Friday, October 19, 2012

I really think we need to call the debt debate in favor of Paul Samuelson, Grant McDermott, and Ryan Murphy

With good contributing insights by Bob Murphy, Paul Krugman, Nick Rowe, Dean Baker (and Gene, Landsburg, me, and other minor notables).

Ryan Murphy makes a few claims I'd disagree with (I think he is too quick to confuse a strawman Lerner with Lerner... I think Nick's original #1 adds claims to the Lerner argument that people that say that stuff never make). But Ryan is justifiably frustrated that we are attributing extreme positions of single arguments to people rather than recognizing that all of these points are fundamentally right, but differentially binding depending on the situation (and that that ultimately makes it an empirical question). I agree. I feel like Nick and Bob have taken a Lerner-Samuelson point from Krugman and Baker and imagined it is some attempt on their part to disprove... something... Buchanan I guess? Or Samuelson? Economics gets really bad when it turns partisan like that. It's a science. Usually everybody has a point and the question is what model (or mix of models) is most useful in a particular situation or to answer a particular question. I don't know if Ryan would agree with this interpretation of him, but that's what I got out of him.

Grant has this conclusion, with which I also agree: "The way I see it, this keeps returning to one unavoidable conclusion: The "bad" outcomes of Bob's model can all be traced back to the fact that the interest rate exceeds GDP growth. Everything else is paper fodder."

It's bad enough that Bob and Nick have turned a Lerner-Samuelsonian reminder to a Buchananish electorate into a much bigger claim than it ever was. That fight is interesting, if a little misleading in my view. But we really should be careful not to lose the fundamental Samuelsonian point in all this, because a lot of the public still doesn't get that.

That's why Krugman and Baker were emphasizing what they were emphasizing.

9 comments:

  1. So tell me, where precisely did Paul or Dean say: "Don't worry about the burden of the taxes on future generations guys, because there won't be any future taxes to service the debt, because we are just going to keep on borrowing to pay the interest, forever and ever!"

    If that's what they were trying to say, why didn't they say that? It's such a nice, clear, simple argument. ;-)

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    1. Well I don't think this was ever a practical discussion.

      It was a pretty abstract theoretical question. Krugman and Baker were making the Lerner/Samuelson point that there's nothing inherent about debt that's bad, and that we should not analogize to families (I'm assuming you agree we shouldn't make analogies to families), and that when you think about debt things like sustainability, distribution, incentives, etc. are what you should worry about (not that "we owe a bunch of money").

      So... I don't think they ever said that and I'm not sure why we should expect them to.

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    2. I've got a better one Nick: The only reason debt is bad for a family is that interest rates are higher than the growth in the family's income. If that is the essential difference they were pointing to, I can really understand why they'd say, "It's debt we owe to ourselves." That sounds like the argument they were making, sure it does...

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  2. Grant, I realize you have been humble yourself, but Nick Rowe made the g>r point back in January. Daniel has hit Ctrl+Alt+Delete on himself with this debate, and thinks Nick and I are ignoring all this "obvious" stuff.

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    1. Ummm... no. When Grant first raised the point with me before writing his post I told him that you and Nick made the g>r point and that everybody is assuming that already.

      That's not what I think Grant is contributing (and which you already stated and then dismissed yourself - see my update of the post linking to Grant).

      Grants pointing out that the only reason why the debt imposes a cost in your models is because you retire it by the last period. That's the only reason why it does that (as far as I can tell).

      So you're really not telling us anything about debt as an intergenerational contract/transfer at all. You're showing that debt imposes costs on the future the same way taxes impose costs on the present, which is really fundamentally a distributional and incentive issue.

      If you think Grant is just pointing out g>r I think you're missing his point. I specifically told him I don't think that alone is saying anything all that new.

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    2. If you really think I'm just marveling at g>r, then this whole conversation has accomplished a lot less than I had thought.

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  3. I didn't go follow the link Daniel, because in this post you just wrote this:

    Grant has this conclusion, with which I also agree: "The way I see it, this keeps returning to one unavoidable conclusion: The "bad" outcomes of Bob's model can all be traced back to the fact that the interest rate exceeds GDP growth. Everything else is paper fodder."

    You're saying that by this statement, Grant was trying to say it was retiring of the debt? It sure looks to me like he's saying the issue is the interest rate exceeding GDP growth.

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    1. Practically speaking that's what's unique about debt as a "bad thing".

      Otherwise debt is no more worse than taxation - it only has distributional and incentive consequences (just like taxation for that matter).

      I take Grant to be saying that there is nothing particularly interesting to say about debt that Samuelson didn't already say, and your example only held interest for a time because you started by saying "let's abstract away from g and r" and then slipping in the cost of r without bringing g in too.

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