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Home Publications Blogs Beat the Press Final Thoughts on the Baker-Rowe-DeLong-Krugman Deficit Debate

Final Thoughts on the Baker-Rowe-DeLong-Krugman Deficit Debate

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Saturday, 13 October 2012 17:15

After having provoked a debate that subsequently involved Nick Rowe, Brad DeLong and Paul Krugman, I will assert blog owners’ privilege and throw out some summary thoughts.

First, we all seem to agree that in a situation where the economy is clearly operating well below its potential, governments can run deficits to boost employment and output. I believe we all agree that in principle the government can also use these deficits to increase future output through productive investment in either physical or human capital. This would make future generations better off on net as a result of deficits today, since the economy will be larger than it would be without the deficits.

I would also add, without necessarily implicating anyone else, that simply by increasing output and employment the government is likely to make society better off in the future for two reasons. First, by keeping people employed we will keep them attached to the labor force and reduce the number of hard core unemployed who would be difficult to re-employ in subsequent years, possibly leaving us with a higher rate of unemployment (and lower output) long into the future.

The other reason that short-term increases in employment can have long-term effects is that by keeping families intact, children are likely to have better upbringings and do better in school. This means that the next generation will on average will have happier more productive lives because we used deficits to keep their parents employed today.

Okay, but even if deficits today don’t reduce output tomorrow, Nick Rowe argues that by increasing the wealth of some members of the current generation (those who hold the bonds used to finance the deficit), we can still be reducing the wealth of members of future generations. The argument here is that if we get back to full employment at some point in the future (this is a full employment argument), the people who hold the bonds will be able to pull resources away from young people who are entering the labor force and were not involved in the decision to run deficits today.

There is some validity to this point, but it is extremely limited. First, it is important to remember that most of the holders of current debt will be people who have children and/or will bequest some of their wealth to their children or charitable organizations. While children may not benefit one to one from the consumption of their parents, surely they benefit in part. Insofar as people with or without children save some of the wealth from the bonds and subsequently will it to children or charitable organizations, today’s deficit will not crowd out any consumption of future generations.

Finally, much of the tax burden of paying the debt service on the debt issued today will be borne by members of the current generation. In that sense it is an issue of intra-generational distribution, not intergenerational distribution.

In short, we can talk about some burden on future generations as a result of debt issued today, if it goes to unproductive uses, but the size of this burden is clearly a fraction of the debt and likely to be a very small fraction in my book. Furthermore, debt is far from the only mechanism through which the government imposes inter-generational burdens of this type.

Let’s take monetary policy, the preferred mechanism of Rowe and others for sustaining full employment. Suppose the Fed adopted a nominal GDP target. To hit this target suppose it bought up some massive amount of long-term bonds, both long-term Treasury bonds and mortgage-backed securities (MBS). This could be expected to drive interest rates even lower than they are now.

Suppose that the interest rate on 30-year Treasuries falls to 2.5 percent. Let’s assume that this sparks enough demand (along with expectations of higher inflation) to get us back to full employment. If this plan goes according to plan, then in 2-3 years’ time the economy will be more or less back to normal with moderate inflation and unemployment back to a 4.5-5.0 percent range. The Fed will then be looking to raise interest rates to keep inflation from rising too high and thereby exceeding the nominal GDP target.

This would mean that the price of the long-term Treasuries and MBS will have plummeted. When the Fed sells off these assets to reduce the money supply and thereby raise interest rates, it will take large losses. In this story, it would likely need additional tax revenue from the Treasury to cover these losses. That would imply a tax burden on future generations in the same way as the formal debt that so concerns Rowe.

The winners in this story are the homeowners and others who were able to borrow long-term at very low interest rates. They will be able to consume more in the future as a result of these long-term low interest loans, with their consumption coming at the expense of the consumption of future generations. Shouldn’t we feel every bit as bad about this story as the story of the deficits that upsets Rowe? (We get a similar story if low interest rates push up house prices, thereby allowing current homeowners to cash out with big gains.)

There are a few other points worth making in this story. First, there is no magic to zero. Any government spending that does not have the character of investment can be seen as coming at the expense of future generations in the sense that concerns Rowe. Even if we had a balanced budget we could still say that if we reduced government consumption or increased taxes, we could have a lower tax burden in the future. It’s not clear what magic zero holds in this story.

The deficit is also a tricky target. We often get lower deficits through asset sales of different types. If we balance the budget by selling off highways or parklands to private businesses that then charge for their use, it’s hard to see how we have helped future generations. The same applies to selling off the airwaves or leasing mineral rights on government properties.

The most important selling off assets along this line does not involve formal sales but rather takes the form of patents and copyrights. The government is effectively paying people to innovate or do creative work by giving them legal monopolies in certain markets. The discounted value of these monopolies likely dwarfs the value of the outstanding debt. In pharmaceuticals alone, the annual cost of patent protection is close to $250 billion a year, 50 percent more than net interest on the debt. These payments will involve much larger generational transfers of the type that concerns Rowe than the debt.

In short, there are many good reasons why we should be doing everything we can to push the economy to full employment. I am inclined to believe that fiscal policy is the most effective route, but I am happy to push monetary policy as far as we can. We seem to agree that there is no reason to believe that deficits in the current context will cause the economy to grow more slowly in the future and many reasons to believe that it could increase growth.

There is a limited sense in which the wealth created today can allow members of the current generation to consume more at the expense of younger people who will be reaching adulthood during the lifetime of those who buy bonds today. However the extent of this intergenerational transfer is likely to be small relative to the size of the stimulus and is a feature shared with many other policies where the issue is not even raised.

In short, sorry kids – you haven’t given me a reason to oppose stimulus.       

Comments (31)Add Comment
Hear, hear!
written by David, October 13, 2012 5:38
Alexander Hamilton knew that debt unites us, as well. And soon after Jefferson and Madison and Gallatin saw the point as well (http://www.vanityfair.com/poli...umb-201111). As long as the commitment of the people to service that debt is strong (and I don't see that in some of the 1%), then there is no problem.
...
written by skeptonomist, October 13, 2012 6:47
This debate about the supposedly crippling effects of national debt goes on perpetually, or at least recurs frequently. People claimed the same thing about Britain's debt in the 18th and 19th centuries, which was sometimes proportionately much larger than any that the US is likely to build up. The historian Macaulay wrote in 1885 "At every stage in the growth of that debt the nation has set up the same cry of anguish and despair...Nevertheless...the nation [became] richer and richer" (quoted in A History of Interest Rates, by Homer and Sylla). The US (any many other countries) ran up large debts in WW II, but there was great prosperity afterwards. Succeeding generations didn't feel the debt because it was dwarfed by economic growth. Those who claim that debt is crippling or places a burden on subsequent generations are just empirically wrong. What is important is continuing growth, and history clearly shows that debt itself is not an impediment.

These days conservatives take up this argument only when their men are not in control of government. If a Republican is President, concern about deficits and debt vanish. The attention span of the media is apparently not long enough to detect this game.
Why not write down the debt?
written by mejimenez, October 13, 2012 8:16
A lot of the debt comes from bailouts after purposefully engineered asset bubbles. Having future generations of the working class paying off bonds inherited by future generations of the rentiers doesn't sound like a good deal.

Michael Hudson says that the problem is structural and we must "recognize the need for debt writedowns, for restructuring the banking and financial system, and for shifting taxes off labor back onto property, economic rent and asset-price (“capital”) gains." See http://michael-hudson.com/2012...-blinders.
inheritance tax
written by paul, October 13, 2012 9:01
As for distributional concerns, wouldn't raising the inheritance back to some sane level address this?
consumption and the wealth effect
written by paul, October 13, 2012 9:13
This may have been addressed, but isn't in fact 1)extremely unlikely for wealthy bondholders to consume all of the accrued wealth from government bonds (or any source, that is, after all, the structural problem that gets capitalism into cyclical trouble in the first place) and 2) if they did, private consumption on that scale would probably have a multiplier effect and hence a positive effect on employment, demand, etc, which is only bad after the economy recovers. Hence, expansionary fiscal policy should be financed by callable long term bonds?
All deficit spending is stimulus
written by David S., October 13, 2012 10:14
I don't understand the discussion of the theoretical when we have several years of stimulus and employment numbers behind us.

From January 1984 to January 2009, employment increased by about 39 Million people. The unemployment rate was 7.8% each of those months. Thus, to maintain an employment rate of X, about 1.5 Million more jobs need to be filled annually. This is close to the monthly break-even estimate of 120,000 new jobs required to absorb new workers often discussed.

Today, we are back down to an official unemployment rate of 7.8%. Yet, the number of employed Americans, seasonally adjusted, is almost exactly the same as in January of 2009. In fact, there should have been an additional 5+ Million more employed Americans to have the same unemployment rate as 3.5 years ago.

We know these 5 million are real people who have in fact rolled off unemployment rolls, got onto disability, were retired early or have not yet entered the workforce from lack of job opportunities. We can't tell from the employment numbers how many full-time jobs have become part-time and how many self-emplyed have shifted their businesses into idle.

Including Bush's last fiscal year with Obama's subsequent fiscal years, and holding as I do that every dollar of deficit spending is in fact stimulus spending (whether labeled as such or not), we have deficit spending totaling $6 Trillion. And for that $6 Trillion we still have fewer employed Americans, which is over 5,000,000 fewer than we should have at a 7.8% unemployment rate due to the discouraged worker falling away.

We're adding over a trillion dollars each year to the national debt simply to bridge yesterday's and tomorrow's recessions with stagnant employment. What our deficits will be when the next recession rolls around in 2016 or so, there's not telling. I'm just not seeing stimulus doing anything.
Ricardian when it suits you, sir
written by Timothy, October 14, 2012 2:32
In the Keynesian world, fiscal stimulus works because people are not Ricardian.

In the Keynesian world, the debt incurred by doing fiscal stimulus is not a burden because people are Ricardian.

In the Keynesian world, government reallocation of capital is a free lunch. Let's not bother about monetary policy, because think of the tax losses on those bonds! (How many $100bn has the fed paid to the Treasury over the last few years?)
Timothy revives the Cochrane-Fama Fallacy
written by Kevin Donoghue, October 14, 2012 3:47
Timothy: "In the Keynesian world, fiscal stimulus works because people are not Ricardian."

Not true. In a world which is both Keynesian (with involuntary unemployment) and Ricardian (households do not regard government debt as net wealth), a temporary increase in government consumption increases GDP. John Cochrane and Eugene Fama appear to have been unaware of this; you'll find numerous blog-posts by Brad DeLong, Paul Krugman and Simon Wren-Lewis explaining their error.
OK!. But watch your implicit Ricardian Equivalency!
written by Nick Rowe, October 14, 2012 6:50
Dean: "There is some validity to [Nick Rowe's] point,..."

Yipeee! You get it! I am *really* pleased to hear you say that!

"First, there is no magic to zero."

Agreed.

"First, it is important to remember that most of the holders of current debt will be people who have children and/or will bequest some of their wealth to their children or charitable organizations. While children may not benefit one to one from the consumption of their parents, surely they benefit in part."

But the greater that part, the greater the extent to which Barro-Ricardian Equivalence is true.

"This could be expected to drive interest rates even lower than they are now."

I disagree. I think it would drive up interest rates, because the IS curve slopes up, because the marginal propensity to consume + the marginal propensity to invest exceeds one. But that's an argument for another day.
factotum
written by xteeth, October 14, 2012 7:00
The problem here to me is who is it that owns those bonds. At least in proxy it is the mega wealthy. It is one of the means by which plutocracy continues. I actually used to own a government bond, but no more and that was puny compared to the National Debt. The issue is not only the size but just who it is that owns the stuff. Money can be thought of as a promise from those that don't have any to those that do. Over and over in revolutions, the result is that that promise is repudiated as much as possible. That is the threat the megarich don't seem to bother about these days, not the pitchfork one of Marie Antoinette.
Not Quite Ricardian equivalence
written by Dean, October 14, 2012 7:18
Nick,

there are two separate issues here. The government spends a pile of money now. My expectation is that this money creates demand directly and then indirectly through standard multiplier effects. No one is saving more because they are worried about the government debt and future tax burden. In short, Keynes rules!

Then there is the question of how people in future years respond to the fact that they now own the bonds used to pay for this burst of spending. My expectation is that people will spend down some, but not all, of this wealth. If you want to call that Ricardian equivalence, you are welcome to use that term. It's not my understanding of Ricardian equivalence -- I don't see their motivation for saving a concern about future tax burdens. I expect that they would spend down from their bond wealth at the same rate as wealth they had in the stock market or their home. But I am not interested in a fight over terminology, if you want to call any savings out of wealth for posterity Ricardian equivalence, you're welcome to do so.
Is war overseas a "productive use" of debt?
written by Bill Heffner, October 14, 2012 9:43
"we can talk about some burden on future generations as a result of debt issued today, if it goes to unproductive uses"

We have had $1 trillion deficits for four years and spent $1 trillion per year on foreign wars. Are you saying that the money spent on fraud, expenditure of consumables and ammunition in Afghanistan is a "productive use" of that debt?

"use these deficits to increase future output through productive investment in either physical or human capital. This would make future generations better off on net as a result of deficits today"

That might be true if we were doing that, but since all we are doing with it is blowing up other countries and stuffing it in banks to inflate the balance sheets of the already wealthy, it is not going to make future generations better off at all.

"Finally, much of the tax burden of paying the debt service on the debt issued today will be borne by members of the current generation."

What? And then the debt magically disappears with the demaise of this generation? Then what? Future generations either continue to pay the interest on that debt, or they have to pay off the debt itself. I realize that Krugman has some magic formula where GDP continues to get larger and debt becomes smaller as a portion of GDP until it disappears altogether, but that is similar to the theory that house prices increase forever. How big does the GDP have to get to make our present debt, and the additional debt you want us to incur, to disappear, and can it possibly get that big without a loaf of bread costing $1000?
...
written by skeptonomist, October 14, 2012 10:04
It's been a long time since Ricardo, and you would think that economists would have made some effort to decide conclusively if his equivalence has any validity at all. Actually, for a number of reasons, both theoretical and empirical, the idea just does not apply to the real world - people almost always make decisions for other reasons than anticipation of future tax burdens. There is nearly always something else that's more important; for businessmen now, its anticipation of demand, and for consumers it's fear of losing a job (among other things).
I'm with Dean B.
written by Nancy Cadet, October 14, 2012 10:04
It's clear that we need more economic stimulus and more jobs , preferably full time, stable with benefits, as my working class parents had with their unionized positions, but even WPA & CCC style work programs would get people back to work, learning or practicing their trades or doing manual and cultural labor . remember the architectural guides to cities, the murals in schools and post offices produced by Depression era programs? Artists and writers need to eat too. So, Bloomberg news reported that household and state/local government debt is at the lowest percentage of GDP since 2006. How does that fit into our economic picture? Is it good, bad or indifferent news? http://www.bloomberg.com/news/...olved.html
Government training
written by David S., October 14, 2012 10:47
Work programs are questionable at best. You don't create more carpentry jobs by training more carpenters, for example; you simply dilute the carpenter labor pool, and thus depress wages. However, if you train people to install expensive terrazzo fooring as part of a WPA-type program, and these terrazzo floors go into buildings that typically don't get terrazzo, then you have created jobs from which training will be beneficial without diluting the existing labor pool.

However, when the stimulus/WPA program runs dry, you not only lose those jobs but all terrazzo-related training becomes obsolete. The debt to fund the program remains. So must the stimulus.

Even without such programs, people are going into debt of their own chosing to retrain for a changing economy. Student loans total over a trillion dollars. Is that new debt, that credit expansion, not also stimulus? Of course the lenders think so, as do those benefitting from the spending of that money downstream.

Cetainly, an individual going tens of thousands into debt seeking a college degree has increased debt/expanded credit faster than a simple WPA-type training program run by the government on a few bucks of new debt. In the end all debt is held in private hands and institutions, so since the amount of accumulated debt doesn't seem to matter, why not simply encourage universities to double their tuitions so the economy gets an instant boost from further credit expansion that accommodates current and future students?
The burden of paying the debt service today
written by Don Levit, October 14, 2012 12:37
Bill Heffner provided an excerpt which I find very significant:
Much of the burden of paying the debt service issued today will be borne by members of the current generation.

Exactly how is the current generation helping pay the debt service?
The interest on the debt is paid by issuing additional debt, for we are currently running budget deficits.
So the interest is actually a deferred way of adding to the principal.
Of course, servicing the debt entails much more than just paying interest. We seem to forget there is principal that is not paid for, but simply rolled over.
How is that bearing the burden of the current generation?
Don Levit
Skeptonomist, you say:
written by diesel, October 14, 2012 1:03
"The US (any many other countries) ran up large debts in WW II, but there was great prosperity afterwards. Succeeding generations didn't feel the debt because it was dwarfed by economic growth. Those who claim that debt is crippling or places a burden on subsequent generations are just empirically wrong. What is important is continuing growth, and history clearly shows that debt itself is not an impediment."

And yet there are countries that have not outgrown their debt. They become mired in the downward spiral of yet more debt and inflation. Why? What is the difference or what are the similarities between those countries and the USA? And further, is the USA today the same nation it was in 1945? With the erosion of our domestic manufacturing base and with the Japanese encouraging us to docilely accept our role as the breadbasket to the 21st century world while the Asians do all the value-added manufacturing are we to become the world's largest Banana Republic? We seem to be regressing towards a post-reconstruction Dixie Economy of plantation owners and (Mexican) tenant farmers.

Help me out here. I'm trying to see a light at the end of the tunnel.
loser liberalism
written by Joe, October 14, 2012 4:56
Still working off a defunct model where the govt actually truly borrows money. All inapplicable to a sovereign nation with a non-convertible currency... Govt had to create the money before anyone had any dollars to purchase bonds or pay taxes. Mainstream economists will fade into irrelevance...
Bonds are not even necessary
written by Joe, October 14, 2012 5:53
There treasury can mint coins in whatever value it wants, deposit it at the fed, and then spend on it's deposit. No bonds necessary, and it's 100% legal under present laws. Dean, Krugman, De Long, etc. just are not working in the real world. Bonds are a monetary tool used to control interest rates, they don't 'fund' anything, just as taxes don't 'fund' anything. If the treasury didn't issue bonds, the FFR would be driven down to 0%. That's right, deficit spending puts downward pressure on interest rates. This is all fully explained by the Federal Reserves itself. The Federal Reserve can put a floor on interest rates by paying interest on reserves.
The purpose of taxes
written by Joe, October 14, 2012 5:59
Taxes do NOT 'fund' the Federal Govt (they do fund state govt's, as state govt's are currency users, the federal govt is a currency issuer). Taxes regulate aggregate demand.

Take WWII as an example. The govt issued war bonds. Did they really need this money? NO! What war bonds did was take away spending power from people. This left unused productive capacity which was then able to be used for war production. (plus there was some heavy handed top-down govt control, etc.)

FICA taxes work exactly the same way. It takes away spending power from current workers so there's leftover production able to be allocated to seniors. All of this is embedded directly into the national income accounting equation (basically spending = income). It baffles me how the equation is right there is standard macro for all to see, yet virtually no actually thinks about its implications.
Printing currency can still create a budren
written by Dean, October 15, 2012 3:53
Joe,

you can get rid of the bonds and it doesn't change the problem. If you think the economy is at full employment, then the money we print will lead to inflation, reducing the value of everyone else's money. It would be the same as a tax.

Also, if people's consumption depends in part on their wealth. If throw another $5 trillion in currency out there it will cause them to spend more money in the future, pulling away resources from the people who didn't get it, at least in a full employment story.
...
written by liberal, October 15, 2012 7:53
skeptonomist wrote,
It's been a long time since Ricardo, and you would think that economists would have made some effort to decide conclusively if his equivalence has any validity at all.


I thought I'd read that even Ricardo didn't believe it.

diesel wrote,
And further, is the USA today the same nation it was in 1945?


Yeah, sadly, that's a very good question.
...
written by skeptonomist, October 15, 2012 8:31
Diesel: Debt does not necessarily cripple a country, but going into debt does not automatically bring prosperity either, and Keynesian stimulus is not as simple as some advocates make it seem; sometimes it has worked and sometimes it hasn't. WW II in the US is one outstanding example of when it worked - none of the dire consequences predicted by anti-Keynesians came to pass (obviously Ricardian equivalence was not a factor). One thing which may have been important is that most of the debt was in war bonds, which presumably were held by citizens and not speculators. Everyone was employed and wages were high while many consumer goods were not available, so workers actually built up their wealth considerably - this must have a factor in post-war consumption. It may also have been important that interest rates were held low through the war and for a considerable time afterwards, so that interest expense remained low. However, tax rates remained high for a long time and that did not inhibit anybody. Instead of learning from this experience economists seem obsessed with absurd "theoretical" arguments about Ricardian equivalence, the alleged negative effects of high tax rates on incentives and other questions which should have been settled empirically long ago.
redbloodedkeynesian
written by Mike Martin, October 15, 2012 8:18
If this conversation was being held by all Americans we would be so much better off. Instead we have sound bites and simplistic answers. Love him or hate him Keynes should be taught in the 5th grade. Economics has way more impact on the average joe than algebra. Thanks, great discussion.
...
written by Calgacus, October 15, 2012 8:26
Yes, Joe, as Dean says, it doesn't really matter whether we print money or print bonds which. is. not. borrowing. (the only thing Lerner got wrong, but only terminologically). And Lerner and Keynes understood all this & refuted Rowe's & Barro's et al misinterpretations long ago.

OF COURSE money and debt can be a burden of one sector to another. That is what money, a form of debt, is BY DEFINITION, a burden on the debtor. Give more money to group A and to maintain the value of this money tax group B. Then group A will be a burden on group B. The increased taxation debt to the government translates into an increased indebtedness of group B to group A, incurred for living expenses, which the Bs must pay by laboring for As (the JobCreators). Dean's short people tax. Randomly, irrationally, unjustly emburdening people can emburden them unjustly. What a surprise! Whoda thunk it!!

Is that an argument against emburdening some rationally (now & in the future) in return for real returns, to foster the division of labor, to not destroy for all eternity people's labor and the fruits thereof?

It is no argument against even banknotes-in-bottles ag demand boosting deficit spending in a depression. Even mildly destructive spending can be a Good Thing in a bad enough depression, even considering the future increased taxation effects.

In thinking things through, I think there is one insight. The correct application of functional finance depends on the future. Commons sez, money is credit is futurity. If Lerner & Keynes had had a crystal ball & knew that an economic dark age would fall, that the world would go insane in the 70s, force mass unemployment by abandoning Keynesian economics & functional finance & returning to the ancient superstitions of unsound "sound finance", their recommendations could have been slightly different in the 40s. Depending on how the crystal ball said people would act in the 70s, they could differently arrange their functional finance in the 40s, so that the return to (un)sound finance would cause the least destruction.

Skeptonomist: other questions which should have been settled empirically long ago They were. But there's a lot of money & power in pretending they haven't been.

Keynesian stimulus is not as simple as some advocates make it seem; sometimes it has worked and sometimes it hasn't.
Keynesian stimulus - of the kind Keynes understood (even more than Kalecki & Lerner et al - it's a real claim for him being primus inter pares) - targetted "demand" (really unemployment) management - direct jobs for the jobless - has ALWAYS worked. He was closer to the JG in actuality & understanding the politics of it. Lerner had interesting buffer-stockery disinflationary thoughts that came epsilon close to the JG. But Minsky was the one who put it together, afaik.
...
written by Calgacus, October 15, 2012 8:38
Took a look at Lerner's Functional Finance and the Federal Debt, online below, and there are argument against worrying about the debt there, more briefly, too:

http://cas.umkc.edu/economics/people/facultyPages/wray/courses/Econ 601/readings/lerner functional finance.pdf

"In the second place, this argument against deficit spending in time of depression would be indefensible even if the harm done by the debt were as great as suggested [i.e. even considering the case which Lerner is said not to have considered]. It must be remembered that spending by the government increases the real national income of goods and service by several times the amount spent by the government, and the burden is measured not by the amount of the interest payments, but only by the inconveniences involved in transferring the money from the taxpayers to the bondholders. Therefore objecting to deficit spending is like arguing that if you are offered a job when out of work on the condition that you promise to pay your wife interest on a part of the money earned (or that your wife pay it to you) it would be wiser to continue to be unemployed, because in time you will be owing your wife a great deal of money (or she will be owing it to you) and this might cause matrimonial difficulties in the future. Even if the interest payments were really lost to society, they would come to much less than the loss through permitting unemployment to continue. That loss would be several times as great as the capital on which these interest payments have to be made. "

Of course that is nuts. "Counterexamples" amount to observing that if the job pays pennies & the debt to the wife is millions, it actually might not be a good idea. True, but realistic?
Progressive taxation and social insurance
written by anon, October 16, 2012 3:24
Dean,

I've asked this elsewhere, but how much can progressive taxation and social insurance mitigate the harm done by
Rowe's "debt burdens"?

I'm thinking that when r is less than g, bonds should just allow low risk saving: a better return than putting the money in a mattress, but less risk than putting it on the market. (In a bad a economy it's a way to wait it out in a risk averse way.)

But when r is greater than g, even if you own no bonds, you could only fall so far, as the social insurance line will pull you back up. Those who do best would pay the most for the social insurance.

(In any case, shouldn't inflation respond to people trying to consume "burdens" lessening the impact?)
Under almost any plausible scenatio, the Rowe budren is trivial
written by Dean, October 16, 2012 3:53
It's the fraction of the spending from interest on government bonds that is spent by people without kids (i.e. not saved) and not received from taxes paid by people who also owe bonds. [The true measure is the consumption based on bond wealth, but I'm going to be sloppy and use this as proxy.] Currently, net interest is a bit over 1 percent of GDP. It also only applies when the economy is at full employment (don't hold your breath on that one). My guess is we're talking about a burden that is hovering around 0.1-0.2 percent of GDP -- maybe one tenth of the burden of pharmaceutical patents. Sorry if I'm not too worried about that. And, it can easily be more than offset by the growth associated with stimulus.
My own final thoughts
written by anon, October 18, 2012 8:30
Dean,

(I know you're not worried about it, but...)

The entire entire burden of the debt can be placed entirely on the debt owners. Since these people bought debt and the risk that comes with it voluntarily it does not make sense to say that those who did not lend the government money can impose a burden on them. In light of this whether or not the debt imposes a burden is always a policy choice not a function of the debt.
Sorry, had another thought
written by anon, October 18, 2012 6:05
If this ever really became a problem couldn't we implement a bond sales tax based on the spread between the rate of interest and growth depending on the level of debt service as a percent of GDP? Like a reverse inheritance tax?
Can Dr. Baker Please Clarify His Empirical Measurement?
written by Bob Murphy, October 18, 2012 10:40
Hi Dr. Baker,

I appreciate that you admit the theoretical possibility of the effect Nick Rowe has been emphasizing. (You have many defenders in the blogosphere who have been quite adamant for 11 months that Nick had raised no objection to your position even in principle.) But I don't understand exactly the formula you are using to gauge the empirical relevance of this effect. Can you please spell it out just a little more, so I can see if I think it's right or wrong? I just can't figure out exactly what you're doing in the calculation above, where you come up with 0.1 to 0.2% of GDP.

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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.

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