

            Major_Freedom, I’m only pointing to the column to cast doubt on the interpretation that Krugman called for a bubble in the first column. I don’t believe he “called for a bubble” at all, but even if he did, that would be like George W. Bush: starting the war and then two weeks later ending the war. Unless you think Krugman not only called for, but started, the housing bubble (if he could start it why didn’t it end two weeks later with his second column) then your analogy doesn’t make much sense.

            • Major_Freedom says:

              The analogy works based on the principle of wanting something at first, then denying intellectual responsibility afterwords because of some “warning” after the fact. The “starting” of things as if Krugman has the power to create a bubble, is not what I was referring to.

              I think the 2002 article WAS an advocacy for a bubble, because in 2009, Krugman was in Spain and said point blank to the interviewer “A satirical newspaper once wrote an article that said we need a new bubble to replace the housing bubble…and that is pretty much exactly right.” (paraphrased)

              Krugman likes bubbles blown up by the Fed, as long as he can post an article “warning” about them before they burst, so that he can pretend to be against them in principle.

              • anon says:

                I missed your other reply before, but would like a citation for the Spain interview.

                I doubt he’s calling for a bubble but is saying that the private sector won’t be able to make up the lost demand on it own (without one), so the government will have to pick up the slack in purchases. (Or lower the value of the dollar to boost exports.) (Dean Baker, by the way, regularly criticizes people for wanting to bring housing prices back to their bubble levels (relative to historic trends).)

                Basically the 2002 quote was saying he doesn’t see how we’ll avoid a recession (and recession fighting measures) unless therte is another bubble. Not that he wants another bubble per se, just that he doesn’t think the private sector will create the demand necessary avoid a recession on its own.)

                He possibly thinks that bubbles are better than recessions: so if its a choice of one or the other he’d prefer the former. I don’t think he thinks it has to be a choice of one or the other though, because he believes in fiscal policy.

              • Major_Freedom says:

                anon:

                Krugman wanted a bubble in 2002.

                Krugman wanted a bubble in 2009.

                You can google the Spain 2009 interview.

          • anon says:

            Also there’s a false equivalency between war and “housing bubble”. American soldiers dying and *two weeks* of higher home values are not morally equivalent. (Or is Krugman responsible for the whole bubble?) So newspaper columnists calling for war are not comparable to newspaper columnists calling for higher housing prices. At least to my eyes.

            You do make a good point that journalists should be held responsible for what they right regardless of what it is. But, again, I don’t think he called for a housing bubble, and if someone thought he did he warned of it two weeks later. (And again in 2005.)

            • Major_Freedom says:

              I wasn’t trying to “equalize” wars and housing bubbles. I was just showing that merely “warning” about something does not mean that one’s hands are clean.

              I think Krugman did advocate for a housing bubble. Not only because of the 2009 interview, but also because of the MANY instances around 2002 where Krugman was literally screaming for lower interest rates in order to boost housing and offset the investment slump post nasdaq bubble collapse.

              • anon says:

                What 2009 interview?

                Do you have a citation for these other instances where Krugman wanted to boost housing in 2002? (Not saying they don’t exist.)

                Wanting lower interest rates is not the same as wanting a housing bubble. (Dean Baker has suggested the Fed could pop bubbles with “talk”.)

              • Major_Freedom says:

                The 2009 interview can be found quite easily online. You have kung fu, no?

                Krugman specifically mentioned how artificially low interest rates would be a good thing because of what it will do to the housing market.

  3. anon says:

    If it is pointed out to any pundit or American voter who is interested in this debate, that our deficits today might make every single American born after 2013 poorer, but that US real GDP from 2013 onward will remain unaffected, then 99.9% of the people hearing this will agree that the former effect is the relevant one for our policy debate.

    And this would be incredibly misleading as it is not “our deficits” that will make them poorer but our tax policy and whether or not they buy bonds. (And if they buy bonds how much the economy grows. And only then if they want to sell the bonds.)

  4. Daniel Kuehn says:

    I agree with the set up… I’m not exactly seeing how your interpretation of Krugman is “clearer”. I hate this line that I’m left to “explain” Krugman to everybody. Whenever I challenge your “Krugman Kontradictions” I’m saying exactly what seems like the clearest interpretation to me. Scott Sumner’s take may well be wrong… I haven’t read him closely on this.

    I am more curious right now how to take Grant’s point that what changes things is the taxes, not the debt. It only hurts future generations when you change the financing scheme.

    On the one hand, it seems very unfair to require that we retire the debt, since we’re dealing with modern economies. But it does seem fair to tax to make interest payments. But if we do that, it makes me wonder why — if we introduce that bit of realism — we don’t introduce other bits of realism about deficit spending’s positive impact on GDP (through the mechanisms Nick listed), etc. I think Grant is right that you broke the fourth wall by introducing forces other than the debt, but obviously if we continue to do that we’re not talking about the debt anymore at all. Because you really haven’t proven anything about debt you’ve proved something about taxes.

    • Brent says:

      ” But if we do that, it makes me wonder why — if we introduce that bit of realism — we don’t introduce other bits of realism about deficit spending’s positive impact on GDP (through the mechanisms Nick listed), etc.”

      Because if you did that, you are talking crowding out vs. crowding in and I don’t think you really want to add that to this debate. It is better to just assume these effects balance out for the purposes of this discussion, don’t you think?

      • Daniel Kuehn says:

        Exactly.

        I’m just not sure where it’s more productive to draw the line. Bob seems to think the place to draw the line is right where it makes things change in his favor.

        That might be the appropriate place… but it seems awfully convenient.

        Why not assume no taxes at all? Why invoke one and not the other? I’m not sure where to draw the line, personally. Grant just raised the significance a lot of these issues for me.

        • Tel says:

          I think you must at least assume that wealth distribution both comes from somewhere and goes to somewhere. Otherwise you get a model that creates something from nothing.

        • Major_Freedom says:

          That might be the appropriate place… but it seems awfully convenient.

          It was MEANT to be “convenient” DK! Haven’t you gotten the point of this debate yet?

          The example was purposefully contrived, purposefully and meticulously designed so as to spit out a desired response.

          Now, before you jump up and cry foul, please understand that this is the PROPER approach to take when analyzing a UNIVERAL assertion that government debt can NEVER burden future generations in the way that the man on the street understands.

          It is quite honestly fascinating how someone as (allegedly) hip deep in the debt debate as you are, can still, at this time, after 11 months, after repeated pleading from both Rowe and Murphy as to the purpose of the OLG model, be completely oblivious to the core issue at hand.

          Yesterday you said to me that you doubted how up to date I was in the debate, but I see you’re more fluff than substance. I am not even directly in the debate, and yet what you are saying now, is something I thought was behind us ages ago.

          If you are not sure what the proper line to draw is, then take a step back and use a little thymology and ascertain what people’s intentions are. You’d be surprised what travelling outside your bubble can do.

    • anon says:

      Daniel, to be fair, with debt there is still the possibility of default. Like if the generation who borrowed produced nothing in the future so there is nothing to tax. In that case, with constant GDP, the young’s productivity will have risen, and they will have to formally default to avoid being taxed.

      There could also be a bond sales tax, but taxing away the entire principle seems unlikely. (Although if the government had a negative income tax and/or social security system this shouldn’t be a problem.)

  5. Daniel Kuehn says:

    Your review here of what is really important is a good thing to raise too. Take this:

    “If it is pointed out to any pundit or American voter who is interested in this debate, that our deficits today might make every single American born after 2013 poorer, but that US real GDP from 2013 onward will remain unaffected, then 99.9% of the people hearing this will agree that the former effect is the relevant one for our policy debate. Nobody cares about future GDP per se, except insofar as it has relevance for Americans who will be alive in the future”

    Yes. I agree completely that the future birth cohorts point is important. That point dictates why we don’t borrow for things like intergenerational transfer payments. We have payroll taxes for that. We borrow for investments. This is why Keynes wanted to do capital budgeting rather than short-run deficit spending in the “current budget”. That’s not how we do things in the U.S., of course, but the principles are the same.

    But I strongly disagree that that means that the point about GDP isn’t one we care about.

    First, GDP generates employment which is how most families in the U.S. access income. Families aren’t magically endowed with 100 apples each period. They have to work. So concerns about what happens to GDP are extremely important because while we are indeed interested in the lifetime income of a birth cohort, you have to eat every quarter (and capital markets are not perfect).

    You also have to think about where the public’s biases are right now. Look at the presidential debates. Do you think the public is more attuned to the idea that debt can hurt future cohorts or more attuned to the idea that debt does not have any direct effect on the level of GDP?

    Clearly they are more attuned to the former, which is why talk about “belt tightening, like responsible families do” abounds.

    That’s why people like Baker and Krugman and me press the GDP point. One does not need to reinforce the costs of debt. That’s pretty well taken care of already.

    • Matt Tanous says:

      “First, GDP generates employment which is how most families in the U.S. access income.”

      Effect => cause? Think you have it backwards there. People work, produce things, exchange the things they produce, and that makes GDP. Malinvestment introduced by government spending and fiat only hampers the economy by causing many people to produce things no one wants to buy.

      And I contend that if government deficits help GDP in a way that is actually productive and useful, the USSR would be a fantastic place to live today. It operated entirely on government spending.

  6. Ken B says:

    I think you (Bob, Nick Rowe) are mis or over reading Krugman. He said
    that debt cannot make the country poorer in any direct way. He disn’t say worse off or less happy. He said poorer. He also said:
    “That’s not to say that high debt can’t cause problems — it certainly can. But these are problems of distribution and incentives, not the burden of debt as is commonly understood.”

    It seems plain what Krugman meant. He meant internally held debt — and Krugman *explicitly* and *repeatedly* excluded foreign debt, think about why — is not a net outflow of resources. It is not like a debt a family can owe a bank, the rayment of which which removes resources from them. That kind of debt burden — a debt burden “as commonly understood’ — is an outflow. But internally held national debt is not like that. It is like a redistribution tax, such as the imagined Santorum tax. It can cause problems, including problems caused by this redistribution.

    Bob and Rowe have exhibited a problem caused by the redistribution and claim this refutes Krugman.

    When Krugman talks about future generations he seems to be taking an integral over a collection of persons, with no overlap on living persons. He is doing this to focus on the constraint that debt is *held* and if none of the holders are foreign thaten that debt is *still part of the wealth of future generations*, and to sidestep the in herent confusion on what the word ‘generation’ means. Bob is not of my generation, so a tax on Bob to pay me is good for one generation and bad for another. That is the kind of thing Krugman acknowldeges and is excluding.

    Bob claims his example shows the error of Krugman’s ways. But what does Bob example really show? It messes with peoples’ utility via distribution but it does not directly impoversih the island. I think Paul Krugman said it well (my italics): “It has distributional effects, but it does not in any direct sense make the country poorer.

    • Daniel Kuehn says:

      Thank you!!

      This is clearly what he meant. I really hate this idea that I’m somehow “interpreting” Krugman. We’re just following his plain words.

    • Bob Murphy says:

      Ken B wrote:

      It seems plain what Krugman meant. He meant internally held debt — and Krugman *explicitly* and *repeatedly* excluded foreign debt, think about why — is not a net outflow of resources. It is not like a debt a family can owe a bank, the rayment of which which removes resources from them.

      Thanks Ken, you just lost. I can give you a model where every single person born from period X onward has access to fewer physical apples. The loss comes from them having to pay interest to creditors on the debt. You lose.

      • Ken B says:

        Huh? Is this the same example where you admit that there is the same 100 apples per generation, just redistributed? Your example shows distributional effects lowering the utility of each person. Not that everyone has fewer apples. So you can’t mmean that example can you?

        I see you said you ‘can’, not you ‘did’. So please do so now.

        • Ken B says:

          BTW, I don’t mind ‘losing’ if losing means having my misuunderstanding corrected. People who do math are used to that kind of losing!

        • Bob Murphy says:

          Ken B., you are now eligible for a Nobel in international trade. Like Krugman, you have somehow managed to literally ignore every single think Nick Rowe and I have said in this entire debate. You are stuck on real GDP being unaffected, and thinking this somehow proves that people in the future can’t really be hurt in terms of real resources. Then, you have the audacity to repeat this proposition to me, as if I am not aware of its power.

          • Ken B says:

            I asserted that did I? I thought I asked a question. You said you can. I asked you to do so. Sorry for the lese majeste. Still, could you indulge, if not me, DK?

        • Tel says:

          Ken, some of the generations did indeed have fewer apples over their lifespan as a whole. And also lower utility based on the utility function.

        • Major_Freedom says:

          Not that everyone has fewer apples.

          But everyone DOES have fewer apples in the model!

          The key word is EVERYONE.

          When the reference is people, when the reference is every person, then the Bob-Rowe model shows every person is worse off.

          How in the blazes are you and DK still completely oblivious to the core of this debate? It seems like you follow Murphy for weeks, reluctantly accepting the arguments being made, then when Bob makes the final case, it’s like you guy’s minds go through a time warp, and go to the “GDP is unchanged cross sectionally!”, which is ALREADY ACCEPTED BY MURPHY.

          Sometimes I wonder if there is a psychological or cognitive wall in your guys minds that only looks like a deep tunnel because it is painted like in the Wily E. Coyote cartoons.

      • Keshav Srinivasan says:

        Bob, can you just answer this simple question for me, since I haven’t been following this debate in excruciating detail: how is it possible that the total number of apples is held constant at all future times, and yet “every single person born from period X onward has access to fewer physical apples”? That seems like a contradiction.

        • Bob Murphy says:

          KS, look at the canonical table in this post. With no debt scheme, everybody consumes 200 apples over his lifetime.

          With debt, the earlier people consume more total apples during their lifetimes, and 4 of the last 5 generations consume fewer, while George consumes the same number of apples. (He’s still hurt, because he prefers to smooth out the consumption.)

          However, that’s a quirk of the example; I could tweak the numbers so that every single person consumes fewer than the endowment number of apples during his lifetime, because the government taxes him/her to make interest payments or pay down the debt.

          Just stare at that thing until you see how it works.

        • Ken B says:

          Watch out Keshav. You might suddenly be leigible for a Nobel.

          Bob is inapprpriate limits of integration. The appropriate ones would be the limits corresponding to what Krugman actually claimed. That would be the entire populace of the island during one cycle. So Old Christy and Young Dave, or Young Iris and Old Hank. Bob is using Young Frank + Old Frank + Young George + Old George. That’s a useful sum for some purposes, just not the purpose of testing Krugman’s claim. Or yours.

          • Major_Freedom says:

            Of course it is appropriate for testing Krugman’s claim. Krugman was claiming the man on the street is wrong. That means he isn’t saying GDP is unchanged. He is saying any loss to one person, must be gained by another, such that there is no change relative to the baseline of no debt whatsoever.

            The Rowe-Murphy model shows that the man on the street is right.

            Both you and DK are putting words into Krugman’s mouth.

            Do you honestly think that Rowe and Murphy would have spent 11 months creating and talking about a model for the purposes of showing Krugman is wrong, if all Krugman was really saying is that GDP is unchanged? Both Rowe and Murphy KNEW THAT FROM THE BEGINNING. It’s the very reason they put UNCHANGED GDP in the model in the first place!

            You boys are hopeless. It’s like you initially disagree with Murphy, and you’re only engaging in ex post rationalizations of why you were right to have faith in choosing disagreement.

  7. lqz says:

    What about using government debt to send money into the future?

    Government debt as a means for the rich to guarantee intergenerational wealth. 

    Assumptions:
    – Canada 1982
    –  P. K. has $4B.

    Goal:
    – Guarantee that $2B is available to P. K. or his descendants in 30 years.

    There are a number of different investment opportunities P. K. can use to achieve this. But only one of them forces his fellow citizens to guarantee the return of the $2B in thirty years. The 1991 introduction of the GST tax across Canada is an example of the Government making sure that citizens pay up. It doesn’t matter how blue a blue chip company is; if Coca Cola falls on hard times, they can’t tax Canadians to make up the difference. We may owe it to ourselves, but it’s mainly the rich versions of “ourselves” that we tend to owe it too. Which means that instead of taking any risk in the market and possibly funding the next big thing. Government debt gives P. K. the opportunity to use everyone else’s kids to ensure his kid gets back the $2B that was invested in Government bonds in 1982 safe and mostly sound in 2012. 

    I think a better question for the likes of Krugman is, why are you okay with the poor guaranteeing the wealth of the rich?

  8. Rob says:

    One of the features of the OLG model Bob has been using is that it starts off in an optimum situation where (because of the distribution of the endowment and the utility function) any transfer of any kind is going to make someone worse off either in the present or the future. This makes it pretty easy to prove the point that govt-debt can cause a “burden” because with his assumptions because so would any other kind of transfer. .

    Many other OLG models are possible where a different utility function (perhaps people prefer to consume more when they are young) or a different distribution of the endowment between the young and the old would lead to a situation where some transfers would be beneficial to some (in terms of lifetime utility) while harming no-one. The real world is probably closer to these kind of models.

    In scenarios of the second kind one could still demonstrate that some govt transfers have the same inter-generational burden effects as in the original model (that is the beneficial ones are not chosen) and to the extent that one just wants to prove to those that have denied this theoretical possibility that such a thing can exist the point has been made. But these debt-is-a-burden-deniers could say that they have always known that the ‘wrong” kind of transfers could harm future generations but that the whole point of economics is to identify the “right” kind of debt-financed transfers.

    As (even without OLG models) one can identify perfectly valid reasons why govt debt will harm future generations both distributional (too much govt controlled spending) and in terms of future GDP (reduced growth) I question what value they are adding.

    • Rob says:

      To generalize my point:

      There are 2 type of OLG models:

      Optimal: No transfers are possible that increase someones utility but cause noone to lose. All transfers are bad.

      Non-optmial: At least one transfer is possible that increases one persons utility while harming noone. Some transfers are good and some are bad.

      For both types of OLG model the negative distributional effect of a bad transfer can (if the utility function allow it) be shuffled down the generations by appropriate transfers from the young to the old. The transfers can be either via tax or via debt.

      These models are pretty simple so anyone who looks into it would have to conclude that they demonstrate the theoretical possible of debt being used as a way of passing the negative distributional effects of a transfer down the generations even in a scenario where this debt cannot affect GDP.

      However beyond the annoying fact that some people are apparently still using weazle words to avoid openly acknowledging this I don;t see how it is a “game changer”. One can easily acknowledge this theoretical possibility while believing that in reality we live in a non-optimal OLG model where some transfers are “good” and believe that the govt will identify the “good” transfers and avoid the bad. Which is what we have been arguing about for years.

  9. Keshav Srinivasan says:

    Bob, let me ask my question in another way. You said this in your post:

    “TRUE STATEMENT: Government debt (under the conditions we take for granted in this debate) can’t reduce the total after-tax income that Americans earn in the year 2080 and beyond.
    FALSE STATEMENT: Government debt (under the conditions we take for granted in this debate) can’t reduce the total lifetime after-tax income earned by Americans living in the year 2080 and beyond.”

    How can one of these statements be true and the other statement be false? Preferably, could you not reference an example, but instead just explain conceptually how these statements are not logically equivalent?

    • Bob Murphy says:

      Because someone in 2080 may have reduced his consumption in 2079 to buy government bonds, which he is then taxed to redeem in 2080. That’s the subtle difference between the two statements. In the second statement, someone who is alive in 2080 is already “deficient” from before we start the clock running, and so to make his “lifetime after-tax income” whole, we have to ding somebody else. That’s where the “leakage” comes from.

  10. Ken B says:

    Imagine we have billiard balls on an infinite frictionless billiard table.
    I say the momentum is constant. Now Ball A smacks ball B, which smacks ball C which smacks ball D. D rolls off.
    Bob Murphy says momentum is not conserved. “Look. Add up the momentum of B before the first impact, B after the first impact,
    C before the second impact, C after the first impact
    That momentum is not what you started with.”

    Well Bob is right the momentum is not what we started with because his limits of integration are wrong.
    I say we have to count all and only the balls on the table at any moment, in the state they are in at that moment.
    “But that’s not what you said Ken B. You didn’t specify carefully enough just what you meant so I am interpreting. And clearly you are wrong because the numbers don’t match.”

    I made a pretty simple statement. If you use the appropriate limits of integration you will find I am right (minus a little for air resistance).
    Bob’s calculation is the problem.

    Paul Krugman made a pretty simple statement. He emphasized it was pretty simple. He provided a simple analogy, the Santorum tax.
    This simple claim has a direct analog in Bob Murphy’s model: it is the claim that in each generation the number of apples will be constant.
    We know this is what Krugman meant because he told us it would be just like the santorum tax, and that’s the way you’d test a claim about the Santorum tax.
    And it’s right. It’s Bob’s limits of integration that are the problem.

    • Bob Murphy says:

      Ken B. once more for the record: I can show that every single person alive today can enrich himself–using deficit financing and the corresponding future taxes to service the debt–at the expense of every single person who will be born next year, until the end of time. I claim that this can surely be described as “the present generation enriching itself by passing a debt burden onto future generations.”

      And you are saying I’m playing games with where I pick my endpoints, that Krugman is far more accurate by claiming, “We can’t make Americans as a whole poorer in the future”?

      I am done with this until next week. My agent has pulled me aside and shown that I’ve lost $700 already in consulting income by pointing out to you and Daniel stuff that was settled by January 6.

      • Ken B says:

        I don’t think you have Bob. I’ll wait to see if you can.

        You certainly cannot do it with your Apple Island example, because to have each generation enrich itself at the expense of the next forever you’d need to impoverish some generation below 0 apples. Apples are quantized.

        • Bob Murphy says:

          MY PROPOSAL TO KEN:

          On Monday or Tuesday of next week, I will post an example where the familiar debt-finance-with-future-taxation-to-service-pay-off-the-debt allows this outcome: Al consumes more than 100 apples in his last year, Bob consumes more than 200 apples over his lifetime, Christy through Iris consume fewer than 200 apples lifetime, and John consumes fewer than 100 apples in his first year. Thus, compared to the laissez-faire baseline, it is correct to say that everyone alive in period 1 EATS MORE PHYSICAL APPLES during his lifetime, while everyone BORN (not alive) in period 2 and forward EATS FEWER PHYSICAL APPLES during his or lifetime.

          If I can do this, then Ken B. will *not* come up with some philosophical argument about why I’m ducking the real issue. No, Ken B. will at that point make a $250 pledge to the Murphy-Krugman debate, which in expected terms is a liability of $1.

          Deal Ken?

          • Ken B says:

            This proposal does not address the points in contention because your ‘everyone’ is time limited, contrary to the claim you made above.

            Can you prove either of these things?

            1. The whole island has fewer than 200 apples in period X, for some X.

            2. Every person born in every generation after period N has fewer than 200 apples available over his lifetime, for at least 300 consecutive generations, for some N. (300 being my concession from forever).

            I’m stingy but I’ll pledge $100 each if you can prove these. You can get the other $50 from DK. Deal?

            (I haven’t made any philosophical points Bob btw. I’ve argued over the correct interpretation of Krugmam’s words. If you want a philosophical point here it is: you have to refute the most likely consistent interpretations of your adversary. Either of my proposed demonstrations above will do so.)

            • Ken B says:

              Of course we both mean using Apple Island as it exists in your model, with two 100 apple trees and people who live exactly 2 periods ….

              • Bob Murphy says:

                Ken I am just tweaking the numbers of who consumes what, and how much the government borrows/taxes. Yes otherwise it’s the same framework; everybody lives two periods, etc.

              • Bob Murphy says:

                Just to reiterate Ken: I don’t want you equivocating on the word “available.” I am talking about what each person has available to consume *after taxes*.

                The people alive in period 1 will each eat more physical apples during their lifetimes than would otherwise be possible.

                The people born in periods 2, 3, …, infinity will ALL consume fewer than 200 physical apples during their lifetimes.

                If that isn’t the present generation taking real resources away from future generations, what would be?

              • Bob Murphy says:

                Ken are you working through a sketch pad of apple models? If so, good. If you are just busy at work or something, and don’t realize the trap into which you are about to fall, then bad.

              • Ken B says:

                @Bob re available. I mean after taxes IFF the taxes are distributed on the island without 1) apples rotting 2) apples being stored. IE just redistributed amongst then then living population, just as in your earlier example.

                On to the next stipulation comment!

            • Bob Murphy says:

              Can you prove either of these things?

              1. The whole island has fewer than 200 apples in period X, for some X.

              2. Every person born in every generation after period N has fewer than 200 apples available over his lifetime, for at least 300 consecutive generations, for some N. (300 being my concession from forever).

              Of course I can’t prove 1. That’s false by construction.

              On 2, what I can prove is that the people born in periods 2 and 3 have fewer apples available in their lifetimes. Then I will show that the people in period 4 are in the exact same situation as the people in period 3, such that I will have shown that this will happen for the rest of infinity to all future people. (The debt won’t ever be paid off; they will just carry it forever, with the government taxing someone each period to pay the interest and keep the nominal debt from growing.)

              Now here is the equivocation I do not allow you to make: You are going to see this example, crap your pants, and then say, “Oh but Bob, there are still 200 apples available each period. So I win.”

              To repeat Ken, everybody knows that there are 200 apples physically existing and consumed per period. It is amazing to me that you think I’m somehow incapable of seeing that there are 200 apples consumed each period; I know there are, that’s why I picked the example. The issue is, what each person gets to consume *after taxes* is lower over each person’s lifetime, for every person born in period 2 or later.

              If you are denying this last claim, and are willing to put up $100 in pledge money (current market value on Intrade of 97 cents), then I will construct the example early next week.

              • Rob says:

                I think you could show this (lifetime consumption of less than 200 apples for anyone born after period 1) for up to 200 generations using whole apples. To show it for more you would have to start having people consuming fractions of apples.

              • Ken B says:

                We’re on the same page here. You stipulated consume *fewer* apples not *less* apple flesh.
                So apples are quantized, taxes are in steps of 1 apple. My claim you cannot continue with ‘fewer apples’ each generation forever.

                I await your example.

              • Bob Murphy says:

                Ken I will release you from the wager because even though I think I can do what I claimed, my initial intuition about how it would “work” was wrong. Also, if I had to get it to “work” by having the units in fractions of an apple, then I could understand if you felt that was cheating.

                What can happen for sure is that earlier generations can increase their physical apple consumption, and then spread that loss over all future generations, with the only limit being how much somebody can lend to the government physically in a given period. To this day, I really don’t think Krugman is seeing that.

                So like I said, I am actually not as annoyed with Krugman as with Callahan. Jury is still out in my mind with you. Assuming you see how it can work, are you still saying that if the two people who come first increase their lifetime consumption by 100 apples, and then the next 100 people born on the island have 1 fewer apple lifetime, that that’s not what the man on the street might think of as the present generation consuming more and making later generations pay for it?

  11. Ken B says:

    @Bob: pulling this out from the nesting.

    I’m still saying what I did earlier about interpreting PK, and limits of integration. I am saying that a natural reading of PK implies that the limits of integration are all the people on the island in a cycle. Krugman emphasized that aside from harm from redistribution the internally held debt does not impoverish the island.

    You — or Rowe — have raised an interesting idea. That individual persons can be deprived on into the future, irreparably. Your example exhibited some screwees. That *screwing* I think is completely replicable by a Sanntorum transfer tax so is a *distributional* effect. It is not a direct impoversihment of the economy as a whole. At some point you said you could extend this forever, ands I pointed out that won’t work. Not under the terms discussed anyhoo.

    If you are now arguing something like this:
    “While the economy as a whole cannot be impoverished the distributional effects can cause a ripple through a series of lifetimes that impoverish some people over their lifetime in a way that cannot be undone by subsequent transfers and in this sense future persons are burdened to finance current borrowing” then I agree you have shown that CAN happen, and that it is a non-obvious effect. I think the issue of whether it WILL happen is an empirical one that has not been decided or even much discussed in these posts.

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