CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Children and Grandchilden Do Not Pay for Budget Deficits, They Get Interest on the Bonds

Children and Grandchilden Do Not Pay for Budget Deficits, They Get Interest on the Bonds

Print
Wednesday, 10 October 2012 04:18

Politicians, especially those who want to cut programs like Social Security and Medicare, are fond of telling people that our children and grandchildren will pay the national debt. That one may sell well with focus groups, but it is complete nonsense. Unfortunately, Eduardo Porter repeats this line in his column today.

A moment's reflection shows why the debt is not a measure of inter-generational equity. At some point everyone alive today will be dead. At that point, the bonds that comprise the debt will be held entirely by our children or grandchildren. The debt will be an asset for the members of future generations that hold these bonds. This can raise distributional issues within a generation. For example, if Bill Gates' grandchildren own the entire U.S. debt there will be important within generation distributional consequences, however this says nothing about inter-generational distribution.

There is the issue of foreign ownership of the debt, but this is an issue of the trade deficit, not the budget deficit. If the country continues to run large trade deficits, then foreigners will continue to accumulate large amounts of U.S. assets, including government debt, even if we had balanced budgets. The key issue with the trade deficit is the over-valued dollar. In this respect, both candidates have effectively committed the country to large trade deficits by indicating that they will try to maintain the over-valuation of the dollar (a.k.a. "the strong dollar").

As a generational matter, we pass a whole economy, society and environment to our children. Unless we have given them a really bad education, they would be crazy to opt for a government with a lower national debt in exchange for a weaker economy, a worse infrastructure or more damaged environment. As a practical matter, the sharp upturn in productivity growth in 1995 has virtually assured our children and grandchildren that they will enjoy far higher living standards than anything we could have done by way of lower deficits (and thereby boosting investment) had productivity growth remained at its much slower pre-1995 rate. (The fact that longstanding deficit hawks like Peter Peterson never acknowledge the impact of this uptick on productivity growth suggests that their agenda has little to do with the living standards of future generations.)

The column also contrasts the money paid out in Social Security and Medicare benefits to the money paid out for programs helping the young. While some may like to pit the old against the young, it is also possible to contrast payments to the wealthy to the young. We pay out hundreds of billions of dollars of interest on government debt each year, much of which goes to some of the wealthiest people in the country. These wealthy people surely don't need the money.

Of course the wealthy paid for the government bonds they own, so they have a strong argument that they should get the interest. Similarly, retirees paid for their Social Security benefits. In addition, the government will save almost no money by taking away the Social Security benefits of the Warren Buffetts and the Bill Gates of the world. They are too few of them and they don't get large checks. To have any substantial savings it would be necessary to cut benefits for retirees with incomes of around $40,000 a year.

While the government does pay out far more for Medicare than workers paid in taxes, the distributional issue here is with doctors, drug companies and other providers. We pay more than twice as much per person for our health care than people in other wealthy countries even though we have nothing obvious to show for this in terms of outcome. The reason is that we pay our providers far more for the same services. If we want to crack down on inequities here we would make bring pay for doctors and other providers in line with payments in other wealthy countries. It is bizarre to imply that we have done seniors some great favor because we make our doctors rich treating them.

Finally, it is important to note that the large deficits of recent years are entirely the result of the economic slump that followed the collapse of the housing bubble. This is easy to see by comparing the deficit projections from the Congressional Budget Office from January 2008, before the impact of the housing crash was recognized, with actual deficits.

deficits-per-GDP-10-2012

Source: Congressional Budget Office.

There were no major new programs created in 2008 or 2009 nor were there permanent cuts in taxes put in place. The explosion of the deficit was either directly the result of the economy's collapse (e.g. lower taxes and higher transfers like unemployment benefits) or temporary measures intended to counteract the downturn, like the payroll tax cut. Implying that large deficits have been a chronic problem is just wrong.

Comments (34)Add Comment
...
written by Last Mover, October 10, 2012 6:14
Bets are now being accepted for when a Ricardian Equivalence troll shows up with a post on this topic.
The generations are fiscally connected by family ties anyway
written by John Wright, October 10, 2012 7:49
This crap about that government programs need to be cut to save future generations from debt doesn't allow that if granny needs and receives $100 from the government, that is $100 that her family doesn't have to provide for her care.

So the current government payments allow the younger generations to spend more as they don't have to allocate money for their elders care.

If the government payments are in excess of granny's needs, then she can save them and give them to the younger generations as an inheritance.

Perhaps this explains why the urgency for benefit cuts is coming from conservatives and not from typical citizens. Perhaps average Americans see benefit cuts as harming their family directly and immediately but future lower interest payments as a diffuse expense shared by all.

The self interested younger generation should encourage their elders to graciously take the government money and if there is an excess, gift it back to the young as an eventual inheritance.
...
written by skeptonomist, October 10, 2012 8:40
Comparing the amount that the federal government spends on the elderly versus children is dishonest if not stupid because spending on children is mostly done by local and state governments, while programs for the elderly are federal. In principle as the fraction of children decreases this would allow contraction of local and state government and decrease of that tax burden, although in fact there has been little decrease so far. Porter and many others seem not to be aware that the same demographics which will require increasing expenditure on the elderly allow decreasing expenditure on children - really should have already. Whether the cutbacks in elementary and higher education spending are consistent with population changes or with increasing expectations for education is a matter for quantitative analysis.
Dean
written by Brett, October 10, 2012 8:42
You should teach a mandatory economics course for DC pundits that write in the WaPo, NYT or are seen on Sunday morning talk shows. It's the only way such facts as these would get implanted in their stubborn skulls.
Brett's Suggestion
written by Jeffrey Stewart, October 10, 2012 9:08
Unfortunately for Dean and the working class, DC pundits don't want to learn or know anything new unless it's approved and spoon fed to them by their capitalist, corporate benefactors.
pretty close but oops on the SS benefits....
written by pete, October 10, 2012 10:54
You misinform readers by stating that:
"Similarly, retirees paid for their Social Security benefits."

Workers pay social security taxes and income taxes. These taxes are used to fund wars and pay social security benefits. No one pays for their own social security benefits since they would have to be working and collecting at the same time. Makes no sense. Usually you get this right. Everyone should read their annual social security benefits update where it states this clearly.

For example, projections are that 2 workers will be forced to pay my social security benefits of $30,000 per year. Thats $15,000 each just for my SS. If they are earning $45,000 a year, that's 33% in taxes just to pay me let alone the taxes necessary to send troops to the middle east (just read we are sending troops to jordan...). And of course the taxes they must pay to cover my payments is independent of the trust fund, since that is just covered by income taxes...interesting construct but does not negate the liability.
and of course...
written by pete, October 10, 2012 11:32
If we had paid for our benefits, then the poor who live entirely on SS might have some endowment to leave to their children, instead of having 0 intergenerational wealth growth.
...
written by Widgetmaker, October 10, 2012 12:12
Great piece, Dr Baker. It really adds perspective to the concept of government debt, which so many of us sorely lack. It takes a lot to get your mind around, since we are all accustomed to thinking in terms of household or business debt.

If the public and the pols could lighten up on the debt hysteria meme than we could make some progress. Alas, it is in their interests to hype it up, so the argument gets clouded.

Keep up the good work.
...
written by Nick Batzdorf, October 10, 2012 1:54
Really interesting post.

The one thing I have to question is your listing overpaid doctors as the first driver of rising healthcare costs in this country. I don't think so, actually. From what I've read, the big ones are, yes, drugs; extra hospital visits due to to chronic disease (caused by obesity, which is very much tied to politics); administrative expenses (which is why we need a single-payer system); and of course piggy insurance companies.
...
written by Cascadian, October 10, 2012 1:55
Pete, workers pay for their own retirement just as much as investors buy the stocks they sell years later, or insurance customers pay for their insurance coverage.

In every one of these cases, the money that pays out at the end of the term comes not from the same worker, investor or customer, but from other workers, investors, and customers. But the right to be paid is implicit in the payroll taxes, investment savings, and insurance premiums paid in advance. And in every case, from Social Security to stock investments to insurance payouts, the amount paid out is almost always more than the amount paid in. But the system works in the aggregate because of economic growth, the changing value of the dollar because of inflation, and so on.
sorry, the right to be paid is not implicit, never was...
written by pete, October 10, 2012 2:46
Insurance comparison makes a little sense, stocks not. Difference is with insurance there are contingencies to be considered of course, but I do know exactly what my payout will be, since I have a contract. With stocks I have no idea what I will have in the future, though I do have a contract. With SS, on the other hand, I do not have a contract. There are no rights, no matter what someone has told you. Read your annual benefits summary carefully. Bold case, not fine print. It says anything can happen.

And it has happened. Like how much, when, etc., these have all changed over time, especially in the 80s. Read some history. At that time they increased taxes and lowered future payouts. Seems to me to be clear proof that the federal government believes there is no "right" at all. It is up to congress and the president, which has changed things from time to time, like adjusting the initial payments to inflation after that got out of hand in the 70s, or lengthening the time to full benefits (lowering the "return"), raising the tax (lowering the "return").

Lets be clear. It would be fraud for an investment adviser to tell you that you have the right to some particular future SS stream of payments based on your eanrings.

PS. If you opt out of medicare, you lose your "rights" ie no more social security.
Nick...Dean's write on medical professional pay
written by pete, October 10, 2012 2:51
I googled this a while back. Pretty steep differences between Europe and U.S. for nurses and doctors. Yet attempts to lower medicare payments to doctors are fought.
...
written by liberal, October 10, 2012 3:00
pete wrote,
With SS, on the other hand, I do not have a contract. There are no rights, no matter what someone has told you.


That's true, as a legal matter. AFAICT the correct legal term is that workers don't have a "property interest" in their future SS benefits. That means, if the government cancelled the program tomorrow and didn't refund the taxes that people have paid in already, the people wouldn't be able to sue for loss of property.

As a moral matter/fairness issue, things are different. While people don't get what they paid in plus interest (some get more, many get less), the program is clearly constructed as a social insurance program.

Thus, if the government canceled the program tomorrow and didn't refund what people had been paid in, there'd be hell to pay.

Even privately held US bonds, which must be repaid precisely because the holder has a property interest (and because there's extra stuff in the Constitution about them) could be defaulted on; if enough people wanted it, we could just pass a Constitutional amendment making it legal.

Not that that could likely happen anytime soon. But the same thing applies to the social contract behind SS.
...
written by liberal, October 10, 2012 3:09
Nick Batzdorf wrote,
The one thing I have to question is your listing overpaid doctors as the first driver of rising healthcare costs in this country. I don't think so, actually.


I don't know that I agree with Dean's placing it on a particular position of his list, but I do seem to recall that his reasoning is that MDs in the US are paid much more than their counterparts in most of the rest of the developed world.
2 objections
written by Floccina, October 10, 2012 5:12
Dean, I am with you most of the above but...

As a generational matter, we pass a whole economy, society and environment to our children. Unless we have given them a really bad education, they would be crazy to opt for a government with a lower national debt in exchange for a weaker economy, a worse infrastructure or more damaged environment.


Infrastructure and environment combined are tiny parts of the federal budget!

Of course the wealthy paid for the government bonds they own, so they have a strong argument that they should get the interest. Similarly, retirees paid for their Social Security benefits.


No one paid for Social Security benefits or medicare, They were taxed but that is different they were not promised anything specific. As proof the program has been changed already.

It would be very sensible to pay SS out equally to all retirees regardless of how much they made in their worklife. Like pay everyone over 65 $700/month.

The current deficits are not a problem but Medicare could be a problem in teh cost is not curved and spending is not cut elsewhere like by paying everyone on SS the same amount.
?
written by Aaron Stephanic, October 11, 2012 2:36
Is this also true for Greek grandchildren?
Dean Baker is Wrong
written by Timothy, October 11, 2012 4:21
http://worthwhile.typepad.com/...lence.html

Sorry, but that's just plain wrong. The economically illiterate rube who thinks that the national debt is a burden on our children or grandchildren is basically right. It's the exact opposite of "especially nonsensical". Unless you believe in Ricardian Equivalence.


Does Dean Baker believe in Ricardian Equivalence?
Dean Baker's argument is indeed wrong
written by Nick Rowe, October 11, 2012 4:46
Dean: "A moment's reflection shows why the debt is not a measure of inter-generational equity. At some point everyone alive today will be dead. At that point, the bonds that comprise the debt will be held entirely by our children or grandchildren. The debt will be an asset for the members of future generations that hold these bonds."

But, unless you believe in Ricardian Equivalence where we *give* our children and grandchildren those bonds, they had to *pay for* those bonds. Whether they were *given* or *paid for* those bonds obviously makes a very big difference to intergenerational equity and the lifetime income of future cohorts.

Yes, if the bonds are issued e.g. to pay for schools, then the benefits of those schools would be an asset for future generations that would offset the burden of the debt. But you can't ignore that burden of the debt. The "We owe it to ourselves" view is a zombie idea.

See my old post that Timothy links to in the comment above.

...
written by bkrasting, October 11, 2012 5:04
No new programs in 2009??? Dean, did you forget HERA, that cost a trillion...

If the debts of the past four years were used to build bridges roads and other infrastructure I might agree with you that future generations would have something to show for it. But the money was spent on food stamps and unemployment. There are no bridges, just debt.

And yes, Americans will end up owning a chunk of this debt. But look what they get for it. A negative yield versus inflation. Owning the debt is the dumbest thing an investor could do. And Dean is happy to stick it to all that save.

Dean is trying to sell the idea that SS is not an inter generational wealth transfer.Dean is selling smoke with this talk. SS most certainly is a an inter-generational transfer of wealth. If you are under 55 you should not support Dean and his thinking. He will stick you with the bill for the Baby Boomers, and leave you with an empty till.
Dean is ricardian when it suits him...he has done this in the past.
written by pete, October 11, 2012 10:02
Essentially, Ricardian believes in rational individuals who can figure all this out. Debt per se does not affect interest rates, only spending on real goods and services might. Most government spending now is just transfers. Hence taking a dollar from Pete to pay Liberal. No effect on the economy there. On the other hand, hiring somebody to build a road takes an individual out of the labor market and moves resources to the road building. A real impact, and in the worst case the road goes nowhere or increases our energy use.
liberal...where were you in the 80s when they violated the fairness issue...
written by pete, October 11, 2012 11:20
means testing, raising the retirement age, increasing the tax rate or the income covered, while keeping benefits constant, all of these are legitimately on the table, but will definitely be "unfair" to many 30 and 40 year olds who have been "contributing" for 15 to 20 years. sorry, no contract, no guarantee...no tickee no laundry.
Not Ricardian equivalence, just unemployment
written by Dean, October 11, 2012 12:22
Folks,

there are two points here. First, the idea of the debt being somehow a burden implies that it pulls away resources that otherwise would have generated wealth in the future. In the context of an economy with unemployed resources (e.g. today's economy) there is no reason to think that the deficits of today are pulling one dollar away from investment from the future. In fact, it is almost certainly the opposite. we are investing more because of the demand created by the deficit. We also keep parents employed so that they kids can enjoy a stable upbringing -- a huge benefit for the future.

The other part of the story is that even if we did think that borrowing is somehow pulling away resources from investment, the debt is not the measure of the size of the drain. The measure would be the weakness of the economy relative to some counter-factual.

In other words, if the deficit hawks were honest in their claims, they would not saying that we are passing on a debt XXX hundred trillion to our children and grandchildren, they would be saying that the economy is X percent smaller today because we ran large deficits.

However, that story would probably not sound too impressive or too plausible so instead we get the nonsense about XXX hundred trillion dollars of debt.
It's not just about investment
written by Nick Rowe, October 11, 2012 12:53
Dean: "In other words, if the deficit hawks were honest in their claims, they would not saying that we are passing on a debt XXX hundred trillion to our children and grandchildren, they would be saying that the economy is X percent smaller today because we ran large deficits."

I am not a deficit hawk, but that statement isn't correct. Even in a (hypothetical) world where investment and the size of the economy were invariant with respect to the current deficit, there is still an intergenerational transfer (unless that intergeneration transfer is reversed by increased voluntary bequests as in Barro-Ricardian Equivalence).

This is a standard property of OverLapping Generations economies (provided the "No-Ponzi condition" is satisfied so the intertemporal government budget constraint holds, which it may or may not do).
of course there is a bequest...on average..
written by pete, October 11, 2012 2:27
Ignoring overseas, and ignoring Fed holdings and probably some others, the average person owes D, and on the flip side the average person has D in bonds, either directly or through bank shares or company cash accounts or mutual funds. Makes no difference. When the average person dies, if still holding some, they are passed on somehow and the average person still has D in bonds and D in government debt. The bonds held do not disappear and their claim on future taxes does not disappear. Government bonds are not certainly not net social wealth. If we were all representative people, i.e., a Lake Wobegon world, then all the average people could burn their bonds and there would be no bonds, and no debts. Nada.
"passed on somehow"?
written by Nick Rowe, October 11, 2012 3:16
pete: "When the average person dies, if still holding some, they are passed on somehow and the average person still has D in bonds and D in government debt."

But it matters *how* they are "passed on". Does one generation *give* them to the next generation, as a freebie? Or does it *sell* them to the next generation in exchange for (command over) real resources which the first generation consumes?

This is a zombie idea.
An Asset for future generations?
written by Don Levit, October 11, 2012 6:56
The debt will be am asset for future generations that hold these bonds.
Correct. And the bonds are also a liability to the Treasury, which results in an acounting "wash'
From a cash (budget) perspective,the liability part will have to be paid back via new general revemnues - the same way we pay all expenses, whether in trust or not.
In other words, the asset is an unfunded asset, one which cannot be liquidated as if it was a pre-paid investment.
Don Levit
What Nick said
written by Richard Williamson, October 11, 2012 6:57
A government bond is an asset, insofar as it is a liability to taxpayers. Assuming away distribution effects, assets and liabilities balance in the existing cohort. Then new people are born, and become part of the tax base. The liability is shared across the new (wider) tax base, but the asset is not. The older cohort have acquired a net asset (which they have not had to forego consumption to purchase purchase), and the younger cohort a net liability. There's your burden (unless the liability is extinguished through bequest, or is perpetually transferred by selling on the bonds to each successive generation).
My post in response
written by Nick Rowe, October 11, 2012 8:56
Nick Rowe is Right
written by greg, October 12, 2012 1:42
If I read Nick Rowe right, he assumes (in a toy economy consisting only of apples) that A: Apples don’t last. And concludes: B: Each generation, in borrowing apples from their children, consumes an increasing share of the apples produced by their children. That is, each generation consumes more than they themselves produced, taking from the production of their children. (The second generation gives apples to the first, but borrows even more from the third, etc.) I think this is correct, and is Nick’s point. There is a transfer of wealth between generations. And Dean Baker, who claims there is no such transfer, is wrong.

If I read this right, then the only moral position is to grow the economy at a rate greater than the increase in (real) inter-generational borrowing. That is, plant apple trees at an increasing rate, greater than the increase in inter-generational borrowing. But this requires (it seems to me) that the present generation consume less than they would if they hadn’t borrowed in the first place. That is, the present generation must invest more than they borrow.

But in terms of the present, real value, this just means the present generation should consume less than they produce, and invest the rest. The borrowing of money is irrelevant, except where it affects this.

In fact, the borrowing of money is rather inverted, because the younger generation is forced to borrow from the older, established, wealthier generation, pay the older generation back with interest, and thus end up with a diminished share of the pie.

See more at:
http://anamecon.blogspot.com/2012/10/inter-generational-borrowing.html
Oops, here's the Link
written by greg, October 12, 2012 1:48
Of Course Our Children and Grandchilden Might Pay for Budget Deficits Today
written by Nick R. -- Kyoto Japan, October 12, 2012 6:49
To state otherwise as a Rule is truly idiotic. If today, we cut taxes to zero, and spend trillions building bridges to nowhere, do you really think the next generation will suffer no adverse consequences? Doesn't it matter what the government spends our money on?

Debt overhangs have always been associated with lower growth, sometimes lower growth for generations. Think modern-day Japan. If our generation doesn't figure this out, surely our children, or our grandchilden, will begin to incorporate the increasing liklihood of the eventual fiscal consolidation into their spending and investing. How could they not? And that sort of thinking carries with it enormous costs. Again, think modern day Japan.

It's amazing, and downright weird, that you would deny the theoretical possibility that bad fiscal planning today has no adverse effects on future generations.

As for your sector balance view, remember,

Public sector debt (and interest on this debt) = private sector wealth ONLY when the private sector remains convinced that this "wealth" will endure, and not be defaulted upon or inflated away. Got it?
Federal Debt is Necessary to Grow the Economy
written by Rodger Malcolm Mitchell, October 12, 2012 8:54
GDP = Federal Spending + Non-federal Spending - Net Imports

This says, if we increase Federal Spending and decrease taxes (to help increase Non-federal Spending), we grow the economy.

Those who fear federal debt do not understand the differences between Monetary Sovereignty and monetary non-sovereignty. http://rodgermmitchell.wordpre...economics/

Rodger Malcolm Mitchell
Funeamentally fallacious
written by Hadrian, October 12, 2012 9:14
It is ridiculous to be insouciant about debt which, if ever repaid, will be repaid by this generation's descendants, especially when the owing of a huge proportion of the debt to foreigners completely negates the idea that the debt will be incoming assets in the hands of the next generations.
So it is not a "budget" or fiscal problem, just a trade problem caused by an overvalued currency. Absurd on at least two substantial grounds. The overvalued currency is itself an indulgence of this generation at the expense of future generations who will not be able to continue the overvaluation which allows cheap imports that prop up the real spending power of today's consumers. The other main ground is that so much of the money spent by government is wasted and never going to be of any value to future generations. The biggest wastes are the costs of Bush's wars. So, instead of the current generation paying for such extravagances by paying more tax they borrow the money and require future generations to finally pay the bill to extinguish a debt which does not correspond to an asset of any value for future generations.
An asset to the current generation - only a liability to the next generation(s)
written by Don Levit, October 12, 2012 9:39
Hadrian said it very well. The future generation(s) inherit the liability - the asset was spent years ago.
He wroite "The future generations pay the bill to extinguish a debt which does not correspond to an asset for future generations."
Nick said the same in a different set of words: "The liability is shared across the new tax base, but the asset is not."
Don Levit

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.

busy
 

CEPR.net
Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

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.

Archives