Friday, January 6, 2012

It ain't the debt - it's the transfer

I've been complaining about consumption vs. investment, but a better way to emphasize that Nick and Bob really aren't hitting on a debt problem is to consider a different transfer: from Bob's older rational actor (Abraham) to the younger rational actor (Isaac).

Isaac gets 10 more apples, Abraham gets an IOU which he leaves to Isaac. In the next period Isaac holds an 11 apple IOU and has to pay 11 apples in taxes to redeem it. That's a wash for him.

So now - given a particular transfer arrangement - we have a different situation.

Would Bob and Nick accept the claim that this proves that deficit spending burdens older generations for the benefit of younger generations!

No - of course not. They'd point out that the only burden to speak of was entirely determined by the nature of the transfer. The method of financing didn't burden older generations at the expense of younger generations. That's bonkers.

So why is Krugman wrong when we change the nature of the transfer but don't change anything about the financing?

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