Thursday, October 18, 2012

This is why we let the Scandinavians choose who gets the Nobel Prize

(Yes, I know he's just an adopted Scandinavian, but I'm a labor economist so I take self-selection seriously)

(Yes, I know he's in Norway and the prize is Swedish, but that's why I said "Scandinavian". Quit nitpicking. I'm just making a joke).

Stickman* has an excellent post on the debt debate. I'll let you click through, but he points out something I completely missed in Bob's tables, and now I'm not even sure Bob and Nick are right on the questions that Bob and Nick are interested in (whether future cohorts are made poorer by debt). Indeed, I'm now wondering if future cohorts are of necessity made richer by debt, ceteris paribus), with no effect on future GDP. Stickman claims that this is the result of bringing fresh eyes, and not necessarily a better brain, to bear on the problem. I think that's probably too modest.

There are many sharp brains blogging about this right now, though, one belonging to Nick Rowe and one belonging to Bob Murphy, and I look forward to their thoughts on stickman.

I think this is a new point - apologies to anyone who has said this. He asked me if anybody had and I don't remember it.


UPDATE: Not meaning to detract from the post at all, but it seems like maybe Bob and Steve did explore this already. Bob writes (way back when): "Now somebody like Steve Landsburg is going to look at the chart above and say, “I don’t know why you Austrians keep picking on poor old deficit finance. It gets a bum rap. The real burden imposed on Iris is the taxation in period 9. Her ability to engage in a mutually agreeable bond deal with the government, actually makes her better off than if she were forced to consume (100, 0). So deficit finance actually helps Iris; it’s the taxation that hurts her.”

OK sure Steve, that’s technically right. But COME ON. Once the government in period 1 gives a freebie of 10 apples to Old Al, and doesn’t have the political cajones to directly tax Bob to pay for it, future generations have their fates sealed. As that government debt gets kicked down through the generations, somebody has to get screwed: either the taxpayer who retires the debt, or the bondholder left holding the bag when the government defaults. Depending on the timing, the chickens might not come home to roost until the people who must singly or jointly suffer the brunt of this pain, weren’t even alive when the original transfer happened."

This seems like the same point. I've still been spinning my wheels on other issues and it's taken stickman to point this out to me, and I suspect others are in that position as well. Bob's response here is very weak IMO. What if the taxpayer never retires the debt and the government never defaults? This is not 16th century Southern Europe, after all. These are modern public finance systems. Shouldn't non-retriement of the debt and non-default be our default assumption here?

This also comes back to a point I made a lot in the first round but haven't made as much in this round. It's true, it seems a little unfair if the government doesn't have the political cajones to directly tax the first young person to pay the first old person. But in real life governments have had the political cajones to do that. As I stated a lot previously, Social Security is not funded by debt, for exactly this reason. What do we fund with debt? Investments in the future. Our major intergenerational transfer program is funded by taxes. In fact we have a whole separate tax system - FICA taxes - just to make sure that it works that way. So when you don't change the financing mid-stream, Bob's case is looking a lot weaker. The only remaining problem is the "political cajones" problem, and in real life we seem to do OK on that count too - if FDR didn't have political cajones, I'm not sure who did.

* - Do I have to continue using this handle? You've commented with your real name elsewhere.


  1. Well, I'm on the verge of blushing. Thanks for the props DK... Now, I'm just waiting for Bob or Nick to swoop in and set me straight.

    Still, from my quick reading of the issue at least, the very issue of debt inheritance seems to be the crucial part missing from Bob's table.

    Regarding the name: Yes, of course. I had meant to change my open ID profile but obviously haven't gotten around to that yet. It's the blogosphere version of coming out of the closet :)

    1. See the update too. I do think it was raised before (by Bob no less) after reading an old post - but I think you are absolutely right to press the point. It certainly went over my head the first time.

      I'm not sure if sale of debt is a problem or not. Usually my type rails against Ricardian equivalence types clinging to all this intergenerational altruism. Seems weird to me to reprimand others for not clinging to it.

  2. "What if the taxpayer never retires the debt and the government never defaults?"

    In that case the taxpayer pays in the long run, because it's the taxpayer that supports interest payments on government bonds. Unless, of course, the government erodes that value of them with inflation, in which case the bondholder pays a share too. This is obvious and doesn't challenge Murphy's basic point.

    1. Well right but there's been an agreement to ignore growth and inflation and taxes. That's the whole point, Current.

      Bob invokes taxes very specifically here to make the result work out his way (and yet it still doesn't invalidate Krugman and Baker's point).

    2. I haven't been following this closely, I didn't know there was an agreement not to involve taxes. I can't see how we can talk about this stuff without involving taxes.

      Certainly we can't include taxes that are used to pay-off debt while excluding taxes to maintain debt.

    3. Well I think it's easy to talk about it without taxes. You just roll over the debt.

      What's hard to do is talk about it without growth. We've sort of solved that problem by cutting off the spreadsheet before that gets inconvenient :)

  3. "Well I think it's easy to talk about it without taxes. You just roll over the debt."

    But if the debt has interest (and it must) then who's to pay the interest? Does it come from nowhere?

    1. I'm not sure I understand your question. It comes from income. Where else would it come from?

      This poses problems down the line if you don't also assume growth. People in this discussion have waved their hands at that problem by cutting off the spreadsheet before it overtakes income.

  4. Daniel:

    ==> Great point about Social Security. You're right, that's the opposite of what we're doing here. They *overtax* the young workers early on, running a surplus (on the SS program). We could argue that it was because of the favorable demographics etc., but I agree it's a good counterexample to my political point.

    ==> Sorry, you are being goofy in your responses to Current. Of course when people say "higher government debt impoverishes the future" they have in mind the fact that the government is going to be using a portion of tax revenue in the future to service the debt. If you are saying suppose we have a Sameulson-esque sustainable Ponzi scheme, because the debt grows exponentially and the government never uses a cent of tax dollars to even pay some of the interest, OK, but that's clearly not the argument Krugman and Baker were making. Nick Rowe explicitly acknowledged the sustainable Ponzi scheme early on, btw.

    1. Well Current initially talked about RETIRING the debt, not just interest. That was an overreaction on my part to the idea that we have to retire it.

      Look we've been abstracting away from all sorts of sustainability conditions the whole time. I see no reason to invoke them now unless they affect the arguments we're already juggling. I'm not intending to invoke a Ponzi scheme. But it seems wrong to require that tax payments to pay interest be included if we're not going to include growth.

    2. "Well Current initially talked about RETIRING the debt, not just interest."

      No I didn't. Above when I said "In that case the taxpayer pays in the long run, because it's the taxpayer that supports interest payments on government bonds." I meant that the taxpayer pays even if the principle is never paid back. Take a perpetual bond for example. In the long run the debt maintenance cost far outweighs the principle in importance.

  5. Last thing: If you're allowing for the possibility of perpetual rolling over of the debt, with no interest payments ever, then debt makes an individual family richer too. They consume a bunch today, put it on the credit card, and then let the credit card bill grow exponentially. Woo hoo!

    So, that's clearly not what Krugman was getting at, when he said debt makes a family poorer but not USA.

    1. Ya - see my response above.

      Current is talking about retiring it. I think that's an unreasonable assumption. It's totally reasonable to talk about taxing to pay interest, but if we're going to include that reasonable assumption we oughta include the other reasonable assumption of growth. Why would you be borrowing without the prospect of growth, after all?

      As a practical matter - I agree with you.

      As a modeling matter, I don't see why we should be invoking assumptions that help your case but not ours. I thought we were abstracting from all that.

  6. I dunno how Bob finds the energy. But then I remember: he's a young guy!

    I didn't get round to responding to Stickman. But I did see this similar post by Prometheefeu

    And I left the following comment:

    "“So again, it’s not the debt that impoverishes. It’s the tax.”
    Yep. But that’s a bit like saying “It’s not the gun that kills people; it’s the bullet”
    OK, that analogy is not exact. Because in some cases an increase in the debt does not require an increase in future taxes to service the debt (pay either interest or principal). Some guns fire blanks.)"

    BTW Stickman, even if the debt is perpetuities, and the taxes just pay the interest on the debt, the present value of the taxes=interest payments to infinity equal the current value of the debt. You only escape this result if the growth rate exceeds the interest rate forever, so you can rollover the debt+interest, never pay any extra taxes, and the debt/GDP ratio still falls.

  7. Was it Dean or Paul or both who said that taxes weren't a burden on future generations, because they paid those taxes to themselves, as owners of the bonds?

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