If you're not getting what he's trying to say about Bob's new table, take a look at Bob's old table where he doesn't switch financinge schemes here. Actually in this one he changes financing schemes too, he just waits until the last year.
I am on the verge of saying that debt, by its very nature, makes future cohorts richer than they would have been and has no impact on GDP (which is all a lot of us ever cared about from the beginning until the goal posts were moved).
That wouldn't be quite right of course. If we're talking in terms of "forever" we certainly need to start thinking more realistically about economic growth. Borrowing at interest with zero growth is not very wise. There might be other problems too - both practical and theoretical. But I'm starting to think I've been conceding far, far too much.
Thursday, October 18, 2012
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Daniel
ReplyDeleteGov't debt never reduces future consumption, by definition (except to the extent that present consumption reduces a future resource)
Thought experiment. Economy has one crop: corn, which is planted in May and harvested in September. In year one, to get able bodied workers to plant and harvest the maximum corn crop this year, gov't has to promise that workers will get 10% more of next years crop (gov't debt).
Year two. Workers still have to produce 100% of corn, as a condition of their getting the added 10% promised in year one (proving that gov't debt distributes income)
Caveat: only gov't coercion can drive production to its maximum, contrary to the silly libertarian ideas you entertain
Excuse me? What silly libertarian ideas do I entertain that aren't just good solid liberal ideas?
DeleteI have always made this point, AH. The only way you could say something interesting is if you do some weird combo of individuals across different years (ie - if you look at cohorts rather than years). And Grant (stickman) is now making me doubt even that.
I've always been the one making the point that you make here. I've always said that if you are interested in national income in a particular year government debt has no impact whatsoever.
It's probably true that only government coercion can drive production to its maximum... but I'm not sure why we'd necessarily want to drive it to its maximum.
Daniel, like I said over email, I'm swamped until next week. Do me a favor please:
ReplyDelete==> Do you agree that Krugman said there is a sense in which debt makes a household or a family poorer? But that he denied this truth for the individual family could be aggregated to the USA as a whole?
==> If you agree with the above, give me a specific numerical example of what it means for a family to be made poorer in the future by running up a debt today. Then, defy me to show you in my apple examples what this would look like, at the USA level. In other words tell me what it would mean if Krugman were wrong, and that the USA *could* be made poorer in the future because of running up the debt today, in the same way that Krugman agrees could happen with an individual family. So then you tell me, "Bob, if Krugman were wrong, then you would be able to construct an apple scenario showing such-and-such. But it impossible for you to do so. If you *could* do so, I would agree you have been right and Krugman's narrow point is wrong, and we need other arguments to justify deficits today."
1. Basically yes, but we should probably be careful about putting words in his mouth. He said that to a family debt is "a lot of money you have to pay to someone else". I don't know if I'd attribute "poorer" to him. But as a general point, you're right - he made a distinction between a micro experience of debt (or perhaps a better way to put it is "a debtor's experience of debt") with an aggregate experience.
Delete2. Well... I think you have to refer to #1. Obviously you could ignore the reasons why a family would contract debt and about discounting the future. If you ignore all that stuff then you could say:
Period 1: Family earns 15 and borrows 10 at 10% interest to consume 25.
Period 2: Family earns 15 and pays 11 back, and consumes 4.
In total - ignoring all the things you've ignored (discounting, growth, yadda yadda yadda). You could call this "poorer". This is certainly poorer as you've been talking about it in your tables.
But I really want to stress that Krugman never said "poorer" to my knowledge. He said "a lot of money you have to pay to someone else"... which is basically just the definition of debt from a debtors perspective, and not very controversial. From an aggregate perspective that's a misleading way to talk about debt. We know that it's better to talk about it as a contract to allocate resources at multiple points in time.
Daniel, I've suggested the government could implement a bond sales tax based on the spread between the interest and growth rates depending on debt service as a percentage of GDP.
ReplyDeleteWhen a bondholder lends the government money he becomes a creditor, but his debtor is not future cohorts it's everyone in economy. Since he is part of that everyone, if he is taxed to pay for his own bonds, he can not be said to be burdened in any reasonable sense. (Note that bonds are bought voluntarily, bondholders should assume the risk that they may be taxed to pay for their own bonds.)
Given that when bondholders buy bonds they become in part their own creditor why would they expect to extract more from the future economy than it can produce? Why does everyone in this debate assume bondholders deserve to be paid with high returns? (Bonds are a way to avoid risk: get a higher return than putting money in a mattress, and less risk than putting money on the market. If you expect high returns, you have to take higher risks.)
Also, since in any period the bondholder can be the only one who has to pay, the debt simply cannot impose a burden. Imposing a burden is always: 1. The free choice of the bondholder to buy bonds. 2. The policy choice of the government.
(Also, agree that Krugman is talking about a single household's debt not households in aggregate.)
Daniel I'm still anxiously waiting for you to show how the government can rack up debt early, and thereby (other things equal) make future cohorts richer. I can see how racking up a *surplus* can do that, but that's negative debt. I would like to see what you are talking about here.
ReplyDeleteAlso, for what it's worth, I found this statement to be annoying:
I am on the verge of saying that debt...has no impact on GDP (which is all a lot of us ever cared about from the beginning until the goal posts were moved).
No Daniel, that is simply unfair. I have never ever ever denied that debt has no impact on future GDP. What has always been the issue for me, from the get-go, was whether this insight means that "future generations" are thereby prevented from being made poorer.
If you want to say, "I have always cared about GDP, and so did Paul Krugman, but Bob and Nick for some reason chose from the beginning to argue something else," OK fine. But that is not us moving the goal posts. Moving the goalposts means, we make a claim early on in the debate, then we see we will lose that point, so we change our claims and pretend that is what we've been arguing all along.
Nick and I never did that. It's possible we misunderstood what Krugman was claiming, but we most certainly have not moved the goalposts.
Since I'm being irritable now, Daniel, let me vent some more. Back on my "post for professional economists," I walked through my canonical apple example. Then I made some observations about it. Here was one of those observations:
ReplyDelete==> There is no crowding out of private investment in this example. Real GDP is fixed at 200 apples per period.
Then, your first reaction to this post in the comments was to tell my readers:
Just on observation on the table for everybody to digest, with absolutely no effort to read the whole post (I said I’m exiting this discussion and damn it I’m a man of my word!):
Future GDP is completely unaffected by the debt in Bob’s model.
I realize you didn't read the post because you were in a hurry. But do you see why this was kind of funny? You thought you were showing everyone the rabbit in my hat, when I explained to everybody that *constant real GDP was picked on purpose* so that Nick and I could more clearly illustrate the flaw in Baker/Krugman's position.
So believe me Daniel, Nick and I have known all along that more debt per se (ruling out disincentives from future taxation and crowding out) doesn't affect the productivity of future workers and tractors, and thereby doesn't reduce future GDP. We were worried that Krugman's readers would get the sense from him (and I happen to think Krugman believed it himself) that this claim about future GDP was *the same thing* as saying future Americans would have the same income.
Murphy, I said this last year, but I will say it again as a reminder: You and Rowe should write a full length paper on this.
DeleteThis issue clearly isn't going away any time soon, and considering the incredible importance of the subject, you would be doing a tremendous service to potentially BILLIONS of people worldwide, whose lives could be improved because our generation/cohort didn't blindly rack up huge government debts believing that the worst that can happen in the future is merely a coercive transfer, precisely because they were armed with the requisite knowledge.
PS. I am looking at your back and forth with DK, Callahan, and Landsburg as honing your argument, not as you trying to convince them before you'll really believe it yourself. I hope you are too.
I'm not sure what you think is so funny. My whole point in doing that was to say, once again, that rather than pointing out the flaw in Baker/Krugman's position you are not addressing Baker/Krugman's position.
DeleteThe obvious way debt can improve future wealth is through public investments complementary to private ones. These are not necessarily only capital ones as even investments in consumption that allow people to retire can increase utility when that is what people desire. An increase in debt to gdp can represent a benefit depending on how the money is spent, just as a decrease in debt to gdp can represent a burden depending on how the money is raised. But just as money spent can be wasted, money raised can improve efficiency, such as those on positional goods. But just as a decrease in debt to gdp can be a burden on the present, it can also be a burden on future if arrived at by diminishment of productive investment, and an increase in debt to gdp can be a benefit to the present, it can also be benefit to the future if it leads to more productive investment.
ReplyDelete