Taking the biscuit – Paul Krugman edition
‘Take the biscuit’ – British idiom meaning “to be particularly bad, objectionable, or egregious” (Wiktionary)
Like Bob Murphy, I’m almost rendered speechless by Paul Krugman’s new post on debt*. The whole economics blogosphere went through this great big massive argument about Krugman and Dean Baker‘s claim that debt cannot by definition be a burden to future generations. Almost anyone who is an anybody wrote about it, and a whole lot of nobodies as well (including myself). A lot happened in that time. Nick Rowe showed very clearly that the apparent identity claim they were making was wrong, and Bob wrote a whole semi-Socratic dialogue on the subject, with like 12 different parts (and enough wit to fill a full sitcom run on NBC**). For those of you who missed out, here’s a quick recap of the arguments. Krugman and Baker make the observation that debt is money someone owes to someone else. It is an asset as well as a liability. So, as long as debt is held domestically, it doesn’t make any sense to say that debt can be a burden to future generations, because it’s just some of them paying money to some of the others. Within a closed system, it’s a tautology to say that the debt cannot be a burden to the people within the system, because the assets equal the liabilities.
But when you introduce overlapping generations, this identity breaks down when we make the distinction between cohorts and time periods. Here is my version of Nick’s argument, which I posted last week
Assume any person alive produces 100 apples a year. In year 1, Annie is the only person alive. The government says ’100 free apples for Annie’! This is financed by the government borrowing Annie’s apples, promising to give her 110 next year (10% interest). Annie produces and consumes 100 apples.
At the beginning of year 2, Annie gives berth to Bessie, and there’s been a 10% increase in apple productivity to 110 apples. Annie and Bessie each produce 110 apples. Annie’s bond matures and needs to be paid back. The government finances the 110 apples it owes to Annie by issuing a bond bought by Bessie. In year 2, Annie eats 220 apples, Bessie none. At the end of year 2, Annie dies of old age.
In year 3, Colin is born to Bessie, and apple productivity increase by 10% to 121 apples each. Bessie’s bond matures, but since Colin is a man and can’t give birth to anyone, and Bessie will die at the end of the year, there’s no market for a bond as there’s no prospect for it being paid back. Therefore, the government taxes Colin and takes his 121 apples and gives them to Bessie. Colin gets no apples, and Bessie gets 242. Bessie dies at the end of the year.
In year 4, apple productivity increases by 10%. Colin produces and consumes 133.1 apples and dies at the end of the year.
Had the government not issued any bonds, Annie would have eaten 210 apples rather than 320. Bessie would have eaten 231 instead of 242, and Colin would have gotten 254.1 apples rather than 133.1. The debt accomplishes a transfer of consumption from Colin to Annie even though they weren’t alive at the same time, and even though (in any given year) the output was exactly the same and was consumed only by people alive at that time.
When you factor in multiple overlapping generations, it can too be the case that no output is transferred between time periods, but future cohorts lose out. In my example, Annie really does eat apples at Colin’s expense. The only way that this wouldn’t be the case is if the bonds were voluntarily bequeathed from Annie to Bessie and Bessie to Colin, rather than them purchasing the bonds. Which is basically assuming Ricardian equivalence, an assumption which Krugman never made and believes is dubious anyway. Game, set and match.
Krugman didn’t respond at all to this line of argument. And that’s OK, if a little annoying as he was responsible for the whole debate in the first place (not that I’m complaining, I initially would have been in full agreement with him until Nick Rowe showed me the error of my ways). But then yesterday he criticized an op-ed which plainly misunderstood his original argument. Now I would be the first to say that Krugman was obviously well within his rights to point out that the piece completely misunderstood his argument, but he then merely repeated the original assertion, as if nothing else had happened in the interim!
What I was actually saying, of course, is that debt is a liability that we pass to the next generation — but it’s also an asset that we pass to the next generation.
No. This only works if you don’t have overlapping generations, as Nick’s/Bob’s/[my] examples clearly demonstrate. In order for the debt to be harmlessly ‘passed’ to the next generation, it requires an actual voluntary bequest, with the older generation deliberately foregoing consumption.
Now, I’m a nobody and I don’t expect what I write to make any difference to anyone. But as primarily a consumer rather than producer of blog posts, it is still completely exasperating when this was what everyone was talking about and the person who started the whole thing (and said that to hold any other position was ‘nonsensical‘) failed to respond at all, except to criticize the seemingly weakest possible example of someone challenging his position.
If anyone else sees it any other way, I’d really like to know because I don’t think I’m being unfair here – unless my expectations about academic civility in the blogosphere are unreasonably onerous.
*Still managed to crank out 943 frustrated words, though…
**I mean this as a
complement compliment (woops!) to Bob