04
Aug
2017
Who Bears the Burden of Government Debt?
As I explain in this video, I might get hit by a bus, so I wanted to go on record explaining this stuff. And here’s the link to the legendary “The Economist Zone” post.
As I explain in this video, I might get hit by a bus, so I wanted to go on record explaining this stuff. And here’s the link to the legendary “The Economist Zone” post.
Nice!
If I understood correctly, the simple way of seeing this is that government bonds are attractive enough to get people to buy them. Those people expect to gain (more than with alternative products), as their choice demonstrates.
The way to see how they gain is considering multiple generations and how the increased taxes are postponed for a few generations.
You’re a great teacher Bob!
The Great Debt Debate of 2012. Seems like an age ago.
Thanks Nick.
Funny thing is, even though this was “just” a talk to a bunch of kids, describing a debate I was a full participant in, I still learned something from it. Your bit about the apparently innocuous simplifying assumption of non-overlapping generations making all the difference.
Reminds me of the post I did about whether it’s possible to take food away from carnivores (who eat only meat) and give it to vegetarians (who eat only veggies) if you don’t have a magical machine (like the time machine) that can convert meat into veggies. It all depends on whether there exists an “overlapping” cohort of omnivores, who eat both meat and vegetables. If omnivores exist, you can take meat away from the carnivores, trade it for veggies with the omnivores, and give those veggies to the vegetarians.
Thanks Nick. Yes I remember your omnivore post, that was great.
Time heals all wounds I guess. You two were soundly thrashed in that debate. Now you can reminisce; sweet.
I think it was Iris
Your chart and your presentation are very clear and engaging (as one expects from Bob Murphy). Also, a big thumbs-up on the beard. A few comments, though:
1) Your chart does not display the effect of govt borrowing; it displays the effect of a Social Security system (with old people receiving transfers of various amounts in various generations). If you financed exactly the same system through taxation, you’d get exactly the same results. In year 1, we tax Young Bob 3 apples and give them to Old Al. In year 2, we tax Young Christy 6 apples and give them to Old Bob. Et cetera.
All of the effects you’re illustrating would have been exactly the same if you’d financed all the transfers by taxation instead of borrowing. It’s the transfers that are having all the real effects.
Your particular assumptions lead to different sized transfers in different years. But any pattern of transfers you care to specify can be achieved equally well by appropriate timed borrowing or similarly timed taxation.
2) You’ve assumed a 100% interest rate. This means that in each year, people adjust their bond purchases until, at the margin, they consider two apples in old age a perfect substitute for one apple in their youth.
Therefore:
Al is a winner.
Bob is neither a winner nor a loser. (He gains 6 “old age” apples, which exactly compensates him for his loss of 3 “youth” apples.)
Christy is neither a winner nor a loser.
Dave is neither a winner nor a loser.
Eddy is neither a winner nor a loser.
Frank, George, and the rest are losers — because they get taxed. The bottom line is that you hurt people by taxing them. Again, this would be true with or without the borrowing program.
I didn’t go back to check this, but I *think* you said Bob, Christy, Dave and Eddy were winners. If so, I think that’s a mistake.
3) Your simplifying assumptions mask the most interesting (to me) issues. Namely: Because the govt is essentially doing people’s saving for them, they face a reduced incentive to save on their own. This isn’t an issue in your model because they can’t save without the govt anyway. But in the real world, this means people will engage in less private saving, so there will be less investment (and in fact suboptimal investment) which hurts
all generations going forward above and beyond what your chart shows.
(This is the essence of Martin Feldstein’s calculations of the social cost
of Social Security.) But once again, this effect will be exactly the
same whether you finance your program through taxes or through borrowing.
Thanks for the comments Steve (especially about facial hair). I will do a separate post worthy of your input.
I should add, though it’s a second-order effect, that some borrowing is inframarginal, so the govt, by making borrowing possible, can make some people better off. For example, we know that the last apple Bob borrows is, for him, a perfect substitute for 1/2 a present apple (otherwise he’d borrow more). But his first and second borrowed apples might be worth more to him than 1/2 a present apple apiece. So Bob can be a winner here, though I think this is a relatively minor point in the context of the issues you’re trying to get at. (Or maybe it’s a major point, if I haven’t fully understood your purpose.)
[“If you financed exactly the same system through taxation, you’d get exactly the same results.”]
The required borrowing in each progressive period only increases because of the debt incurred in the prior period. If instead of debt the transfer payments were carried out with taxation, the required cash flows in each period would be reduced by the interest component. so unless government were arbitrarily deciding to double the size of transfer payments funded by taxes in each period (to match the 100% interest rate), then the results would not be exactly the same.
Perhaps you overlooked this paragraph:
Your particular assumptions lead to different sized transfers in different years. But any pattern of transfers you care to specify can be achieved equally well by appropriate timed borrowing or similarly timed taxation.
I’m gonna buy in and support DZ on this one.
If Bob’s book “choice” taught me anything, economics is about people making choices. Possibly I should have read more than the front cover, but let’s not go into too many details.
Suppose a government fronted up and said, “We would like to borrow your money, and we might even pay it back, or not, at some arbitrary rate of interest, possibly zero interest, possibly even negative… but let’s clear the air: we haven’t seriously thought about the question of paying any of this back. We are hoping some future government figures out how to repay you.” How many people would lend them money? Would you lend them your money?
Probably no one would lend anything! I think, they would raise zero money on such a bond program.
The whole concept of debt is that it creates an obligation, and because people believe the obligation is real, they therefore have the confidence to lend money. Once an obligation exists, you don’t have just “any pattern of transfers” you have a specific pattern involving an interest rate that most people think seems reasonable under the circumstances. It’s not arbitrary — it’s a confidence game.
That is not how a Social Security system works.
The hint should be right there in the word “Security” but think about this… every future pension offered by the US Social Security is legally accounted as a VOLUNTARY payment. That is to say, the US government does NOT regard future Social Security payments as genuine debts or obligations for accounting purposes.
HOWEVER the US citizens sure as heck think those payments are coming… and they don’t regard the system as voluntary either. If those citizens ever did wake up to the precarious nature of their Social Security retirement after paying into the system for a lifetime… you know I expect they would retaliate by voting for some wild eyed crazy man to shake the foundations and bring down the temple for once and for all. So you better hope that never happens.