Wednesday, October 17, 2012

More blogging on issues that you shouldn't worry about if you don't know the context (ie - Government Debt Blogaggedon 2012)

I would hope that my take on the debt debate is clear by now, but weird victory lap posts by Bob make me think maybe it's worth clarifying (I have several brilliant flashes of insight in the comment section of that post)...

If you are asking what will happen to individuals that live in the future, Bob and Nick are exactly right.

1. It's not what a lot of us are talking about or worrying about
2. When you think about actual programs like Social Security it's not clear their point matters one iota

But if you find yourself asking that question, Bob and Nick are right.

This hardly suggests to me that Dean Baker and Paul Krugman are wrong.

One caveat: I'm still not sure I've wrapped my head around Gene Callahan's point that this is an issue of the transfer and not the debt (that no debt increase at all can give you the same results if you still have the transfer). He says some of the modeling I've done demonstrates this. If that's true I'm loathe to admit I don't understand what I've demonstrated. But if he's right about all that, maybe Bob and Nick aren't even right on the question they're interested in. I'll stay agnostic on that until I understand it, but all of Bob and Nick's arugments seem right to me.


  1. At this point you and I are in a select group of addicts, so let's ride this trip to the bitter end...

    Some responses:

    1) Yes, you're right that Krugman often made his point in terms of real GDP in the future being unaffected by the level of government debt at that time (subject to the caveats about crowding out, distortionary taxation to finance the debt, etc.).

    2) However, where I disagree strongly with you, is when you think that Krugman (and Baker) understand that *all Americans who will live after the year 2050* can be made poorer, even though real GDP is unaffected. In other words, they are leaping from the true fact about real GDP, to the conclusion that "future generations of living people" can't be hurt by the level of debt they "inherit" from us.

    3) This conflation of "future national income" and "income of everyone who is alive in the nation in the future" is an understandable mistake; just me typing it out is a hard distinction to make. So Krugman and Baker weren't dumb for initially making this mistake (if I'm right about their position). But, it's a mistake.

    4) Gene (and Landsburg and Noahpinion and you!) have pointed out that it's not the debt PER SE causing the problem, rather it's the subsidies to the old timers, and the net taxes on the people later, that cause the problem. So they (and you!) are claiming that Nick and I are wrong to focus on the debt per se, because it's these other things that we are just bundling up with "government runs a deficit".

    5) That's OK, and I understand in particular that Steve Landsburg goes nuts when people get mad at deficits, rather than government spending. But this argument is NOT what Krugman and Baker have been saying. By the same token, this type of reasoning shows that even an individual household isn't made poorer by debt per se. Given the household's income and spending paths, whether you finance it by borrowing money or by selling off assets is irrelevant (with identical interest rates). But since Krugman and Baker were both trying to show that there was a qualitative difference between a family's debt versus Uncle Sam's debt, this is clearly not the argument they were making.

  2. Also since I know he sometimes reads your blog: I have never accused Brad DeLong of saying anything wrong on this issue. It's Dean Baker and Paul Krugman who have been going to the barricades in defense of a fallacy; DeLong has always correctly spelled out the assumptions under which today's deficits do not "impose a burden" on our grandkids.

  3. I post on your question today. It's the same point Noahopinion made, as I understand him.

  4. "If you are asking what will happen to individuals that live in the future, Bob and Nick are exactly right."

    Given their assumptions. Which includes certain actions by the people alive at or near the time of the crisis. Boundary conditions matter.

  5. You could still make an argument for Krugman on the government is not like a household in the sense that a government is like *all* the households (as opposed to one) *and* controls all the money.

    Daniel, the only thing difference I can see between an increase in debt and a transfer payment is the debt implies a transfer in the future rather than now. The only question is whether that transfer will include what Rowe calls a burden. Basically all (sane) increases in debt are expectations of a better outcome in the future. Some generations may fare slightly better or worse than others, but in general, provided things go according to plan, things should improve over the long term.

    However, even if they don't the burden can in principle be minimized.

    The real question, which Rowe seems to be addressing now, is whether it matters in a depression. If we can borrow at negative real rates should we really be worried that *in principle* future growth could be negative? Is that a serious bet? Are we all Austrians now?

  6. I think I've come around to Gene's point of view.

    If those alive in period 0 set themselves the task of enriching themselves at the expense of a future generation they would conclude that they need to transfer apples to the elders in period 1, followed by a compensating transfer in period 2 to the youngers from period 1 (now the elders from period 2).

    If they do this then they have achieved their goal and someone in the future will now lose out and it does not matter if they use tax or bonds to do it - which I think maybe is what Gene is saying.

  7. On transfers, I think the issue is simply that the young generation which is impoverished by the old will simply compensate by impoverishing the next young generation when they themselves are old. Really, the issue isn't time. If I take a dollar from you and you compensate by taking one from Paul who compensates by taking one from Brad who takes one from Bob who is too honest to take one from anyone, I am up a dollar, Bob is down a dollar. Ultimately, everyone among the chain was made poorer. It's just that they compensated by making someone else poorer. What really matters is the transfers which make one person poorer.


All anonymous comments will be deleted. Consistent pseudonyms are fine.