Friday, October 19, 2012

A little more on the debt debate

Gene has posts: here he reminds people that as of yet time travel is not possible and future generations did not vote on (much less plan for) the public debt they deal with. That, like taxes, is the price of modern civilization. It's something we're stuck with - we don't properly plan for it. And here he points out once again that a good indicator of whether Bob Murphy is miscommunicating Krugman's position is that he is making a claim about Krugman's position (I kid Bob... I like Bob).

But I am not done with Bob yet.

In this comment he seems to think I am marveling over the fact that whether or not g > r has practical implications for debt burdens.

Umm... no. Let's be clear: the implicit assumption of everybody so far has been to abstract away from those sort of sustainability issues. If you really think that's where we're at I have to seriously question how much progress we've made in this discussion.

What Grant helpfully points out is that Bob's models (as far as I can tell) don't really tell us about the inherent costs of debt so much as they tell us that debt imposes the same sorts of costs on the future that taxation imposes on the present.

Well duh.

But there's nothing costly about debt that isn't also costly about taxation. And that's Grant's contribution that brings some of this back to reality. The only reason why Bob's model imposes costs on future cohorts (not future national income, of course) is because he retires all the debt. In other words, debt has the same costs and benefits that taxation has just on a different group of people: namely, it has costs associated with distribution and incentives.

Which is Krugman's original different "kettle of fish". There's nothing uniquely costly or bad about debt.

And to bring this back to Krugman and Baker's real public service announcement: it makes no sense to think about public debt the way you think about your family's debt. Talk about the country having to tighten its belt the way grandpa did during the Depression is nonsense. It's good personal finance (what else can you do?), but bad public finance.


  1. But there's nothing costly about debt that isn't also costly about taxation. And that's Grant's contribution that brings some of this back to reality.

    No, it's <a href='">not a contribution.</a> It's what Landsburg said all along, and what I pointed out in crystal clear form on January 6.

    This is ridiculous.

    (Grant, again, I'm mad at Daniel, not you.)

    One last thing Daniel: You keep saying "retire the debt." No, it's servicing the debt that is key. If they just keep making interest payments but hold debt at the same level, the future generations are poorer. They can never retire the debt, and get the same outcome.

    1. For the second time in the last fifteen minutes, yes: see my update to the post linking to Grant. I noted that it was said before, which I hadn't initially realized. I linked TO THE SAME DAMN JANUARY 6 POST OF YOURS.

      It is "contribution" in the sense of it being an argument that Grant is pressing. It was something I had lost track of myself. I didn't initially remember it being said on the sixth. I wasn't the first one to point out the GDP point. Krugman said that. But I contributed that to a lot of the discussions.

      If you think this is just g > r it's not just that.

      I know servicing the debt does the same thing, but your models retired it, right? I thought they did at least. There is a cost to debt and a cost to taxation. The cost of debt includes interest where taxes don't because of time and liquidity preference. These costs balance the benefits of the transfer to old Al.

      We were abstracting away from these costs to ask whether there was something uniquely costly about debt to the future... something above and beyond taxation.

      There isn't. And the only reason to get costs in the future is by either retiring or servicing the debt.

    2. btw - believe it or not I actually do not like fighting all the time.

      I felt the need to do a post linking to one of your recent posts and saying "this is a really great post from Bob and I totally agree with him" to balance out the karma here.

      Then I exasperatedly realized how much recent posting has been dedicated to this debt issue!!

  2. (Sorry if you can fix the formatting on that hyperlink...)

  3. Daniel, I wrote this in a reply to you over at Bob's blog, but the one unique thing about public debt as opposed to taxes in these models is the possibility of default. If the generation who borrows produces nothing in the later period (and so has nothing to tax) then the younger generation would have to default to avoid being taxed themselves. (This could in principle be "reversed" with taxes targeted at the old, as in Noahpinion's post, but I don't know if this is a serious argument.)

    There is also my bond sales tax idea, but they'd have to take the entire principle from the old. (If you add a negative income tax and/or social security to the system this might not be a problem.)

    1. No I think that's a legitimate difference between taxes and debt. I think ultimately it's a difference that doesn't make a difference, but it's certainly something unique about debt.

      I guess that would make current cohorts better off, middle cohorts a lot worse off, and cohorts in the far future no better or worse off?

      On the sales, I don't personally get why we have to be assuming inheritance here. I'm not sure why bond sales don't work. Whether they are sold or inherited (both are voluntary actions after all), the cost of debt is servicing or retiring it and that's analogous to the direct cost of taxes. They're no different. There's no special cost that debt imposes. The cost of debt is just the future value of the present value of the cost of taxes.

    2. I don't know what you mean by middle cohorts. I'm saying that it's never the case the future generation has to be worse off: because either the bondholders could be taxed to pay for the bond themselves or in the extreme case there could be a default. (But note that in the default scenario the younger generation's productivity has risen dramatically if GDP is constant.)

      I'm saying that a bondholder can't be said to be burdened in any reasonable sense because when they buy the bond they already know they may be taxed to pay for it (at least the interest) themselves and know about the possibility of default.

      In the default case you could perhaps make an argument that they'd be burdened (if you believe that a sovereign currency government should never formally default), but I'm thinking with a negative income tax or social security the damage would be minimal.

      Also, people aren't talking about inflation, which may respond to "high burden" periods, lessening the impact.

      I imagine though in all cases there will be people at the margin who do slightly better or worse, but I imagine this is true of everything. (For example if the central bank buys a bunch of assets to keep prices from crashing, someone else who owns one of those assets (or buys in in the period between the stock dropping and rising again) may cash out and consume more now: burdening someone else before or after.)

    3. I am thinking that Rowe's point may be good with regard to the government borrowing money in a high interest rate environment. The government should almost never increase the deficit if *nominal* interest rates are very high because then they'll be stuck later paying off those high rates *later* (when inflation has subsided) which could be significantly higher than the growth rate.

      So I take three lessons away from this now:

      1. In a Volcker recession: We should not increase the deficit. Raise interest rates and taxes (or cut spending) to fight inflation.

      2. Bush tax cuts are bad. Should not increase the deficit when the interest rate is above zero unless the cost/benefit can be justified.

      3. MMT types are wrong to say that the Clinton surpluses are harmful (and "caused" the 2001 recession): should pay down debt when possible (perhaps slowly and only to an "optimal" level, a la Simon Wren-Lewis), and only increase deficit spending (at the zero lower bound) when the "inevitable" recession hits. (This goes hand-in-hand with reducing the trade deficit which will either dictate deficit spending to maintain full employment or increased private sector borrowing which could result in instability/bubbles.)

  4. But there's nothing costly about debt that isn't also costly about taxation.

    That's exactly it. I tried to summarize my argument along very similar lines on Bob's blog a few moments ago... Moreover, this extends to consideration of utility: "If taxing in the current period doesn’t lower aggregate utility and g >= r, then deficit financing won’t lower overall utility either."

    PS - And I'm obviously fine with Landsburg and many other people having said this before... I'm reassured to have arrived late to this argument, only to find other people have made the same arguments that immediately struck me :)


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