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Home Publications Blogs Beat the Press Brad DeLong Beats Me to Responding to Nick Rowe

Brad DeLong Beats Me to Responding to Nick Rowe

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Friday, 12 October 2012 05:33

I saw that Nick Rowe was unhappy that I was saying that the government debt is not a burden to future generations since they will also own the debt as an asset. I had planned to write a response, but I see that Brad DeLong got there first. I would agree with pretty much everything Brad said. The burden of the debt only exists if there is reason to believe that debt is somehow displacing investment in private capital, which is certainly not true at present.

I would probably argue the case even more strongly. In a depressed economy like we have today, there is reason to believe that the deficit, by boosting demand, is actually increasing investment, thereby making future generations wealthier. There is also the issue of human capital, that by keeping workers employed and keeping families intact, it is improving the productive capacities of the labor force in the future.

Perhaps most importantly, it is essential that people understand that the measure of the burden of the debt in future generations is not the size of the debt, but the extent to which we believe the debt has reduced output in the future compared to a counter-factual where we did not run the debt. If the debt did not reduce the economies' future productive capabilities (or even raised them) then there is no burden of the debt. In any case, how well we are treating our children is measured first and foremost by the health and the economy and the society we pass on to them, not the amount of government debt.

It is also important to add that government borrowing (if it does divert capital from private investment) is just one way in which we can reduce the economy's productive capacities in the future. Suppose we don't borrow but instead sell off government assets like park land or highways which are then turned into toll roads. The sale of assets (including oil leases on government property) has roughly the same effect as government borrowing.

This also applies to other ways in which the government can raise money which may not be thought of as asset sales, but have a similar impact on future output. Foremost in this category is patent and copyright protection. In these cases the government is effectively paying people for innovations and creative work by promising to give patent and copyright holders a monopoly in certain markets in the future. This is using the government's power to allow copyright and patent holders to collect a tax on specific products. In this sense, it has a similar impact on future generations' well-being as if the government borrowed several trillion dollars to pay innovators and creative workers and then allowed their products to be sold in a free market.

Other factors not related to the debt also can make future generations poorer in important ways. If we get other countries or people angry at us so that we have to spend more on defense to keep the country safe, then we will have imposed a large burden on future generations. If we impose harsh penalties for minor offenses so that millions of people will be tied up in the penal system, then we are also imposing a large burden on future generations.

These and a long list of other policies (did I mention the environment and global warming?) all can impose substantial burdens on future generations in ways that are not at all captured by the debt. Therefore the debt does not in any way present a measure of the burden that we are imposing on future generations.

In fact, the debt we have today does not even give us a good measure of the debt. Suppose that we issue $4 trillion in 30-year bonds at 2.75 percent interest. If interest rates return to more normal level (say 6.0 percent on 30-year bonds) in 3 years we would be able to buy the bonds back for around $2.2 trillion, eliminating $1.8 trillion on debt. This would not change our interest burden one iota, but those who worship the debt as a measure of inter-generational equity would then be able to go to the alter in their basement and offer thanks for having reduced our debt to GDP ratio by more than 10 percentage points of GDP.   

 

 

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The projections are that Interest rates will rise
written by Dean, October 12, 2012 8:10
Skeptonomist,

i was referring to projections, not my desires. I am not running the Fed. Given who is running the Fed, they and others project that interest rates will rise. I don't get to change that.
It's not (just) about investment
written by Nick Rowe, October 12, 2012 8:36
Dean: "The burden of the debt only exists if there is reason to believe that debt is somehow displacing investment in private capital, which is certainly not true at present."

That's what I am disagreeing with. Even in a world with only consumption and no investment there can be a burden on future generations. And I give an example in my old post http://worthwhile.typepad.com/...lence.html

Yes, if the government borrows to build schools, and if those schools benefit future generations more than the future taxes on the debt burdens them, then that is a net gain for future generations, and we should certainly do it.

But if the government borrows and builds something that is totally useless to future generations, that is a loss to future generations *even if private investment is totally unaffected*.
I (think) I know where you are coming from
written by Nick Rowe, October 12, 2012 8:51
I should add: 30 years ago I used to believe what (I think) you believe. I (like nearly all macroeconomists) accepted Abba Lerner's view that the debt is not a (primary) burden because we owe it to ourselves. It's only a (secondary) burden to the extent that: it crowds out real investment; future taxes have disincentive effects; we owe some of it to foreigners.

Then I read Barro. Then I read Buchanan. And then I sat down and worked out some very simple numerical examples in an Overlapping Generations context, with no capital, no disincentives, no foreigners, and it slowly dawned on me I was totally wrong. And that the economically illiterate rube who thinks the debt is a burden (unless it's spend on good schools which offset that burden) is totally right.

There are two ways to aggregate:

1. Aggregate across cohorts in any given year. That's the way GDP data is aggregated. That way, you can't see the (primary) burden of the debt. You can only see the secondary burden, if it crowds out investment, or has disincentive effects.

2. Aggregate across the years in the lifetimes of any given cohort. That's the intergenerational accounting perspective. That way you can see the burden on future cohorts.
Reading Barro and Buchanan
written by Dean, October 12, 2012 9:43
hmmm, I read Barro and Buchanan about 30 years ago, too. It didn't have the same effect on me. Let's see, if we assume that GDP in our simple economy can expand due to the issuance of debt (as a result of putting to use idle resources), then we have the first generation essentially producing their own additional consumption, which they would not have, absent the debt. Hard to see how that one harms the generations to come, especially if parents ever buy things for their kids.

We do have the issue of the sheets of paper (bonds) that some members of the current generation have that gives them claim to future output. If we put in an assumption that the economy will come back to full employment and remain there, and that the current generation must eat all their wealth before they die, then anything that allows the current generation to have more claim to wealth (e.g. higher house prices, a run-up in the S&P500 etc.) will be imposing a burden on future generations.

Of course most people with wealth don't die penniless and it is not likely that we can expect to have full employment at some near date and for the indefinite future thereafter, so I don't think we have to worry very much about the burden on future generations posed by the government debt.
...
written by JSeydl, October 12, 2012 10:00
Nick, of course it matters what the government spends the money on. But the bar is really low for productive investments, because real borrowing rates are still negative across most of the curve. In your original post, you wrote:

And if the interest rate is permanently less than the growth rate then the "No Ponzi" condition does not hold, and the debt can be rolled over with interest forever without taxing future generations


The "No Ponzi" condition obviously does hold. But, as Dean notes, paying back the debt by taxing future generations is not the only way to pay back the debt. If the government borrowed more now and then used the funds to pay back the debt at a time when rates are higher, then there would be no burden on future generations. Of course, future generations wouldn't be better of either, despite the fact that the debt burden, as measured by the debt-to-GDP ratio, would drop.

Dean's basic point is that the debt-to-GDP ratio is a useless measure. Why would a government need to raise taxes to reduce a high debt-to-GDP ratio if the interest burden on the debt load isn't fiscally binding? Interest payments as a share of GDP are near a post-war low. If they rise, then the government may need to impose higher taxes, but that's sort of unrelated to the overall debt load per se.
RE or not RE, that is the question
written by Nick Rowe, October 12, 2012 10:11
Dean: if the current cohort *gives the bonds as a freebie* to their kids, then there is no burden on the kids. But then they will have to save all of the bond-financed tax cut to do this, and we are in a world of Ricardian Equivalence, so the bond financed tax cut does not increase AD and employment and GDP.

If RE is false, and the current generation spends the tax cut and *sells* the bonds to their kids, then we get the increase in AD and employment and GDP, but we also get a burden on the kids.

You can't have it both ways. RE or not RE. Which is it?

(OK, maybe in a world of multiple equilibria you can have it both ways, but then if you go for multiple equilibria I'm going to call in my confidence fairy to fix the problem.)
war bonds
written by ljm, October 12, 2012 10:52
I said when wars started that we should have had war bonds that paid like Series EE savings bonds to pay for the wars. Raiding social security was just the wrong thing to do. They could issue bonds paying 6% interest and just sell them to Americans and I suspect they'd get all the money they paid for the wars. Take that money and repay SS. Give up the idea of spending over $600 billion on nukes over 10 years. Of course, end tax cuts for the rich and lift the SS tax cap. With all that money, they should pay off all the debt eventually.
...
written by prometheefeu, October 12, 2012 11:22
@Dean

The fact that GDP can be boosted doesn't change the "we owe it to ourselves" point. All that it shows is that while our grandchildren will bear the burden of the debt, we're also giving them a more prosperous economy which they can use to offset the debt burden relative to the baseline.
The key point is that output expands
written by Dean, October 12, 2012 11:52
Nick,

the issue here is that output can expand. This means that people consume their tax cut and output expands accordingly. This doesn't pull anything away from the kids in an overlapping generations model without fixed capital.

The only issue then is what happens to consumption down the road as a result of the fact that people in the current generation hold debt. If we require that they spend all of their bonds on themselves and bequeath nothing to their kids, then you can get your story that the debt will be a burden on our children, but that is a rather strong and unrealistic assumption.
Not everyone has a bequest motive
written by Andy Harless, October 12, 2012 1:10
"If we require that they spend all of their bonds on themselves and bequeath nothing to their kids, then you can get your story that the debt will be a burden on our children, but that is a rather strong and unrealistic assumption."

That assumption is one extreme. The other extreme is Ricardian equivalence. The reality is somewhere in the middle, which means that debt is in fact a partial burden. (Everyone acknowledges that it is no burden at all in the Ricardian equivalence case, but nobody believes that case, any more than anyone believes your alternative straw man.)

For example, some people choose not to leave bequests. (Indeed, since I personally have no children, I would hope, if I outlive my wife, to minimize my bequests -- which is to say, to leave no bequest except what I will hold to compensate for uncertainty about my lifespan and what I would have given to charity anyhow.) For those of us who choose not to leave bequests, your straw man requirement is no longer a straw man. If the government borrows today to give us a transfer, we will screw over the next generation by saving more today and consuming more when the economy returns to full employment and the transfer is discontinued. Not everyone is as selfish as me -- some people do have bequest motives, and some people are bad financial planners and may irrationally leave bequests -- but I think there are enough of us to impose a non-trivial burden on the next generation.
when we move closer to reality
written by Dean, October 12, 2012 1:18
Sorry Andy,

I was picking extreme cases to make a point. if we want to move closer to reality, the additional spending/tax cuts associated with the deficit will almost certainly be associated with some additional investment, both public and private. It will also keep people employed, thereby keeping the structural unemployment rate from rising.

All of these factors will make our children richer. While your decision to spend all your additional wealth from the bonds may be a negative, you'll have to get a lot of other people to go along in order to ensure that the net effect on the kids is negative.
ED
written by Ted Boettner, October 12, 2012 1:49
Nick,

If you are correct, can you explain how the WWII debt was passed onto the baby boomers? It didn't seem to make them less poor.

Thanks - TED
Getting closer
written by Nick Rowe, October 12, 2012 2:17
Like Andy, I think the truth lies somewhere between the two extremes of zero bequests and full Ricardian Equivalence.

Under full RE the deficit has no effect on current GDP and no burden on the kids.

Under zero bequests the deficit will increase current GDP but has a 100% burden of reduced consumption on the kids. (It is even conceivable that it could be more than 100%, if the kids are tipped into recession and there's a Keynesian multiplier.)

If the truth lies roughly halfway between those two extremes, you would think that both the benefits of fiscal expansion plus the costs on the kids would also be roughly halfway between those two extremes. I can't see how you could get a fiscal stimulus and no burden at all at the same time.

If I were a Keynesian (I sort of am) I would argue like this: Yes, the debt will have a burden on the kids. But if we spend it on schools and roads etc. they will also get a benefit. Or make a sort of "pump-priming" ("kick-starting") argument which says that a very short burst of deficit spending could flip the economy into a good equilibrium and prevent a prolonged recession in the bad equilibrium that would hurt the kids' employment.

(But I'm a monetarist, and would argue instead that a really good and aggressive monetary policy with a sufficiently high NGDP target could do the same job with no burden on the kids at all.)
...
written by Andy Harless, October 12, 2012 2:24
Well, OK, but I don't think I'm all that atypical. The overall evidence regarding bequest motives is mixed. Can we just say that there are two opposing effects, so that it's an empirical question whether debt would be a burden on the next generation, and the the empirical question has not been settled. Personally I'm inclined to agree with you that the investment-encouraging effect is likely to be larger, but only because I think it is a large effect, not because I think the consumption-shifting effect is a small one. So Brad's argument alone is not sufficient: to argue convincingly that debt is not a burden, you have to explicitly emphasize the investment effect. (And it still will only be convincing to some people.) It might be more reasonable to say, "We believe the burden of the debt on future generations is offset by the benefit to those generations" rather than saying that there is no burden in a gross sense. (Suppose the debt were borrowed from abroad: in that case, I presume you wouldn't deny that there's a burden, but it still might -- and I think would -- be offset by the benefit.)
Grandma got shafted
written by Nick Rowe, October 12, 2012 2:28
TED: It's not the boomers. It's the boomers' grandparents who paid the cost. Inflation made their bonds worth less. The same generation that fought WW2 also paid for it, when their savings got inflated away in the 1960's and 70's.

That's part of the story. The other part is Samuelson 1958. If the rate of interest is less than the growth rate of the economy (and it sometimes is) the government can roll over the debt+interest forever, and the debt/GDP ratio still falls. Ponzi schemes can be sustainable, and if they are sustainable, there is no burden on future generations.
the deficit
written by mel in oregon, October 12, 2012 3:22
well most of us have read barro, buchanan, friedman, marx, keynes, fisher & minsky to name a few economists. but always harping on the deficit like all conservatives do & lying about it as the most important factor for the long term determinant of the future economic health of the country is really quite stupid. the most important problems facing the country & the planet are the consequences of global warming & the billions of people that will die from starvation, thirst, disease & war as a result of oil going the way of the dinosaur & nations fighting over what is left. these issues are never discussed in the debates or elsewhere. romney & ryan probably think, "oh well, the lord will provide". obama probably thinks, "haven't i got enough problems without worrying about that". the fiscal cliff of the deficit will look like mighty small potatos in a few years.
The impact of the debt is felt in GDP, it is not a separate measure
written by Dean, October 12, 2012 3:29
Okay, a few quick points in response to Nick and Andy.

First, as a dues paying Keynesian, in addition to virtuous public investment, there is also the point that simply spurring GDP will lead to more investment. This is simply an accelerator effect that has pretty solid support in both macro and micro investment models. This means that the immediate effect of the stimulus will be to make potential GDP larger than it otherwise would be. (Okay, I know if we have some long-term equilibrium model with an optimal capital stock, this will disappear over time, but I am not going to accept that one.) That makes out children richer.

We also have the effect of keeping people employed, which keeps the structural rate of unemployment from rising. I would also point to the literature showing that the children of unemployed parents suffer in school to argue they will benefit through this channel as well.

So these are the help our kids stories of stimulus. Then we have the question of what portion of the wealth that we have handed them in the form of bonds get spent during their lifetime. This will be a negative, insofar as we are up against full employment constraints and we don't actually tax it away from them in their lifetime.

I am not confident that we will be about against full employment constraints all that frequently. Certainly no one is projecting it for the next 5 years. When we are below full employment, the current generation eating their wealth is a good thing -- it maintains employment and output at higher levels than would otherwise be the case.

Now, getting to Nick and Andy's belief that many people will eat their wealth before they die and therefore be pulling income away from our kids. This only is an issue when we are at full employment. And, as I noted above, some portion of this wealth will be taxed away -- in effect the bondholders will pay their own interest.

However, the final point is that the impact on our kids will be felt in the size of GDP, not the debt. In the case where all of old-timers are bad boys and girls and eat our wealth, we will be selling it off to the next generation to pay for our consumption. This will pull capital away from productive investment. The extent to which this has happened will be reflected in the growth of the capital stock and the growth of GDP. The debt will not be giving us this measure. Just looking at the debt we won't be able to distinguish between the case where we were complete inter-generational altruists and were completely selfish.

So, the real issue is simply the rate of growth of the economy. If we have good GDP growth and a large debt, then there is no reason to apologize to the kids, they will be doing much better than us. On the other hand, if they is little GDP growth, but zero debt, our kids should kick us in the face if we try to tell them that we have done them any favors.



governments generally move money from investors to consumers
written by Brian Dell, October 12, 2012 5:29
Pulling capital away from investment to finance current consumption is a core role of government, though. The alternative is a world ruled by robber barons whom government doesn't touch because they have a higher propensity to invest than the rest of us.
No, the impact will not be felt in GDP
written by Andy Harless, October 12, 2012 9:04
You get the same effect in a model where GDP is exogenous. We sell the debt to our kids, and they consume less, because they used their money to buy the debt instead of to consume.

They may or may not reduce their investment in physical capital. If they behave in accordance with any notion of rationality, they won't reduce their investment in physical capital to the same extent as their purchases of bonds, because they are holding the bonds to offset their expected taxes that will be used to service the debt. If the debt didn't exist, and those taxes were not expected, then they would consume more instead of investing the entire difference.
It's not (just) about GDP
written by Nick Rowe, October 12, 2012 9:15
Dean: "However, the final point is that the impact on our kids will be felt in the size of GDP, not the debt."

That is what I am saying is wrong.
Have a look at my counterexample here: http://worthwhile.typepad.com/...u-get.html
...
written by david j michel jr, October 12, 2012 9:21
I am ok with your comments, even if you agree with brad delong. just don't velcrow your lipps to obamas butt like brad.
...
written by urban legend, October 12, 2012 11:49
By deficit spending in a downturn, aren't we essentially assuming private debt, reducing it for millions who cannot handle it, and taking it on as a society because, all together, we can handle it as long as want?

In any case, the other side as a very short meme: "putting a burden on future generations." We need a comeback that's not 500 words but is almost as short and essentially accurate. How about, for example: "A much bigger burden on our kids than gradually paying off a shared national debt over 30 years is letting their parents stay unemployed and leaving them a weak economy that will make it harder for them to find jobs Putting their parents back to work now is the best thing we can do for them."
...
written by Calgacus, October 13, 2012 12:08
Hmm. Some say "Lerner wuz wrong". Wonder if they, uhh, ever read Lerner?

"A larger national debt makes a higher rate of taxation necessary. ... Everything else being equal, it is better for the economy if the national debt is smaller". Yup, a spendthrift who never thought about the burden of debt, but airily dismissed it.

Might be nice if moderns said what they meant by "burden" too, but careful definitions and coherent, systematic arguments, like even bothering with citations, is not something modern economists do, unlike pretending to be smart, showing off, using Big Words, overcomplicated examples & terminology & fake mathematics. All to recreate in modern economics an Academy of Laputa - which as I don't think is well known - was entirely taken by Swift from papers of the Royal Society - nothing original at all. Funny, if fraudsters & deficit terrorists hadn't spent the last 4 decades wrecking the non-Laputan Keynesian/Lernerian/New Deal age & myriads of people's lives.

JSeydl: Why would a government need to raise taxes to reduce a high debt-to-GDP ratio if the interest burden on the debt load isn't fiscally binding?

Wealth effect, p. 280 . The need is never to "raise taxes to pay debt" - gibberish - or lower the debt/GDP ratio (why?), but to deflate - by (net) taking some government debt=money away from the public. As Lerner notes, a tax which raised no revenue, but diminished spending, would do the (only sensible) trick, while one that merely reduced saving & "paid down the debt" (ooh, great!) would not.

Quotes are from Mr. Guess Who, Economics of Employment Where the old fox hid his thoughts and clarifications of erroneous interpretations, more detailed than http://cas.umkc.edu/economics/...urses/Econ 601/readings/lerner functional finance.pdf . In a chapter he mysteriously called "The National Debt". Knowing that no one would ever look for his thoughts on the National Debt there. Diabolically clever!
The fact that we can construct unrealistic models where the debt is a burden shows nothing
written by Dean, October 13, 2012 5:42
Nick,

as I've tried to argue, your model is unrealistic in a way that does shed any light on the world. I can show a model in which debt is a burden on short people. We issue a trillion in bonds and only give them to people over 6 feet. Does this prove the debt is a burden to short people?

Your model assumes that output is fixed, that is the fundamental flaw. It also assumes that people spend all their wealth on themselves (no kids) before they die. Again, an assumption that is clearly not strictly true (most people have kids) and I would argue not anywhere close to being true.
I just don't see why I should change my view of the economy because you can construct a model where the debt would be a burden on future generations?
Net vs gross burden
written by Nick Rowe, October 13, 2012 6:51
Dean: OK. This is the way I would look at it:

If someone argues "the national debt is not a burden on future generations, because any taxes they pay to service the debt they will be paying to themselves", my counterexample shows that argument to be invalid.

If the debt implies future taxes, those taxes *are* a (gross) burden on future generations that pay those taxes.

But that does not mean that there always is a *net* burden. It all depends. There may be benefits, as well as costs. And if those benefits exceed the costs, there is no *net* burden. And that depends on a lot of things: what the government buys (good schools, or bridges to nowhere); does it cause future GDP to rise; etc.

Again: I am *not* saying that debt is always and everywhere a *net* bad for future generations. I am saying that (if future taxes have to rise to service the debt) there is a cost to future generations. But there may be benefits too. And the benefits may be bigger or smaller than the costs. Like most things in economic policy: it depends. On a lot of things. Too many things to put in one model.
The No Ponzi Condition was roughly satisfied for all periods except 1981-1987
written by Negi, October 13, 2012 8:21
Dear Nick,

I read through the whole comment thread for your 'first counterexample' over at your blog again, and I checked whether or not the No Ponzi Condition was satisfied in general in the US economy.

According to this paper: http://www.apeaweb.org/confer/...mano_p.pdf , it seems that if we look at the 'trend' real interest rate and 'trend' gdp growth, the no-ponzi condition is satisfied in all periods 1954-now except 1981-1987 (the paper analyzes data that go up to 2006, but we know that real interest rates have been roughly flat since then). That is accounting for fluctuations from the business cycle, real GDP growth exceeded the real interest rate for almost all of the past ~60 years.

You admitted that your counterexample fails in the case where the No-Ponzi condition is satisfied, so don't these data more-than prove Dean's point?
Consuming the proceeds on what?
written by LSTB, October 13, 2012 9:28
Nick's argument is that the older generation sells the bonds to the younger generation and then consumes the proceeds of the sale. If you disagree, then you must believe in Ricardian Equivalence.

Okay, but here's the thing: What does the older generation consume? Ultimately, it must be buying goods and services produced by younger people, so in buying the bonds, the subsequent generation is giving the money to itself via the older generation. Consequently, I'm unconvinced of this ponzi-scheme-burden-on-future-generations aspect of public debt.

I do think what that the government spends the debt on is important and can create a burden if it's wasted, but that's not an intergenerational issue.
Nick is assuming that the government is burning the money in a fireplace
written by Negi, October 13, 2012 9:56
Dear LSTB,

In Nick's model, he assumes that the government is spending on something totally useless, like sending it out into space, burning it in the white house's fireplace, or spending it in order to build explosives for a war that doesn't result in a territorial expansion.
What would we do?
written by anon, October 13, 2012 11:33
Nick's problem is he's acting like if the economy stopped growing or no longer kept pace with the interest burden over the long-term all we could do is sit on our hands.

We could give the bondholders a haircut or inflation could rise.

These same arguments can apply to NGDP targeting and private sector borrowing too. If the central bank is pumping money into the economy and the private sector is borrowing the money and the economy doesn't grow, but inflation rises you could get the same "burden."

Nick's framing this as a debt/tax burden is misleading, as was were talking about is interest/inflation and claims on real resources. He's trying to slip in bias against "transfer payments," in his model.
Min from Econmist's View sums things up nicely (Can't find a direct link, sorry)
written by anon, October 13, 2012 12:37
Min said in reply to Nick Rowe...

Nick, your example at Worthwhile Canadian Initiative ( http://worthwhile.typepad.com/...ian_initi/ ) (plug :)) had a simple steady state economy with no economic growth and no population growth. You had the gov't debt pay real interest.

That's crazy. I said so at the time and I knew it when I was 13 years old. If it seems normal, perhaps that is because some people want to make a risk-free loan that earns on average more than society produces, and have the political clout to make the gov't offer such bonds.
I think I see what's going on
written by paul, October 13, 2012 2:09
(should be doing my numerical analysis homework, but oh well...)

Nick's comments seem to indicate that he believes Dean (and for that matter Krugman today)
1) are making an "accounting identity" argument about the impact of debt and
2) this is not something you can apply an identity to (and I (NR) can show you why)

But that is NOT what I think Dean et al are doing. Instead, they are reacting to the well-known austerity hawk trope that is an accounting identity ("when families are in debt they are poorer") and instead saying that's not the right identity ("you have to look at the country as whole") --
which is different than saying the identity captures all of the reality of the impact of (cross-generational) debt.

But once you make the leap to say the identity of cross-generational debt is only a starting point for analysis (@Nick, it is pretty clear Dean, Brad, Paul etc., have indeed said the identity is just shorthand) then the debate moves onto a different terrain. So you may disagree with them, but you haven't found a fatal flaw in their positions, though I can see why you mistake their arguments for something much simpler (accounting identity arguments) than what they really are (an argument for the choice of the accounting identity to begin the analysis contra "conventional wisdom").

Nick's question is to narrow
written by Shining Raven, October 14, 2012 5:56
In Nick's model there is no purpose and no need for the transfer payments in the first place. It redistributes consumption between two generations, but people would be able to live okay without this. Therefore he is able to frame this as an alternative between having his bond scheme as a re-distribution scheme between two generations, and not having any redistribution at all. He is also able to end this scheme at will after three generations, although additional generations follow.

However, this is not the alternative that we are facing in the real world. The bonds are one way for the older generation to save for "retirement", but if you end the bond scheme, this would not end the burden on the young generation to care for the "retired" generation. So in the alternative, in reality, the last generation would not receive "nothing", but would receive something from the next generation by some other redistribution scheme. Unless of course you assume that we vote to let old people starve.

So even if the bonds are "paid off" in any one generation and are no longer available as a vehicle to re-distribute consumption from the next generation, the alternative is not that the old generation gets to consume nothing, and the next generation gets to consume all that they produce, as Nick's model assumes.

No, the next generation would still have to forgo part of their potential consumption to care for their parent generation, it would just be by some other scheme.

There really can only be a burden if all people, old and young, living at any one point in time, decide at that point in time to allocate the possible consumption in a different and "unfair" way. In Nick's model this is the "government" deciding to retire the debt instruments used to organize the re-distribution. This is imposed from the "government" as an outside actor, but of course it is the then-living people who have to take that decision. Assuming a sustainable scheme, this is never really necessary.

So the way I see it, yes, of course there can be a burden, but only if you assume it is an realistic alternative to let old people starve.
Nick: Grandma did not get screwed in the 60s and 70s in the US.
written by Michael Sullivan, October 15, 2012 8:05
Both my sets of grandparents were depression or WWII generation and they made out just fine, as did most of their middle class cohort. While their portfolios faced massive inflation in the 60s and 70s as they neared retirement, they were also earning tons of interest or other returns that kept up with or exceeded inflation. In addition, people in pre-boomer generations that received social security got a *much* better deal than anyone since, as they paid much less in relative to their total working life income and yet got a similar level of benefits to what boomers are receiving today. If anything, the grandmas and grandpas of the late 20th century got the greatest amount of government largesse of any cohort before or since. Given that most of them started out their working lives either in the depression or going to war, I can hardly begrudge it to them, but let's be very clear that after that initial hell experience, there was no government screwing of that cohort, but exactly the opposite.
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written by Calgacus, October 15, 2012 8:48
Michael Sullivan: Hear, hear! Damn right. If there's anything worse than modern mainstream economics, it's their rewriting of recent history. On the other hand, the baby-boomers got screwed by themselves or the government, by utterly unnecessarily, entirely destructive SS overtaxation.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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