Wednesday, November 21, 2012

Krugman: Public debt has distributional and incentive problems

Kling with Boudreaux chiming in: WRONG KRUGMAN! You can't forget that it also has distributional and incentive problems!


If you haven't had enough of the debt debates and if you want Bob's OLG model in words rather than in a nice understandable table, and if you want commentary from people who (seem to, to me) have a weaker grasp of what Krugman was saying than Bob, click through the links.

One virtue of Kling's post is that it details how one particular distributional nightmare associated with inflationary finance could play out. But as usual, the Krugmania is driving the narrative.


  1. Oh for pity's sake. Krugman could not have been clearer that there are incentive and distributional effects. No-one in this debate has denied large scale debt can cause problems with those.

    I pick apart Bob's OLG thing here

    and here

  2. Woo hoo! At last I am able to wholeheartedly agree with you Daniel on the debt stuff. I completely agree that this isn't at all a problem for Krugman's post. Kling is *not* showing that the debt can burden our grandchildren in a way for which Krugman didn't already allow.

    BTW I strongly suspect Ken B. is wrong on his "counterexample" but I haven't had time to work with such examples in my preferred template, so I shall officially remain silent on that count.

  3. A simpler version of Ken's example: the government borrows 10 apples at 0% interest, gives them to the old, then rolls over the debt forever, without increasing taxes. With 0% growth, and 0% interest, the debt/GDP ratio stays constant. The old of the first cohort are 10 apples better off, and nobody is worse off.

    This is the borderline case between r < g, (Samuelson 58) where debt is too low, and an increase in the debt/GDP ratio requires permanent transfers (negative taxes), and cases where r > g, where an increase in the debt/GDP ratio requires permanently higher taxes.

    It's the taxes.

    1. @Nick_Rowe: That's true, but your first paragraph actually includes a well-concealed gift transfer. When you "loan" money at 0%, you're really just giving the money away. So that could be rephrased as, "some really generous dude gifts the government 10 apples. The government gives them to old people. Every year the government asks the dude or his heirs if they want anything back. They say no."

      It changes things a bit when you include a give-away fairy :-)


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