Brad DeLong Beats Me to Responding to Nick Rowe
|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.