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I note that in the above, everything the government does is consensual, except the taxing in Period 10. Looking at this sequence of events, Joe Sixpack says, "Wow! In Period 1 Al got 10 apples for free. Then the generations kicked the can down the road through the decades, until 5 generations later, the piper finally had to be paid. Shocking how irresponsible that all was. That poor 5th generation really got burdened with a massive government debt."
Paul Krugman says, "Joe you idiot! In Period 10, it's a wash, since Kelly and John owed the debt to themselves."
Landsburg, good heavens man, surely you don't want to say that Krugman is basically right?
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Krugman *is* basically right. The only concerns are distributional, but then that's why #4 is a much better option, and the government (and society) is best just rolling over the debt forever.
ReplyDeleteBen, do you agree that in the scenario above, Al gains in period 1, while the losers are John and Kelly in period 10? Yes it's "distributional," but across 5 generations.
ReplyDelete"I note that in the above, everything the government does is consensual, except the taxing in Period 10."
ReplyDeleteAssigning debt obligations to the citizens of a country is consensual?
I had no idea that I consented to higher taxes tomorrow. Maybe it's consensual in the same way that you consented to Bush invading and occupying Iraq.
Progressives have an interesting idea about what amounts to consent. Maybe that explains Sweden...
I can't even read that.
ReplyDeleteRemember, I was burned in nasty fire from that whole lava fight. This mask really hampers my eyesight. Sometimes I even walk into walls.
ReplyDelete"Ben, do you agree that in the scenario above, Al gains in period 1, while the losers are John and Kelly in period 10?"
ReplyDeleteNo, Bob, bad analysis. Someone's consumption dropped by 10 apples in period 1 to loan the government the money. And in period 10, Kelly's consumption dropped by 100 apples, but John's went up by 100. Inter-generationally, it is a wash.
"Progressives have an interesting idea about what amounts to consent."
ReplyDeleteSo Bob Murphy is now a "progressive"?!
"Krugman *is* basically right. The only concerns are distributional, but then that's why #4 is a much better option, and the government (and society) is best just rolling over the debt forever."
ReplyDeleteBen, it's not just distributional. You're ignoring opportunity costs.
John and Kelly both have less than they otherwise would have had, had the government in generations 1 through 9 NOT borrowed and spent.
Remember, in period 10, the government pays John by taxing John (and Kelly). Neither John nor Kelly are gaining there. The standard of comparison is, again, what they COULD have had, had the government not borrowed and spent in years 1 through 9. The standard is not what nominally occurred in period 10 itself.
Murphy is right.
There are the opportunity costs of what COULD have been produced had everyone lent their money only to those who are in the production side of society, and not to a productionless consumer that taxes people.
"Voluntarily" lending money to a coercive agency isn't like voluntarily lending to an entity that has to earn money, i.e. produce something of value in exchange, in order to pay the debt back.
It is NOT the case that "the government (and society) is best just rolling over the debt forever." For that would represent a forever lost opportunity of what could have been produced had apples available for private investment be used for private investment instead of buying debt from a consumer that taxes.
TINSTAAFL
TINSTAAFL
TINSTAAFL
Gene:
ReplyDelete"No, Bob, bad analysis. Someone's consumption dropped by 10 apples in period 1 to loan the government the money. And in period 10, Kelly's consumption dropped by 100 apples, but John's went up by 100. Inter-generationally, it is a wash."
No, Gene, bad analysis. You too are ignoring opportunity costs. You're just focusing on apple flows.
In periods 1 through 9, the government is borrowing more and more apples that could have been invested in apple production instead. Those series of apples, 10, 11, 13, 18, 26, etc could have been invested in more apple production instead.
Yes, John is getting 100 apples from the government, but if there were no productionless consumer borrowing apples at all, then John could have consumed MORE than 100 apples. The total production of apples could have been greater, leaving both John and Kelly with the opportunity to consume more apples together.
Suppose the totality of all apples available for investment went to buying government debt instead, after which the government spends the apples. That would be the equivalent of the government becoming total controller of all means of production (capital goods can only be bought through savings). There would no longer be a price system for the means of production. Compared to before, production would collapse. John and Kelly would become impoverished relative to what they could have had because of what past generations did.
TINSTAAFL people, come on.
re: "No, Gene, bad analysis. You too are ignoring opportunity costs. You're just focusing on apple flows."
ReplyDeleteMF - I'm not sure it's fair to say he's ignoring opportunity costs. But we are all abstracting from opportunity costs.
That's appropriate. If you want to say that goveernment allocation is bad because of its inefficiency and the private sector opportunity costs, that's fine. I'd agree with you in many, many cases.
But that's a different quesiton entirely from the deficit question.
Yes, transfers impose costs on those who pay the transfers.
Yes, inefficiency of political allocation can impose burdens on net because the opportunity costs exceed the benefits.
If you want to talk about "is government on net a benefit or a burden?" these are some of the many things we'd need to talk about. But the burden of an opportunity cost has nothing to do with burdens introduced by the debt.
See my next post on Diamond for more on this point. You all are sneaking net burdens in through the back door.
Inter-generationally, it is a wash.
ReplyDeleteOf course; if you were to lend me a tenner, on aggregate that's also a wash (assets = liabilities), but I still owe you a tenner.
Exactly vimothy, but that was Krugman's entire point.
ReplyDeleteBetween different people some will be burdened. Between generations there won't be any additional burden.
Daniel,
ReplyDeleteI don't see how that can be Krugman's point.
If there's no burden to future generations then "on aggregate, it's a wash", and if there is a burden to future generations, it's also a wash. On aggregate, it's always a wash.
You cannot appeal to that accounting tautology to resolve the matter. We know that assets must equal liabilities. The question is, whose liability is it? As Nick showed, the cohort who pay the higher tax has lower consumption, thus it is a burden on that future generation.
I don't know what to tell you except to read Krugman's original post.
ReplyDeleteYes, if I owe you ten, I will be burdened and you will benefit. But Krugman acknowledged that point. Our generation will not bear a net burden.
As for Nick's model - Gene has been addressing that, I'm working a post on Bob's model now.
But you simply can't say that debt owed between people in one generation is a burden on the people that owe isn't Krugman's point. He said it in plain English, and if you don't believe me you can go back and read his first post.
BTW, you'll probably remember from your macro class conditions under which no future generation ever faces a higher tax rate as a result of current deficit spending, and therefore conditions under which it is fair to say that there is no burden on future generations.
ReplyDeleteIf the growth rate of the debt is lower than the growth rate of the economy, then taxes never have to be raised and there is no burden full-stop to any future generation. But this lies outside the scope of Krugman's claim.
Here is Dean Baker, who Krugman quoted approvingly in his original post:
"As a country we cannot impose huge debt burdens on our children. It is impossible, at least if we are referring to government debt."
That is clearly false--it is not impossible.
Our generation will not bear a net burden.
ReplyDeleteAll claims net out to zero in every state, i.e., that it holds if Krugman is right and it holds if Krugman is wrong.
If future taxes are raised to pay for current deficit spending then the cohort who face higher taxes necessarily bares the burden of current deficit spending. But this contradicts Krugman's claim that future generations cannot bare a burden from current borrowing.
Yes vimothy - I've said it's not impossible. I said I disagree with Dean Baker. I've said this even before you started commenting on these posts.
ReplyDeleteI've said that Krugman doesn't seem to be arguing about logical possibility the way Nick Rowe wants to - he's simply disabusing the public of a few misconceptions about the national debt.
But it's important to remember, even with Dean Baker's comment, that debt just shifts the burden intergenerationally. What actually creates the burden is the initial spending decision (ie - are we consuming or investing? Are we giving to the old or the young?).
That't correct. If there were no deficit spending, then it would make no sense to ask if deficit spending can burden future generations. Conditional on there being deficit spending, can there be a burden on future generations? Krugman made a universal statement. To disprove a universal, we need to prove the existence of just one contradiction.
ReplyDeleteAnother way to look at it would be to say Nick Rowe is arguing that the issue is distributional, and the distribution is such that some future generation bares the cost of current spending, because (assuming taxes are raised in the future), at the margin, the current generation has higher consumption and the future generation has lower consumption.
ReplyDeleteKrugman is also arguing that the issue is distributional, but that the burden of the debt is not distributed in such a way that future generations bare the cost of current spending, even if taxes are raised, because "we owe it to ourselves".
By the way Daniel, I thought your story about explaining the Slutsky equation at a party was brilliant. Every time I read, "...and you break out the calculus", it cracks me up.
ReplyDelete"But it's important to remember, even with Dean Baker's comment, that debt just shifts the burden intergenerationally. What actually creates the burden is the initial spending decision (ie - are we consuming or investing? Are we giving to the old or the young?)."
ReplyDeleteThe ability to deficit spend changes spending decisions.
The demands on govt by citizens are boundless. The goodies will go to those who are most connected to and generous with politicos. These are the elderly (who vote the most, have the most free time to holler at people, and are wealthiest.) Who gets the most entitlements? The elderly.
But they don't want to tax themselves to pay for stuff; that's exactly the opposite of government's purpose. Because their desires are boundless, any method for increasing taxes on people outside their cohort that can be gotten away with will be used. How about a giant head tax on everyone under 55? Won't work. The youth will see that. How about a scheme to draw investment dollars out of the private sector to be used to fund goodies in a non-transparent way while deferring the moment until taxes must be raised to pay for said goodies? Sounds good!
The spending cap brouhaha showed that the debt is THE MOST IMPORTANT budget item. Why? Because if creditors are not paid, then this massive, sneaky way to shift taxation from the politically connected short-termers to the young and clueless ends. Govt shrinks to what it can tax today. Current politicians are ousted. And nobody wants that.
"We" don't owe it to "ourselves." And deficit financing is nothing like an age-targeted tax. It's nothing like an outright tax. It's whole purpose is to increase the scope of government.