Friday, January 6, 2012

Callahan on Debt

The man just can't quite quit unstable career politicians (although he's much closer to it than many), but he does have some good things to say about the national debt.

First, he calls Nick Rowe's model logically incoherent. I wouldn't go that far at all. It's logically coherent it just might not be applicable to reality. But even there I would quibble, because it is applicable to the reality we find ourselves in if we're dealing with deficit-financed transfer payments from the young to the old. And we do have quite important transfer payments from the young to the old, and it can represent a burden on the young. That's why we hire an actuary - to try to forestall that issue.

There are two problems with this, though. One that Gene points out in this post and one that he points out in his next post. The first problem, of course, is that there's no investment in this economy. The imposition of intertemporal costs without talking about the intertemporal benefits we see all around us seems like a really funny way of making a claim about intertemporal costs, doesn't it? Pure time preference is the only thing driving intertemporal choices.

In the next post, addressing Bob's models, Gene says more bluntly about Nick and Bob's models something that I've been saying too: "Bob Murphy's model proves exactly the opposite of what he set out to prove". Bob's model does show that costs can be imposed on younger generations. But simply looking at the payoffs in his Abraham/Isaac model demonstrates pretty blatantly that there is no difference between taxing to pay for Abraham's consumption and borrowing to pay for Abraham's consumption. In either case the exact same cost is imposed on Isaac to the benefit of Abraham. That is not a burden introduced by deficit financing, in other words. This is the Ricardian Equivalence case. The burden is the transfer, not the debt. Everyone already knew zero-sum transfers burden one party and benefit another. The question is, does financing that transfer with a deficit add a burden to future generations? No, it doesn't. It may change who bears the burden of the transfer, but it doesn't add any burden whatsoever.


  1. "The burden is the transfer, not the debt." This is exactly right. And with the right set of transfers, this 'burden' can actually be net stimulative in the transfer period - if the transfer is progressive, from a consumer with a low MPC to one with a high MPC.

  2. It may change who bears the burden of the transfer, but it doesn't add any burden whatsoever.

    I'm not sure if Nick would disagree with that.

    What you don't get in Murphy's example is the chain of borrowing. Of course it makes no difference to Isaac, because he is the final generation. But if Isaac could borrow from Esau...


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