Sunday, October 14, 2012

Future cohorts and future national income are different

And Krugman's first post on this several months ago talked an awful lot about GDP, which puts him in the second group.

Dean Baker's initial post several months ago used mushier talk than Krugman's that did get into things like "the future" (whatever that means). If I recall I complained that Baker did that back then.

I was hammering this point as the really essential difference the whole time, and now Bob Murphy's co-conspirator Nick Rowe is making the point quite emphatically as well.

If we are talking about Krugman's post, I pretty much agree with Krugman on the points he made. If we are talking about Rowe's post and future cohorts of people, then I pretty much agree with him. His verbal OLG models illustrate the point, but Bob's tables make it really obvious.

A couple more thoughts:

(1.) If we are talking about GDP and not cohorts, it might be relevant to talk about growth too. But since when we talk about GDP debt has no effect (a la Krugman) it's a moot point so I don't worry all that much that we haven't been talking about growth.

(2.) If we are talking about future cohorts of people like Rowe wants to, it might be relevant to talk about population growth. Since debt does have an effect when we talk about future cohorts it's probably more important that someone think this through with population growth. As far as I know no one in this blog discussion has done that. That won't rescue Japan. It may make a difference for the United States.

(3.) As Gene Callahan has been pointing out the problem here isn't so much the debt as the inter-temporal transfers. You can get the same issues with taxation. So maybe we shouldn't think of this as a problem inherent in debt and instead think of it as an inherent problem of transfers. I don't know what the fact that you can roll over debt does to this argument exactly. It probably just amplifies the problem.

Anyway, Nick Rowe, if we are genuinely facing a "Borges Problem" it seems unfair to call the other side "zombies".

If you didn't understand this post, don't worry about it.


  1. I understand this post. It's a good one.

    "Anyway, Nick Rowe, if we are genuinely facing a "Borges Problem" it seems unfair to call the other side "zombies"."

    OK. Semi-fair point.

  2. And if anyone doesn't understand your post, they *should* worry about it.

    1. Well - I meant more that I wasn't doing a lot of linking or providing a lot of background on the debate... if you don't understand the post you probably haven't been following the debate, so don't worry about it.

      Granted, if you've been following the debate and you don't understand the post you should probably worry about it because I'm not exactly contributing the economic equivalent of quantum mechanics here!

  3. I dont see how the relative income among cohorts isn't relevant. That's the basis of the whole Social Security Ponzi scheme. A smaller young cohort can support a larger older cohort if growth continues apace. Again, the assumption that all cohorts are the same size is another reason this debate only makes sense on it's own terms.

  4. Daniel, what makes debt unique from transfers is the interest. The debt *principle* transfers are a red herring, as Gene Callahan shows. It's the so-called interest rate transfers that result from when r>g that are the problem.

    But Nick's spreading FUD about the debt. He's exploiting the bias against transfer payments by creating a model with no growth. The government had no logical reason to borrow to begin with. Unless it was their intention to exploit the young.(It's like the bush tax-cuts for the old instead of the wealthy.)

    Almost everyone agrees we should not raise the debt (relative to GDP) when outside of a liquidity trap given accommodating monetary policy. The idea that we would, at full employment, decide to finance transfer payments, with borrowing, seems so obviously wrong, that it's no wonder people like Krugman aren't warning about the burdens of the future.

    Because outside of full-employment, given their assumptions (would our children be better of if we're unemployed?), they're right. (Any costs of borrowing today are surely offset.) And even if on the margin there are winners and losers these will not neatly fall across generational lines.

    But that's not all: Nick keeps saying "NGDP" targeting "doesn't have these problems," but what could he mean? It's true there is no interest to pay, but there is inflation. If inflation grows faster than the economy then anyone born (working) after that time will be burdened, if it grows slower anyone born before that time will be "burdened."

    But it's not only NGDP and debt, it's everything. If there is a bubble in the economy there will be winners and losers too. Maybe we should and go back to barter trade lest we succumb to money illusion and are burdened.

    So this is at best a libertarian morality tale that it is wrong for the government to influence the economic outcomes we all face. Perhaps, Rowe is an Austrian at heart, because unless he's arguing for long-term efficiency he's arguing we face short-term unemployment based on the inherent unfairness of life. Alternatively, he could be a communist.

    (To be fair, he could possibly say NGDP targeting is more "neutral," as it could eliminate government discretion.)


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