"That is, if government builds a bridge today by borrowing money, who ultimately pays for the bridge? Buchanan showed, I believe conclusively, that the bridge is paid for by the people whose taxes rise in order to pay off the bondholders (that is, in order to pay off the creditors who lent the money in the first place, or the successors of these creditors). Debt issued today, therefore, is a burden on future taxpayers."Definitely. I agree completely, which is why when this discussion started many months ago I for one said that I am agreeing with Lerner, not disagreeing with Buchanan. I think I came out saying that all of them were right on the claims they were making.
If Lerner/Krugman/Baker actually disagreed with this, I would be dumbfounded. I would lose a ton of respect for them.
As I said in the last post, think of how insane it would be to disagree with this. If you actually disagreed with this you would want the government to borrow 100% of GDP and just buy everything that everyone wants for them. Why not? Surely there are going to be efficiency losses, but if it's really costless why quibble over some efficiency losses.
Obviously no one is arguing this.
No one disagrees with this point that Don makes. But I'm glad that at least we're on firmer ground than we were yesterday afternoon.
[UPDATE 2: I wrote this paragraph thinking of what Don wrote about taxpayer reaction to anticipated taxes on future generations - but I see he linked to the '58 book and not the '76 article... anyway, this is still an important point about Buchanan's views on the issue but a little separate from the argument Don is addressing in the linked post] Note the context in which all this arose for Buchanan (something which I think is often lost in debt debates): Buchanan was not a fan of strict Ricardian equivalence (like every sane economist of course he thought people were forward looking, but he was doubtful of the veracity of strict Ricardian equivalence). That's just one more reason to like him, IMO! I'd have to reread the article, but I believe it's best to think of Buchanan's assertion here as a response to Barro rather than a response to Lerner, as Don frames it.
UPDATE: The key to remember - something we were reminded of regularly during the campaign - is that "future taxpayers" and "future generations" are two different groups of people. I know it doesn't seem like it sometimes, but creditors are people too!
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Not so fast. Don writes " if the bondholder who must be repaid tomorrow is a citizen of the same country as is the taxpayer whose taxes rise to repay the bondholder, then the burden borne by the taxpayer is somehow canceled out [is a fallacy]... The reason is that the belief that $X of outstanding yet internally held government debt is no net burden on the citizens of the country threatens to make people too sanguine about debt-financed government spending."
ReplyDeleteHe needs to bold the word belief. That is what he alleges the burden to be. Now that's a good reason for being skeptical about public debt, if the belief sways behavior, but it's not a burden on the future is it? What matters still is the spending. Follow the goods as Landsburg always puts it. Resources were diverted to build the bridge, and the burden or bebefit flows from that not the method of financing and not the public's beliefs.
Huh. I am not so sure. Doesn't I matter what the elasticity of supply for the materials to build the bridge are? If the government increases purchasing of something inelastic, isn't the thing paid for at the moment of purchase by the people who don't get to use the materials the government is now using? The debt payment, then, is a transfer of wealth from taxpayers to bond holders (which may well be different 'generations').
ReplyDeleteEg, World War II was paid for at the time of the war in decreased consumption, rationing, etc, but was not 'paid' for until well after, because the government wanted to smooth the burden on taxpayers (but couldn't really smooth the cost of the war).
And now I finish reading the comment above me...
Is there somewhere I am going wrong here?
I don't think that's wrong at all. I think a lot of us have been bracketing out those issues that generally revolve around the question of whether the spending is wise in the first place. Forget inelastic supply - we also just need to establish if the expenditure is producing value, period!
DeleteI guess I'd put it this way: would the issues you raise be different at all between a debt-financed WWII and a tax financed WWII? I don't think it should (except insofar as current creditors and current taxpayers demand different things, of course - but that probably militates things in favor of debt financing!). It's because your issues are common to debt and tax financing that people have been bracketing them off for the time being.
But they are definitely real issues to think about.
In the same vein, these things affect income distributions, but people have pretty much been bracketing that off too.
Don misses the entire point, which is always the case.
ReplyDeleteIt matters not a whit about the future, when it comes to borrowing money.
The sole issue as regards borrowing money is whether the return is greater than the costs of borrowing, including ultimate repayment of principal.
Don also misses the point on the second order effect of borrowing money which is that borrowed money is why the rich grow richer.
Why do you bother with such a fool and such pointless conversations?
The only time government borrowing is of concern is when it goes only to pay current consumption. That is God's rath against us for not assuring a competitive legal regime where prices fall at the first sign of a slow down. If prices fell as they should under all the assumed models there would be do need to borrow.