Thursday, June 14, 2012

Dredging up those debt fights

Gene does it, referencing a new article by Bob. Here's an interesting section:

"As Noahopinion put it, "So I think this tells us something important about debt in the real world. What matters is not debt, it's intertemporal choice. The important question is not how much debt we rack up, but whether we want to move consumption from the future into the present or from the present into the future."

Exactly. In particular, in the current situation, we could easily do an inter-generational transfer from ourselves to future generations simply by borrowing now, while costs are low, and spending the money on infrastructure projects that we know will need to be done over the next decade or two anyway.  We would cut our current consumption today to get these projects done now, and future generations could consume more than otherwise because they won't have to repair, let us say, the George Washington Bridge in "their" time.

Murphy might protest, "But come on, Gene, you know if the government borrows more, it's just going to fritter away the money on current consumption!""

Now, I didn't start that old discussion so I had no real rights to change the question at hand, but one thing I wished we talked about more was (1.) investment and (2.) economic and population growth (that's one thing most OLG models have that ours didn't - population growth). Bob and the rest of the guys on that side did have a point that I tried to stress I didnt deny at all: debt has intergenerational distributional consequences. What it doesn't do (in and of itself) is hurt future output levels.

The fact that its impact is on distribution rather than output is why the consumption/investment point (which the old discussion kind of glossed over) is so important. Debt is probably bad insofar as it finances transfers. It's OK insofar as it finances investments (this is why Keynes advocated a separate capital budget).

What I think a lot of people who complain about U.S. debt don't realize is that we don't use debt to finance our big consumption programs. Medicare and Social Security have a dedicated tax. Unemployment insurance and workers comp have a dedicated tax. Those are the really big consumption programs. Smaller welfare programs may dip into borrowing, of course. But for the most part the expenditures that are left that don't have a dedicated tax are investment programs.

Human beings aren't dumb. We tend to figure this stuff out. We tend to fund consumption with taxes and if we use debt at all we use it more for investment. We tend to use government to spend on externalities and public goods and if we use it for private goods at all it usually has very well defined egalitarian justifications. We naturally converge on a lot of these results.


  1. "Debt is probably bad insofar as it finances transfers. It's OK insofar as it finances investments (this is why Keynes advocated a separate capital budget)."

    Sorry Daniel, but I have to veer slightly off topic on this.

    Have you finally come around to seeing Dr. Michael Emmett Brady's position on why Keynes advocated a separation of the public accounts into a "current account" and a "capital budget"?

    If so, how did you come to this conclusion, and why?

    1. I don't think I've "come around". I think it's always been out there for all to see that Keynes supported a capital budget. I don't recall ever denying that. That's a hallmark of his internal finance proposals, not something new that Brady pointed out.

      What I disagreed with Brady on (and still do) is that that implies that Keynes somehow didn't approve of deficit spending. I suppose my point here (with regard to the way we have dedicated taxes for our big consumption programs) is that we make a distinction implicitly that Keynes thought should be made explicitly.

  2. I don't think Dr. Brady was pointing out something new either. Thanks for clarifying your position, however.


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