Maybe/hopefully the last thing I have to write about the ‘burden’ of public debt
[UPDATE: it does appear from reading the comments sections on a number of posts on this debate that pretty much everyone has accepted Nick Rowe’s counter-example to the identity claim propounded by Dean Baker and Paul Krugman. However, it seems to me that most people, even if they have accepted the counter-example, have not yet seen the implications of it. That is what this post is (mostly) about.]
Ok, let’s try a slightly different way of thinking about this. Suppose the government wants to spend more money on x, where x could be anything. Let’s think about what happens if the government finances x through taxation, or through bonds. Assume for the sake of argument that the spending on and financing costs of x are evenly distributed through the current population, and that there are no incentive effects changing total output. Whether x is paid for through debt or taxation, money is initially just moved around the current population. The difference in the case of bonds is that everyone is left with an asset (bonds) and a corresponding liability (being part of the tax base), which initially cancel each other out.
Then, the next cohort is born and become part of the tax base. The older cohort still hold the same amount of bonds, but the liability is now spread out between both cohorts. So the older cohort now have a net asset, even though they haven’t had to forego any consumption to obtain it, and the younger cohort a net liability. If the younger cohort purchase the bonds from the older cohort, all does not end up equal – because the older cohort did not have to forego consumption to end up with bonds, whereas the younger cohort did.
So an increase in public debt does impose a burden on future cohorts (relative to tax financing), unless either a) there is a corresponding increase in bequests (i.e. assets the younger cohorts did not have to forego consumption in order to obtain) or b) the nominal interest rate on the debt is less than the rate of NGDP growth, in which case the debt can be rolled over to future cohorts forever without a tax ever being instituted (Samuelson 1958, H/T Nick Rowe). If it was the case that b) was true and a) was false, the first cohort have still increased their consumption from what it otherwise would have been, just not at anyone’s expense (although future cohort’s consumption would shift forwards in time, because they purchase bonds from the older cohort allowing that cohort to consume, but then do the same trick to the next cohort etc.).
But if you think a) is true, then whether or not the debt is held domestically or internationally is irrelevant, because it’s the increase in bequests to offset the future cohort’s liability that makes the difference no matter who holds the asset. I see no reason to think that marginal changes in bequests, insofar as they happen, would depend on whether the marginal debt was domestic or international (it would involve equal foregoing of consumption on the part of the older cohort either way). Welcome to Planet Landsburg*.
The whole debate boils down to this: unless you believe that corresponding marginal changes to voluntary bequests occur in response to marginal changes in public debt, deciding what mix of debt and taxation to plump for will have intergenerational distribution effects. Of course, it could be entirely appropriate that future people should foot some of the bill for the schools we build for them. But that is what would happen if we were to finance government spending with debt rather than taxes (unless you believe in something approximating Ricardian equivalence, or unless the debt is ponzi-sustainable a la Samuelson 1958).
[Note: This bit is more speculative, just throwing it out there] Furthermore, if we relax the assumption around the distribution of the tax burden to something more approximating reality, I think the intergenerational distribution effect actually becomes even more pronounced. This is because people living off their assets have lower taxes, and therefore form a relatively smaller part of the tax base. So when older cohorts are winding down their assets (i.e. selling bonds) in retirement, they are actually in a substantially better position (and the younger cohort in a worse position) than if you assume even distribution of taxation.
*For the record, I don’t (as an empirical matter) believe we live on Planet Landsburg, but would be delighted to be proven wrong