Nick Rowe, applauded by such luminaries as Don Boudreaux and Bob Murphy, argues that, contrary to folks like Paul Krugman and yours truly, government debt is too a burden on our grandchildren, unless you believe in Ricardian Equivalence.
I want to explain what that means, and why it’s wrong.
To make sure we’re all talking about the same thing, I’m going to adopt all of Nick’s assumptions, most critically that all taxes are lump sum. I’ll come back at the end and say a little more about why this obviously false assumption is the right assumption to make.
Now: Suppose the government borrows money to finance a tax cut. That makes us feel richer. We therefore buy and consume more stuff, which leaves less stuff for our grandchildren to consume. (Nick tells a very nice detailed story about how this might play out across generations; I applaud that kind of detail, but it’s not important for this response.) Government debt is therefore a burden to our grandchildren.
Unless! If we — the current generation — foresee all this, and care about our grandchildren, we’ll choose to (in effect) undo what the government has done by saving our tax cuts and giving them as gifts to our grandchildren (presumably as part of their inheritance). This restores every generation’s consumption to the original status quo.
Ricardian Equivalence is the economist’s jargon for the assertion that we will foresee all of this, and will care about our grandchildren, and therefore will give them our tax cuts as gifts. Nick Rowe’s claim is that unless you make the very strong assumption that Ricardian equivalence holds, government debt enriches us at the expense of our grandchildren.
Here’s why that’s wrong: There’s no “us” that decides whether to save these tax cuts. Some of us can save them, while others spend them. That’s a failure of Ricardian equivalence, but it’s not a burden on all of the next generation. It’s only a burden on that part of the next generation that had greedy grandparents. If you’re not interested in living well at your grandchildren’s expense, then you won’t — and your grandchildren, therefore, won’t suffer.
Here, then, is the main point: Your grandchildren suffer only if you want them to. Bert wants to live well at his grandchildren’s expense; Ernie doesn’t. Therefore Bert spends his tax cut and thanks God for the public debt, while Ernie saves his tax cut and considers the public debt a matter of indifference. In this story, nobody who is alive today actually objects to the public debt. So Nick cannot use this story as a reason for you, me or anyone to become a deficit hawk.
Three more points:
- This is not to say that government debt won’t affect your grandchildren. If I don’t save my tax cut, my grandchildren will be poorer, which means they’re more likely to turn to your grandchildren to finance their Medicare and Social Security. That’s a real effect—but it’s not the effect Nick is talking about. It can’t be, because he assumed lump-sum taxes (as is standard in these discussions, in order to focus on one issue at a time), which means that he’s ruled out this effect.
We all agree that deficits can matter because they have redistributive effects and incentive effects. But those are not at all the same as the alleged burden-on-the-next-generation effect — and the real effects are typically much smaller than the imagined effect. (The whole point of assuming lump-sum taxes is to make these agreed-upon effects go away, so we can see what the other effects might be.) So deficits do matter, but not for the “usual” reasons, and not nearly as much as is widely imagined. This is exactly what both Krugman and I said earlier this week.
- Note that this all plays out exactly the same way whether the American public debt is held by Americans, or by Chinese, or by Martians. Paul Krugman muddied the waters when he pointed out that American debt held by Chinese is largely offset by Chinese debt held by Americans. That might be true, but it has nothing to do with the fundamental issues.
- There seems to be a widespread assumption (at least among econo-geeks) that Ricardian Equivalence is likely to fail because people misperceive the effects of current tax cuts on future generations. There seems to be a further widespread assumption that all those misperceptions will be in the same direction. But why should that be? Politicians, journalists and bloggers admonish us every day that our grandchildren face disaster because of our government’s fiscal irresponsibility. Some taxpayers will take those warnings too lightly, and therefore undersave; others will take them too seriously and therefore oversave. The grandchildren of the first group will be impoverished by our debt; the grandchildren of the second group will be enriched by it. Who can say which group is larger?
nice :-)
At the aggregate level though, if some people are left with no burden and some with some burden, then on average everyone in the future inherits “some burden”, no? It’s not a wash.
Steve, I may be missing something obvious, but if someone spends his tax cut, thus draining the world of some resources, doesn’t that deprive everyone’s grandchildren of those resources? Or do the inherited tax cuts exactly compensate the value of those resources for the grandchildren of those who save the tax cut? If so, are you making some assumptions about the way prices behave, like being flexible and/or efficient?
This reminds me of an article I read a long time ago…
http://www.slate.com/articles/arts/everyday_economics/1996/08/kwitcherbellyachin.single.html
“It’s not a burden on all of the next generation. It’s only a burden on that part of the next generation that had greedy grandparents.”
OK, but then what if you care about other people’s grandchildren? (Assuming you’re saving your tax cut for your own grandkids and don’t have any left over for other people’s kids.)
Plus, there are people alive today who will have no grandchildren. They can spend their tax cut and the burden will be spread across future taxpayers.
It seems that Nick is saying that government debt enriches (some of) us at the expense of (some of) our grandchildren, which means it enriches us (on average) at the expense of our grandchildren (on average). Which makes it (a) coherent and (b) a legitimate issue if you care about other people’s descendants.
Neat! Best response to my post yet.
Now assume:
1. I care about my grandkids.
2. I’m a reader of the New York Times, and I have it on very good authority that the debt will not be a burden on our grandkids, and that Ricardian Equivalence is false.
3. I would never ever question what I read in the New york Times, and try to figure it out for myself.
What happens?
Considering the arguments of commenters above, how about an extreme illustration. If nobody cares about their grandchildren, and nobody saved, we would actually be impoverishing all the granchildren. However, this does not matter, because we have already said that nobody cares about their grandchildren, so this is not a cost to anyone today. Therefore nobody today should argue to reduce debt to help the granchildren, because they dont care about the grandchildren. If they did, they could simply save.
SL’s argument seems to hinge on the “In this story, nobody who is alive today actually objects to the public debt.” and “Some taxpayers will take those warnings too lightly, and therefore undersave; others will take them too seriously and therefore oversave… Who can say which group is larger?”
I would be very surprised if the oversaving group was larger, but I will have to think about this some more. I suspect this point is where I feel the argument is wrong, because it “seems obvious” that people are more likely to overspend than oversave, but is this really the case?
Further assume:
4. You (Steve) are my friend.
5. You know about assumptions 1,2,3 above.
6. You have the ability to write a letter to the person who writes the New York Times, and maybe convince him to change his mind.
What would you write? Would it differ from my post?
I don’t understand this post.
You say that:
“Government debt is too a burden on our grandchildren, unless you believe in Ricardian Equivalence.
I want to explain what that means, and why it’s wrong.”
But where exactly do you explain why it’s wrong?
1. “That’s a failure of Ricardian equivalence, but it’s not a burden on all of the next generation. It’s only a burden on that part of the next generation that had greedy grandparents.”
That it is only a burden on some grandchildren, doesn’t mean that it’s wrong to say that “it’s a burden on grandchildren” (overall). A person can choose to spare his own grandchildren, true, but that’s not point of the discussion.
2. ” In this story, nobody who is alive today actually objects to the public debt.”
This doesn’t disprove that debt will result in a burden on the grandchildren. Only that (some) people who are alive don’t object to putting this burden on them.
3. “Some taxpayers will take those warnings too lightly, and therefore undersave; others will take them too seriously and therefore oversave. The grandchildren of the first group will be impoverished our debt; the grandchildren of the second group will be enriched by it. Who can say which group is larger?”
This is true. But it might be the case that the group of undersavers *is* much larger, and then the debt will be a burden on the grandchildren. So this is an interesting discussion of a possibility that debt will not impose a burden. But not a proof.
It seems to show not that it will not impose a cost on our granchildren, but that it will only impose such a cost as we don’t care about, and therefore imposes no cost on us.
Oh, Steve: your link to my post links to one of your own posts instead.
Here’s my original post:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/12/debt-is-too-a-burden-on-our-children-unless-you-believe-in-ricardian-equivalence.html
Nick: My apologies! It’s fixed now.
Take Steve’s scenario. In world 1 we use the money to make and explode fireworks. In world 2 we build frabulators, which convert grass and stone to delicious healthy food. Same borrowing in both worlds. Which, as a prospective grandchild, would you prefer to be born into?
I agree with both of you. My impression is that you’re arguing different things.
Steve is arguing, “the burden of the debt falls only on *certain* grandchildren, the grandchildren of non-saving grandparents.”
Nick is arguing, “it’s not true that the burden of the debt falls on *nobody*.”
The comments on Nick’s original post — at least the first few pages that I read and participated in — were definitely debunking the “nobody” case.
Suppose I make $15,000 and pay no taxes, but I am grooming my grandchild to be a billionaire. I obviously can’t offset effects of U.S. borrowing on my grandchild’s wealth, since his tax dues will be proportional to his own income, which will require that he suffer more than he would have if his burden were proportional to my income.
This is captured in Steve’s 1st caveat, but if it is true that most Americans think their children will be wealthier than they are, then the effect I describe explains why Americans are not comforted by Steve’s argument.
Phil:
Steve is arguing, “the burden of the debt falls only on *certain* grandchildren, the grandchildren of non-saving grandparents.”
Nick is arguing, “it’s not true that the burden of the debt falls on *nobody*.”
Steve is also arguing that the burden of the debt is such that nobody currently alive should be distressed by it.
Do you also say that no one in Greece should be distressed by their debt burden?
I think that if we could effectively borrow from future generations, that we should because they will most likely to be richer than us. Having said that I think that worst thing that government does is pull resources that could be more productive today in the market into government making them less productive. E.g. I think that mail carriers are overpaid and so are over qualified. As a result some who would be very productive as carpenters, auto mechanics, accountants etc. are doing work that less qualified people could do just as well. This means that people across the planet are a little less well off than they could be.
Steve: this will be a tough one for many of your readers.
First they’ve got to understand me (which contradicts what many of them have learned).
Second they’ve got to understand you, where you “go meta” on me.
When they’ve figured all that out, they need to take a look at my first and second comments above, where I go meta^2 back, to come back around to my original post.
Should be fun!
“Do you also say that no one in Greece should be distressed by their debt burden?”
If they spent it on fireworks, yes. If they spent it on frabulators, not so much. Alas no frabulators in Greece.
The Greeks don’t just have high debt. They have high debt and low ability to pay. That fact is due in part to how they spent their borrowings.
Who is worse off anyway Roger: the Greek, or the Greek bond-holder?
Does it make it simpler or more complicated if we get rid of the grandchildrern, and use a single generation? The Govt borrows to reduce taxes and announces that taxes will rise in 2 years to pay off the debt. I can choose to save the money to pay the increase in taxes – cancelling out the tax reduction. Or I could spend the money, and then take a cut in living standards in 2 years. My choice. Presumably some people would choose to spend, and therefore effectively borrow from their future selves, but they choose to do this, so are obtaining a benefit from it. They have no interest in preventing the Govt. from borrowing for the tax cut. Those who save are indifferent either way.
It is not that there is no “borrowing from the future”, but it imposes no cost on the current person. Therefore nobody should plead for the Govt not to borrow the money *because* of the cost to their future selves. At least as long as people are rational and informed. Is this the argument, or is there more to it?
“>Steve is also arguing that the burden of the debt is such that nobody currently alive should be distressed by it.”
Doesn’t this make the additional assumption that everybody currently alive cares only about their own descendants?
If I invest my portion of the deficit, I can compensate only 1/300,000,000 of the future population. That only satisfies me if 1/300,000,000 comprise all the people I care about.
If I use the money to buy and consume some good that I otherwise wouldn’t buy and consume, wouldn’t that normally affect the market for that good, resulting in increased production of that good (or at least of substitutes) and therefore cancelling out the effect on future generations?
And if the market can’t produce more of the good, wouldn’t the fact that I have consumed an extra amount of the good raise the price of the existing supply, result in less consumption of the good, and still cancel out the effect?
A lot of commenters want to talk about the debt as if it existed apart from what we got in return for the debt, and apart from what we did with the money.
You cannot do this coherently because it ignores logical constraints.
Our debt to the Chinese did not fall like an evil cloud upon the land. We *traded* for it. Debt is a result of a *trade* and *both* sides of the trade matter.
Let’s look at the brighter side of forgetting both sides of a transaction, my handy-dandy perpetual motion machine. Ignoring the oil you put in it it is a source of free power.
Let’s look at the brighter side of forgetting both sides of a transaction, my handy-dandy perpetual payment machine. Ignoring the amount you lend it it is a source of free interest payments.
So to the oft-repeated and oft-answered questions, would the Greeks be better off without their debt I reply, of course, in exactly the same way a perpetual motion machine is better than your car.
But this question is only relevant if the Greek debt was a cost arbitrarily imposed, like the costs germany imposed on Holland in the early 1940s.
To the better question, ‘Would the Greeks have been better off if they had not borrowed the money in the first place’ I reply it depends mostly on what they did with the money.
Steve seems to endorse this:
Steve is arguing, “the burden of the debt falls only on *certain* grandchildren, the grandchildren of non-saving grandparents.”
which is obviously false. Did my grandparents discover penicillin? Do I benefit from it? Did my grandparents endow the Ford Foundation? A little more care is needed here.
Nick Rowe, shame on you! This is serious stuff. I am going on Judge Napolitano’s show in about 36 hours, and his producer told me we might discuss Krugman’s “we owe it to ourself” argument. You can’t say “Neat!” when Steve says you are totally wrong.
I am going to try to solve this problem on my blog. But you know, I actually have a day job. You and Steve are tenured, right? So what the heck is the purpose of your lives, if not to resolve something like this?
C’mon guys, what is the geeconosphere for? Surely the two of you–who are intellectually honest and very very bright–can answer a simple freaking question: Does the government running a deficit today, impose a burden on our grandkids? And if so, why?
Ugh! I can’t believe my hands allowed me to type a monstrosity such as “ourself.” I obviously meant “ourselves.”
BTW Steve, I’m not as confident in my criticism of you as of Nick Rowe right now, but I think this post represents a major concession on your part, though you seem to think it’s what you’ve been saying all along.
I take Krugman to be saying that if the government’s deficit is financed purely internally, then as a matter of accounting it can’t possibly impoverish future generations–full stop.
In your previous (ridiculous) post, I thought you were saying Krugman was right, but didn’t push it far enough. That even if the government’s deficit today were financed by outsiders, then it still couldn’t impoverish future generations.
But in this post, you seem to be saying it *can*, depending on the behavior of today’s elders.
Here’s the only way I can resolve all this: You think that to say “the next generation owes the debt to themselves” is NOT equivalent to saying “the debt doesn’t impose a burden on them.” And I hope that IS what you believe, because my own resolution of all this centers on just that insight (or fallacy, if I’m wrong). What do you think?
Bob Murphy:
Here’s the only way I can resolve all this: You think that to say “the next generation owes the debt to themselves” is NOT equivalent to saying “the debt doesn’t impose a burden on them.” And I hope that IS what you believe, because my own resolution of all this centers on just that insight (or fallacy, if I’m wrong). What do you think?
Well, this is partly a matter of language, so let’s try to clarify what “burden” means here.
1. I’ve been planning to leave my daughter a $1000 inheritance. But I’ve changed my mind and decided to spend that money on a $1000 bottle of wine instead. I drink the wine and leave my daughter nothing. Question: Have I imposed a burden on my daughter?
2. I’ve decided to borrow $1000 from my Chinese friend, spend it on a bottle of wine, and saddle my daughter with the debt, which will completely deplete her $1000 inheritance. Have I imposed a burden on my daughter?
I claim that:
A) Surely both questions should have the same answer, because my daughter is indifferent between the two scenarios.
B) What that answer is depends on how you define the word “burden”.
C) Most people would not be willing to say in scenario 1 that I’ve imposed a burden.
D) Therefore, according to the definitions that most people implicitly use, we ought not say in scenario 2 that I’ve imposed a burden.
Do you disagree with A, B, C, or D?
Bob Murphy: Following up on the above response: Suppose I *already* plan to leave my daughter nothing. But I borrow $1000 for a bottle of wine, drink the wine, and leave her with a $1000 debt. You can call this a burden if you want to.
Note that so far, I don’t need the government to help me create that burden.
Now: Suppose nobody other than the govt is willing to lend to me, because nobody other than the govt has the legal power to force my daughter to pay up. Then it is certainly true that the govt, via the national debt, enables me to transfer resources from my daughter to myself that I could not otherwise have transferred. You might reasonably call that a burden on my daughter.
BUT — If I impose that burden, I do so VOLUNTARILY. So what govt debt CANNOT do is FORCE me to impose a burden on my daughter. It can only expand my options, and therefore cannot make me worse off.
I am 99% sure that Nick Rowe will agree with all of this.
Bob: OK. Here’s my take on this:
1. Steve is saying that I am right, and that his old post is wrong.
2. But Steve is also saying that no individual should give a damn that I’m right. (That’s the “neat” bit.) Because Ricardian individuals who care about their grandkids can and will offset the burden on their own grandkids. And non-Ricardian individuals who don’t care about their grandkids will want to gain at the expense of their grandkids. So there’s no audience for my post.
3. My response (see my comments above) is that some people care about their grandkids, but think there’s no burden on their grandkids, because they read the New York Times which tells them there isn’t a burden, and they think that the New York Times is always right, and they aren’t clever enough to figure it out for themselves. So my original post was an open letter to the New York Times telling it to change the personal financial advice it gives. The New York Times should post a new column, advising its readers: “Yes, there will be a burden on your grandkids, unless you personally give your grandkids a bigger bequest to offset that burden”.
@Steve:
I think in fairness to the anti-Landsburgite commenters on this issue you are glossing over a point in your response to Bob Murphy. in case 2 you are leaving $1K which will repay the loan. But what if, case 3, you are leaving nothing because you were already broke, just the $1K debt. In that case — the case where you could not afford the wine in the first place — most people will say you ARE imposing a burden. (And I would say you are if you bought wine and not if you bought a savings bond.) I don’t think this is just a nit, I think it goes to the heart of some of the objections we see here and in the press.
Nick Rowe:
1. Steve is saying that I am right, and that his old post is wrong.
I don’t think we have any substantive disagreements, but I do want to insist that any “burden” is created by spending, not by borrowing. That was the point of my old post, and I stand by it.
Steve, could you not just as well say:
C) Most people would l be willing to say in scenario 2 that I’ve imposed a burden.
D) Therefore, according to the definitions that most people implicitly use, we ought to say in scenario 1 that I’ve imposed a burden.
The problem is that in some sense people have contradictory intuitions. Or to put it another way, they’re not consequentialists: even if it has the same financial implications, they feel that imposing a debt is fundamentally different than giving someone less money than you otherwise would have.
A bit off-pist but did anyone read the article titled “Marginal revolutionaries” in The Economist? Seems we (or more you all, I am more often just an observer) are making history through blogging this way. I like seeing that Nick is responding, let’s hope all this leads to better economic policy.
I forgot to mention that a debt imposes a moral obligation, not just a simple financial loss, and this might be why it’s perceived differently.
When debt repayment time comes around, we’re still planning to have a progressive tax system, right? One in which grandkids with doting Ricardian grandparents who helped pay for college will end up paying disproportionately more than grandkids who have nothing more than granddad’s empty wine bottle? In other words, “we owe it to ourselves” is oversimplified shorthand for “families who choose to be more responsible will owe it to families who choose to be less responsible”. Discouraging responsibility in this way may be the price we have to pay to protect people from indigence, but clearly the *level* of discouragement matters to the overall economy, no? And the effects of that discouragement ought to be nonlinearly increasing: we tax income, not wealth or utility, and income taxes create incentives for less income-generating behavior.
In that case, since the option wherein spending and taxation levels are roughly constant creates fewer such bad incentives than the option wherein low taxation levels today have to be compensated for by high taxation tomorrow, if borrowing is done in an excessive and/or non-counter-cyclical fashion then its effects will not only be non-equivalent to taxation, they will be clearly inferior.
Steve:
“I am 99% sure that Nick Rowe will agree with all of this.
I agree 90% with all of that. I would quibble over C. I would say that relative to the status quo where you had planned to leave your daughter a $1,000 inheritance, you have imposed a burden on your daughter at the margin when you spend it on wine instead.
You are quite right that the foreign/domestic issue is irrelevant.
“I don’t think we have any substantive disagreements, but I do want to insist that any “burden” is created by spending, not by borrowing. That was the point of my old post, and I stand by it.”
Sure, spending creates a burden on someone (absent free lunch cases), but the financing choice will determine who that “someone” is, unless it is offset by individual transfers going in the opposite direction (like Becker’s Big Daddy Theorem). For a given level of spending, if that spending is financed by borrowing rather than taxing that does create a burden on future generations, unless that burden is offset by Ricardian individual actions. And my example in my post showed this.
Landsburg:
You’re assuming that there will be no lost productivity growth on account of the government’s borrowing and spending, since you are also assuming that if they didn’t borrow, they would have taxed instead.
I will make a case that while internally consistent, I think that assumption is wrong if you are going to talk about the real world of government borrowing and spending versus taxation.
If we assume your example, of grandparents taking their additional incomes due to tax cuts, and giving it as gifts to their grandchildren, and that the government spends out of the funds they borrow from the market, then I will argue this will result in a loss of productivity from what it otherwise would have been, and hence real consumption will be lower than it otherwise would have been, and hence yes, our grandchildren will in fact be poorer as a result. I am making this case differently from the other attempts, so I’m not going to just parrot what you have already seen elsewhere.
So…
You assumed that if borrowing were lower, taxes would have otherwise been higher.
I will assume that if the government didn’t borrow and spend, then taxes would have NOT have been higher. My reasons are here:
http://www.thebigquestions.com/2012/01/03/actually-we-owe-it-all-to-ourselves/#comment-38972
To summarize, it’s because borrowing enables governments to collect more money than they otherwise can get through taxation alone, as the costs of borrowing can be shifted to future generations who can’t speak up for themselves, whereas the costs of taxation would have to be shifted to people who can speak up for themselves.
Since borrowing enables governments to collect more money than they otherwise could through taxation alone, it enables them to spend more today then they otherwise could spend. Governments love to spend money when the costs can be passed off into the future, after the spenders in government are out of office.
We should therefore eliminate the possible counter-factual you are assuming, which is “otherwise we would have had higher taxes instead.” Instead we should assume the counter-factual of “government borrowing and spending would have been lower.”
Government borrowing and spending results in a net loss of real productivity no matter if the borrowing is accompanied by tax cuts. This is because as government borrows out of the market pooling of savings, money that would have gone into production, goes to consumption instead (even if we assume the money the government gives out is all invested, there’s still economic losses incurred in the needless transfer). Since government does not itself produce, it is therefore consuming wealth without replacing wealth. The borrowed money that would have gone to production that satisfies consumers who are involved in production, instead goes to productions that satisfy consumers who are not involved in production, i.e. the state and those the state gives the money to.
Borrowing and spending by government redirects what would have been invested (market pooling of savings), which increases productivity and supply and goods and services in the future, to what is consumed or largely consumed instead, which does not increase productivity and therefore does not increase the supply of goods and services in the future. Combined with the assumption that borrowing enables governments to spend more than they otherwise could through taxation alone, we can conclude that government borrowing and spending brings about an increase in the ratio of consumption spending to saving and investment.
Now, let’s reintroduce your assumption of borrowing being matched by equal tax cuts. Even if we assume that the borrowing is matched by equal tax cuts, even if we assume 100% of those tax cuts are saved and invested, the fact that the government is able to spend more than it otherwise could, by virtue of borrowing, leads to reduction in the ratio of savings and investment to consumption. That leads to a net loss in productivity. Once the market pool of savings is spent by government, then that’s it, we are forever without the benefits that private savings and investment could have created.
Not only that, but we are also forever without something else, which almost every economist I read ignores, and that is the increased productivity that could have resulted by virtue of more capital existing and assisting future production in the physical sense. By this I mean the following. Suppose the government borrows and spends. Had those savings gone into production instead, of, say, a transport truck, then not only are we deprived of the transport truck itself, which is a loss of real wealth, but we are also deprived of everything that can be produced by virtue of there being an additional transport truck. And if that transport truck could have been used to transport materials that go into further transport trucks, then we are also deprived of those trucks, and so on.
Capital goods is to production in economics, as force is to acceleration in physics. It’s not just that we’re losing the truck when the government spends what it borrows, we’re also losing the exponentially increasing production that an additional truck can set into motion in the economy over the course of time just by virtue of being there.
“There seems to be a widespread assumption (at least among econo-geeks) that Ricardian Equivalence is likely to fail because people misperceive the effects of current tax cuts on future generations. There seems to be a further widespread assumption that all those misperceptions will be in the same direction. But why should that be? Politicians, journalists and bloggers admonish us every day that our grandchildren face disaster because of our government’s fiscal irresponsibility. Some taxpayers will take those warnings too lightly, and therefore undersave; others will take them too seriously and therefore oversave. The grandchildren of the first group will be impoverished by our debt; the grandchildren of the second group will be enriched by it. Who can say which group is larger?”
This response assumes that the government won’t counter-act people’s desire to save more, if they do decide to save more. I should emphasize that you can’t hold government spending/borrowing/etc as equal and then analyze various citizens actions. The government’s actions influence what citizens do, and citizens actions’ influence what governments do. If people save “too much”, what do you think the Keynesian inspired government is going to do? They’ll borrow/print more money for themselves and their friends, nullifying the savings on the part of the populace.
You see the average person indebted by something on the order of $44,000.
You see the economy is so messed up that any significant reduction in the rate of credit expansion will send the whole thing crashing down (sooner, rather than later where it will be bigger).
You see stagnating real wages.
It is way too inaccurate to assume constant government spending no matter what the savings rate of people becomes. I think at this point, those who are “paranoid” and save a lot are just going to be counter-responded to by the Fed who will inflate more and the Treasury who will go deeper into debt and spend more.
On a closing note, I will just say that my impetus for writing all the above is your unfortunate “blame the victim” mentality you had when you said that if grandparents don’t save for their grandchildren due to the tax cuts, then it’s their fault. Well, yes, to a degree it is their fault, namely, their decision to consume rather than save, but the grandparents had no involvement with the government borrowing and spending, and that by itself reduces productivity, and thus impoverishes those grandparent’s grandchildren. That is NOT the fault of the grandparents.
The government borrows at a significantly lower rate than most of us get to. Please let them borrow on our behalf.
Here’s another thought-experiment.
Suppose that only people over 30 can vote. And suppose we have a budget that will provide benefits for the over 30’s, and we are arguing about whether it should be financed by a tax on the over 30’s or financed by a tax on the under 30’s.
No economist would deny that a tax on the under 30’s, relative to a tax on the over 30’s, would create a burden on the under 30’s. (But that is exactly what many economists deny when we talk about a tax on the under 0’s. They start talking about the impossibility of time travel.) Unless the over 30’s make offsetting transfers to those individual under 30’s they care about.
Some voters will want a tax on the under 30’s. And the other voters won’t care, because they can offset the burden on the under 30’s by making individual transfers.
Puts a whole new light on all public finance.
Steve L: ‘I do want to insist that any “burden” is created by spending, not by borrowing’
This is a point you’ve taught me before, and it is the one that I believe Krugman is trying to obfuscate by putting emphasis on the debt. His logic seems to go like this: i) I know you are upset about spending because of the debt; but ii) you shouldn’t worry about debt because we owe the money to ourselves; therefore iii) you shouldn’t be concerned about the spending.
Suppose the debt is used not to fund a tax cut but to build mansions for government officials that would not otherwise have been built (that is : would not have funded by tax if the money was not borrowed instead). What would people who care about their grandchildren need to do then ?
OK, after Steve’s most recent comments, I think I understand the discussion better.
Steve’s main argument goes like this:
Asking the government to (a) tax you now and spend is EXACTLY like asking the government to (b) borrow and spend and you’ll bequeath extra money to your daughter.
So, how can you prefer (a) to (b) if they’re the same thing?
You can only complain about (b) on behalf of your daughter when you feel that you CANNOT bequeath extra money to your daughter. But then how can prefer (a)? If you don’t have the money to save for (b), how can you have the money to be taxed for (a)?
If you’re worse off either way, then the problem, obviously, must be the SPENDING, not how it’s financed.
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Which means Nick and Steve’s discussion goes something like this:
Nick is saying: “If you assume the current generation goes into debt and thus consumes more than it produces, then the debt is a burden on future generations.”
And Steve is saying: “Right. But the problem is not really the debt. The problem is that the current generation consumed more than it produced! The debt is a symptom of the burden, but not its cause. If the current generation doesn’t consume more than it produces, then it must save and bequeath more than the amount of the debt, the next generation is BETTER off.”
To which I might reply to Steve: “Agreed. But more debt is highly correlated with more spending, so your point is mostly academic.”
To which I think Steve would reply: “How do you know that? See the last paragraph of my original post. Maybe more debt leads to LESS spending, because people OVERSAVE in response to the debt.”
To which I say, “If oversaving happens, I agree with you that it doesn’t make sense to look at debt as a proxy for spending. But the oversaving hypothesis doesn’t sound plausible to me.”
Murphy has a post up http://consultingbyrpm.com/blog/2012/01/my-resolution-of-the-dastardly-debt-debate.html It is interesting and well done, but again sidesteps the question of the spending. Murphy spends on a big meal for Abraham, thus screwing Isaac. But if you spend on a big meal for Isaac instead then he isn’t screwed. It was the *extra spending to benefit Abraham rather than Isaac* which screwed Isaac.
Oh how sharper than a serpent’s tooth than to have a thankless parent.
In this debate, it is helpful to remember what the “equivalence” in Ricardian equivalence means. It is equivalence, for all intents and purposes, of taxes and borrowing. In such a world, financing is irrelevant. It does not mean that burdens cannot be shifted. If the government spends more and taxes me, I can shift the burden to future generations by reducing my bequest in order to pay my taxes. I do not need the government to deficit finance the spending for me to do that.
But financing does matter–non-equivalence–when bequests are zero (greedy households.) A greedy household cannot shift the burden of tax-financed government spending to future generations, because it cannot make its bequest negative to pay the tax. (The burden of insolvent estates is borne by current creditors, not future generations.) Now it takes government to debt finance spending in order to transfer the burden.
Steve:
Do you have any more writings on this concept?
“I do want to insist that any “burden” is created by spending, not by borrowing”
They both suffer from this mistaken idea that debt is harmless. This is all like some theoretical argument that jumping off a cliff is fine, while ignoring the pile of dead bodies at the bottom.
Andrew:
Do you have any more writings on this concept?
“I do want to insist that any “burden” is created by spending, not by borrowing”
I have so many more writings on this concept that my regular readers are probably oversatiated by now.
Chapter 11 of my book The Armchair Economist and Chapter 15 of my book Fair Play are devoted entirely to this notion. So are many of my blog posts (enter the word “deficit” or “debt” into the search box) and old Slate columns.
There was a pretty good reason Ricardo didn’t believe in Ricardian equivalence – the fact that he observed how people actually behaved.
Your example merely shows that you can invent an imaginary world in which some people’s grandchildren don’t suffer direct financial loss as a result of government debt. That world would seem to have a lot more imaginary dimensions than real.
Landburg: “Do you disagree with A, B, C, or D?”
The example you put up is not exactly what we are talking about. In the example, you talk about an action of an individual. The original discussion is about an action of the government. If the government behaves in such a way that overall people use more of their money, rather than saving them for their grandchildren, then yes, I would say this “imposes a burden” on the grandchildren”. In parallel, I would say that if the government behaves in a way such that people save more money for their grandchildren, I would say this “benefits” the grandchildren.
Steve,
I want to reiterate a point made by Nick Rowe that I think is worth emphasizing. First, in your post you define an individual as Ricardian if he (1) recognizes that consuming more stuff today leaves less for his grandchildren, and (2) cares about the consumption of his grandchilren. You then argue that Ricardian Equivalence doesn’t need to be assumed. You do this by relaxing (2) and showing that still no one should care about the debt “burden”.
Nick says “Okay, I made a strong claim. I don’t need (2) but I do need (1).” That is, now Nick is arguing that government debt is too a burden on (some of) our grandchildren, unless you believe in (1). He challenges (1) by arguing that some people may read the New York Times and be convinced that consuming more today does NOT affect the consumption of our grandchildren.
Looking over your post one last time I see that you addressed this in point number 3. (Always two steps ahead you are.) So would you say that someone could be a deficit hawk if they thought (1) was false and that they believed (or better, had evidence) that the net effect was negative?
@Roger: No, debt you cannot afford, necessitated by spending you cannot afford, is the problem. If I have $1 in the bank and borrow $1 I am fine. If I have $1 in the bank, and borrow $1M for a bottle of wine to drink I have a problem.
As several have pointed out, the easy credit led to Greece borrowing easily and then being able to spend foolishly. Remove the foolish spending though and the borrowing would do no great harm.
SL: “I have so many more writings on this concept that my regular readers are probably oversatiated by now.”
Oh I dunno, I see some regulars here who don’t see it. That’s a caustic way of putting it, but in fairness there have been a lot of points raised — in error mostly but still raised — that neither you nor Nick have *directly* addressed.
@KenB: So when Steve said that no one should be distressed by the debt burden, he meant that no one should be distressed provided that the borrowed money was invested in a suitable way. Right?
I have now read Steve’s previous post. Steve’s previous post is a (nice clean) restatement of Ricardian Equivalence (that deficit-finance and tax-finance are equivalent). There is nothing (logically) wrong with Steve’s last post, EXCEPT: Steve thinks he is agreeing with Paul Krugman. He isn’t. Paul does not agree with Ricardian Equivalence. Paul believes that bond-financed tax cuts increase aggregate demand. (That also explains why Steve does not agree with Paul on the external debt).
Steve,
Interesting discussion. I may be missing much of the subtlety here, but it seems to me that to the extent that resources are actually consumed now, they will not be available for consumption in the future. Otherwise, why worry about peak oil?
Moreover, your response to Nick Rowe fails to address the “competitive consumption” issues that “liberals” now like to raise in order to use income inequality as a replacement for the traditional concern for actual poverty. To apply their argument in this area: if govt borrowing leads to increased incomes, I’ll have to pay a lot more for housing in a decent school district, more for tutoring and other enrichment programs to get my kids into a top school, etc. All that competitive spending to care for my kids reduces my ability to save for my grand-kids.
Nick, Steve didn’t say that taxes and debt have the same effect on the economy. His point was that each individual can choose to leave their bonds as an inheritance rather than sell them, if they believe there’s a burden and want to offset it for their family. That’s not really an economic claim (a claim about behavior) at all.
As some others have noted, I might care about grandchildren other than my own. But let’s suppose that I only care about my own. Even so, humans don’t reproduce asexually. Each of my grandchildren will really be 1/4 mine and 3/4 other people’s. Each grandchild’s inheritance depends on what I did *and* what three other people did. (I might have some influence over the grandmother with whom I procreated, but probably little or none over the other two grandparents.) So, even if I’m a good Ricardian, I have grounds to worry that my grandchildren will suffer from their other grandparents’ lack of foresight. Or am I supposed to save enough to cover for them, too?
To add to Glen’s point: If one assumes a static population of potential taxpayers and a form of savings that grows at the same rate as the interest on the bonds the government sold then an individual who had more than 1 grandchild (or more than 4 if they only care about their biological share) would actually be better off paying the tax.
Could Steve have made an error of basic mathematics here ?
Plus what about all those in the later generation who have grandparent that didn’t care or didn’t invest enough ? If there is even one of these doesn’t Nick and Bob’s point still stand and the debt still imposes a burden ?
Bennet Hastelton: “Plus, there are people alive today who will have no grandchildren. They can spend their tax cut and the burden will be spread across future taxpayers.”
I would not get hung up about biology. Whether I leave my estate to my grandkids, charity, or the U.S. Treasury, I can ease the burden of my share of budget deficits (which, BTW, I would argue is zero). Since I have no children, the first option is not available, but my nieces would argue great nieces/nephews are an appropriate replacement. Since I regularly pay taxes to send other’s kids to school, to feed and clothe them, all to see other’s get a tax deduction for having them, I feel no guilt.
David:
“Since I regularly pay taxes to send other’s kids to school, to feed and clothe them, all to see other’s get a tax deduction for having them, I feel no guilt.”
Taxes are redistributive, and to the extent taxes fall on savings, it reduces investment, which means in the long run, the quantity and quality of schooling, food, and clothes going to those children is reduced.
Then there is the fact that private charity could replace taxation as the means by which money goes to those who are more vulnerable and impoverished, which then changes the incentives for people’s reproduction choices (e.g. at the margin, if there is “guaranteed” schooling, clothes, food, etc financed at taxpayer expense, those of lower income tend to have children versus not having children). People do not have a right to have children financed at taxpayer expense.
David:
“Since I regularly pay taxes to send other’s kids to school, to feed and clothe them, all to see other’s get a tax deduction for having them, I feel no guilt.”
Taxes are redistributive, and to the extent taxes fall on savings, it reduces investment, which means in the long run, the quantity and quality of schooling, food, and clothes going to those children is reduced.
Then there is the fact that private charity could replace taxation as the means by which money goes to those who are more vulnerable and impoverished, which then changes the incentives for people’s reproduction choices (e.g. at the margin, if there is “guaranteed” schooling, clothes, food, etc financed at taxpayer expense, those of lower income tend to have children versus not having children). People do not have a right to have children financed at taxpayer expense.
Sorry Steve, don’t know what happened but my comments were posted twice.