Saturday, December 31, 2011

The government does very unique things...

What would you consider more "burdensome"? Paying off a high British national debt through the mid-twentieth century, or brushing up on your German in Nazi-occupied Britain (outside areas that are restricted because of nuclear fallout from Hitler's bomb, of course)?

Companies (well, for-profit ones at least) are profit maximizing. The test for whether debt is on net burdensome for them is relatively straightforward and tied to a return on investment.

Government is odd in that sense, and while we continue to pontificate about these issues I think the question is a lot harder to speak to in real life. Government makes a lot of investments, but the whole point is there's not always a monetary return on them and it's often hard to know what the costs or the benefits would be like in a counterfactual.

When we deal with profit maximization these questions are somewhat easier. When we deal with welfare optimization I think it's harder.


Also, Don Boudreaux embraces Nick Rowe I'm very curious what Nick thinks of this. As has happened a couple times before, I think in the comment section I've actually realized Nick and I are closer than I thought (he seemed interested in a fundamentally different question than I was. He was concerned with whether it was "impossible" to burden future generations - I agreed with him it was not impossible - while I thought Krugman's point was that public finance and personal finance are two different things). Anyway, my position has always been that Boudreaux and Rowe both are saying pretty much what Krugman is saying.


  1. Well, as a Brit, I'd take "paying off the debt" please.

    (But as an expatriate Brit, I've managed to avoid most of that by emigrating to Canada, though my family didn't, which opens up a whole new can of very interesting worms, that if followed would lead us to the Phisiocrats and Henry George and Tiebout.)

    Almost all policies have costs and benefits. And sometimes those benefits go to future generations too, just like the costs. Like investments in building schools, or fighting WW2. That's OK. But we do have to look at both sides of the Cost-Benefit calculation. Same with debt-financed investment as with anything else.

    Don Boudreaux thinks James Buchanan is right on this. I think James Buchanan is right on this (as far as my 30 year old memory of reading Buchanan is still working). So naturally, Don and I think each other is right on this too.

    Oh, and Don was right to correct me on one point: I had forgotten that there's a macro aspect to Public Finance too, it's not all just micro, and that James Buchanan was a public finance guy too.

    I'm pretty sure I'm saying something different from what Paul Krugman is saying. Don thinks so too. Maybe we have misunderstood what Paul Krugman meant. But he's usually very clear in explaining stuff.

  2. "Paying off a high British national debt through the mid-twentieth century, or brushing up on your German in Nazi-occupied Britain (outside areas that are restricted because of nuclear fallout from Hitler's bomb, of course)?"

    Why is that people use WWII as if it were some universal historical example that applies to all things? WWII doesn't really justify much more than what happened in WWII.

    I and anyone else can point to a million examples of times where the state made shit worse. When WWII is your way of looking at things though, that sort of falls by the wayside.

  3. I guess it isn't at all surprising that the so-called "lessons of WWII" is just this powerful meme that is shot through so much of how we think; but it remains depressing that is the case.

  4. Not sure how to respond to that Vader. WWII is not a universal historical example.

    It was in a link that Krugman recently posted. It is relevant to high debt burden discussions. In this case it's just a nice illustration of the fact that you can't think about burden and costs and benefits in purely monetary terms. A lot of investments we make with debt financing aren't amenable to that sort of thinking.

    I'm not quite sure I understand what your problem is with that or why you think people think WWII is a universal example. I've talked about other things in the past - like public education - and how tough it is to think about counter-factuals to that and how hard it is to think about return on investment in monetary terms for that. One could discuss the legal system, defense in general, and public infrastructure too.

    The really big public consumption programs - Social Security and Medicare - are financed with taxes.

    But the wide range of public investment programs are often funded by debt, but people need to recognize that the returns on those investments are often hard to pin down.

  5. Ya, I have to say LV - I talk about education and training, the economics of science and public involvement in science, and more recent wars on here a lot. This was a Paul Krugman link and he talks about a lot of other public investments too.

    I'm not sure what you're getting at.

  6. (a) You say government does unique stuff.

    (b) You follow that up with an either/or comment - pay off debt or get invaded by the Nazis.

    (c) Clear as a sunny day.

    (d) Our entire culture is heaping over with WWII as "the lesson." It isn't as bad as it once was, which is a good development.

  7. "...but people need to recognize that the returns on those investments are often hard to pin down."

    FYI: That just tells me that they are probably dubious "investments."

  8. You're starting to remind me of a commenter that use to come around here a lot... in fact he stopped coming here almost exactly when you started coming here. But perhaps I'm just being suspicious.

    Anyway - not sure what to tell you. A single use of an example doesn't mean you think that example is universal. That's as clear as sunny day.

  9. You're talking about WWII on this blog all the time; I've been watching it for a while. You do make a lot of neo-con noises so that doesn't surprise me now.

    You're starting to remind of why I don't talk to neo-cons.

  10. Lord Vader,

    And looking through your blog history as I have I can say that you've locked horns with a number of intelligent people who decided to bail out.

  11. Yeah, I didn't mean to address myself. I was having a vision of my future self doing something while I was writing that. Being a Sith lord can make things confusing.

  12. Daniel: Here's Paul again: "The point that occurred to me is that since the real burden of debt is the possible distortionary effect of the taxes that must be levied to service that debt,..."

    I don't think I misunderstood him. I would say that's only part of the burden of the debt. The burden of the debt includes those taxes themselves, plus the distortionary effects of those taxes. (I assumed lump sum non-distortionary taxes in my example.)

  13. Nick-

    How in the blazes does that "can of worms" lead us to the Physiocrats and Henry George? I'm trying to follow the lead and not seeing the connection.

  14. Anonymous: if people (and capital) are perfectly mobile, then the only thing you can really tax is land. If you try to tax labour it just emigrates. Physiocrat's l'impot unique/Henry George land tax.

    Which has the neat implication that the burden of future taxes from the debt are immediately capitalised in land prices. The national debt is like a mortgage on the land.

    And if you follow that idea through to its logical conclusion you end up with saying that only landowners should vote on the budget. Everyone else doesn't care, because they vote with their feet.

    That's all under extreme assumptions of course. But when you think of countries like Ireland, both today and in the recent past, where people emigrate and return depending on jobs and taxes, which depend on debt, you can see an element of truth in it.

  15. Nick-

    That argument for the land value tax is a new one to me! I tried to think of some other tax could not be fled, but think I came up empty. Perhaps an emigration tax?


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