Magic tricks and linear thinking

Scientists are often fooled by magicians, and are unable to explain certain seemingly supernatural tricks.  That’s because scientists aren’t used to working with entities that are consciously trying to fool them.  They are linear thinkers.  So they fall for the illusions created by magic tricks.

Nick Rowe recently pulled off a clever magic trick, which seems to have fooled some very bright people.  He pointed out that even if budget deficits had no impact on either current aggregate levels of consumption, or the aggregate levels of consumption in any and all future years, from 2013 to the end of time, deficits could still reduce the consumption levels of future generations.  That seems impossible, but is in fact quite possible in overlapping-generations models.  But because it seems impossible, lots of people seemed to have trouble accepting Nick’s conclusion that a budget deficit can impose a burden on future generations, even if there is no crowding out.

However I think it’s likely that one extremely smart person did immediately see Nick’s point.  Here’s Paul Krugman:

First, however, let me suggest that the phrasing in terms of “future generations” can easily become a trap. It’s quite possible that debt can raise the consumption of one generation and reduce the consumption of the next generation during the period when members of both generations are still alive. Suppose that after the 2016 election President Santorum tries to buy senior support by giving every American over 65 a gift of newly printed government bonds; then the over-65 generation will be made richer, and everyone under 65 will be made poorer (duh).

But that’s not what people mean when they speak about the burden of the debt on future generations; what they mean is that America as a whole will be poorer, just as a family that runs up debt is poorer thereafter. Does this make any sense?

Maybe I’m reading too much into that, but to me it seems like the response of a very bright person who realizes he was the victim of a magic trick, and tries to argue that it’s not very important.  But contrary to his second paragraph, people most certainly do mean that the selfish baby boomers are going to make the next few generations worse off by gobbling up lots of consumption for themselves, and leaving less for generations X Y and Z.  Of course they also mean they think America will be poorer due to crowding out, but that’s a separate issue.  One can argue that the quantities are not that important if economic growth is not affected (I haven’t studied the issue) but the sort of generational selfishness people worry about is exactly what Nick’s model describes.

PS.  JP Koning has a very good discussion of how the “Borges Problem” applies to this case.

Update:  After I wrote this I noticed a new Dean Baker post, which grudgingly concedes that Nick does have a point.


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77 Responses to “Magic tricks and linear thinking”

  1. Gravatar of KRG KRG
    16. October 2012 at 08:00

    “But contrary to his second paragraph, people most certainly do mean that the selfish baby boomers are going to make the next few generations worse off by gobbling up lots of consumption for themselves, and leaving less for generations X Y and Z. ”

    Seems like the magic trick lies in exploiting the false assumption right there that the consumption of the current generation will somehow reduce future generations to consume less, rather than leaving them with the production infrastructure to support higher levels of consumption and better investments in more efficient production where any real limitations might actually exist.

  2. Gravatar of Bill Woolsey Bill Woolsey
    16. October 2012 at 08:03

    And Baker goes on to make implausible claims that a nominal GDP level target will impose burdens on the future generations too.

    The massive capital losses due to the heroic quantitative easing necessary to implement the policy will require a bailout of the central bank by future taxpayers.

    Pretty speculative.

  3. Gravatar of Bill Woolsey Bill Woolsey
    16. October 2012 at 08:20

    Also, Krugman appears to say that the losses must be born by those living now. Rowe showed by example that the loses can all be born by people born 100 years from now.

  4. Gravatar of John John
    16. October 2012 at 08:49

    It seems to me that in this blog post by Krugman he was ignoring the fact that debt isn’t passed down from one generation to the next, in which case debt would not be a burden to the future generation in the second period. Instead what actually happens is that ownership of government bonds are typically transferred by sale instead of inheritance and hence is actually a net burden on the next generation since they are forced to pay taxes to pay off the debt and pay the principal of the bonds themselves. Rowe addressed this in the third paragraph of his post which I actually suspect Krugman posted about without actually reading.

  5. Gravatar of John John
    16. October 2012 at 08:50

    It’s also worth pointing out that government debts are a burden on the future because the government tends to invest funds less efficiently than the private sector.

  6. Gravatar of Matt Waters Matt Waters
    16. October 2012 at 09:29

    I’ve been away from most of this debate, but one thing that brought clarity to me is what happened in World War II. Debt/GDP went down dramatically in the 50’s and 60’s, but that was due to the denominator. The nominal level of debt never went below 1945 levels.

    In other words, the debt for WWII was never “paid back,” by that generation or future generations. This seems very wrong. If it’s never paid back, then who paid for it?

    Well, it simplifies the analysis if we assume Say’s Law always applies. In that case, then debt merely moves the composition of GDP from private goods to public/military goods. The military spending was paid for by the reduction in private goods consumption in 1941-1945.

    In this view, debt, inflation and taxes are three sides of the same coin. Taxes reduces the living standards of some class of people directly. Debt and inflation reduce living standards generally by moving more production from private goods to public goods. To spend is to tax.

    The analysis becomes more complicated if Say’s law does not apply. If there is a General Glut before the war, then at least some of the military spending was in fact free. We increased the production of public goods through unidling idle labor, while the production of private goods remained constant. Once the idle labor was mopped up, then private goods production had to decrease and military spending started reducing living standards.

    However, the true cost is not the cost vs. doing nothing. The true cost is the opportunity cost vs. the best possible alternative. In that case, the best alternative is using monetary policy to increase private goods to their levels of full production. The public good alternative is only better if the return on spending is bigger than private spending, which may be the case for some infrastructure spending. In general though, increased private goods will improve living standards more than increased public goods.

  7. Gravatar of Matt Waters Matt Waters
    16. October 2012 at 09:31

    Also, under this view, the future Medicare and Social Security spending will in fact cost “future generations.” By future generations, they mean my generation and I happen to be alive today. The debt issued for transfer payments will reduce all living standards while only increase the living standards of seniors.

  8. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    16. October 2012 at 10:09

    Wow, Dean Baker admitted;

    ‘…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….’

    Now there is something pregnant with possibilities.

  9. Gravatar of Morgan Warstler Morgan Warstler
    16. October 2012 at 10:45

    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….’

    We must begin to nudge single parents to marry.

    Which used to happen on it is own… We’ve become like beef cattle unable to birth naturally without odd human intervention.

    Shaming single parents socially isn’t enough, we should use tax policy and public goods to ensure that being partnered up.

    Which is to say, we shouldn’t ever try to make it easy to be a single parent, no matter how hard it is.

    Less govt. solves the problem, but let’s call it a NUDGE. Liberals love nudges.

  10. Gravatar of Scott Sumner Scott Sumner
    16. October 2012 at 12:14

    Morgan, You are truly evil:

    “Shaming single parents socially isn’t enough”

  11. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    16. October 2012 at 12:24

    Didn’t Gary Becker get a Nobel for saying more or less what Morgan did?

  12. Gravatar of Morgan Warstler Morgan Warstler
    16. October 2012 at 13:09

    I just say it so it feels good (dirty).

  13. Gravatar of david david
    16. October 2012 at 13:23

    The Bob Murphy argument implies, symmetrically, that if we expect g > r in the long-term then the government should deliberately raise more debt over that term. Note that, looking back historically, the real growth rate does in fact often exceed the real interest rate over long periods of time. Endorsing the Rowe argument means endorsing this result.

  14. Gravatar of The Closer | FT Alphaville The Closer | FT Alphaville
    16. October 2012 at 13:50

    […] – Magic, deficits, and future generations. […]

  15. Gravatar of Charlie Charlie
    16. October 2012 at 15:32

    Scott,

    I think all the talk about debt/is confusing the picture. If one thinks of consumption and capital stock, it is obvious that past generations can make future generations poorer, just consume more of the capital stock. Since future generations inherit the capital stock, they will be poorer. In the end, that’s all Nick Rowe is saying.

    I think, if they both wrote out models, the other side would basically be saying, “wait what does this have to do with debt? Of course we know older generations can make future generations poorer by consuming more of the capital stock.”

    James Tobin made this point in response to Tullock and others in 1961:

    “More broadly, here are many sins of omission and commission by which the present generation can contrive to bequeath to the future a smaller capital stock than it might. Why single out debt finance to bear the whole burden of guilt?”

    “The Burden of the Public Debt: A Review Article” Tobin, James. Journal of Finance, 1961

    (The whole article is interesting if one doubts that we are debating something any differently than we did 50 years ago)

    Rowe is certainly right that its plausible to construct a scenario, where debt makes future generations poorer. The counter-example will just be of the form debt causes old people to consume more of the capital stock. The other side was really just arguing, the idea the debt causes old people to consume more of the capital stock is just wrong debt doesn’t do that (with or without Ricardian Equivalence), in fact debt can mean a larger capital stock (due to higher growth). The whole thing gives me tired head, as it seems obvious both sides are talking past each other.

    We continue to relive the same econ debates over and over…

  16. Gravatar of Nick Rowe Nick Rowe
    16. October 2012 at 16:16

    Charlie: “Since future generations inherit the capital stock, they will be poorer. In the end, that’s all Nick Rowe is saying.”

    That is certainly NOT what I am saying. That is why I deliberately constructed an example with NO CAPITAL! And showed you can STILL get a burden.

    And, in a non-Barro-Ricardo world, future generations do NOT “inherit” the capital stock. They BUY it. Just as they don’t “inherit” the bonds. They BUY them.

    Once again, someone reads this, and totally misses the point.

    AAAAAAAAAAARRRRRGGGGGHHHHH!!!!!!!

  17. Gravatar of Nick Rowe Nick Rowe
    16. October 2012 at 16:19

    Smashes head against keyboard in total frustration!

  18. Gravatar of david david
    16. October 2012 at 16:19

    You need diagrams, Nick. Diagrams.

  19. Gravatar of david david
    16. October 2012 at 16:19

    In fact, I’ll sketch you some now, in Paint. Gimme a moment.

  20. Gravatar of Saturos Saturos
    16. October 2012 at 16:40

    How freaking hard is it to get that T-bonds are the government promising to repay you with someone elses’ money? If you weren’t expecting another generation to come along then you’d have to be repaid with your own tax dollars. But a cohort of people will want to hold their bonds until there’s another cohort around to get repaid off of. The government can keep rolling over debt, but eventually it will have to raise taxes on some workers of the future to pay off the outstanding creditors. It’s too simple. Either bondholders really get repaid or they don’t; if they really do then some suckers are footing the bill by foregoing access to those resources making the payments. ITS. REALLY. NOT. THAT. HARD.

    On a lighter note, PSY was on the breakfast show this morning. He’s turned Gangnam Style into a conventional act, playing down the humor, not the best way to go if you ask me.
    Seems like a nice guy though.

  21. Gravatar of ssumner ssumner
    16. October 2012 at 17:09

    Patrick, No.

    Nick, I feel your pain.

  22. Gravatar of Nick Rowe Nick Rowe
    16. October 2012 at 17:41

    For Charlie (and anyone else who STILL doesn’t get it):

    Here is another example in which aggregate consumption is constant at all times and is unaffected by the debt. But the current cohort gains at the expense of ALL future cohorts:

    Assume all output is consumed. Assume people live for 2 periods, produce 100 when young and 100 when old. Assume one person per cohort (so population is always 2). So aggregate consumption is 200 at all time periods.

    In the baseline scenario each person produces and consumes 100 each period, so lifetime consumption is 200, and aggregate consumption per period is 200.

    Now suppose:

    In period 0, the young in cohort A consume 100. (Same as baseline)

    In period 1, the old in cohort A consume 200, and the young in cohort B consume 0. Aggregate C=200. Lifetime consumption of cohort A is 300.

    In period 2, the old in cohort B consume 150, and the young in cohort C consume 50. Aggregate C=200. Lifetime consumption of cohort B is 150.

    In period 3, the old in cohort C consume 125, and the young in cohort D consume 75. Aggregate C=200. Lifetime consumption of cohort C is 175.

    In period 4, the old in cohort D consume 112.5, and the young in cohort E consume 87.5. Aggregate C=200. Lifetime consumption of cohort D is 187.5.

    And so on.

    The government borrowed 100 and gave it to cohort A to consume, then slowly reduced the debt at the rate of 50% per period.

    Every single future cohort has lower lifetime consumption, even though aggregate consumption is always 200 at all time periods. There is a burden on ALL future cohorts (though that burden asymptotically approaches zero as we go into the very distant future).

    Here is a second example, where all future cohorts have lower lifetime utility, even though their lifetime consumption stays at 200:

    Same as the first example, except the government only borrows 50, and then taxes all future generations to pay the interest on the debt, but leaves the debt unchanged at 50 forever. So all future cohorts consume 50 when young and 150 when old. But they have a utility function U=consumption when young x consumption when old. So their lifetime utility will be 50×150, which is less than 100×100.

  23. Gravatar of Becky Hargrove Becky Hargrove
    16. October 2012 at 17:54

    Thanks Nick. Hope your head isn’t too sore!

  24. Gravatar of david david
    16. October 2012 at 18:23

    @Nick

    https://dl.dropbox.com/u/27783795/misc/nickrowe.html

    (it behaves funkily when negatives happen, but if negatives happen there’s an unresolved question of whether the government defaults or taxes anyway)

  25. Gravatar of Nick Rowe Nick Rowe
    16. October 2012 at 18:24

    Charlie, on James Tobin:

    “James Tobin made this point in response to Tullock and others in 1961:

    “More broadly, here are many sins of omission and commission by which the present generation can contrive to bequeath to the future a smaller capital stock than it might. Why single out debt finance to bear the whole burden of guilt?””

    Notice how Tobin speaks of the capital stock being “bequeathed” to “the future”, rather than being *sold* to the future *cohort*? His own metaphor is what tripped him up. Though, in Tobins’ defence, this was before Barro wrote his 1973 paper on Ricardian equivalence. Before Diamond 1965(?) on OLG models. And not very long after Samuelson’s 1958 OLG model.

    Tobin totally missed the point too. Buchanan and Tullock got it basically right, IIRC.

  26. Gravatar of Bob Murphy Bob Murphy
    16. October 2012 at 19:45

    Here’s a post for those who want pictures, illustrating Rowe’s point.

  27. Gravatar of Bob Murphy Bob Murphy
    16. October 2012 at 19:51

    Scott (Sumner): I like what you’re doing here, but Krugman still doesn’t see it. Krugman still thinks the only “trick” occurring is to enrich one generation at the expense of “the next generation” by taxing from the younger ones and giving the money to the older ones *while they are simultaneously alive*. Those aren’t my emphases; Krugman himself put that phrase in italics (or maybe he underlined it) in the post you are quoting.

    Again, I can only repeat what I said in that earlier post I made (which I sent to you over email). I don’t think you or Steve Landsburg are *quite* able to diagnose Krugman’s thought process, because you seem to have never fallen for Nick Rowe’s magic trick. In contrast, I didn’t believe his results myself, and it took me several days of painful thinking to admit he (Nick) was right.

    Because of this ordeal, I can now identify in seconds that Paul Krugman and Dean Baker were suffering through the same thing. I agree with you that as of his Saturday October 13 post, Dean Baker grudgingly admitted what Nick had been saying all along.

    But, I have yet to see Krugman actually indicate that he “gets it.” He still–as of the post you yourself quote from–thinks this is merely an issue of the government at any particular time, impoverishing the taxpayers while simultaneously enriching the bondholders. Krugman still doesn’t see how you can piggyback this whole process sequentially, such that all of the people alive in 2012 can enrich themselves at the expense of (say) all of the people who will be alive in the year 2112. The way Krugman is thinking about it, with lump sum taxation and no crowding out, this result is physically impossible. And yet, Rowe-type models show that it *is* possible, and thus something is wrong with Krugman’s entire approach.

    (I’m agreeing with everything Bill Woolsey has been saying in this thread thus far, if that makes you more likely to believe me, Scott.)

  28. Gravatar of Morgan Warstler Morgan Warstler
    16. October 2012 at 20:53

    Can we please stop worrying about whether DeKrugman is wrong, and egt to the next bigger issue:

    Assume DeKrugman is wrong, and knows he is wrong… knows it, his brains shades logic, so he can’t see it – he KNOWS IT….

    Why would he not admit it? This is a far more interesting question with many variables.

  29. Gravatar of Bob Murphy Bob Murphy
    16. October 2012 at 21:17

    Morgan, that’s just it: DeLong (who never said anything wrong, as far as I can recall) jumped in by clarifying the assumptions under which Baker and Krugman’s conclusions would be right. Baker eventually agreed that there was a theoretical plausibility to what Nick was saying, but argued it was empirically trivial and anyway was totally swamped by idle resources right now.

    In contrast, Krugman has yet to show that he actually sees the problem in what he’s been writing for (I think) almost a year now. If he *did* see the problem, he would just do what Baker did: he’d scoff at the depths to which the deficit-haters were stooping, and would switch his argument to a different reason that deficits today are a good idea.

    I only chimed in here, because Scott inexplicably is thinking Krugman has seen the light. No, he hasn’t: That’s why he (Krugman) italicized the part about both generations needing to be alive at the same time. Krugman still, after all this, doesn’t get what Nick has been saying.

  30. Gravatar of Charlie Charlie
    16. October 2012 at 21:57

    Nick,

    You totally missed my point. You are saying the debt causes the old to CONSUME MORE. That is why the bequeathing even matters to begin with. The bequeathing matters because old are then consuming MORE.

    *Smashes Keyboard on Head*

    Sure we can assume the consumption falls like manna from heaven or like apples from invisible trees. It doesn’t change my point, and it doesn’t change the fact that you are talking past each other.

    Listen, I agree you can play these infinite transfer games. And you are definitely correct you can transfer wealth across generations. The way you are talking past each other is to think it has something to do with debt. There need not be any debt in your story.

    I believe I learned about it from this Gale paper that had money facilitating transfers, which my macro teacher had a penchant for (http://www.karlshell.com/www/pdfs/gale73.pdf) though I didn’t read through it again.

    I can see what you are saying. Can you see what I’m saying?

    This is why we build models…

  31. Gravatar of Charlie Charlie
    16. October 2012 at 22:18

    “Notice how Tobin speaks of the capital stock being “bequeathed” to “the future”, rather than being *sold* to the future *cohort*? His own metaphor is what tripped him up.”

    I don’t want to speak for Tobin, since my reading might not be the only one, but to me he was speaking in the traditional macro model, where consumption and capital are fungible. The old don’t have to sell the capital, they can just consume it. He’s saying, why did the debt call the to eat more of their capital?

    Also, Tobin writes this in the next paragraph, which may make you devalue Barro’s contribution somewhat:

    “The second comment questions the consumption-saving behavior assumed in the Modigliani notion of the burden. Is it not based on some asymmetrical illusion? Society fools itself into consuming more, thinking that possession of government paper provides for its future. Why don’t those who will have to pay taxes to service the debt-or even those who will be squeezed out of consumer goods markets when the holders of government paper spend it-consider themselves poorer and save more accordingly?”

    Tobin understood a lot about Ricardian equivalence, before Barro modeled it formally. Agree?

  32. Gravatar of Charlie Charlie
    16. October 2012 at 22:28

    P.S. – I thought Scott saw my basic point in the post, but I guess I read it wrong. To me, the “magic trick” is to start talking about debt and then do a very standard inter-generational transfer. Talking about debt, which conjures up a bunch of different arguments, is the misdirection that causes everybody to misunderstand the simple point you are really making.

    If you had said, “Brad and Paul, older generations usually leave some bequeath (they don’t consume 100% of their wealth). Suppose they started to consume more of it and leave behind less of it. Suppose all generations did this. Would this make future generations poorer? Even ones far in the future?”

    Do you think they’d miss it without the sleight of hand?

  33. Gravatar of Charlie Charlie
    16. October 2012 at 22:45

    P.P.S. – You can play this game with anything.

    Nick: NGDP targeting can be a burden on future generations.

    Scott: No, it can’t.

    Nick: Sure, it can. If NGDP targeting causes the older generation to consume more, then holding aggregate growth and consumption constant, every future generation must be worse off. Here I’ll construct an example…

  34. Gravatar of JL JL
    16. October 2012 at 23:10

    I think it’s a great magic trick and it has greatly entertained me.

    But bottom line is, as Krugman says, you can only do a intragenerational transfer when both generations are alive.

    Nick’s ‘magic’ trick of chained transfers does not change the fact that it was cohort B – and only cohort B – that paid for cohort A’s extra consumption while both cohorts where alive and both where aware of this fact.

    The (later) transfer from C to B is independent. Cohort C could choose to not recognize cohort B’s claims. Default, inflation and emigration being the usual tools in practice.

    Indeed, every generation can simply choose to break and/or restart the chain.

    Therefore one can not conclude that cohort A is consuming at expense of cohort C, D, E or F.
    It is merely an illusion, an accounting gimmick, that works under conditions where young generations are willing to recognize old, paper claims.

    But the apples did not travel back in time.
    The laws of physics still prevail.

    And IMHO this creative, yet ultimately (physically) unsound, thinking by economists and Wall Street actively harms us.

    And I think Krugman got that: Nice accounting trick, Nick, but I’d rather focus on the real economy.

  35. Gravatar of J.V. Dubois J.V. Dubois
    17. October 2012 at 01:35

    Forgive me my language, but the only thing this whole debate shown is that the fiscal stimulus crowd is as dense as RBC crowd when it comes to their pet ideas. If this idea is only remotely endangered – like admitting that it is possible that fiscal stimulus is burden – they turtle, squirm, respond to arguments never spoken and deliberately confuse the debate and throw supporting blogs among themselves: all this just to make this nasty thing go away.

    And I am saying this fully aware that this Nick’s argument is not as trivial as it seems. But once it is revealed and you spend some time (like few minutes to few hours) thinking about it, you have to get it. Assuming that you approach the subject with the goal to learn something and not to “win” the debate or to prove that you are smart and that you cannot err. Yes, it gets some time to get used to it, but it is nowhere near as complicated as some Game Theory examples I had to tackle in the past.

  36. Gravatar of Nick Rowe Nick Rowe
    17. October 2012 at 03:20

    Charlie: Look at that quote from Tobin:

    ” “The second comment questions the consumption-saving behavior assumed in the Modigliani notion of the burden. Is it not based on some asymmetrical illusion? Society fools itself into consuming more, thinking that possession of government paper provides for its future. Why don’t those who will have to pay taxes to service the debt-or even those who will be squeezed out of consumer goods markets when the holders of government paper spend it-consider themselves poorer and save more accordingly?””

    Answer: because they aren’t alive yet.

    Suppose we add capital to my example. So that the deficit causes the first cohort to save in the form of bonds rather than invest in capital. And so sell bonds to the second cohort, rather than selling capital. The only difference that makes, compared to my original example with no capital, is that the lower capital stock might reduce the marginal product of labour and real wages of the second cohort.

    The “money” in the Gale and Samuelson models gets sold once per generation. It is really “bonds”.

    If a bond-financed transfer to the current cohort implies higher taxes on future cohorts (however unborn and far in the future those future cohorts may be), then those higher taxes represent a burden on the future cohorts paying them.

  37. Gravatar of Shining Raven Shining Raven
    17. October 2012 at 03:28

    JL, really nice summary.

    Nick, you are really unfair to Tobin: “Tobin totally missed the point too. ”

    Just above, you complain: “That is certainly NOT what I am saying. That is why I deliberately constructed an example with NO CAPITAL!”

    Yes, but Tobin was obviously not talking about your example, but about the real world. And I think the discussion in the numerous different places has firmly established that it really, really depends on investment whether the debt turns out to be a net burden in the future. Different from your model, which has NO CAPITAL.

  38. Gravatar of Nick Rowe Nick Rowe
    17. October 2012 at 03:28

    JV: People who have never been exposed to the “we owe it to ourselves” view get it very quickly. People who have learned and deeply internalised the “we owe it to ourselves” view, like Bob, and me once too, find it a lot harder to get our heads around it. It took me ages.

    It’s like one of those duck/rabbit pictures. Once you have seen the duck, it’s really hard to switch to seeing the rabbit.

  39. Gravatar of Shining Raven Shining Raven
    17. October 2012 at 03:33

    But GDP is not constant over time with sensible investment, because productivity rises. And that depends on investment (and debt to finance the investment).

    Whether people are better off in the future depends on whether they produce sufficiently more so that they can pay taxes (support the older generation) and still have more left over than without the investment.

    In a model that keeps total production constant, but has accumulating interest on capital, *of course* the “burden of debt” grows.

  40. Gravatar of Saturos Saturos
    17. October 2012 at 03:35

    Bob, I thought you totally settled this with your post in January, I don’t get why we’re still debating this…

    Nick, yes it’s a duckrabbit because people are making two incompatible equivalences simultaneously between taxpayers and bondholders, and lenders and creditors.

  41. Gravatar of Saturos Saturos
    17. October 2012 at 03:37

    @Bob Murphy: Ahh, I see you’ve restated that post in “straight” terms. No one can miss it now.

    Everyone read the post Bob Murphy linked to above before you decide to chime in with any opinion on this. Or else…

  42. Gravatar of Saturos Saturos
    17. October 2012 at 03:40

    Shining Raven, and now you are off with the fairies. Read Bob’s post. We’re talking about consumption loans – interest on the capital stock as periods progress is income to society, “owed to ourselves” – we are talking about taking consumption from future generations – workers today at the expense of new workers tomorrow.

  43. Gravatar of Saturos Saturos
    17. October 2012 at 03:43

    It’s sad that some of the best economists in the world actually had to debate this…

  44. Gravatar of ssumner ssumner
    17. October 2012 at 04:39

    I can see lots of commenters still don’t get it . . .

    I give up.

  45. Gravatar of Morgan Warstler Morgan Warstler
    17. October 2012 at 05:47

    This is the one piece I’d love to see DeKrugman get pushed to say;

    “Indeed, every generation can simply choose to break and/or restart the chain.”

    The default on the fake SS T-Bills will be super fun.

  46. Gravatar of Charlie Charlie
    17. October 2012 at 05:56

    Nick,

    “Suppose we add capital to my example. So that the deficit causes the first cohort to save in the form of bonds rather than invest in capital. And so sell bonds to the second cohort, rather than selling capital. The only difference that makes, compared to my original example with no capital, is that the lower capital stock might reduce the marginal product of labour and real wages of the second cohort.”

    Of course it will still work. You don’t need debt at all for your example. You don’t need bonds or prices either. Just assume the old generation has a tree with apples that fall from it. They consume all their apples and leave the tree. Now do policy X. Assume policy X causes the old generation to eat some branches off the tree. They consume more and are better off. Everyone else forever is worse off.

    I agree you don’t even need the tree you can tell it like you just did in these comments where policy X makes younger generations want to give apples to older generations. You don’t even need transfers, though, you can say old usually die with positive net worth (leave some apples) and policy X makes them leave fewer apples behind.

    That’s your story. You want to say policy X is debt? That’s fine. The story still works. But the story is the same if I say policy X is anything. Why can’t it be NGDP targeting? Why can’t it be anything? Again, I’m agreeing with the story. I just think the point is vacuous.

    Lastly, in the Gale paper, the old have “money” and they give it to the young, who gives it to the next generation and so on… The old generation can’t pay the younger generation back. It isn’t debt. It isn’t a loan. It’s just that “money” is something that facilitates the transfer. You can call it a money bubble if you want. But there is no gov’t and the old generation never has a way to make good on claims, young people are just trusting that someone will want the money in the future. The person that will want the money owes nothing to the person with the money.

  47. Gravatar of Charlie Charlie
    17. October 2012 at 06:12

    Nick,

    Whoa, I thought you understood this next point, but maybe you don’t.

    “If a bond-financed transfer to the current cohort implies higher taxes on future cohorts (however unborn and far in the future those future cohorts may be), then those higher taxes represent a burden on the future cohorts paying them.”

    You understand this statement isn’t true, right? The taxes can be higher on future cohorts without representing a burden. There are lots of cases where intergenerational transfers are Pareto Optimal. That is one the lessons of Gale’s paper. Start with your example in the comments and just assume that the young give 200 apples to the old and so on ad infinitum. The old are better off and no one is worse off. Gale generalizes that result. When is everyone better off?

    Mankiw shows both cases in his “The Deficit Gamble” paper. In that OG model, sometimes debt makes everyone poorer and sometimes it makes everyone richer.

    I think really you already knew that higher taxes need not imply a burden on future generations in these types of models. I think you just mispoke. Do you think Tullock and Buchanan knew that? I would think so.

  48. Gravatar of Becky Hargrove Becky Hargrove
    17. October 2012 at 06:42

    Charlie,
    Granted, mine is the perspective of a non-economist who struggles to understand these debates, but I want to explain to you why Nick’s position makes so much sense to me. Forget about capital and physical assets in debt terms, because their valuations are being sorely tested in the present by ongoing obligations to healthcare services which presently have higher valuations than anything else our economy offers. A high percentage of government debt (that eventually results in transfers) cannot easily be wished away, in that doing so would place many healthcare services back primarily into a non-pooled status.

    Most healthcare in the U.S. depends on access to the apex of lifetime learning even for a “simple” healthcare product. That is the equalivalent of wanting to buy a good in a factory process and being told one has to buy the process itself just to acquire the good. In turn, that sets up asymmetric patterns that continue through economies in general, in this case the generational debt problem. The reason those patterns are more noticable in the present is that as we age, we need more healthcare. And yet it is not really the fault of the older citizen (getting the blame) who is only purchasing the product as it has been dictated to him in the first place.

  49. Gravatar of Charlie Charlie
    17. October 2012 at 06:46

    *Checked Nick’s numerical example. I should have said the young transfer 100 apples ad inititum (or it could be 1 or 2 or anything, but they don’t have more than 100). I just forgot what their endowment was.

  50. Gravatar of Charlie Charlie
    17. October 2012 at 06:58

    Hi Becky,

    It’s another nice example of my point. We don’t need any debt for your story. Just take wealth from the young to pay for health care for the old. Do this each generation forever. In some scenarios, you could hurt future generations. In some scenarios, you could help all generations*, but the story doesn’t require and isn’t about debt. It’s about transferring consumption.

    *How can everyone be made better off? If you allow for growth, you can always transfer a little from the young to the old. Then they get a transfer from next years young, and so on… With growth the transfer can increase each generation. Gale/Mankiw (and many others) explore those cases. Think of Nick’s example, but with 10% growth. The young transfer 100 apples but get 110 when they are old, the next generation had to transfer that 110, but get 121… The nth generation always holds the bag, and n goes to infinity.

    Notice taxes have nothing to do with it. “Taxes” went from zero (everyone eats their own apples) to 100% everyone gives all their apples to future generations. Yet, everyone is better off. There is no “burden.” [taxes are in quotes, because you don’t really need a government or taxation for these models to work]

  51. Gravatar of Charlie Charlie
    17. October 2012 at 07:06

    Becky,

    You could also ask yourself this question. Is the reason that heath spending can impose a burden on future generations, because it is debt financed? I am claiming debt is not necessary or sufficient to cause a burden. Debt is the sideshow. It has distracted everyone in the whole debate (including Nick) as to what’s really going on.

  52. Gravatar of Why Dean Baker and Paul Krugman Were Wrong on the Debt Burden for At Least 11 Months Why Dean Baker and Paul Krugman Were Wrong on the Debt Burden for At Least 11 Months
    17. October 2012 at 07:11

    […] Scott Sumner is wrong for thinking Krugman finally gets it with his discussion of Rowe. Nope: Krugman italicizes in the […]

  53. Gravatar of Matt Waters Matt Waters
    17. October 2012 at 09:34

    The nature of sovereign debt is still the hardest thing for me to wrap my mind around. But I think I’ve changed my mind from my previous post.

    Taxes and printing money have direct methods where they transfer a country’s productive capability to targets of government spending. Printing money moves out the demand curve for government goods. Supply moves from non-government goods to government goods due to the price difference, and everybody that does not receive the printed money has a lower standard of living.

    With debt, the government can always issue debt at some interest rate if it wants to. In that case, the people who see lower living standards are those who purchase the debt and a country’s production similarly moves from non-government to government goods. Later on, the debt holders receive a similar amount of goods back from the government and the government gets that money through either taxes, printed money or government issuing more debt.

    So what happens if you have a systematic increase in debt due to underfunded entitlement programs? The entitlement programs are set up to have the same amount of payroll taxes come in as the benefits that go out to each generation. But let’s say every generation expects to get 50% more in benefits than what they paid in.

    The first generation pays the debt down some and then gets 150% more in benefits. The government issues more debt than was paid down when the first generation was working. The second generation has to buy this debt.

    The second generation has to buy the debt and pay payroll taxes. But they expect 50% more than they put in and so the government has to raise even more debt from the third generation and so on.

    Over time, what happens exactly as the debt balloons? Let’s say real interest rates are set as some function of debt/GDP. People are fine giving up 10% of their earnings each year to roll over debt, but require very high real interest rates to give up 50% of their earnings.

    As we get to the fourth, fifth, sixth generation, real interest rates on Treasury debt will become very high for the Treasury auctions to clear the market. Eventually, the debt and interest payments becomes so high that the workers simply do not produce enough to pay them back. The fifth generation could be owed all the rolled up debt for the first through fourth generation, as well as the extra entitlements they themselves get. If the sixth generation does not produce enough to pay the debt plus the high real interest rates, the sixth generation must either default on the debt or monetize the debt. In the first case, only the fifth generation suffers. In the second case, both generations suffer since the fifth generation gets a lower real payment than they expected.

    Unfortunately, this model also says that the first through fourth generations are maximizing their personal utility by shifting costs continually to later generations. To not be a burden on future generations, we need to increase payroll taxes as soon as possible to meet their actuarial cost of benefits.

  54. Gravatar of Matt Waters Matt Waters
    17. October 2012 at 09:46

    Charlie,

    It is all about taking from the young to pay the old. The issue with doing it through debt, however, is that debtholders expect to be paid back. When somebody purchases debt, it’s like they paid voluntary taxes.

    If the old always receive more than they put in, then their debt has to be paid by the young. When the young become old, then they expect the government to issue debt to pay for their own benefits AND to pay back the debt they paid in.

    If that level of debt increases faster than the productive capability of the young, real interest rates have to continually go up to get the young to fork over more of their disposable income to debt. Eventually you’ll have a generation who, even if they use 100% of their income to pay for the last generations, will not be able to pay back the debt level. Or it will be an unrealistic burden for them to do so.

    In that case, the young will be best off leaving the old holding the bag and defaulting. If the debt is monetized, all of the new dollar bills will go to the old and the young’s living standards essentially go to nothing. In either case, the young or the old are both future generation and one of the two will have to pay for the debt of the previous generations.

  55. Gravatar of Nick Rowe Nick Rowe
    17. October 2012 at 09:51

    Charlie:
    “Of course it will still work. You don’t need debt at all for your example. You don’t need bonds or prices either. Just assume the old generation has a tree with apples that fall from it. They consume all their apples and leave the tree. Now do policy X. Assume policy X causes the old generation to eat some branches off the tree. They consume more and are better off. Everyone else forever is worse off.”

    Stop right there! Did the old generation SELL the tree to the young? Or did they GIVE it to the young as a freebie?

    “You understand this statement isn’t true, right?”

    It is true. In the Samuelson 1958 case, future generations are made better off by the debt. Because r is less than g, so the government can rollover the debt forever, *without taxing future generations*. The debt/GDP ratio falls over time, even without taxes, because debt is growing at rate r, and GDP is growing at rate g

  56. Gravatar of Doug M Doug M
    17. October 2012 at 09:54

    Matt,

    Social Security taxes don’t go to social security benifits. They go into the general revenue stream, and benifts are paid from the general revenue stream.

    There is no social security trust fund.

    There is no gurarantee that you will get back anything from social security. Congress can change (or eliminate) the benifit at any time.

    Once you have cleared your mind of the myths around Social Security, it is much easier to think about how to fix it.

    You don’t really have to collect more SS taxes now to cover the future liability. But, perhaps the governmnent should look to lower its overall level of indebtedness.

  57. Gravatar of Matt Waters Matt Waters
    17. October 2012 at 10:15

    Doug,

    The SS trust fund does affect how the government accounts for surpluses and deficits. If the government runs a balanced budget without taking into account SS fund surpluses or deficits, then people of working age pay down the debt by the same amount they increase the debt when they retire.

    The trust fund is purely an accounting measure, but accounting can be very important. Basically the size of the trust fund is an accrual liability which gives an accurate picture of our debt/GDP, since the trust fund liabilities will eventually need to be converted to debt held by the public.

  58. Gravatar of Morgan Warstler Morgan Warstler
    17. October 2012 at 10:17

    I think it is healthy if you folks simply reverse the premise…. in a way that is historically more likely:

    There is no safety net.

    People die and leave their stuff to their children.

    BUT for our purposes lets assume we also make children personally responsible for debts left by parents.

    And since no one wants to assume generational default above (which instantly solves), we’ll assume those kids in debt ALSO can’t default. Ever.

    Now then…

    1. which family do you want to be born into?

    2. in such a system how is debt viewed?

    —-

    Charlie, you get less, not more, your status goes down, not up, you need to be less important, less liked, despised and hated… until you stop being greedy for other people’s stuff.

    Why not just say, “I want more, I want people who I think should have more to have more now, and I will bend any logic, and assume any facts not in evidence to achieve it.”

    Debts passed on matter because of love… the future generations should BE THE ONES to decide not to take on debts either – for themselves.

    This is called paying it forward. Debt is not loving. Sacrificing / taking pain today so that interest can be paid to those you love tomorrow… this is paying it forward.

    The question is WHY certain people do not want to see what is there.

  59. Gravatar of Matt Waters Matt Waters
    17. October 2012 at 10:18

    Also, if you look at the debt/GDP graph, the Bush administration was positively German in the path of debt/GDP. Things were fine until the drop in NGDP in 2008.

    http://en.wikipedia.org/wiki/File:USDebt.png

  60. Gravatar of Morgan Warstler Morgan Warstler
    17. October 2012 at 10:21

    Final note: Stop assuming it isn’t family vs. family, tribe vs. tribe, nation vs. nation.

    Yes for every debit there is a credit.

    The loving family, tribe, nation is a creditor.

    Beautiful, Darwinist, Capitalist love.

  61. Gravatar of Charlie Charlie
    17. October 2012 at 10:56

    Nick,

    “”You understand this statement isn’t true, right?”

    It is true. In the Samuelson 1958 case, future generations are made better off by the debt. Because r is less than g, so the government can rollover the debt forever, *without taxing future generations*. The debt/GDP ratio falls over time, even without taxes, because debt is growing at rate r, and GDP is growing at rate g”

    Define taxes in your model. I’m under the impression you are defining taxes in period 1 as 100, taxes in period 2 as 50, taxes in period 3 are 25…and so on. [Of course, you don’t need “debt” and “taxes” to do this transfer, so maybe I understand you incorrectly].

    I’m saying let taxes each period in your example equal 100 in every period after period 1. T1 = 100, T2 = 100… forever. Now the first generation is better off, while all others are no worse off, Pareto Optimality. Create whatever story you want to facilitate that. There is a government that can only issue 1 period debt. It raises taxes each period to pay the debt and then issues new debt to pay the transfer.

    You can say, I just set R=G=0. That’s fine. You actually don’t need prices, government or debt to do this transfer. You can say “money” was created and for some strange reason people think it is worth something. The first generation gives “money” to the next generation in exchange for goods, which gives “money” to the next… forever. It ISN’T DEBT. The first old generation can NEVER pay back the young generation. They can’t borrow resources to consume this period, because they could never possibly pay it back.

    You could tell the same story with a straight up tax and transfer. Tax 50 give to old, tax 25 give to old… It isn’t a debt story.

  62. Gravatar of Charlie Charlie
    17. October 2012 at 11:05

    “Stop right there! Did the old generation SELL the tree to the young? Or did they GIVE it to the young as a freebie?”

    They don’t have to sell it. There are no markets! Capital and consumption are perfectly fungible. If they want to eat the tree (or chop it down for firewood or whatever), they can. I’m implicitly assuming that bequests are positive in that example (as Tobin is) since they leave a positive capital stock behind, because the point is to show that debt isn’t a necessary part of this story. The old just have to start chopping branches off the tree.

    It’s not a debt story. None of these are debt stories. Debt is not sufficient or necessary to tell the story.

  63. Gravatar of Charlie Charlie
    17. October 2012 at 11:49

    Nick,

    Maybe you can see it this way. You use Samuelson’s model and assume that the Debt grows forever, which it can with r < g. Do they same thing but assume that the debt stays constant, only taxes rise. Just pay the interest. I've raised taxes on every generation, but there is still no burden.

    For g = 10%, r = 5%, Debt = 100, Taxes = 5

    Generation 1: consumes 300 (as opposed to a 200 endowment)
    Generation 2: consumes 215 (110 + 100 + 5 as opposed to 210)
    Generation 3: consumes 231 (5 + 121 + 100 + 5 as opposed to 221)

    The last generation gets 110 when young, but transfers 105 to pay and service the debt. Then when old they get 121 and receive 105.

    You can make the taxes grow without bound as long as the debt grows slow enough the taxes need not be a burden.

  64. Gravatar of Doug M Doug M
    17. October 2012 at 12:58

    Nick,

    The assumption that r will be less than g is thin. Even if it is currently below, r had been greater than g for most of my working life. Furthermore, the level at wich debt stabilizes could be multiples of GDP. Whereupon we may see a Spanish style spike in r.

    Matt,
    There is no social security liability. It is a staight-up transfer. Congress can cut benefits at its discression.

  65. Gravatar of Charlie Charlie
    17. October 2012 at 13:04

    Matt,

    I agree with everything you wrote, except that this is something specific to debt. You can create “money” so people think they will get paid back. You can just do a straight tax and transfer like Social Security, so people think they will get paid back. The government doesn’t need to issue any debt to start a Social Security scheme.

  66. Gravatar of James Oswald James Oswald
    17. October 2012 at 13:16

    Talk about a blast from the past. I think Krugman and Rowe both completely understand this issue, but I think Rowe errs in talking about debt rather than transfers. It *is* impossible for debt to reduce the consumption of future generations, if you don’t have transfers. Conversely, transfers without debt lower future generations’ welfare just fine. Ultimately, this whole argument is pedantic.

  67. Gravatar of Charlie Charlie
    17. October 2012 at 14:43

    Nick,

    I still think you secretly knew this on some level:

    Looking at your first post you give this example:

    “Same as the first example, except the government only borrows 50, and then taxes all future generations to pay the interest on the debt, but leaves the debt unchanged at 50 forever. So all future cohorts consume 50 when young and 150 when old.”

    Just don’t change the utility function (let utility = total consumption). The first generation is better off and no other generation is worse off.

    Now read our exchange:

    You:

    “If a bond-financed transfer to the current cohort implies higher taxes on future cohorts (however unborn and far in the future those future cohorts may be), then those higher taxes represent a burden on the future cohorts paying them.”

    Me:

    “You understand this statement isn’t true, right? The taxes can be higher on future cohorts without representing a burden.”

  68. Gravatar of Morgan Warstler Morgan Warstler
    17. October 2012 at 16:38

    “You understand this statement isn’t true, right? The taxes can be higher on future cohorts without representing a burden.”

    If future cohorts didn’t choose to carry it, it is a burden. Stop splitting hairs.

    Less for you, less for the things you care about.

    And THAT is not a burden today because you aren’t due anything. You getting less = no burden.

    You can understand that statement is true, right?

  69. Gravatar of Charlie Charlie
    17. October 2012 at 16:53

    Morgan,

    The debt need not cause lower utility or consumption. In the revised Samuelson case, debt can raise utility and consumption in all periods with taxes. It’s like I’m Nick Roweing Nick Rowe. I find it hard to believe he really meant to say that debt that causes taxes are always a burden, but that’s what Tobin says Buchanan/Tullock were saying, and that’s who Nick learned from. I thought it was a straw man or talking past each other, but I guess not.

    I guess I have the magic tricks now.

  70. Gravatar of Major_Freedom Major_Freedom
    17. October 2012 at 21:04

    ssumner:

    I can see lots of commenters still don’t get it…

    I give up.

    Giving up is how one gets to advocating for NGDP targeting…

    ——————–

    Charlie,

    You keep talking past Rowe. You keep countering with “but debt MAY not be a burden to future generations if…” type arguments, when Rowe’s only point is about showing a single “debt CAN be a burden to future generations” COUNTER-EXAMPLE to the universal claim “debt cannot ever represent a burden to future generations” being made by DeKrugman.

    If you yourself can imagine a single scenario where debt COULD burden future generations, then there is NO reason why you should be quibbling.

  71. Gravatar of JL JL
    17. October 2012 at 23:14

    Nick said:

    > It’s like one of those duck/rabbit pictures. Once you have seen the duck, it’s really hard to switch to seeing the rabbit.

    Nice analogy, affirming my point.
    In the paper world of accounting it may be possible to see both a rabbit and a duck.

    But in the real, physical world there can be only one actual creature: either a rabbit, a duck or some frankenstein hybrid (a platypus?).

    I, for one, am getting tired of economists making theoretical arguments.
    At the end of the day, biologists cure disease and physicists give us productive machinery.

    But if the economists can’t even get us out of this depression, then perhaps they should go flip some burgers.

    (And that is why I deeply respect both Krugman and Sumner: both have put forth workable plans to end the depression.)

  72. Gravatar of Matt Waters Matt Waters
    18. October 2012 at 07:06

    Doug,

    When the benefits are paid, the money itself comes out of tax revenues or issuing debt. But if the money going into the trust fund equals the money later being paid out, then the debt does not increase over the long-term.

    Charles,

    I thought the same way not long ago, in fact at the beginning of the comment thread. The difference between debt and taxes/inflation is that, if debt is issued, the people who buy the debt expect to get paid back.

    If taxes are used, then the people who pay the taxes aren’t expecting to get those taxes back. If inflation is used, then people AT THE TIME OF THE SPENDING see their living standards go down and do not expect to be paid back.

    If somebody spends 20% of their income on Treasury bonds, then they will see a lower standard of living. But over the long-run, they expect their standard of living to be the same. If every generation expects to get their debt paid back AND to get more from entitlements than they put in, then the debt level will continually increase. If it increases faster than income, interest rates have to go up for Treasury auctions to clear. Eventually there just isn’t enough money to buy the Treasuries and the debt will need to be monetized, putting the burden on the future generations.

  73. Gravatar of Charlie Charlie
    18. October 2012 at 07:06

    Major,

    Nick made this statement, “If a bond-financed transfer to the current cohort implies higher taxes on future cohorts (however unborn and far in the future those future cohorts may be), then those higher taxes represent a burden on the future cohorts paying them.”

    I’ve tried to let him back out of it. I’ve tried to let him add “can” or “sometimes” or “in this model.” He doubled down on it. I only need a counter example to disprove this statement. I produced several showing debt that causes higher taxes on future generations need not be a burden.

    I’ve never argued that debt can never be a burden. I argued that debt was a sideshow in the discussion. The deep structure of the problem is intergenerational transfers, not debt. Any policy that can cause intergenerational transfers can be a burden. You, who think NGDP will not cause growth, but will cause inflation, could easily use Nick’s story to say NGDP is a burden on future generations.

  74. Gravatar of Charlie Charlie
    18. October 2012 at 07:14

    “If taxes are used, then the people who pay the taxes aren’t expecting to get those taxes back.”

    Matt,

    There is no uncertainty in Nick’s model. All the taxes and transfers can be laid out at time 0. Further, there is no saving and no investment. They don’t make any decisions. If they get transferred apples, they get higher utility/consumption. How they feel about it doesn’t matter.

    If you want to talk real life, it is in general not true that people don’t expect to receive government transfers. People make retirement decisions expecting to get social security compensation.

  75. Gravatar of Charlie Charlie
    18. October 2012 at 07:17

    Also, Tobin’s point is that we’ve long known that policies that cause older generations to bequeath less to the next generation can cause a burden. If you just say, debt does that, without modeling how, is there any contribution?

  76. Gravatar of Major_Freedom Major_Freedom
    18. October 2012 at 19:17

    Charlie:

    Nick made this statement, “If a bond-financed transfer to the current cohort implies higher taxes on future cohorts (however unborn and far in the future those future cohorts may be), then those higher taxes represent a burden on the future cohorts paying them.”

    I’ve tried to let him back out of it. I’ve tried to let him add “can” or “sometimes” or “in this model.” He doubled down on it. I only need a counter example to disprove this statement. I produced several showing debt that causes higher taxes on future generations need not be a burden.

    I think there is some confusion here. The point of counter-examples is to refute a universal claim. If we then consider a counter-example as a possibility, then looked at from the outside in, it is a “may” situation. But when considered in and of itself, we have to look at it as a “certainty”. We can’t keep considering it as a possibility of a possibility of a possibility, etc.

    For example, suppose you said that all red heads must like vanilla ice cream. A valid response to this would be to give a single possible counter-example. You cannot then respond to this response by saying that I can only say that it is a possibility of a possibility. I only have to show that X is possible, full stop.

    I honestly don’t think your examples suffice in showing that Rowe’s counter-example is invalid. The reason for this is that you denied the assumptions in Rowe’s model. You cannot deny the assumptions of a counter-example to a universal claim. It would be like you giving a counter-example to my counter-example to the universal claim that all red heads like vanilla ice cream.

    I’ve never argued that debt can never be a burden.

    Oh for sure, please don’t misunderstand my motivation here. But to be clear, if someone said that government debt can NEVER be a burden to people in the future, then would you say this is wrong? If so, then you agree with Rowe in principle.

    I argued that debt was a sideshow in the discussion. The deep structure of the problem is intergenerational transfers, not debt. Any policy that can cause intergenerational transfers can be a burden. You, who think NGDP will not cause growth, but will cause inflation, could easily use Nick’s story to say NGDP is a burden on future generations.

    Debt is the engine for the inter-generational transfers. I honestly cannot see how you can divorce debt from such inter-generational transfers. Are they not two sides of the same coin?

  77. Gravatar of Charlie Charlie
    18. October 2012 at 20:54

    Again, Rowe made a blanket statement that I disagreed with. Something to the effect of “debt that causes higher taxes on future generations MUST be a burden.” It is easy to show a counter-example, so I showed several.

    “But to be clear, if someone said that government debt can NEVER be a burden to people in the future, then would you say this is wrong? If so, then you agree with Rowe in principle.”

    I do agree with Rowe in principle about intergenerational burden. I said that from the get go. I went even further and said that any policy that caused the old to consume more in Rowe’s example would be a burden. The debt is a sideshow. In fact, I learned about these models and the “Economics of Infinity” (a paper by Kenneth Shell in 1971), when the models included no debt, so perhaps that is why I’m not stuck in that mindset.

    “Debt is the engine for the inter-generational transfers. I honestly cannot see how you can divorce debt from such inter-generational transfers.”

    Notice that debt isn’t even modeled in Rowe’s counter-example. That’s the beauty of it. The debt is completely hand-waving. You could use the same model and say that the government just taxes 100 apples from the young and gives it to the old. Shell introduces money as a store of value. He says suppose the old use apple cores as money and give the young their apple cores in exchange for the young’s 100 apples (in the original example, it was chocolate and the candy wrapper so imagine the cores don’t decay and aren’t gross). Shell shows that money can create a free-market equilibrium where the 100 is transferred indefinitely by each generation. To get to Rowe’s example you just need inflation. Consider the price level doubling after each generation. While the first generation gets 100 apples with their “money”, the second generation can only get 50 (because prices are twice as high). The third can only get 25….

    It becomes even clearer with positive bequests (which is what we actually observe -> at least some people leave money to their errors). In that case, debt can cause people to leave less behind, but so can any policy that causes the debt to consume more.

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