Home > Economics > A note on the ‘debt burden’ debate

A note on the ‘debt burden’ debate

[UPDATE: My argument is completely different to Nick Rowe’s, and relies on distrubitional issues between current bondholders and taxpayers and how they are not the same people. Which, on the terms of the debate, I believe has been assumed away. His argument is much more brilliant and I will post something on it soon.]

I know I’m a little late to the party… but I think people have been missing the nub of the disagreement, which I’m pretty sure is semantic. Here’s Nick Rowe on the question of whether government debt ‘burdens’ our grandchildren (he has links there for those of you not up on the debate):

There are 4 possible positions to take on the debt. One of them doesn’t make sense; the other 3 do. Which of those 3 is right is an empirical question.

Here are the 4 positions. I gave each one a name. I made up the quotes.

1. Abba Lerner. ‘The national debt is not a first-order burden on future generations. We owe it to ourselves. The sum of the IOU’s must equal the sum of the UOMe’s. You can’t make real goods and services travel back in time, out of the mouths of our grandkids and into our mouths. The possible second-order exceptions are: if we owe it to foreigners; the disincentive effects of distortionary future taxes; the lower marginal product of future labour if the future capital stock is smaller.

2. James Buchanan/uneducated person on the street. ‘The national debt is a burden on future generations of taxpayers. Foreigners are basically irrelevant. Any second order effects of distortionary taxes and lower capital stock are over and above that first order effects of the taxes themselves.

3. Robert Barro/Ricardian Equivalence. ‘The national debt is not a burden on future taxpayers (except for the deadweight costs of distortionary taxation) but only because ordinary people take steps to fully offset the burden on future generations by increasing private saving to offset government dissaving and increasing bequests to their heirs to offset the debt burden.

4. Samuelson 1958. ‘If the rate of interest on government bonds is forever less than the growth rate of the economy, the government can run a sustainable Ponzi finance of deficits, where it rolls over the debt plus interest forever and never needs to increase taxes, so there is no burden on future generations.

Nick thinks that 1 is false and the truth of 2-4 is an empirical question. I have spent a lot of time on the sidelines trying to decide what I think, and have held at least three different positions on this since the recent debate started. As of right now, I also think 1 is false – but in all honesty I actually changed my mind about halfway through writing this. Here is why I agree with Nick (although I’m not 100% sure our reasons are exactly the same).

1 basically has the assumption

‘assume for the sake of argument that output will be the same in each period regardless of whether the government borrows/taxes/spends’

One might say – if that is the case, how could government debt be a ‘burden’? All transactions stay within the system, so everything must cancel out… right? Wrong. Taxation is coercive. It is something you have too pay regardless of whether you want to or not. It is a ‘burden’. Governments borrow on the back of their ability to tax in the future, and people freely give the government money on the basis that it has the ability to forcible extract that money (plus interest) from future taxpayers. Government borrowing that is not ‘ponzi sustainable’ in the sense of Nick’s proposition 4 will eventually mean higher taxes. Borrowing rather than taxing takes what would otherwise be a burdensome coercive act (tax paid by current people), turns it into a free exchange (funds willingly supplied) on the basis of a future burdensome coercive act (tax paid by future people).

Of course, the opportunity cost is the same either way and lies in the first period, with current people either having resources forfeited to the government through taxation, or through crowding out in the case of borrowing (assuming full employment). But the opportunity cost of government commandeering of resources is only one sense of the word ‘burden’*. And, indeed, a reduction in output (even though it is assumed away) is also only one sense of the word ‘burden’. I think this is a case where everyone is pretty much in agreement about what really happens, but disagrees about what to call it. Everyone agrees (absent sustainable ponzi finance) that more taxes will be paid eventually if the government increases spending via borrowing. I think that counts as a ‘burden’ on the future generation, even though an equal amount is received by bondholders (who are also members of that generation). Paul Krugman, I think, doesn’t believe that counts (prepared to be wrong on that, seeing that mere mortals such as myself don’t get the chance to ask such things). Whether or not you agree should depend on whether you think taxation (considered independent of whatever effects it has on output) is always and everywhere a ‘burden’ on the group, even if it gets redistributed back to members of the same group. That’s the nature of the disagreement, and it’s over the semantics of ‘burden’**.

What I think has been conspicuously absent from the debate is trying to add in utility, rather than just using output (like Nick’s ‘apple economy’ models). But that’s really, really hard to do even on a theoretical basis, because people have inconsistent intertemporal preferences. If Richard today discounts the consumption of Richard in a year’s time by 10%, but Richard in a year’s time enjoys an apple as much as he would today, what’s the correct way of scoring ‘utility’ in a way that is time-independent? If we imagined that “Richard in a year’s time” was a different person to “Richard”, and therefore of equal moral value to “Richard” (rather than another version), I’m inclined to say that it seems we should be good consequentialists and value his consumption at par with “Richard” today (ignoring Richard’s intertemporal consumption preferences). Therefore, no discounting of utility would be allowed on a moral basis (i.e. the moral fabric of the universe consists of time-independent value). Which would make this a lot easier… but I haven’t made up my mind on the matter.

_______________________________________________________________________________________________________

*I think I agree with Steve Landsburg, in that I read his argument about Ricardian equivalence potentially holding at an aggregate level meaning that the domestic/foreign dichotomy a la Krugman is wrong. I see Steve as essentially agreeing that government borrowing creates a burden on future generations in the sense I have identified, except that rather than bondholders v taxpayers it is (to caricature) considerate/knowledgeable savers v selfish/ignorant spenders. I would say he has provided an expansion of my/Nick’s position, rather than a disagreement.

**The only exception that springs to mind would be if each individual when taxed was literally writing a cheque to themselves. But of course, they’re not – even if (arguably) it is true to say that they are at an ‘aggregate’ level. I may be inclined to agree with Krugman if you assumed that each individual gets back exactly what they put in. Otherwise, I think it is appropriate to describe the group as ‘burdened’ by a tax.

Categories: Economics
  1. November 25, 2013 at 10:44 am

    Quality articles or reviews is the important to attract the users to pay a quick visit the web site, that’s what this web page is providing.|
    Michael Kors Outlet http://www.demigraphics.com/

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: