In What Sense Does Government Debt “Burden”?
Robert Skidelsky runs through and corrects five fallacies about debt that one often hears lazily deployed in the public arena. His third correction:
…the national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders. This may have disagreeable distributional consequences. But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had.
Nick Rowe had a post a couple weeks back on this same topic that might be of interest to some MMTers and Abba Lernerites. Rowe lays out four different positions on the question of whether or in what sense the national debt imposes a burden on future generations, the first of which (it’s labeled “Abba Lerner”) sounds like it’s supposed to represent functional finance. Rowe is ultimately dismissive of the functional finance approach, but you’ll find quite a bit of lively discussion in comments and a number of links to the ongoing debate.
For some background reading on functional finance, Thorvald Grung Moe recommends this short piece from 1943 by Abba Lerner himself: “Functional Finance and the Federal Debt.” It’s tightly argued and written in a reasonably jargon-free style that’s so rare in economics or public policy writing.
For those who want more of the basics and central contrasts, Mathew Forstater’s primer on deficit “doves,” “hawks,” and “owls” (beginning on p. 6 of this working paper) is a helpful place to start.
Update: Nick Rowe graciously engages in the comments section below.
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Robert Skidelsky: “the national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders.”
That is flat out wrong, as I show in my first 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
Skidelsky again: “But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had.”
That may or may not be true, depending on whether monetary policy is done properly, and on the particular way in which the deficit is cut.
But thanks for the link!
i wish my parent’s generation wouldnt have left me with the great burden imposed by the interstate highway system…those country backroads with a 25MPH speedtrap at each intersection were just fine…
rjs: Yep. The benefits to future generations of government investment in good, productive, long-lived assets like roads, bridges, schools, sewers, water, etc., can more than offset the burden on future generations of the taxes needed to pay for them. That’s the right way to look at it.
Nick, I don’t understand. You agreed with JKH that debt is a burden *only if* future taxes are a consequence of that debt. But you continue to make statements, such as the one above, implying that taxes will eventually be needed to pay back the debt. I’ll even agree with your conditional position here, against this blog, but please make it clear that the condition is one that *assumes taxes.* The next step is debating when debt requires future taxes, and it’s that the debate we haven’t all settled, and the more important one.
Nick Rowe:
It would be one thing if you would say that “within a certain set of conditions, this is wrong”, but no, you make ridiculous blanket statement like this:
“That is flat out wrong, as I show in my first post.”
Let me remind of you some of the conditions under which your model holds:
1- deficit spending benefits only the first generation (no infrastructure or education type of spending);
2- real interest rate is constanly above real growth;
3- the new generation ALWAYS accepts to buy government bonds from the previous generation at their nominal value.
ALL of these conditions are plain ridiculous in the current context. In particular, you have been less than forthcoming regarding condition 3; if you drop this condition -I am sorry to tell you that in the real world bonds rarely sell at their nominal value- your entire analysis collapses.
Your model does not show anything other than your ideology-driven bias against deficit.
Agreed. Though I’d put it slightly differently and as follows. Nick’s entire thesis is based on the assumption (no reasons given) that oldies sell bonds to youngsters. That is an assumption guaranteed to produce the answer he wants.
Ralph: Are you assuming Ricardian Equivalence? Are you assuming that the current generation will save all of a bond-financed tax cut, and pass all of those increased savings plus accumulated interest as a bequest to the heirs?
If so, then you are logically correct. There is no burden on future generations because current generations offset that burden 100% by increasing bequests.
You are then logically correct on the debt burden question, but you should immediately turn in your membership card for any version of keynesian/MMT macroeconomics that believes that bond-financed tax cuts stimulate demand.
Do you believe in Ricardian Equivalence or not?
Nick, Thanks for your response. Re your first question, I make no assumptions as to what proportion of bond financed tax cuts are bequeathed / sold to youngsters. I’m happy with a 99:1 ratio or a 1:99 ratio. My central point is that whatever amount is sold, and assuming oldies do not change their planned retirement income, there will be no effect on the burden imposed on youngsters or the “next generation” to put it another way.
Re interest rates, these are a red herring I think. Interest rates are currently around zero and real interest rates have never been anywhere near the 10% figure used in your illustration. So can we forget interest?
Re the idea that bond financed tax cuts raise demand I fully accept that’s a likely effect. But this is not allowable given your very reasonable assumption that the economy is a full employment. Thus any government that wants to do “bond financed tax cutting” at full employment will probably just have to implement some deflationary policy at the same time to counteract the demand raising effect (perhaps an Abba Lerner type “raise taxes a bit and confiscate money from the private sector”).
As to Ricardian equivalence, it makes me throw up (to use technical language). Bill Mitchell attacked the whole idea in a recent post, plus see my own attack on the whole idea – 1st comment after the post. Plus see my criticisms of the whole idea on my own blog.
Bill: http://bilbo.economicoutlook.net/blog/?p=13236
Me: http://ralphanomics.blogspot.com/2010/10/ricardian-equivalence-is-nonsense.html
Ralph: “My central point is that whatever amount is sold, and assuming oldies do not change their planned retirement income, there will be no effect on the burden imposed on youngsters or the “next generation” to put it another way.”
OK, now work backwards from that assumption, and figure out whether, in order for that to be true, you need to assume that all of the bond-financed tax cut is saved. Then figure out whether or not you were implicitly assuming Ricardian equivalence, and had unwittingly swallowed something that would make you throw up if you knew you had swallowed it.
My model assumed 10% interest per generation, not per year. Since my people live two periods, that works out at about 0.3% interest per year if real people live to 70. (Not that the actual number makes any difference to my argument of course, as long as the interest rate is above the growth rate, and I clearly stated why that assumption matters.)
Jos: “Your model does not show anything other than your ideology-driven bias against deficit.”
I suggest you make the same stupid accusation against Robert Waldmann, after you have read him making the same argument I am making, using a similar model:
http://www.angrybearblog.com/2012/01/educating-dean-baketr.html
Only if you believe in Ricardian Equivalence can you argue that the next generation inherits the bonds as well as the future tax liabilities. But the people making that argument do not believe in Ricardian equivalence, so they are being logically inconsistent.
Sure, logic is a right-wing plot.
wh10: the position I am attacking is the logical fallacy that the debt cannot be a burden on future generations, even if it implies higher future taxes, (aside from debt to foreigners, distorting taxes etc.) because “we owe it to ourselves”. Skidelsky repeats that logical fallacy in the passage I have quoted above.
Once that logical fallacy is out of the way, and when we understand that future taxes, and/or default, and/or default through unanticipated inflation constitute a burden on future generations, then we can look at the real questions: are there offsetting benefits that might outweigh that burden on future generations? is it possible that the government might be able to roll over the debt+interest forever without increasing taxes and/or defaulting and/or defaulting via unanticipated inflation?
Again: all I need is one counterexample to explode a logical fallacy. And my model provides that. And those conditions 1,2,3 are sufficient, not necessary conditions.
Mr Rowe,
I am just being forthcoming about the conditions under which your model/conclusion holds, so that we can have a levelheaded discussion rather that using blanket statement like you did in your first comment @ Jan 23, 5:31 PM.
Since you refused to expand on condition #3 that I alluded to in my initital comment, I will.
You implicitly assume in your scenario that the new cohort willingly and constantly buys government bonds held by the previous cohort at their nominal value (plus interest). In short, in your scenario, bond price never changes. Do away with this assumption, and your analysis collapses like a house of cards.
For example, if cohort 2 refuses to buy bonds from cohort 1, so that bond price tends toward zero, then there will be no burden to subsequent generations and no gain for cohort 1. All the government will have to do in this case is to redeem the bonds with a nominal value of 100 apples at a symbolic price of 1 apple (and taxing cohort 1 correspondingly).
Even more interesting, imagine that cohort 2 buys bonds from cohort 1 with a nominal value of 100 apples at a price of 1 apple and cohort 2 is able to sell these bonds to cohort 3 at their nominal value (100 apples), then the government deficit that took place in cohort 1 will be of highest benefit to cohort 2, and will bring little to cohort 1 .
In short, play with the desire to save of the various cohorts in your
model, and you’ll be able to dictate the conclusion. Clearly, in your post, you have dictated the conclusion that you want.
Jos:
1. It is in the collective interest of the young generation to form a buyers’ cartel and exploit their monopsony power to force the price of the bonds they buy down to zero. But it is in the individual interest of each individual person to defect from the cartel and buy up lots of bonds at one penny on the dollar. The cartel will fall apart. That’s why we don’t see this happening.
2. However, the young generation might vote in a government that decides to default on the debt (if they can outvote the old bondholders), which accomplishes essentially the same thing.
3. Any future generation that does default on the debt, rather than it or a subsequent generation paying taxes, pushes the burden of the debt back to the previous generation, who are now stuck holding worthless bonds that they had previously bought off the previous generation.
4. The only way to use default to prevent a burden on any future generation is to make default immediate, so the same generation that gets the bond-financed transfer payment also suffers the burden of default.
5. But a bond that immediately defaults won’t be purchased in the first place. So there is no bond-financed transfer payment to begin with.
By the way: did any of you MMT guys read down to the bottom of my post that Michael kindly linked to above? I wrote this:
“And if I could only get my head around that question, I might come up with something that would make both Scott Sumner and the MMT guys very happy indeed.”
Read the post to see the question I’m trying (and failing) to get my head around. It might interest you guys. And the answer might really matter.
Mr Rowe:
I am not talking about default, cartel or monopsony or anything like that, I am talking about change in bond prices as a result of change in demand (change in desire to save).
What would happen if you impose that Cohort 1 has zero desire to save from the get-go (no desire to hold on their bonds)? Response: Inflation, and no burden on Cohort 2.
You would note that change in desire to save is a MMT concept since in MMT terminology, M*V=P*Q, where M is net financial assets of the non-government sector and V is the desired leveraging of the non-government sector. In you scenario, you impose that V always cancelled out M for any cohort irrespective of the size of M (and M is compounding at 10% at each cohort!).
No wonder why your model leave a bad aftertaste from a MMT perspective: it seems that you have engineered V to reach a given result. From a MMT perspective (nevermind that the deficit is created in a period of full employment), if you would hold onto you assumption that V always cancel out M indefinitely, the government would never have to tax anyone, and therefore there would not be any burden on future generation.
Jos: “You would note that change in desire to save is a MMT concept…”
No I wouldn’t. A change in the desire to save is a concept that is used in a very wide variety of economic theories.
“What would happen if you impose that Cohort 1 has zero desire to save from the get-go (no desire to hold on their bonds)?”
If they have no desire to save even at a higher rate of interest or higher level of income then you can’t get a bond-financed tax cut in the first place. So you can’t even ask the question of whether a bond-financed tax cut would impose a burden on future generations.
(Plus, if there is no desire to save, you couldn’t even have an MMT argument in favour of a bond-financed tax cut to stimulate demand because the desire to save is too great.)
Mr Rowe,
You wrote:
“No I wouldn’t. A change in the desire to save is a concept that is used in a very wide variety of economic theories.”
Agreed, I should have said “is also a MMT concept”…
You wrote:
“If they have no desire to save even at a higher rate of interest or higher level of income then you can’t get a bond-financed tax cut in the first place.”
Precisely. And you could go on playing with the “desire to save” of the various cohorts by assuming that Cohort 1 has a relatively high desire to save, Cohort 2 has no desire to save whatsoever, Cohort 3 has sky-high desire to save… etc. While doing this, please enjoy the spectacle of watching the initial result of your model being annihilated.
Jos: remember where this is all coming from. Some economists argue that it is impossible for the debt to impose a burden on future generations (investment, distorting taxes, debt to foreigners aside) because “we owe it to ourselves!” and “you can’t eat today the apples produced 100 years in the future!” and “If future generations pay the taxes they are paying them to themselves as bondholders!”. You must have heard lots of arguments like that if you hang around MMT blogs!
If someone says that something is impossible, then all I need is one counterexample to show they are wrong.
Basically, and somewhat ironically, I have shown that the Functional Finance people are doing the accounting wrong!
Can you think up another example where future generations are better off? Of course you can! Here’s a nice simple one, where all future generations are better off:
Assume that everyone lives two periods, has an endowment of 100 when they are young and 0 when they are old. And that they would like to consume equal amounts when young and when old, because their utility functions are U=ln(C1)+ln(C2). And assume that there are no other assets of any kind in this economy, and apples cannot be stored. Assume zero growth. A bond-financed transfer of 50 apples will make every single generation better off, because now they consume {50,50} instead of {100,0}.
Notice that in this simple model the rate of interest before the bonds are introduced is minus infinity (less than the growth rate). After the bonds are introduced it’s 0% (equal to the growth rate).
The above model is equivalent to Samuelson 1958.
Your model above is a more complex example. I don’t need that extra complexity.
Mr Rowe:
You wrote:
“Some economists argue that it is impossible for the debt to impose a burden on future generations”.
I am asking for reference. Who exactly in the MMT community has said that it is IMPOSSIBLE for the debt to impose a burden on future generations. I have been keeping abreast of MMT blogs, I have never read such thing written. For starter, if desired leveraging of the non governmental sector suddenly increases, then accumulated past government deficits could create inflation now -and gives rise to higher taxation (i.e. budget surplus) to curb this inflation.
Morever, a “net tax” (i.e. budget surplus) necessary means a reduction in net financial assets of the non government sectors, so could you please tell me who in the MMT community said : “If future generations pay the taxes they are paying them to themselves as bondholders.” I am sorry to tell you, but this statement makes absolutely no sense from a MMT perspective.
There is a reason why some of the MMT heavyweights have deserted your blog and did not repond to your post on the debt burden: they have enough of you distorting their views and attacking a straw man.
So when you say: “If someone says that something is impossible, then all I need is one counterexample to show they are wrong.” Nice try, but until you show me who said it was IMPOSSIBLE, you need more than a counterexample.
Jos: Are you calling Paul Krugman a strawman?
“That’s not to say that high debt can’t cause problems — it certainly can. But these are problems of distribution and incentives, not the burden of debt as is commonly understood. And as Dean says, talking about leaving a burden to our children is especially nonsensical; what we are leaving behind is promises that some of our children will pay money to other children, which is a very different kettle of fish.”
Source: http://krugman.blogs.nytimes.com/2011/12/28/debt-is-mostly-money-we-owe-to-ourselves/
Again:
“And you don’t have to be a right-winger to acknowledge that yes, very high marginal tax rates act as a disincentive to productive activity. So real GDP may well fall significantly.
This is what I mean when I say that the burden of debt is about incentives, not about having to deliver resources to other people.
……
The general point is that the analogy with a family that owes too much is all wrong. Unfortunately, this dumb analogy dominates our national discourse.”
Source: http://krugman.blogs.nytimes.com/2011/12/28/more-on-the-burden-of-debt/
Are you telling me that MMTers would never say such a thing? Did I only imagine reading Abba Lerner on Functional Finance, and MMTers agreeing with him?
OK, maybe I’ve got a really bad memory.
Nick, (as I said on your blog) (I think) the interest rate is equal to the growth rate.
http://delong.typepad.com/sdj/2012/01/is-there-any-reason-to-think-that-the-interest-rate-on-us-government-debt-in-the-future-will-be-greater-than-the-growth-rat.html
So why wouldn’t you assume that? What reason would a government have to PERMANENTLY raise the interest rate above the growth rate?
I’m sure I’m missing something here. If the government spends to “stimulate” the economy (ie the long term society may or may not derive any long term infrastructure benefits from the spending), arguing the “tax now” or “tax later” issue is pointless. (Application of Austrian Economics theory holds that since governments have no way to generate wealth anything that is spent must be taken from the people – thus reducing the available wealth in the private economy. Therefore no government “stimulus” can increase wealth generation. It simply removes the option of what to spend the wealth on from the private sector and gives it to the government.)
Assuming a stable currency base, “taxing now” simply immediately removes the spending from the private economy, thus offsetting any possible government stimulus effect and decreasing available investment wealth from the private economy, thus having a counter-stimulus effect, as we see now in the US economy, and have seen in the Japanese economy. Borrowing and taxing later would increase the total negative effect on the private (non-government) economy but would do so over an extended period of time as the interest on the bonds would increase the total monetary cost of the intervention, thus decreasing the private economy to a greater extent over time instead of immediately. ie Once you decide on “stimulus spending,” your choices are decrease the economy fast, or more slowly, but you WILL decrease the economy – NOT “stimulate” it.
A missing argument in the comments above is when such stimulus spending is done via inflationary spending when the economic system is using fiat currency (as in the US now), which is a form of taxing now. But it is different since it debases the currency and lowers the worth of everything in the economy. Inflation affects not just the amounts of interest on bonds or dollar cost of spending, but also eliminates any possible stimulus effect and also undercuts the wage base, because it lowers total economic spending (due to the lower value of wages received) and thus, if done over a long enough period and in sufficient amounts, destroys the “stimulated” economy… so the “pay later” option above is not an option.
Therefore I hold that ANY “stimulus” spending will inevitably lead to negative effects on the economy, and never positive effects.
This debate has made me recall one of my favorite articles by James Galbraith, “In Defense of Deficits,” in which he writes:
“Nor is public debt a burden on future generations. It does not have to be repaid, and in practice it will never be repaid. Personal debts are generally settled during the lifetime of the debtor or at death, because one person cannot easily encumber another. But public debt does not ever have to be repaid.”
Nick,
I don’t think an example with apples is helpful. Money isn’t like apples.
Money is simply an accounting of control of the assets available at the current time. If you have 2 times the money that I have at time T, you have access to 2 times the real assets AS THEY ARE VALUED AT TIME T than I do. That’s it.
Suppose that there are 10 times more dollars 10 years from now than today. What does that mean? Nothing. If we all had the same real resources and desires and the same number of people existed, then things would be 10 times as expensive, but so what? It’s like scoring in Tennis. We count 15 – 30 – 40 – game. We could just as well count 1 – 2 -3 – 4 or 150 – 300 – 400 – 500. In a tennis game, the scores are relative. Similarly, the value of money is relative, not absolute.
You also were worried about a future cohort being unable to pay off the bonds of a previous cohort. Let’s suppose for a minute that money worked like apples, and you could only grow so many apples in a year. In that case the government would simply give the apple bondholders a haircut — their bonds would get less back than they expected, in apples. Life goes on — we’ve just changed the distribution of apples in a way that wasn’t planned by the bondholders. They are relatively poorer than they thought they were, but that doesn’t mean that as a society we are any poorer — there were only so many apples to consume in the first place. This is the point the MMT people try to make — at any time T, you can only buy what’s for sale, and the point of money is to buy stuff. One can’t know what a dollar will buy in the future, but if you’ve got two and I’ve got 1, you’re going to be better off than I.
Nick, I don’t see why I’m assuming “all the bond-financed tax cut is saved” (or for that matter that none of it is saved). The effect of tax cuts is well known: households spend a significant proportion of tax cuts and save a significant proportion.
I’ll run thru the changes that occur when a bond-financed tax cut happens.
When government aims to borrow $X in lieu of taxing $X, sundry taxpayers are relieved of paying $X in taxes, so they’ll spend a bit more (almost certainly less than $X).
At the same time sundry lenders lend $X to government, and as a result they will spend less and/or abstain from lending to the private sector entities they would otherwise have loaned to.
As you say, the NET effect will probably be stimulatory, so government implements some form of deflationary policy to deal with that (e.g. raises interest rates by selling bonds, which withdraws money from the economy.)
The net effect so far is that lenders own more bonds and to compensate for the stimulatory effect, the population as a whole holds less money.
Bond holders reaching retirement now have the choice between bequeathing their additional bonds to the next generation or selling them. If they bequeath, no additional benefit or burden is passed to the next generation. If those oldies sell to youngsters, then youngsters sacrifice income and oldies gain income. Extra burden is passed to the next generation, as per your theory.
But, to repeat my basic point, I don’t see why oldies will significantly change their planned retirement income just because government changes the extent to which it funds itself from borrowing as opposed to tax.
Errors and omissions expected.
Ralph:
Take the simplest possible example: in the year before they die, the government gives every oldie a $100 bond. They have a choice:
1. They can save the whole $100 and bequeath it all to their kids. This means their retirement consumption is constant, there is no stimulus, and no burden on their kids.
2. They can sell it to their kids, increase retirement consumption by $100, so there is a stimulus, and a burden on their kids.
3. Do any mix of 1 and 2.
Nick, if the government “gives” the oldies a bond, this is of course stupid. A smarter governement might sell the bond to them, and spend the dollars where they are needed.
Nick, if the oldies sell to their kids, the kids will have the bond. The oldies have to spend the money, presumably by buying from the kids.
If the interest rate is equal to the growth rate there will be no (monetary) burden. You’re only right to the extent that financing consumption through debt is bad policy unless it helps stimulate other aspects of the economy.
The oldies may get away with undermining the economy through money illusion, but the young could respond with an EQUAL amount of inflation. Hence: no net burden.
I think our example is only correct because you have the interest rate permanently above the growth rate. (And no money and no trade.)
Mr Rowe,
Funny the use of a Krugman quote when I was asking for a MMT reference. Paradoxically, this same Krugman accused not so long ago MMTers of believing that “deficits never matter”. (Krugman was also asked to name one MMTer that said this to no avail).
So I guess I will still have to wait for a reference of a good MMTer that said it is IMPOSSIBLE for governement debt to impose a burden on future generations… To be fair, MMTers are not typically prone to talk about this in the current context, but for a very good reason: please have a look at the conditions under which the burden thing holds in your model… and you will quickly realise that none of them remotely applies to the current reality. So it is puzzling to see you pushing this model on every forum you could find like if there is some kind of universal truth to it -and usefulness to address our current predicament.
Jos: Abba Lerner, “Functional Finance” page 47. (I can’t figure out how to copy and paste from a pdf photo, and the quote is too long anyway).
I am not going to go hunting through reams of MMT blogs just to come up for a juicy quote for you.
Just give me a straight answer to this question: if you read this on an MMT blog, would you say “Yep, that’s right”?
“…debt is a liability that we pass to the next generation — but it’s also an asset that we pass to the next generation…”
So I Googled, and found:
Warren Mosler:
“Deadly Innocent Fraud #2:
With government deficits, we are leaving our debt
burden to our children.
Fact:
Collectively, in real terms, there is no such
burden possible. Debt or no debt, our children get to
consume whatever they can produce.”
“But, fortunately, like all of the seven deadly innocent
frauds, it is all readily dismissed in a way that can be easily
understood. In fact, the idea of our children being somehow
necessarily deprived of real goods and services in the future
because of what’s called the national debt is nothing less than
ridiculous.”
“So I then asked him the following questions to hopefully
illustrate the hidden flaw in his logic: “When our children
build 15 million cars per year 20 years from now, will they
have to send them back in time to 2008 to pay off their debt?
Are we still sending real goods and services back in time to
1945 to pay off the lingering debt from World War II?””
http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf
Please don’t tell me a sample of one isn’t enough. Or that Warren Mosler isn’t one of the central figures in MMT.
And if anyone doesn’t understand why Warren Mosler is wrong in those quotes, and how it is possible to take apples out of the mouths of great grandchildren and eat them ourselves, even without a time machine (or by reducing investment and future GDP, or by borrowing from foreigners), then you need to read my original post.
Because it really isn’t obvious. 30 years ago I myself believed that Abba Lerner was right. I used to believe what Warren Mosler believes. It took me some time to figure out why it was wrong.
Nick, you yourself (I think) said on Robert Murphy’s blog the Mosler Position was right by time periods, but not within time periods.
But (I think) Mosler is only wrong within time periods to the extent interest is held permanently above growth. (If he assumes growth at least roughly equal with interest rates.)
I reserve judgement on the remainder of MMT and Lerner. (I think MMT assumes no bond finance at all.)
I read your original post. It didn’t make sense to me. Money isn’t apples.
One can place things into three categories:
1) Things we just make up – like money and fantasy stories.
2) Things that are, for practical purposes, renewable to a certain quantity in a certain time – like apples.
3) Things that are, for practical purposes, finite and destroyed upon use – like oil or natural gas.
You can’t ever run out of things in category 1. You are limited to things in category 2 by the amount that can be produced at any given time. You are limited to things in category 3 by the the amount in existence at the beginning of time (from a human perspective).
You can “steal” things in category 3 from future generations, but you can’t “steal” things in the other 2 categories. If you disagree, please explain.
This really has nothing to do with interest. Interest is only paid on money, and that is in the first category, so there is an infinite supply.
“I think MMT assumes no bond finance at all.”
Edit: I think they say bond finance is unecessary because of banking stuff I don’t understand (something about interests on reserves).
Mr Rowe,
Give me a break! You have built-in assumptions to the effect that the new generation has a high propensity to save -and given overlapping generations in your scenario- their production gets to be consumed by the older generation which has zero propensity to save. And you are using this to say that Mosler is wrong and that our children does not get to consume whatever they can produce?? But you have excluded this possibility by assumption through your saving desire variables!
Let’s play with this a bit, imagine a high propensity to save from Canadians, and no propensity to save from U.S. citizens, then Canada gets to export its production to the U.S.. Therefore, would you say that Mosler is wrong again, Canadians do not get to consume what they produce? Again, this would be a disingenuous statement. Mosler would say that the U.S. benefits from the high propensity to save by Canadians, just like he would say that the older generation benefits from the high propensity to save from the new generation in your scenario.
In your scenario, if you would assume that the new generation has zero propensity to save, and the older generation has zero propensity to save alike, then everyone will get inflation (bidding war for existing production). MMT would typically prescribe to raise tax in such scenario. If this tax applies to everyone (old and young), then yes, burden could arise from previous government deficits.
Let ‘s take a real life example, Japan’s saving desire goes to zero overnight, everyone starts to bid up prices in Japan using their accumulated savings (i.e. net financial assets of non government sector, which in aggregate corresponds to pass government deficits more or less) , the economy is booming and inflation goes to the roof. The Japanese government intervenes and impose a “head tax”. Everyone has to pay. Then , yes, there is a *possibility* that past government deficits did impose a burden on the newer generation (of course, the reality is more complicated than that, since the newer generation also benefits from a booming economy).
Jos: leave aside your Canada/US example, because Warren Mosler would (presumably) agree that a foreign debt is a burden.
Let’s concentrate on your closed economy (Japan) example.
So you agree that it is *possible* that past deficits impose a burden on the newer generation. OK! Now we are getting somewhere.
Now lets change your example slightly. Suppose that all cohorts have exactly the same preferences regarding consumption today vs saving for more consumption in their old age. And suppose the real interest rate adjusts (or the central bank adjusts the real interest rate) to keep the economy at full-employment (just to keep it simple). If the government makes a transfer payment to members of the current cohort (and the interest rate rises enough to persuade them to save it), and if the government then increases taxes on some future generation to pay the interest and/or principal of the debt, do you think that the current cohort (that gets the transfer) would gain, and the future generation (that pays the higher taxes) would lose?
And how would Warren answer that question? Wouldn’t he say “it’s impossible to take apples out of the mouths of future generations to let the current generation consume more”?
Nick, you said, “If the government makes a transfer payment to members of the current cohort (and the interest rate rises enough to persuade them to save it), and if the government then increases taxes on some future generation to pay the interest and/or principal of the debt.”
Nick, you have a transfer payment coming from nowhere. (I’ll assume it’s tax financed. But why would the government make this transfer?)
You’re saying the governement borrowed the transfer? Didn’t they spend what they borrowed?
The current cohort still has to buy goods from the future cohort or the money gets passed down. The future cohort can always raise prices.
The burden is still the interest payments, not the borrowing. (You’re saying the government will only be able to borrow when the interest rate is higher than the growth rate? Is this true?)
Nick, I just don’t understand the part about the tax increases – if such tax increases are indeed required – being a burden on the succeeding generation.
Let’s’ assume, for the sake of argument, that all bond payments in the hypothetical society are always accompanied, dollar for dollar, by an equivalent tax levy. Let’s imagine that such a practice is a fixed and unalterable government policy. At some date in the future, the government levies a tax of $X and makes bond payments of $X. That is simply a transfer of $X from one part of the population to another part. It has no effect on the total income of that population. Some individual people will experience a burden and some individual people will experience a benefit. But the population as a whole does not experience a net burden.
We can simplify the point. Forget all the business about the debt and borrowing. Forget the intergenerational relationships. Just suppose right now the government levies additional taxes of $X and simultaneously spends an additional $X. Is that decision a net burden on the current population? No. It is a redistribution of income netting to zero. A tax is a burden on some taxpayers. But it is not a net social burden unless the pooled revenues are spent less wisely than they would have been spent if the tax had never been levied.
If the government today incurs some binding obligation for the government in 2022 to take $X from one part of the population and give $X dollars to another part of the population, that might or might not have beneficial macroeconomic effects. But it is not a net burden on the people who happen to be alive in 2022. It is just a pre-ordained redistribution of income. And that’s all that that bond obligations passed on to the next generation amount to: they are a binding requirement for the people existing at some future point in time to redistribute income from taxpayers to bond-holders.
It doesn’t matter whether the bonds are bequested or sold to the next generation, so long as the current generation doesn’t simply burn up their dollars. If the current generation bequests the entire $X of bonds to the next generation, then there will be a $X redistribution at some point in the future. If the current generation only bequests some portion of the bonds to the next generation worth $(X-Y), and sells the remainder to the next generation for $Y, then it will end up bequesting $(X-Y) in bonds and $Y in liquid money. The succeeding generation relinquishes $Y to the oldsters when it purchases the bonds, and then gets the $Y back as the oldsters die.
The oldsters can’t take it with them. Dollars are not apples. Societies don’t literally consume dollars, they just exchange them for something else that might or might not be consumed. Could the present generation burden the succeeding generation by over-consuming its real resources? Absolutely. But this has nothing to do with public debt relations that finance the purchase of real resources, but independent decisions about what is done with the real resources that have been purchased.
Suppose the current generation collects money into a pool from some of its members, and gives all of those people a bond in exchange. It then uses the pooled money to buy up from one another some very large quantity of finished lumber from its stores of finished lumber. Consider two further possible developments.
1. After buying the lumber they use it to stage the mother of all bonfires, which is very exciting and spectacular, but rather unnecessary. They have consumed much of their lumber stores, some portion of which would have passed into the ownership of the succeeding generation. They have hurt the succeeding generation to reap a brief frivolous immediate benefit.
2. After buying the lumber they use it to build fine and durable houses all across the country, which they live in themselves and then pass on to the next generation. They have probably in this case benefitted the next generation.
So, the decisions of the oldsters might be a burden to the youngsters, and they might be a benefit. But the existence of the bonds that were created when the lumber was purchased has nothing to do with it. Those bonds just mean that at some point in time the youngsters will be required to shift some of their monetary income around among themselves.
Now suppose the bonds that are issued are, in line with your examples, purchased with apples, and are promises not for payment of dollars, but for payments of apples. Suppose the interest on the payments means the commitment to apple transfers or lumber transfers is mounting with each generation. Could that be a problem? Well, in one way. No matter how large these obligations become, so long as the total is less than the total number of apples available, the obligations are always for an intergenerational transfer, and do not impose a net burden.
But what happens if the obligations come to exceed the number of apples available? Well, debts that can’t be paid won’t be paid. The excess obligations will be unwound. Some people who were due to get apples won’t get them; some people who were due to pay apples won’t pay them. Courts might decide that some of those unpaid apple debts must be paid with some other good. Those combined payments of apples and the substitutes will also involve a transfer of income netting to zero, not a net burden.
Now all of the above was conducted “for the sake of argument” with the assumption that bond payments are always matched my tax levies. Even on that restrictive assumption we have no burden for the next generation unless the current generation does something frivolous or stupid with the real resources whose exchange was financed by the bond sales. But in the real world, that restrictive assumption does not hold. In each generation, part of the debt payment will be matched not by tax levies, but by direct or indirect borrowing from the central bank. In other words, by a direct credit from the central bank. It other words, by manufacturing some new money from scratch, out of thin air. Each generation has to decide what proportion of its bond redemptions are to be matched by offsetting taxes, and what percentage will not be.
I can make no sense out of the suggestion that, at whatever level of interest, the government can operate a Ponzi scheme based on payment promises in a currency of which that government is itself the monopoly producer. A Ponzi scheme is by definition a system of rolling over increasing payment obligations in a way which is unsustainable. It’s a Ponzi scheme because the person running it is a mere currency user who has limited financial resources, and no ability to create the object that is guaranteed in payment. That isn’t the case with the government. That doesn’t mean that any system a government devises for rolling over payments will be macroconomically sound. But it’s not a Ponzi scheme as the government is the currency issuer, not a mere currency user.
Nick, I just don’t understand the part about the tax increases – if such tax increases are indeed required – being a burden on the succeeding generation.
Let’s’ assume, for the sake of argument, that all bond payments in the hypothetical society are always accompanied, dollar for dollar, by an equivalent tax levy. Let’s imagine that such a practice is a fixed and unalterable government policy. At some date in the future, the government levies a tax of $X and makes bond payments of $X. That is simply a transfer of $X from one part of the population to another part. It has no effect on the total income of that population. Some individual people will experience a burden and some individual people will experience a benefit. But the population as a whole does not experience a net burden.
We can simplify the point. Forget all the business about the debt and borrowing. Forget the intergenerational relationships. Just suppose right now the government levies additional taxes of $X and simultaneously spends an additional $X. Is that decision a net burden on the current population? No. It is a redistribution of income netting to zero. A tax is a burden on some taxpayers. But it is not a net social burden unless the pooled revenues are spent less wisely than they would have been spent if the tax had never been levied.
[continued in next post …]
Nick, if the government levies a tax of $X and makes bond payments of $X at the same time, the net result is zero. You seem to be relying on some instinctive feeling that the existence of a future tax on some population is itself a burden on that population. But if the next generation holds a bunch of bonds, and the tax obligation is matched by equal amounts of bond payouts, then the total effect on the whole population is not a burden.
Jos: leave aside your Canada/US example, because Warren Mosler would (presumably) agree that a foreign debt is a burden.
Are you guys talking about the same Warren Mosler?
Foreign debt is the IOUs we write for imports that have been shifted from a demand account to a time account.
We can pay it off with other IOUs at anytime (and if the foreign countries balk, that’s for the good, we can finally get rid of that trade deficit!). In extremis, we can just tear it up– since everyone knows that, it will never get to “in extremis.”
Nick:
“Now lets change your example slightly. Suppose that all cohorts have exactly the same preferences regarding consumption today vs saving for more consumption in their old age. And suppose the real interest rate adjusts (or the central bank adjusts the real interest rate) to keep the economy at full-employment (just to keep it simple). If the government makes a transfer payment to members of the current cohort (and the interest rate rises enough to persuade them to save it), and if the government then increases taxes on some future generation to pay the interest and/or principal of the debt, do you think that the current cohort (that gets the transfer) would gain, and the future generation (that pays the higher taxes) would lose?”
I would say that the future generation would lose, but not because some are taxed to pay off others, but because previous generations saved and invested in government debt as opposed to productive private enterprises.
Their real consumption is less than it otherwise would be because of the fact that people’s savings went to lending to government and hence to government spending, instead of producing more apples in the market.
So at any given time, over time, there are greater and greater opportunities lost due to past generations engaged in government borrowing and spending. Over time, capital that could have existed but was never produced, builds up (conceptually), and that is what burdens future generations.
Forget about government. Imagine I borrowed and spent money, and then once the debt becomes due, I borrow more, and then spend it again. Over and over, year after year. Suppose that my bond is such that whoever holds it, has the right to steal money from any one person they want, to “settle” the debt.
Now, am I leaving a burden to “future generations” by virtue of them having to deal with a growing sized bond that has to be paid off by the owner stealing money from someone else? Or am I leaving a burden to “future generations” by virtue of me engaging in a Ponzi scheme and not legitimately productive activity that could have benefited future generations?
I will argue that I am not leaving a burden to future generations by virtue of the bond itself, but by virtue of the fact that I did not legitimately invest the money lent to me which then reduced productivity and what people could have produced.
One last analogy:
Suppose that there is no government debt from day one in 2012. Suppose that everyone’s savings were investments in private productive enterprise, year after year. Fast forward to 2112. Out of the blue, someone finds a bond buried in the ground that everyone forgot about, in the amount of $1 million. Suppose the bond stated that the owner has the right to steal $1 million from others. Suppose the owner of the bond then steals $1 million from other people.
Questions: Is the money transfer in 2112 burdening the entire generation of people? Or just those who were forced to pay the owner? What would have to have been the case regarding the debt and past people’s actions, if the 2112 generations are going to be labelled as being burdened because of the debt?
Obviously it cannot be the mere money transfer in 2112 alone, because there one person gains, and others lose with no net loss.
Obviously it cannot be what the past generations have done, because the fact that the debt is buried means some crazy person buried a debt contract that says the bearer can steal someone’s money. You can’t blame the crazy person for the choices that the future owner has made to collect on this debt claim. He didn’t have to take anyone’s money.
So clearly it cannot be the debt contract itself that burdens future generations, it’s the ACTIONS of people in the past, which the debt contract can tell us they engaged in, that burdens future generations.
If there is government debt then, and future generations are going to steal from each other to settle it, then the real wealth that they will fight over will be absolutely less only if past generations left less real wealth to them. So what does that mean? It means government debt does not burden future generations because of the debt contract itself, or even the forced money transfers. Government debt impoverishes future generations because it represents specific actions of people in the past. Namely, it shows that people saved and invested not in productive private enterprises that leave real wealth to future generations, but because it shows people saved and invested in an unproductive Ponzi scheme that consumed resources rather than produced resources.
EVEN IF the future generation government of 2112 just reneged on the debt, and let bygones be bygones, the future generation will STILL be burdened because of the debt, because the debt would still have showed that past generations saved and invested in an unproductive Ponzi scheme, and not a productive enterprise that left real wealth, for future generations to benefit from.
This is why the caveat of “only if debt holders voluntarily saved everything” is necessary for future generations not to be burdened. It is because this caveat mimicks the scenario I am talking about of past generations taking their savings and investing them in productive enterprises thus leaving behind real wealth to future generations, rather than merely borrowing and consuming everything, thus leaving behind nothing but debt claims to future generations.
So in summary, contrary to Krugman, government debt does leave behind a burden to future generations, but contrary to you, it’s not because of taxation or even the debt claims themselves. It’s the lost productivity that the government debt represents.
the federal ‘debt’ is nothing more than data entry on the books of the Fed
treasury securities are nothing more than nominal dollars in what are called ‘securities accounts’ at the fed.
there is nothing to actually ‘pay back’ as when the tsy secs mature the securities account is debited and a member bank reserve account at the fed credited. and those dollar balances can only exist as a credit in one fed account or another. (actual cash is functionally a fed account)
so what ‘debt’ is being left to anyone?
and if there was some kind of computer problem, and the data vanished, what’s China going to do? Call the manager?
😉
http://www.moslereconomics.com
You can’t blame the crazy person for the choices that the future owner has made to collect on this debt claim. He didn’t have to take anyone’s money.
So much for rational agent theory.
Government debt and private sector borrowing need not at all result in lost productivity for either the current or future generation. Governments can always substitute productive public investment for any lost productive private investment. They always have the option of doing this by directly creating and injecting the money they need to order up the production. But if for the sake of price level management in periods of full capacity, the government decides to offset their injections with taxes – which remove money from the private sector – or with with borrowing – which shifts and spreads out the schedule of government money injection into the future – there need not be any lost production. Government can either use the spending to create additional demand which creates additional production; or it can use the money to do some additional production itself.
I thought economists knew the difference between real and nominal.
Mosler said there would be no real burden. A nominal burden sure. But not real.
Why is it that MMTers constantly feel the need to recite their one liner mantras but then fail to properly integrate them into various economic discussions? They’re like the ultimate conversation derailers.
Warren Mosler writes:
“the federal ‘debt’ is nothing more than data entry on the books of the Fed”
Data that implies the taxpayers are on the hook to paying back the debtholders.
“treasury securities are nothing more than nominal dollars in what are called ‘securities accounts’ at the fed.”
No, treasuries are not dollars. They are securities that can be exchanged for dollars.
“there is nothing to actually ‘pay back’ as when the tsy secs mature the securities account is debited and a member bank reserve account at the fed credited. and those dollar balances can only exist as a credit in one fed account or another. (actual cash is functionally a fed account)”
And where will the money come from on the credit side? It has to come from either the printing press, the taxpayers, or lenders.
“so what ‘debt’ is being left to anyone?”
The debt that future taxpayers will have to “pay back”, given the assumption that the government doesn’t just print its way out of debt, as much as MMTers would love to see.
“and if there was some kind of computer problem, and the data vanished, what’s China going to do? Call the manager?”
Start a trade embargo? Destabilize the trade relationship between them and us? Oh that’s right, I forgot, we can print our way out of trade embargoes and political destabilization too.
Nick Rowe,
It looks that you did not see my critique of a similar reasoninng on Robert Murphy’s blog. I think that R. Murphy’s example is a bit more sophisticated. I have several objections to the example and to the way it is interpreted. NB I am not an economist. Things like “Ricardian equivalence” or even “rational expectations” sound like snake oil to me. I also can assume that I can travel it time if I go faster than light. If I start thinking like that in my work the most likely outcome is that I won’t be able to design a working solution (I integrate IT systems) and will lose my job. I use models only when they are valid.
Let’s talk about the reality not about the (rotten) apples.
1. Why do you assume that the public debt has to be repaid? Because of the interest rates leading to an excessive redistribution of the real income between the “99%” and the bond holders? So let’s reduce the interest rate on bonds (like in Japan). The Central Bank can buy the bonds. Will “cheap money” or extra reserves lead to another credit bubble? Banks do not lend reserves and the money multiplier model is invalid. If there is a risk of excessive credit creation leading to inflation then the government should apply brakes on speculative lending such as 50% deposit on new mortgages or even a tax on net loans levied on banks. This is the correct solution anyway as cranking up interest rate will damage the productive economy and may not stop the bubble on its tracks.
If you don’t repay the debt there is no issue of overtaxing a certain cohort in the future. There still can be a redistributional issue between the different cohorts living at the same time in the future if the real interest rates are high. The redistributional flow has never exceeded 3.5% in the US.
You assumed that “[t]he rate of interest must be high enough to persuade them to eat fewer apples when young and more apples when old, otherwise they wouldn’t have bought the bonds from cohort A.”
What for? Apple bonds can be bought by the central bank for apple currency. The assumption that the market dictates the interest rates makes the whole example inapplicable to countries like the US, Japan, UK or Australia. This is the way to model the meltdown in Greece or Italy. But in the end ECB has blinked and they are buying bonds like hell.
2. (An Old-Keynesian argument partially addressing the redistributional problem) The government does not need to run primary surpluses in order to service the debt as long as in the long run the rate of growth of nominal GDP is greater than the nominal interest rate on the debt multiplied by the ratio of debt to GDP. As long as this condition is true, the ratio of debt to GDP will not increase. That condition was true for the most of the immediate post-WW2 period in the US and the debt was not a burden in the sense demonstrated in the example with the apples. Of course, on the margin there will always some trade off unless the interest rate is zero.
3. You haven’t distinguished between the case when the economy is already running at full capacity and the government merely tries to redistribute the GDP by inducing higher saving (like during WW2 – issuing bonds was just a part of the operation, strict price/wage controls and rationing of products was also relevant) and the more common case when the economy is running below the full capacity. In that case the Skidelsky’s argument is relevant as extra government spending (offset by bonds sales to the non-government sector or merely to the Central Bank) will most likely lead to higher GDP in the future.
4. I have to admit that the example itself is either incomplete or flawed as we don’t know whether there is anyone who is going to eat apples when “the government decides to pay off the debt by imposing a tax of 121 apples on each young person in cohort C, which it uses to buy back the bonds from cohort C. Each member of cohort C eats 121 fewer apples.” This has been fixed by Robert Murphy. I am assuming that you wanted to say something similar to what he said.
NB the argument used by Major Freedom is a reversal of what Skidelsky said. In my opinion it is flawed. We are not talking about the government reducing investment at the cost of consumption while productive capacities are fully utilised.
You stated that “I would say that the future generation would lose, but not because some are taxed to pay off others, but because previous generations saved and invested in government debt as opposed to productive private enterprises.”
…
“So at any given time, over time, there are greater and greater opportunities lost due to past generations engaged in government borrowing and spending. Over time, capital that could have existed but was never produced, builds up (conceptually), and that is what burdens future generations.”
Please be aware that if the government borrows $100mld over the time period it also spends $100mld over the same time period. As long as productive capacities are not exhaused (no real crowding-out effect) the private sector will still have the same amount of money (savings) to spend. There is NO financial crowding out unless unrealistic assumptions are made (“Ricardian behaviour”).
If the economy already runs at full capacity why would the government try to stimulate the aggregate demand (except for a war)?
We don’t live on Mars, we live on Earth. In the real live government spending often goes to investing in public goods such as infrastructure. I am not advocating nationalising everything and I do acknowledge that government spending is often wasteful but there is room for public services. Here in Australia we have Medicare and the quality of health care which can be afforded by the majority of people is way better than in the US. It is the mostly private-run American health care system what wastes more money on man-in-the-midddle and overpriced medicines. The government is not always evil. Don’t worry, I know something about “real socialism”, I would not nationalise semoconductor manufacturing plants (they went to China anyway), grocery shops or dairy farms for sure.
If the economy runs below full productive capacities even wasteful government spending may be better than nothing as it will prevent a deflationary spiral.
First, to make things clear, I should not speak in the “MMT name”, I will let others more knowlegeable people do that.
Nick, you said:
“Suppose that all cohorts have exactly the same preferences regarding consumption today vs saving for more consumption in their old age.”
You would note that this is precisely what you did not do in your intial scenario… the saving relative to income keeps on increasing at 10% with every passing cohorts in your initial scenario.
But more to your point:
” If the government makes a transfer payment to members of the current cohort (and the interest rate rises enough to persuade them to save it), and if the government then increases taxes on some future generation to pay the interest and/or principal of the debt, do you think that the current cohort (that gets the transfer) would gain, and the future generation (that pays the higher taxes) would lose?”
I would agree with that statement just like I would agree with the following statement: if the government give a transfer to Nick Rowe, and the government taxes Jos to make sure that the transfer is non inflationnary (economy is already at full employment as you said), then Jos looses and Nick Rowe gains. Note: since Jos is from the new generation and Nick is part of the old generation, the old generation wins and the new generation looses. Forget about cohorts, you do not need that to show that the guy that is taxed is loosing and the guy that gets the transfer is winning.
In your scenario, taxation arrises -I hope- on future generations to avoid inflation, correct? (otherwise, why tax at all? There would be no need to confiscate net financial assets of the non government sector if galoping inflation is nowhere to be seen).
Sorry all about the redundant post at 12:36. I didn’t know how the commenting system worked and thought my first one at 12:33 hadn’t gone through. The 12:33 post contains everything.
Major Freedom,
I am happy to debate your claims. Please buckle your seat belt.
1. “Data that implies the taxpayers are on the hook to paying back the debtholders.”
Please show me the data that the taxpayers have to pay back the money to the debtholders. I claim that this is not true as in general public debt is not repaid (there were some minor exceptions)
2. What is the difference between “securities that can be exchanged for dollars.” and “nominal dollars in what are called ‘securities accounts’ at the fed”? Do you question that Treasuries are liquid? I can tell you that it takes a few milliseconds to complete a transaction on CME. Do you question the fact that the market is organised in such a way that the Fed will intervene if the price of bonds moves away from the desired price range? So do you question the statement that US bonds are riskless assets and bonds and cash are close substitutes? Of course bonds are not cash as 1. bonds have a non-zero interest rate and cash has zero interest rate, 2. the bonds prices can fluctuate so there is a risk or oppotunity of capital losses or gains. That’s why they (or their derivatives) are an useful instrument for hedging.
3. “And where will the money come from on the credit side? It has to come from either the printing press, the taxpayers, or lenders.”
Please take a sheet of paper or better google for “Macroeconomic Balance Sheet Visualizer”. Please look at the balance sheets of the Treasury and Central Bank. You will instantly see that when bonds are bought by the Central Bank one form of State liabilities (Treasury liabilities) are exchanged for another form of State liabilities (CB liabilities). So what? Do you question that the Fed is a state institution? Who then prints money? What really matters are spending and taxation flows not asset swaps.
4. “The debt that future taxpayers will have to “pay back”, given the assumption that the government doesn’t just print its way out of debt, as much as MMTers would love to see.”
Once you build the understanding of the role of State liabilities you will instantly discover that there is absolutely no need to repay anything. Please be aware that as in physics and electronics a derivative of a stock is a flow. Yes in macroeconomics we can also say that dL/dt = G-T where L is the aggregate stock of government liabilities (the so-called broad money “L” as defined in “financial-dictionary”).
So why do you want to thrash the economy by draining the aggregate demand due to the destruction of government liabilities?
Please don’t assume that the Chinese act in the best interest of the US when they talk about “preserving the value of their assets” and “repaying the debt”. The Reds know how better the economy works because they studied Keynes and Kalecki. What they are telling you now is “jump from the balcony now, stupid, jump”. And the Austrians and Monetarists are first to follow… how disgusting.
correction:
dL/dt = G-T assuming no change in the stock of the bank deposits backed by private debt (no debt growt or debt deleveraging).
Otherwise we would need to build a model of the whole economy to see where broad money comes from and where goes.
Dan Kervick has a nice clean statement of the argument we are saying is false. Here’s Dan:
“Nick, if the government levies a tax of $X and makes bond payments of $X at the same time, the net result is zero. You seem to be relying on some instinctive feeling that the existence of a future tax on some population is itself a burden on that population. But if the next generation holds a bunch of bonds, and the tax obligation is matched by equal amounts of bond payouts, then the total effect on the whole population is not a burden.”
That’s a classic statement of the “we owe it to ourselves” argument.
Here’s the simplest way to see the problem with that argument.
If our children buy the bonds from us (rather than receive them as a free gift from us), then they have an asset that they have paid for by giving us goods in exchange. So far it’s a wash. The kids are not worse off. But if they are then told “Oh, by the way, you know that asset you have just bought? Well, it’s not really an asset. If you look closely, you will see it’s got your signature (as taxpayer) at the bottom of the IOU”. So the kids’ net wealth has declined. Unless they can pull the same trick on their kids!
Adam (ak)
“I am happy to debate your claims. Please buckle your seat belt.”
I’m shaking in my little space boots.
“1. “Data that implies the taxpayers are on the hook to paying back the debtholders.”
“Please show me the data that the taxpayers have to pay back the money to the debtholders. I claim that this is not true as in general public debt is not repaid (there were some minor exceptions)”
What “data” could possibly disprove the necessity that the government has to find an external source of funds from which to pay back the debt it owes to lenders? There is only three sources, inflation, borrowing, and taxation. I excluded inflation and borrowing, because inflation is a tax anyway, and borrowing just moves the problem to future taxpayers.
“Do you question that Treasuries are liquid?”
No. I question the claim that they are money.
“I can tell you that it takes a few milliseconds to complete a transaction on CME.”
Transaction? Transacting treasuries for what? Money of course. It doesn’t matter even it takes a single yoctosecond to complete a transaction. Treasuries aren’t money. They are bonds that can traded for money.
“Do you question the fact that the market is organised in such a way that the Fed will intervene if the price of bonds moves away from the desired price range?”
No. But that point just reinforces my point. By “intervening”, what you mean is inflation, or selling treasuries.
“So do you question the statement that US bonds are riskless assets and bonds and cash are close substitutes?
Yes. US bonds are not riskless. There is no such thing as a riskless asset. There is a very, very low risk of default, but it’s non-zero. More importantly, US bonds are not inflation proof. Even the inflation indexed bonds are not inflation proof since their return is tied to the inexact CPI. Most importantly, you just inadvertently agreed with my point that treasuries are not money. You said bonds and cash are close substitutes. You didn’t say exact substitutes. That they are close substitutes is on account of them being different things.
“Of course bonds are not cash as 1. bonds have a non-zero interest rate and cash has zero interest rate, 2. the bonds prices can fluctuate so there is a risk or oppotunity of capital losses or gains. That’s why they (or their derivatives) are an useful instrument for hedging.”
That’s not why bonds are not cash. For one thing, bonds can have zero, and even negative, interest rates. Just look at German bonds:
http://online.wsj.com/article/SB10001424052970204124204577150311730396748.html
The yield on German bonds went to -0.0122%
Second, it is silly to say that bonds are not cash because bond prices can fluctuate. Bond prices fluctuating means the exchange value against cash is fluctuating. But then we can also say that the value of cash is fluctuating against the bond. They are two sides of the same coin. We just say bond prices fluctuate because we measure exchange ratios in terms of cash (money), not bonds.
“Please take a sheet of paper or better google for “Macroeconomic Balance Sheet Visualizer”. Please look at the balance sheets of the Treasury and Central Bank. You will instantly see that when bonds are bought by the Central Bank one form of State liabilities (Treasury liabilities) are exchanged for another form of State liabilities (CB liabilities). So what? Do you question that the Fed is a state institution? Who then prints money? What really matters are spending and taxation flows not asset swaps.
So what? So it means when the Fed credits the Treasury, that is new money created out of thin air. That is inflation, which is what I said was one of the three ways the Treasury gets cash.
Do I question that the Fed is a state institution? No.
Who prints money? Depends on what you mean by “print.” If you mean physical currency, it’s the US mint. If you mean who is ultimately responsible for increases in the supply of money in the economy, it’s the Federal Reserve System.
“Once you build the understanding of the role of State liabilities you will instantly discover that there is absolutely no need to repay anything.”
Once you build an understanding of the fact that inflation cannot be used indefinitely, you will “instantly discover” that if the Treasury wants to borrow and spend more than what inflation alone can make possible without collapse, then they will have to repay the debt from outside sources.
“Please be aware that as in physics and electronics a derivative of a stock is a flow.”
I am into economics, which is about people and what they do. Not so much interested in atoms and molecules.
“Yes in macroeconomics we can also say that dL/dt = G-T where L is the aggregate stock of government liabilities (the so-called broad money “L” as defined in “financial-dictionary”).”
G cannot be greater than T without the government borrowing or inflating the difference.
“So why do you want to thrash the economy by draining the aggregate demand due to the destruction of government liabilities?”
LOL, the constant flooding of credit expansion and inflation which increases aggregate demand is what thrashes the economy.
Healthy economies don’t need an external inflater and printer of money, and are only hampered by them, because any entity that consumes out of the economy, and replaces what is consumed with new money that was not earned through prior productivity, is only acting as a parasite on those who produce real wealth for their benefit, but do not get real wealth in return, just devalued currency.
“Please don’t assume that the Chinese act in the best interest of the US when they talk about “preserving the value of their assets” and “repaying the debt”.”
I don’t.
“The Reds know how better the economy works because they studied Keynes and Kalecki.”
LOL, the Reds are going to experience an economic crash greater than any crash that has ever existed.
“What they are telling you now is “jump from the balcony now, stupid, jump”. And the Austrians and Monetarists are first to follow… how disgusting.”
MMTers are wanting to push people out of the windows by ramming them with piles of paper bills.
Nick Rowe:
“If our children buy the bonds from us (rather than receive them as a free gift from us), then they have an asset that they have paid for by giving us goods in exchange. So far it’s a wash. The kids are not worse off. But if they are then told “Oh, by the way, you know that asset you have just bought? Well, it’s not really an asset. If you look closely, you will see it’s got your signature (as taxpayer) at the bottom of the IOU”. So the kids’ net wealth has declined. Unless they can pull the same trick on their kids!”
That is exactly how I explain the intuition.
http://consultingbyrpm.com/blog/2012/01/my-names-bob-and-i-have-a-debt-addiction-problem.html#comment-31295
If you keep track of property rights, then another way to look at it is to realize that the introduction of government debt into the economy, generates an increase in assets owned by identifiable property owners, but there is no clear increase in liabilities owned by identifiable property owners. The liabilities are in a sort of no man’s land, kind of but not really owned by the government, kind of but not really owned by the people. The assets are very clearly owned by property owners.
This is how future generations of identifiable people get burdened. Once those previously ephemeral liabilities are introduced into the economy and become the “property” of identifiable people, then just like you said, the quantity of “stuff” that is owned by property owners, is reduced. They own the same money and the same real goods, but they own less “wealth” because the debt claims essentially disappear with no replacement wealth (since they were paid back by taxation).
Adam (ak):
“NB the argument used by Major Freedom is a reversal of what Skidelsky said. In my opinion it is flawed. We are not talking about the government reducing investment at the cost of consumption while productive capacities are fully utilised.”
But I am talking about that. Government spending consumes resources, without replacing them. It doesn’t matter if 99% of the factories are idle and 99% of the working population are unemployed. The spending the government engages in consumes resources using money that it did not earn from prior production.
In a world without government taxation or spending, then should there be 99% idle resources and 99% unemployment, then should there be loaning money to a wealth generator rather than to an unproductive spender/consumer, and that project earns a profit, then we can know that wealth was generated. The 99% idle resources are idle because people want them idle. The sellers don’t want to sell for a lower price, and the buyers don’t want to buy at the higher price. In a free market, at some point sellers will relent, and will find that they are owning something that is not valued as high as what buyers value them at.
For an external unproductive entity to just swoop in and print money, give it to certain buyers, so that they have more money to pay the higher price, is not a wealth generating solution. What would happen is that producers in general were defrauded, because they are selling goods without benefiting from goods being produced for them in return. In addition, the unproductive entity is also destroying individual value coordination between producers and consumers. By giving some consumers free money, other consumers are defrauded, because they are being outcompeted by buyers who didn’t produce more wealth themselves to be put into a position of having more money to outbid other consumers.
The ultimate fallacy you guys make, the correction of which trumps even what I said above in terms of importance, is the fallacious belief that just because idle capital goods are there for a specific purpose but their disposition is being delayed, and just because idle workers are unemployed for a specific purpose but their disposition is being delayed, that it is somehow an act of “productiveness” for an unproductive entity to print and spend money to bring about idle resources to “move” once more in their previous employments or according to the values of those in government. Idle resources should be destroyed and the parts scrapped asap, if consumers don’t value them more than they value their money. If someone values their money more than they value some good, then that good should not be produced. In a free market, this is what happens. People don’t value an additional house more than the price, because they value other things more highly, like more future goods in general as opposed to more present goods.
“You stated that “I would say that the future generation would lose, but not because some are taxed to pay off others, but because previous generations saved and invested in government debt as opposed to productive private enterprises.”
“So at any given time, over time, there are greater and greater opportunities lost due to past generations engaged in government borrowing and spending. Over time, capital that could have existed but was never produced, builds up (conceptually), and that is what burdens future generations.”
“Please be aware that if the government borrows $100mld over the time period it also spends $100mld over the same time period.”
Please be aware that this is exactly what holds back productivity. Government borrows $100 million but does not invest it for profit. They borrow $100 million to SPEND it. That does not bring about an increase in wealth.
If you kept loaning money to me and I kept spending it, then I am not producing wealth, and other people are worse off compared to if I took that loan to produce wealth.
Another fallacy you guys make is your belief that consumption is the same as producing. That spending money on consumer goods is somehow an investment in consumer goods. That you somehow benefit people by merely spending money, rather than the truth, which is that you really benefit people by what you did in the past to earn that money you spend now.
“As long as productive capacities are not exhaused (no real crowding-out effect) the private sector will still have the same amount of money (savings) to spend. There is NO financial crowding out unless unrealistic assumptions are made (“Ricardian behaviour”).”
Forget about money, and focus instead on acts of production and acts of consumption. Just consider what people are doing, abstracted from money, when the government engages in fiscal and monetary “stimulus.”
If you just consider what people do, then MMT, Keynesianism, Monetarism, all these schools of thought are based fundamentally on consumptionism. They believe consumption brings about productivity and prosperity. They believe consuming durable consumer goods brings about productivity and prosperity (which is why so many believe that Keynesian spending programs that bring about durable consumer goods like roads and bridges, increases productivity and prosperity).
Benefiting from consumer goods is one thing. Calling the act consuming “productive” is quite another.
“If the economy already runs at full capacity why would the government try to stimulate the aggregate demand (except for a war)?”
Is this a rhetorical question that implies I somehow believe the government should print and spend money on themselves and their friends in the case of the economy running at full economic capacity? I don’t think ANY entity should coerce people into accepting paper money, then they go ahead and print money for themselves and their friends, who then spend and consume out of the economy, without putting real wealth back in, as if producers benefit from this behavior. It’s pure parasitism. Producers don’t produce ONLY to earn money. They produce to earn money because ultimately they want to consume too. They abstain from consuming and save and invest now, so that they can earn more money and consume more in the future. To believe that producers (which includes workers by the way) benefit from earning more money but not additional real goods, is to take people for fools.
So how about a screed on the banking system?
The idea that investment comes from deferred consumption is quaint. We have productive capacity far beyond our ability to consume (in many areas, not all). Hedge funds do not invest only what they have collected in other’s savings. Leverage still exists.
Lets keep the real and nominal in their respective places.
Without government debt, net financial assets would be a zero sum game, some individuals would own, but only if others owed.
If our children buy the bonds from us (rather than receive them as a free gift from us), then they have an asset that they have paid for by giving us goods in exchange. So far it’s a wash. The kids are not worse off. But if they are then told “Oh, by the way, you know that asset you have just bought? Well, it’s not really an asset. If you look closely, you will see it’s got your signature (as taxpayer) at the bottom of the IOU”. So the kids’ net wealth has declined. Unless they can pull the same trick on their kids!</i
Nick, I tried to address this in the original post by pointing out that you are leaving out what happens to the money that the children used to buy the asset. First of all, if the kids by a financial asset from grandpa for $1000, then when grandpa dies they get the thousand dollars back.
You are assuming that the assets are purchased with something that is then somehow lost or vaporized by the older generation, or remains permanently with that generation and is taken by them to their graves. Now that could happen. If the kids buy the assets with some frozen apples that they were saving, and the oldsters unfreeze and eat up all the apples, then the kids end up with fewer non-financial assets, plus some pre-commitments to exchange money among themselves at some point in the future.
But suppose the kids buy the assets with lumber and nails, and the oldsters use the lumber and to build a bunch of houses with a combined value far greater than the lumber or nails, and these houses are then passed on to the kids as the oldsters die. The kids now have non-financial assets of greater value than they had before, plus some pre-commitments to exchange money among themselves at some point in the future.
So the point is that while it is always possible for an older generation to screw over the succeeding generation in the aggregate, that always has to do with decisions about what to do with real resources. It never has to do in the aggregate with the creation of financial obligations alone. Every financial obligation, whether it is a debt obligation or a tax obligation, is an obligation for a payment. A payment is always a transfer from one party to another party. These financial obligations can always represent a burden for one part of the population, but never for the population as a whole.
If the oldsters decide to draw heavily on the society’s stores of real goods to have one last big bacchanalian blowout binge, then of course they can hurt their descendants. If instead they prudently manage their society’s stores of goods, and employ some of them in value added production, then they have benefited their descendants. The financial obligations that are created in the course of managing these real economic processes make no net difference. Only the real processes do. That’s the real question we need to ask.
As time marches onward, financial assets either have to be passed on or extinguished. If an asset is extinguished, then both an asset and a liability are extinguished at the same time. If an asset is passed on, then both the asset and the liability are passed on. If one financial asset is exchanged for another financial asset before either one of them is either passed on or extinguished, that makes no difference. So it doesn’t matter whether bonds are simply bequeathed, or are sold for money which is then bequeathed.
The one last wrinkle to be added is the special role of the public sector. One could think about the public sector in MMT or circuitist fashion as a place where money is both created from scratch and extinguished into nothingness. The spending and taxing are completely independent functions. So maybe the tax obligation is viewed not as an obligation for a payment from on part of the population to another, but as an obligation to extinguish money. But that will only represent a burden if our kids foolishly decide not to undertake public spending that is at least as high as the public tax collections. So here’s what we need to tell them: “Don’t be stupid and run completely unnecessary surpluses on the mistaken assumption that your public debt obligations are a net burden to you!”
Dan: “If the kids buy the assets with some frozen apples that they were saving, and the oldsters unfreeze and eat up all the apples,…”
They could be just regular apples. The kids work to produce goods, and instead of consuming those goods themselves they sell them to the oldies so they can then buy the bonds off the oldies, and then the oldies consume the goods the kids have produced.
pebird:
“The idea that investment comes from deferred consumption is quaint.”
The notion that investment can come from anything but deferred consumption, is impossible.
It’s interesting how you believe that an economic law is “quaint.”
“We have productive capacity far beyond our ability to consume (in many areas, not all). Hedge funds do not invest only what they have collected in other’s savings. Leverage still exists.”
Not true. It’s the exact opposite. We as human actors have far more desires as consumers than any productive capacity can ever meet.
There is always a greater desire to consume. The key is producing what people want to consume in the relative ratios that they desire to consume them, cross sectionally and temporally.
The reason why you see “excess capacity” and “idle resources” is not because the ability to produce has outstripped the desire to consume. It’s because there exists partial relative overproduction of some goods (which you can see) and a partial relative underproduction of other goods (which you cannot see).
For example, imagine you are a self-sufficient producer/consumer. If you have a certain ability to produce, then you are almost certainly going to want to produce food and water before you produce a massive shelter that would take up 6 straight months of production to complete. Once you produce enough food and water to last you 6 months, then you might consider producing that shelter.
It’s the same thing with all other wealth. Some consumers may want an additional car before they want a new yacht. They could want both sure, but they can’t acquire both because their own productivity is not yet high enough to enable them to earn what it takes to produce and acquire a yacht. In other words, what they lack is more capital.
The lack of capital is ubiquitous.
“Lets keep the real and nominal in their respective places.”
Government spending brings about consumption that is not replaced with additional wealth.
“Without government debt, net financial assets would be a zero sum game, some individuals would own, but only if others owed.
You mean a zero sum game in terms of accounting for dollars. But that doesn’t mean it is a zero sum game in terms of real productivity.
The same quantity of money and volume of spending can facilitate a practically infinite increase in production of real wealth, as both output prices and input prices fall over time as more and more wealth is produced and sold over time.
It’s not a zero sum game in terms of real wealth. Sure, it could be a zero sum game in terms of money, but then who cares? If people value more real goods before they value more money, then there is no problem.
Government spending brings about consumption that is not replaced with additional wealth.
Why would you say that? A government is every bit as capable of investing as the private sector. Martin Wolf presented a very long and incomplete list the other day of public goods, many of which have suffered from severe underinvestment in recent years.
For some reason, I have suddenly lost all of my rudimentary html skills. Sorry.
Dan Kervick:
I said: “Government spending brings about consumption that is not replaced with additional wealth.”
You said: “Why would you say that? A government is every bit as capable of investing as the private sector.”
No Dan, governments do not “invest.” That is just Orwellian doublespeak to give an air of legitimacy to their consumption and the consumption they bring about.
The only activity that is productive in a division of labor, monetary economy, is activity that is self-sustaining in terms of being able to recoup expenditures made. The activity of everyone else, no matter how large and long lasting and no matter how complex and technologically sophisticated the projects, they are not designed to recoup expenditures made. The trajectory of these goods is therefore towards disappearing, however long the time may be.
Those who make unproductive expenditures are those who will have nothing to show for it once the projects are physically worn out or used up. The only way to maintain or replace these projects is by a fresh new source of external funds.
Therefore, for government, since they don’t make expenditures with the intention of recouping those expenditures, they are not an investor, but a consumer. Even large projects like roads and bridges and dams, are not for the purposes of being self-sustaining. Therefore, government roads and bridges and dams are consumer goods, NOT capital goods. The government is fully and completely dependent on producers.
The expenditures made leave the government poorer by the amount of money they spent. In order to maintain or replace the projects, the government has to resort to external source of funds, i.e. the taxpayers or the money printing machine.
“Martin Wolf presented a very long and incomplete list the other day of public goods, many of which have suffered from severe underinvestment in recent years.”
There is no such thing as public goods that are distinct from economic goods.
And what do you mean “underinvestment”? Compared to what standard? Wolf’s arbitrary values that ignore individual value?
Both you and Wolf should read what Gustav Molinari wrote:
“If there is one well-established truth in political economy, it is this: That in all cases, for all commodities that serve to provide for the tangible or intangible need of the consumer, it is in the consumer’s best interest that labor and trade remain free, because the freedom of labor and trade have as their necessary and permanent result the maximum reduction of price. And this: That the interests of the consumer of any commodity whatsoever should always prevail over the interests of the producer.”
This uncomfortable truth has socialists like you and Wolf scrambling to find some outlet, some caveat, that can somehow refute economic science. So you make the absurd claim that there somehow exists goods to which economic reasoning cannot apply. Potatoes and skin cream is OK for the market and economic principles apply, but roads and water and schools is not OK for the market because economic principles allegedly don’t apply. The entire “public goods” doctrine is riddled with internal inconsistencies, appeals to popular prejudices, and non sequiturs.
Major_Freedom, I just think you are wrong about what you regard to be the boundaries of economic science. Your understanding of investment is narrow and crabbed. returns on investment do not all take the form of monetary income flows.
There is not the slightest reason in the world why governments cannot operate enterprises. Whether an enterprise is private or public is just a matter of who owns and runs it: some collection of private individuals in the fist case and the political community as a whole in the second. You might find the idea of public sector enterprises ideologically offensive or prudentially inadvisable. But the existence of such enterprises is an obvious fact.
So is the fact that these enterprises are not just collective engines for the consumption of finished goods and services, but enterprises that employ some goods and services as inputs and churn out other goods and services as outputs. That’s investment.
There are all sorts of ways of recouping expenditures. If the public builds some roads and charges tolls for its use, in the way a private sector business does, that is one way for it to recoup some of its expenses. On the other hand it might just rest content with the massive amount of productive, value-adding transportation activity their society is able to undertake as a result of the new roads. That’s presumably why they built the roads in the first place, and after a certain amount of such activity has occurred and value has been created the public that built the road has recouped its expenses.
You seem to be laboring under the idea that government expenditures consist entirely of transfer payments used for immediate consumption. But when a government builds a school that is not “consumption”. The school is part of the capital equipment of the society, so that is capital development.
Dan Kervick:
returns on investment do not all take the form of monetary income flows.
In a division of labor, monetary economy, they sure do. Anything other than self-sustaining, profit-making enterprises, are consumptive activities, not investment activities.
There is not the slightest reason in the world why governments cannot operate enterprises.
I wasn’t doubting that government can “operate” enterprises, any more than I would not doubt that families can “operate” ovens and cars and washing machines. The difference is that they won’t be productive enterprises.
Whether an enterprise is private or public is just a matter of who owns and runs it: some collection of private individuals in the fist case and the political community as a whole in the second. You might find the idea of public sector enterprises ideologically offensive or prudentially inadvisable. But the existence of such enterprises is an obvious fact.
No, it’s not just a matter of who owns it. Names don’t matter. Even the nature of the physical resources don’t matter. What matters is the purpose of which expenditures are made. If an expenditure is made not for the purposes of making money, then they are not productive enterprises in a division of labor, monetary society. This isn’t a normative statement, this is an economic statement of fact. It is not to look down on the activity, although I do look down on government activity because it’s based on force, not consent.
Government activity is not “communities as a whole” activity. I am not the government, I don’t vote, I do not wish to deal with them, but they nevertheless use force to keep me involved with them. Yet I am no less a member of the “community” than the most ardent political lobbyist and voter.
You are conflating governments with communities, when they are two different things. There are involuntary, violent “communities” and there are voluntary, peaceful “communities.” I am a member of the latter. So are many others. Not sure about you.
So is the fact that these enterprises are not just collective engines for the consumption of finished goods and services, but enterprises that employ some goods and services as inputs and churn out other goods and services as outputs. That’s investment.
No, those are not investments, no more than a housewife or househusband “churning out” cooked meals from uncooked store bought raw food are investments.
There are all sorts of ways of recouping expenditures. If the public builds some roads and charges tolls for its use, in the way a private sector business does, that is one way for it to recoup some of its expenses.
Yes, but those “tolls” are only nominal fees that in totality cannot maintain the roads by themselves. Thus, they are consumption activities that disappear over a longer period of time, rather than a shorter period of time.
A public road that continually operates at a loss is a consumption of resources, not an investment and production of resources.
On the other hand it might just rest content with the massive amount of productive, value-adding transportation activity their society is able to undertake as a result of the new roads.
Who might rest content? Those who don’t want to pay for a road and are willing to not use it?
That’s presumably why they built the roads in the first place, and after a certain amount of such activity has occurred and value has been created the public that built the road has recouped its expenses.
Ah, the just world fallacy strikes again.
You seem to be laboring under the idea that government expenditures consist entirely of transfer payments used for immediate consumption. But when a government builds a school that is not “consumption”. The school is part of the capital equipment of the society, so that is capital development.
No, a government school is also a consumption activity. They are not self-sustaining. They are not created for the purposes of recouping expenditures. Their purpose is to indoctrinate, I mean educate, children.
Major_Freedom,
0. I am not interested in a debate about the definition of the word “inflation”. An increase in the quantity of money is not called inflation. A process of growth of prices and wages occurring in time is defined as inflation and can be measured or estimated. The growth of the quantity of M0 may be called “Inflation in the Austrian School of Economic Sense” but this is not the same.
1. “What “data” could possibly disprove the necessity that the government has to find an external source of funds from which to pay back the debt it owes to lenders?”
1a. The debt is not repaid, it is merely rolled over. I am stating as a historic fact that the governments usually don’t reduce the holding of state liabilities which are in the hands of the non-government sector. They don’t have to do it in the fiat money era subject of certain rather obvious additional conditions. The composition of state liabilities may change. I was asking for an example from the modern era showing that the state debt was actually paid off because of economic necessity (money is also a form of debt) and there were no serious adverse consequences like the growth of the private debt. In Australia they are serious negative consequences of the policy of running budget surpluses during John Howard’s era.
1b. If we have to play a deduction-from-the-first-principles game then I have to disagree with the statement that the government has to find an external financing source. We don’t live in gold money / gold standard era and money is not a pre-existing commodity or it is not leveraged over a pre-existing commodity. The state can always honour its nominal obligations when the central bank buys back expiring bonds for cash and then records an overdraft on the government’s account. This is merely an accounting operation – an asset swap. You may say this is an inflation in the ASoES. To me this is irrelevant as it does not affect the real world in a significant way.
1c. I don’t need to wear the dogmatic straitjacket of the so-called Austrian praxeology in order to describe the social phenomena. I am interested in describing the real world. We use numbers to measure the value of assets (wealth) and liabilities. Money is a unit of account/value. In the end we may want to make valid predictions about the consequences of certain decisions or about the outcome of the processes. We can falsify these statements as in “common” science or in engineering. I would like to talk about these numbers.
Please show me the falling purchasing power of money caused by your “inflation in the ASoES” related to common good and services, happening right now around us. I am not interested in the rising price of gold, silver or real estate in some countries still experiencing a bubble. Please show me this phenomenon looking at the prices of food, energy, transportation and basic services. Please show me that changes in M0 cause the level of wages to change.
Let’s talk about the facts which can be verified not somebody’s imagination derived from the dubious axioms like “cats miaow and humans act”. My cat can act and I can miaow.
2. “The spending the government engages in consumes resources using money that it did not earn from prior production.” So what? This is eacatly what the doctor has prescribed when some agents keep hoarding money / other government financial liabilities and remove an equivalent volume of spending. It is not the quantity or velocity of money what matters but the act of removal of spending which is a flow (a derivative of a stock of money).
3. “just because idle workers are unemployed for a specific purpose but their disposition is being delayed, that it is somehow an act of “productiveness” for an unproductive entity to print and spend money to bring about idle resources to “move” once more in their previous employments or according to the values of those in government. Idle resources should be destroyed and the parts scrapped asap, if consumers don’t value them more than they value their money.”
Do you actually advocate destroying these unemployed people? Or just starving them almost to death like in Irealnd in 1845 and 1852 so that they will be more keen to work? Some died anyway. This is my favourite example about the functioning of the free market economy under gold standard. You may call Joseph Stalin a totalitarian mass murderer. I agree with that statement. But the colonial British government suppressing the Irish and the invisible hand of free market were also mass murderers. NB the Great Famine was actually one of the events which triggered the chain of events which led to the change in paradigm. SInce then the governments started to intervene more often.
4. “Please be aware that this is exactly what holds back productivity. Government borrows $100 million but does not invest it for profit. They borrow $100 million to SPEND it. That does not bring about an increase in wealth. ”
The government is not (or should not be) run for profit but for example building a bridge or a rail line will most likely increase the wealth of the nation. What you totally forgot about is that the government usually buys products and services from the private sector. They have increased profits because of the government purchase. This affects the investment decisions. For the guy who builds a bridge it is absolutely irrelevant where the money comes from. It can be a private loan or the money can be created by the government. One may question some forms of the government spending but if you have idle resources and low opportunity costs virtually any form of spending may be better than nothing.
5. “If you just consider what people do, then MMT, Keynesianism, Monetarism, all these schools of thought are based fundamentally on consumptionism. They believe consumption brings about productivity and prosperity.” This is actually a partially valid point in my opinion because it exposes the inherent contradiction in the modern capitalism. NB Kalecki also raised it quite a long time ago.
Regarding MMT you will find Bill Mitchell arguing strongly against wasting of non-renewable resources. To me the state MUST intervene and override the market processes based on human greed and profit seeking precisely because only such an intervention can force the economy to switch to more sustainable processes before it is too late and the environment is irreversibly wrecked as a human habitat. Some of the followers of the Austrian School of Economics are very active in negating the facts showing us that our shared (not private!) human habitat WILL be damaged as a consequence of the free-market economic processes.
6. “This uncomfortable truth has socialists like you and Wolf scrambling to find some outlet, some caveat, that can somehow refute economic science. So you make the absurd claim that there somehow exists goods to which economic reasoning cannot apply. Potatoes and skin cream is OK for the market and economic principles apply, but roads and water and schools is not OK for the market because economic principles allegedly don’t apply. The entire “public goods” doctrine is riddled with internal inconsistencies, appeals to popular prejudices, and non sequiturs.”
I am not on the receiving side but I wish to comment. What does the term “economic science” mean in these sentences – the Austrian economics based on praxeology which explicitly rejects modern methodology common in social sciences? This would shine in the era of medieval scholastic-ism. There is nothing departed farther from modern scientific methodology than the so-called “praxeology”. I am not interested in thinking what could happen if whatever. I can write a computer program which will do that for me (in fact there were attempts to do exactly that). Will it work? Will it make me rich? No the results are not very encouraging. I can show that some theories are false because they contain logical errors. I will never prove that some theories are true if I cannot validate the assumptions and axioms. You BELIEVE in them and take them as self -evident. I don’t. To me this is not science, this is a practice common in cults. Since some of the assumptions/axioms cannot be directly validated I have to verify whether the predictions of the theory are consistent with the observable reality. So far the Austrian economics has failed miserably by failing to predict that prices and wages haven’t risen as a consequence of the “inflation in the ASoES” or QE. The success of China also should act as a warning sign. You say – they will collapse. I say – don’t bet on this. Their system was never purely free-market and their civilisation is one of the oldest, it survived several thousand years. How old is the Austrian school of economics and have their principles been ever implemented?
Adam (ak):
“0. I am not interested in a debate about the definition of the word “inflation”.”
Neither am I. I simply define it as an increase in the quantity of money and volume of spending. You can define it as rising prices if you want.
“An increase in the quantity of money is not called inflation.”
According to your definition, no. But according to mine, yes. It doesn’t matter how you define inflation, as long as we both know what the other means when they say it. Incidentally, my definition of inflation is the original definition of inflation.
“A process of growth of prices and wages occurring in time is defined as inflation and can be measured or estimated.”
Defined by you, yes. Defined by me, no.
“The growth of the quantity of M0 may be called “Inflation in the Austrian School of Economic Sense” but this is not the same.”
What is not the same? The definition? Big deal. Definitions don’t matter. You say you don’t want to argue about definitions, but there you are making statements about, i.e. arguing about, definitions.
I am not going to use your definition of inflation. I don’t care if you believe one definition is “more right” than the other. Definitions are conventions, they are not declarative statements about reality that can be subjected to a judgment of truth or falsehood.
“1. “What “data” could possibly disprove the necessity that the government has to find an external source of funds from which to pay back the debt it owes to lenders?”
“1a. The debt is not repaid, it is merely rolled over.”
First, in principle rolling over debt still means the government is paying back borrowers. They just borrow from new borrowers to pay back the old borrowers. Debt is being repaid even when the debt is rolled over. Debt investors aren’t planning to throw their money down a sink hole when they buy government debt. They invest with the intention of eventually getting paid back. The fact that the government is not going into a negative cash flow when it rolls over the debt doesn’t mean that they are not paying back debt. They are. They are just paying it back with new borrowed money.
Second, rolling over debt still means the government is finding an external source of funds from which to pay back the debt it owes to lenders.
Third, rolling over the debt just delays the inevitable taxation to the future, where the taxation falls on taxpayers, or there is an inflation tax that falls on holders and earners of dollars.
“I am stating as a historic fact that the governments usually don’t reduce the holding of state liabilities which are in the hands of the non-government sector. They don’t have to do it in the fiat money era subject of certain rather obvious additional conditions.”
Yes, but as the government accumulates more and more debt at currently low rates, the day will come when rates are higher (they can’t stay low forever). The interest burden on the debt will become much higher and take up a larger portion of the total budget.
“The composition of state liabilities may change. I was asking for an example from the modern era showing that the state debt was actually paid off because of economic necessity (money is also a form of debt) and there were no serious adverse consequences like the growth of the private debt. In Australia they are serious negative consequences of the policy of running budget surpluses during John Howard’s era.”
How about a balanced budget?
“1b. If we have to play a deduction-from-the-first-principles game then I have to disagree with the statement that the government has to find an external financing source.”
You just made an argument above exactly consistent with that thesis.
“We don’t live in gold money / gold standard era and money is not a pre-existing commodity or it is not leveraged over a pre-existing commodity. The state can always honour its nominal obligations when the central bank buys back expiring bonds for cash and then records an overdraft on the government’s account.”
That is finding money from an external source, namely, the central bank’s printing press.
“This is merely an accounting operation – an asset swap.”
Calling dollars an “asset” is misleading because it makes it seem like dollars are valued by the market, when they are not valued by the market at all, but are compelled to use them due to legal tender laws.
Calling inflation of the money supply to buy previously issued debt a “swap” is also misleading, because it makes it seem like money was not created out of thin air, but merely transferred from one party to the other.
“You may say this is an inflation in the ASoES. To me this is irrelevant as it does not affect the real world in a significant way.”
It absolutely does affect the real world in a significant way. Just look at the last boom and bust that this process caused. And the fact that it is “irrelevant” to you, does not mean that it is not relevant to economic science and political economy.
“1c. I don’t need to wear the dogmatic straitjacket of the so-called Austrian praxeology in order to describe the social phenomena. I am interested in describing the real world. We use numbers to measure the value of assets (wealth) and liabilities. Money is a unit of account/value. In the end we may want to make valid predictions about the consequences of certain decisions or about the outcome of the processes. We can falsify these statements as in “common” science or in engineering. I would like to talk about these numbers.”
Talk about the numbers using what theory? The dogmatic straightjacket of the so-called MMT accounting tautologies?
I am interested in describing the real world. We use rationalist founded principles of knowledge to understand what “the numbers” mean. We know that money is not an abstract “a unit of account.” Money is a commodity. Money has as one of its properties the use of “unit of account”, but this is a corollary to money being a medium of exchange. It is because of its medium of exchange use that money can be used as a unit of account. Strip away the medium of exchange property, and money ceases to be money, and the commodity ceases to be a unit of account.
“Please show me the falling purchasing power of money caused by your “inflation in the ASoES” related to common good and services, happening right now around us.”
http://research.stlouisfed.org/fred2/series/CPIAUCSL
“I am not interested in the rising price of gold, silver or real estate in some countries still experiencing a bubble.”
So you ask about the falling purchasing power of money, but you’re not interested in hearing about the effects of a falling purchasing power of money, which is rising prices.
Haha
“Please show me this phenomenon looking at the prices of food, energy, transportation and basic services.”
Food: http://research.stlouisfed.org/fred2/series/CPIUFDNS
Energy: http://research.stlouisfed.org/fred2/series/CPIENGSL
Transportation: http://research.stlouisfed.org/fred2/series/CPITRNSL
“Please show me that changes in M0 cause the level of wages to change.”
Wages aren’t determined by M0. They are determined by the supply and demand for labor. The demand for labor is determined by the amount of savings and capital. Nominally, the amount of savings and capital can be increased by credit expansion and consequent inflation of the money supply.
“Let’s talk about the facts which can be verified not somebody’s imagination derived from the dubious axioms like “cats miaow and humans act”. My cat can act and I can miaow.”
Cool story.
“2. “The spending the government engages in consumes resources using money that it did not earn from prior production.” So what? This is eacatly what the doctor has prescribed when some agents keep hoarding money / other government financial liabilities and remove an equivalent volume of spending. It is not the quantity or velocity of money what matters but the act of removal of spending which is a flow (a derivative of a stock of money).”
The government is not a doctor.
If people “hoard” money, then the illness is not the hoarding, it is the economy that gave people a reason to “hoard” money. The only cure for a sick economy is unhampered economic calculation. That means no government printing and spending of money. The doctor is the market process, not legalized counterfeiters.
“3. “just because idle workers are unemployed for a specific purpose but their disposition is being delayed, that it is somehow an act of “productiveness” for an unproductive entity to print and spend money to bring about idle resources to “move” once more in their previous employments or according to the values of those in government. Idle resources should be destroyed and the parts scrapped asap, if consumers don’t value them more than they value their money.”
“Do you actually advocate destroying these unemployed people?”
Do you actually believe that the government not counterfeiting and spending money is an act of destroying unemployed people? Are people helpless in your worldview that they cannot find a new job in an unhampered market that they need to be rescued by mommy and daddy government?
“Or just starving them almost to death like in Irealnd in 1845 and 1852 so that they will be more keen to work?”
Workers weren’t starving in Ireland because of a lack of money. They were starving because of a lack of food.
You can’t eat money, as much as MMTers want to believe otherwise.
“Some died anyway. This is my favourite example about the functioning of the free market economy under gold standard.”
It wasn’t a free market.
“You may call Joseph Stalin a totalitarian mass murderer. I agree with that statement.”
You may call the free market evil and destructive. I disagree with that statement.
“But the colonial British government suppressing the Irish and the invisible hand of free market were also mass murderers.”
The invisible hand has never murdered a single person in the history of mankind, and never will. You just gave an example of governments suppressing people, and you blame the free market for that? You’re crazy.
“NB the Great Famine was actually one of the events which triggered the chain of events which led to the change in paradigm. SInce then the governments started to intervene more often.”
With disastrous results.
“4. “Please be aware that this is exactly what holds back productivity. Government borrows $100 million but does not invest it for profit. They borrow $100 million to SPEND it. That does not bring about an increase in wealth.”
“The government is not (or should not be) run for profit but for example building a bridge or a rail line will most likely increase the wealth of the nation.”
That is exactly what makes them a consumer, not a producer.
“What you totally forgot about is that the government usually buys products and services from the private sector.”
Consumption in a division of labor economy does that, yes. Spending money on consumption doesn’t help business and workers. It is what you did to earn that money that helps business and workers.
“They have increased profits because of the government purchase.”
Increased nominal profits from inflation that overrules the sovereign consumer is exactly what distorts the economy.
“This affects the investment decisions.”
Sovereign consumer spending patterns should affect investment decisions, not government inflation and spending.
“For the guy who builds a bridge it is absolutely irrelevant where the money comes from.”
False. It is entirely relevant where the money comes from, because it can tell us if the whole set of actions are productive and promoting of economic health, or not.
“It can be a private loan or the money can be created by the government. One may question some forms of the government spending but if you have idle resources and low opportunity costs virtually any form of spending may be better than nothing.”
Idle resources are idle for a reason. If a resource is idle, then it should be put back into use by way of unhampered economic calculation, not by way of government inflating and spending. Only through unhampered economic calculation can idle resources find their most highly valued use.
“5. “If you just consider what people do, then MMT, Keynesianism, Monetarism, all these schools of thought are based fundamentally on consumptionism. They believe consumption brings about productivity and prosperity.” This is actually a partially valid point in my opinion because it exposes the inherent contradiction in the modern capitalism. NB Kalecki also raised it quite a long time ago.”
Inherent contradiction in capitalism? Oh I get it. You’re a silly Marxist. And a confused one at that. Not only is there not an inherent contradiction in capitalism, but my identifying MMT, Keynesianism and Monetarism as fundamentally based on consumption, as a FLAW of the theories, can’t be any “exposing” of such an alleged “inherent contradiction.” To identify a flaw in the way people look at the economy isn’t a flaw in the economy.
“Regarding MMT you will find Bill Mitchell arguing strongly against wasting of non-renewable resources.”
Private property, free trade and economic calculation minimizes waste of all resources, renewable and non-renewable. Threats against private property, hampering free trade, and distorting economic calculation through funny money dilution, generates waste and encourages consumption over saving and investment.
“To me the state MUST intervene and override the market processes based on human greed and profit seeking precisely because only such an intervention can force the economy to switch to more sustainable processes before it is too late”
Wrong. The state lacks the requisite knowledge, and the moral justification, to “force” the economy to go in a more optimal direction. Only unhampered economic calculation can make the economy go in the optimal direction.
If humans are greedy and profit seeking, then clearly a government will also be greedy and profit seeking, the crucial difference being that they will be armed greedy and profit seeking people. Why would you want more gun toting greedy and profit seeking people, and less goods and services toting greedy and profit seeking people? You’re making no sense.
” and the environment is irreversibly wrecked as a human habitat.”
The environment is improved by capitalism and industrialization.
The free market changes the environment according to human values. When the environment is changed via industrialization then, it follows that the value of the environment improves. Value is a human concept. When the environment is changed by human activity, to be more in line with human needs and desires, then by the very nature of “value”, the environment is improved.
The environment is destroyed when human values are destroyed. Human values are destroyed through state violence against people’s material property.
“Some of the followers of the Austrian School of Economics are very active in negating the facts showing us that our shared (not private!) human habitat WILL be damaged as a consequence of the free-market economic processes.”
Utterly false. Our shared human habitat WILL be improved in a free market, where private property rights are respected / enforced.
Some irrational environmentalists are very active in negating the negation of the negation of the fact that capitalism improves human habitat, not destroy it.
6. “This uncomfortable truth has socialists like you and Wolf scrambling to find some outlet, some caveat, that can somehow refute economic science. So you make the absurd claim that there somehow exists goods to which economic reasoning cannot apply. Potatoes and skin cream is OK for the market and economic principles apply, but roads and water and schools is not OK for the market because economic principles allegedly don’t apply. The entire “public goods” doctrine is riddled with internal inconsistencies, appeals to popular prejudices, and non sequiturs.”
“I am not on the receiving side but I wish to comment. What does the term “economic science” mean in these sentences – the Austrian economics based on praxeology which explicitly rejects modern methodology common in social sciences?”
What does the term “modern methodology” mean in these sentences – economic science based on rationalist epistemology which explicitly rejects positivism in the social sciences?
“This would shine in the era of medieval scholastic-ism.”
Economic science is derived in part from Scholasticism, but goes far beyond it.
“There is nothing departed farther from modern scientific methodology than the so-called “praxeology”.”
There is nothing departed farther from economic science than so-called “positivism” and “empiricism.”
“I am not interested in thinking what could happen if whatever.”
If whatever what?
“I can write a computer program which will do that for me (in fact there were attempts to do exactly that). Will it work? Will it make me rich? No the results are not very encouraging.”
Computers must be programmed by humans. Computer programming is subsumed under economic science, although the technology and specialized knowledge is subsumed under physical science.
“I can show that some theories are false because they contain logical errors. I will never prove that some theories are true if I cannot validate the assumptions and axioms.”
What assumption(s) and what axiom(s) are you utilizing when you say “modern economic methodology” is superior to praxeology (and thymology)?
“You BELIEVE in them and take them as self -evident. I don’t.”
You BELIEVE in the same fundamental premises as I do, except you contradict yourself. I don’t.
“To me this is not science, this is a practice common in cults.”
I find your worldview to be a cult.
“Since some of the assumptions/axioms cannot be directly validated I have to verify whether the predictions of the theory are consistent with the observable reality.”
You’re just explaining the positivist methodology. But then I must ask, do you know the assumptions and axioms behind positivism? Obviously they cannot be observed, because that would just beg the question. It would be like saying the process of theory – observation – induction – falsify/confirm methodology is established and known to be a valid epistemology by way of utilizing the same theory – observation – induction – falsify/confirm methodology! You might as well claim that God exists, then when someone asks you to establish how you know it, you include God as an assumption in your argument to prove God exists.
The irony here is that the true “dogmatist” here is you, not me. I don’t presuppose my own conclusion is true as one of the premises for that conclusion.
“So far the Austrian economics has failed miserably by failing to predict that prices and wages haven’t risen as a consequence of the “inflation in the ASoES” or QE.”
Austrian economics doesn’t make predictions of what people will do, what they will value, nor what choices they will make. Austrian economics teaches us the nature of what people do and of economic laws. It isn’t astrology that claims to be able to predict how people will value of, and hence price, wheat and Jim’s wages next year.
Austrians are far more humble.
“The success of China also should act as a warning sign. You say – they will collapse. I say – don’t bet on this.”
I say I already am betting on it. I say you should bet on it too. I say you should realize that China’s success is due entirely to the government letting go of its control over the economy, starting in the 1970s. It is not due to the government itself.
“Their system was never purely free-market and their civilisation is one of the oldest, it survived several thousand years.”
? What kind of nonsense is this? The human race has survived the whole time the human race has existed. Does that mean everything we are doing is right? Don’t be silly. The mere existence of an area of land, and of people who are born and die on that land, whose culture has undergone drastic changes over those several thousand years, doesn’t mean that what they are currently doing is ipso facto correct.
“How old is the Austrian school of economics and have their principles been ever implemented?”
How old is science?
Austrians principles came CLOSE to being practised, from the 18th to late 19th early 20th centuries in the US. In that short time frame, the US economy went from being an agrarian society of self-sufficient farmers, to the world’s most prosperous economy that has ever existed in the history of mankind.
If Austrian principles are fully realized the world over, then in just a few generations, the world will become the most prosperous it has ever been, the safest it has ever been, the most clean and healthy it has ever been, and the most technologically advanced it has ever been. The rate of economic progress would be so incredible that poor people in one generation would be living like Kings in subsequent generations, just like what happened to poor people in the 18th to 19th/20th century US. They went from being poor farmers, to having cars, radios, televisions, washing machines, mass production of food, clothing, and all manner of civilian goods.
“Definitions don’t matter”
They matter a lot especially if you want to build a deductive system and reject “positivism”. I will come back to the statement that they don’t matter later using an example from your comment.
Redefining the meaning of words is the core issue here. You want me to believe in the bizarre medieval way of thinking about the world which is absolutely inconsistent with what I have been doing during my study and professional work and then you want me to adapt the particular set of axioms and definitions. I am supposed to do it as a matter of faith because one cannot prove axioms. Everything is neatly wrapped in scientifically-sounding philosophical words such as the critique of positivism. I flatly refuse to go down that path. The burden of proof is not on my side. I haven’t accepted the “irrational” axioms of positivism first before my cultish brainwashing into modern science started. I have been interacting with the world, with the environment since I was born. This is how I learned to walk, to speak, to use maths, to use tools, computers etc. I did not have pre-existing axioms of rational action embedded in my brain. Did you have? Think about it.
Let’s look at this particular statement: “The environment is improved by capitalism and industrialization.”
You don’t use the words in the usual meaning used by the other people. This becomes counterproductive as it confuses people – maybe this is the goal? English is not my first language. I had to learn it when I was a teenager. I am very aware how the meanings of words differs between the languages. Nor you nor Austrian SOE professors have a license to redefine the words like “inflation” or “rational”. You have to learn plain English and start using it like I did or else people will simply laugh at you.
I don’t question the internal consistency of the Austrian economics. What I do question whether it describes the real world. The geocentric theory in astronomy was also sound and rational – there was only one issue, the axiom that the Earth was sitting still at the centre of the universe was simply wrong and this was not merely a matter of choosing a different reference frame as that frame would rotate and the physical effects of the rotation can be measured. So the theory was wrong.
You have failed to demonstrate that an increase in monetary base is an inflation tax. This is the graph you have forgotten to link:
http://research.stlouisfed.org/fred2/series/BASE
to be compared with this one:
http://research.stlouisfed.org/fred2/series/CPIAUCSL
This is the Corriolis effect showing that the Earth is spinning against the inertial reference frame.
I am not getting into an econometric debate because this would require me to spend a few weeks familiarising myself with the toolkit (I studied metrology and probablistics but not econometrics) but it is obvious from that changes in monetary base do not cause changes in the CPI index.
If we compare broad money or even M3 then its quantity is
correlated with the CPI index but the causation is not obvious – the endogenous money theory explains the reality perfectly well.
… more to come later as I have to go to work now. I will be particularly happy to come back to the Irish famine example.
BTW did you ever ride a train from Nowy Targ to Krakow? Young Carl Menger must have seen the poverty of the people living there (the region was in fact affected by the famine in the late 19th century) but he did not develop any social sensitivity. Things have greatly improved recently but even 20 years ago you would instantly grasp what I was talking about. This is the primordial sin of the Austrian school of economics. Its fouder saw and experienced the reality but failed to grasp it. The reason why so many people in the Chicago area have Polish, Ukrainian or Jewish sounding surnames is the direct result of the endemic poverty and famine in Galicja.
let me continue… it seems that the centre of debate has shifted towards Austrian Economics in general. I doubt whether anyone except for the moderator reads this comment but anyway…
I would like to divide the issues raised in this discussion into two categories:
1. There are certain claims which can be verified either by pointing at the historic facts or data. There are also issues which can be found inconsistent with the non-controversial assumptions.
2. Then there is a category of claims and statements which can be derived from certain assumptions or axioms but if these assumptions are rejected then these statements cannot be falsified. They dangle in vacuum.
I have presented my views on the pseudo-rationalist medieval methodology used by the Austrian School of Economics. Since the most of the scientific and technological progress of the last 200 or 300 years occurred precisely because the “positivist” methodology was developed, I think that the burden of proof why I should reject that methodology is not on my side. How can the supporters of the Austrian School claim that the technological progress will solve grave environmental problems facing the humanity when they flatly reject the core part of the growth engine? Anyway I am done with praxeology for a while. I recommend reading 2 books: “Predictably Irrational” by Dan Ariely and “Debt. The first 5000 years”.
Let me show what is factually wrong with the examples you gave me. These statements belong to the first category. Debating statements belonging to the second, “deep faith in the axioms”, category is waste of time. NB Robert Murphy did a great job by presenting an example belonging to the first category that’s why I entered the initial debate.
1. “Do you actually believe that the government not counterfeiting and spending money is an act of destroying unemployed people? Are people helpless in your worldview that they cannot find a new job in an unhampered market that they need to be rescued by mommy and daddy government?” So you negate the very existence of involuntary unemployment by asking whether ” people [are] helpless in your worldview that they cannot find a new job in an unhampered market”. If the economy has only 50000 job openings and there are 200000 unemployed people, no matter how hard they push all of them will not find jobs. It is true that if the initial 50000 vacancies are filled up, the aggregate demand will rise and some new jobs will be created but this is usually not enough to employ everyone. So you have never been to a town with 30% unemployment and spoke to these people – lucky you. Negating the facts does not change the reality. Involuntary unemployment does exist and Say’s law is commonly violated in a monetary economy.
2. “Workers weren’t starving in Ireland because of a lack of money. They were starving because of a lack of food.” , “It wasn’t a free market.”, … ,”The invisible hand has never murdered a single person in the history of mankind, and never will. You just gave an example of governments suppressing people, and you blame the free market for that? You’re crazy.”
These statements are factually incorrect unless you twist the meaning of common English words and this shows how one can reach false conclusions sticking to the free market dogma:
This is what Irish themselves think about the famine.
“Government policy: the government felt that it was not their job to feed the masses, and that it was up to the Irish to sort out this problem themselves, an attitude known as ‘laissez-faire’.
…
Cecil Woodham-Smith, an authority on the Irish Famine, wrote in The Great Hunger; Ireland 1845-1849 that, “…no issue has provoked so much anger or so embittered relations between the two countries (England and Ireland) as the indisputable fact that huge quantities of food were exported from Ireland to England throughout the period when the people of Ireland were dying of starvation.” Almost throughout the five-year famine, Ireland remained a net exporter of food.
Christine Kinealy, a University of Liverpool fellow and author of two texts on the Irish Famine: This Great Calamity and A Death-Dealing Famine, writes that Irish exports of calves, livestock (except pigs), bacon and ham actually increased during the famine. The food was shipped under guard from the most famine-stricken parts of Ireland. But the poor had no money to buy food and the government then did not ban the exports.”
source:
http://www.cavanmuseum.ie/Default.aspx?StructureID_str=11
Of course they were suppressed by the British landlords and they did not have their own state which would have intervened. But this has nothing to do with whether market was free or not.
So in this context do you still think that ” The only cure for a sick economy is unhampered economic calculation. That means no government printing and spending of money. The doctor is the market process, not legalized counterfeiters.”? It was the market process and unrestricted ability to exercise property rights what failed the Irish people and “more market” and “more unhampered economic calculation” would yield the same result. One could have pushed harder. The result would have been more people dying.
3. “Inherent contradiction in capitalism? Oh I get it. You’re a silly Marxist. And a confused one at that”. I love this, you have outed me! So I am not an MMTer. I am going to spend the rest of the evening studying Andrew Kliman and his views on falling rate of profits.
4. “The free market changes the environment according to human values. When the environment is changed via industrialization then, it follows that the value of the environment improves. Value is a human concept. When the environment is changed by human activity, to be more in line with human needs and desires, then by the very nature of “value”, the environment is improved.” … “Some irrational environmentalists are very active in negating the negation of the negation of the fact that capitalism improves human habitat, not destroy it.”
Is getting rid of many species of animals and plants or widespread pollution, deforestation, destruction of soil, etc. an integral part of this improvement?
5. “You’re just explaining the positivist methodology. But then I must ask, do you know the assumptions and axioms behind positivism? Obviously they cannot be observed, because that would just beg the question. It would be like saying the process of theory – observation – induction – falsify/confirm methodology is established and known to be a valid epistemology by way of utilizing the same theory – observation – induction – falsify/confirm methodology! You might as well claim that God exists, then when someone asks you to establish how you know it, you include God as an assumption in your argument to prove God exists.”
But I don’t have to derive the knowledge about the consequences of putting my finger into the flame from any axioms. It is just common sense. It is patently false that modern science and technology has been developed as a consequence of some philosophers like Auguste Comte assuming a set of axioms and then building up the new positivist scholastics as a system of self-referencing statements. People started making physical and chemical experiments rather than playing thought games of the middle ages. As a result they developed more sophisticated technical devices enabling them to make more discoveries. This process spawned an accelerating process of technological and scientific progress. Otherwise we would still ride horse-driven carts and instead of embracing or fighting against capitalism with its good and bad features – lived in a half-feudal society of the 16th century. Positivism and empiricism is not a wicked copy, an evil twin of rationalist epistemology. I dare to say that the majority of the philosophers don’t even know how to hammer a nail or write a .NET application in C++ using managed code. I know how to do both.
6. “Austrians principles came CLOSE to being practised, from the 18th to late 19th early 20th centuries in the US. In that short time frame, the US economy went from being an agrarian society of self-sufficient farmers, to the world’s most prosperous economy that has ever existed in the history of mankind.”
– You forgot to mention the slavery, genocide of the native Americans and the destruction of the environment. But anyway, time will tell who is right.
I bet on the guys who follow the “I don’t care if it’s a white cat or a black cat. It’s a good cat as long as it catches mice” doctrine regardless whether they live in China or elsewhere.
Adam (ak)
“Definitions don’t matter”
“They matter a lot especially if you want to build a deductive system and reject “positivism”. I will come back to the statement that they don’t matter later using an example from your comment.”
No, I meant they don’t matter in someone’s argument based on premises. You are arguing OVER definitions. However, one can only argue over FACTS. Definitions “don’t matter” to issues of truth. You can define things any way you want, as long as they are meaningful.
“Redefining the meaning of words is the core issue here.”
For someone who said they didn’t want to debate over definitions, you sure are trying to debate definitions. This is your second time debating definitions.
Oh wait, I know what you meant when you said you didn’t want to debate definitions. You meant it in the sense that you want to be the authority over what definition I must use, and that if I don’t use YOUR definition, then I am somehow “wrong.”
But arguing over definitions is not arguing over facts. It is arguing over what agreements we should have when it comes to the meanings of words. You insist that I agree with your definition, but I am not insisting that you agree with my definition, because I know that definitions don’t matter for issues of discerning facts.
I am not going to use your definition for inflation. I am going to use mine. If you don’t want to agree to my definition, then don’t. I am not getting all pissy by you defining inflation as rising prices. You are getting pissy that I am defining inflation as an increase in the supply of money and volume of spending.
I don’t care if you say I am “redefining” the word inflation. I know that I hold the original definition for the term, and so if there is anyone who is using the “redefined” inflation, it is you, not me. Not that it matters anyway.
“definition that I somehow changed.”
I didn’t say YOU changed the definition.
“You want me to believe in the bizarre medieval way of thinking about the world which is absolutely inconsistent with what I have been doing during my study and professional work and then you want me to adapt the particular set of axioms and definitions.”
False. I do not want you to think in any “bizarre medieval way of thinking about the world.” If what I am saying is “inconsistent” with what you’re used to, then so be it. I am not going to coddle to you just so that you feel comfortable.
For definitions, I don’t expect you to use my definition of inflation. Use any definition you want. What you call inflation, I call rising prices. What I call inflation, you call increase in the money supply. You know what I mean and I know what you mean when the word inflation is uttered, so what’s the problem? Is this how you talk with people from different countries? In many cases they use the same word to mean something else as what the word means to you. Are you going to start a war of words, and are you going to play semantics, with those people too? Or are you going to think to yourself “I am confident in what I think, and if they want to use that word to mean something else, then I will respect it, not insist that they adopt my definition, and I will keep up with them and know that when they say “bobby” and “peeler”, they don’t mean a boy’s name or potato skin remover, they mean a police officer.
Why is it so hard for you to even accommodate people’s definitions? You don’t have to accept it for crying out loud, just understand what they mean when they say it.
“I am supposed to do it as a matter of faith because one cannot prove axioms.”
Is that an axiom?
“Everything is neatly wrapped in scientifically-sounding philosophical words such as the critique of positivism.”
*******************
Ed. note: Comment edited (clipped at asterisks). Vigorous debate is welcome, but do try to avoid egregious and unproductive forms of ad hominem.
Major_Freedom,
I am not intersted in debating definitions in the sense that “my meaning of the word inflation is correct while yours is incorrect”. This doesn’t lead us anywhere. I have pointed out that by assuming a certain system of definitions, assumptions and axioms one may most likely reach a certain set of conclusions.
We may have a different set of assumptions or axioms and still be able to debate as long as the definitions of words we use do overlap. Once we diverge in the meaning of words we can only try to manipulate each other and the debate is pointless.
What I want to point out is that you have made an assumption that government involvement in economic processes always makes people worse off. I know that this assumption can be logically derived from the axioms of Austrian School of Economics. It is that assumption what enabled you to say that public debt is a burden to future generations. However I flatly reject that assumption as unfounded and I reject the axioms of ASoE as patenly incorrect.
“Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.” (Archimedes). There is no external pivot point in this debate, you need to find one. You have failed to show or prove using commonly agreed statements about historic facts that free market processes always lead to better outcome for everyone than processes moderated or controlled by the government. I dare to say that I gave a counterexample showing that the lack of intervention in free market processes led to disastrous consequences.
Since we cannot employ deduction in our specific case what is left is an original model of overlapping generations producing and consuming apples. As long as that model is applicable, it can be shown that certain policies and rules may lead to redistribution of income making a generation of individuals worse off. I merely stated that we can find a set of policies and rules, prefectly applicable to our real world which will not make any generation of individuals worse off despite the presence of the public debt. This does not mean that I advocate selling bonds to offset deficit spending. It only means that the system does not have to punish any social group just because the public debt exists.
Therefore the generic statement that “public debt is a burden to future generations” is false.
Adam (ak):
“What I want to point out is that you have made an assumption that government involvement in economic processes always makes people worse off. I know that this assumption can be logically derived from the axioms of Austrian School of Economics. It is that assumption what enabled you to say that public debt is a burden to future generations. However I flatly reject that assumption as unfounded and I reject the axioms of ASoE as patenly incorrect.”
I flatly reject the assumption that violating individual property rights can ever make “people” better off, and can only make some individuals better off while making other individuals worse off in the short term, and it makes every individual’s life worse off in the long term.
You reject the axioms of the Austrian school? You deny that humans act?
“You have failed to show or prove using commonly agreed statements about historic facts that free market processes always lead to better outcome for everyone than processes moderated or controlled by the government.”
You have failed to show or prove using commonly agreed statements about historic facts that government intervention can do anything other than lead to worse outcomes.
“I dare to say that I gave a counterexample showing that the lack of intervention in free market processes led to disastrous consequences.”
Where? All I saw is you giving an example of government intervention making people’s lives worse off, and then you blamed the free market for it.
“Since we cannot employ deduction in our specific case what is left is an original model of overlapping generations producing and consuming apples.”
Which is all that is needed to refute the universal claim that debt cannot possibly burden future generations.
“As long as that model is applicable, it can be shown that certain policies and rules may lead to redistribution of income making a generation of individuals worse off. I merely stated that we can find a set of policies and rules, prefectly applicable to our real world which will not make any generation of individuals worse off despite the presence of the public debt.”
You aren’t getting the purpose of the OLG model. It wasn’t meant to be exhaustive.
“This does not mean that I advocate selling bonds to offset deficit spending. It only means that the system does not have to punish any social group just because the public debt exists.”
Needlessly punishing certain groups is precisely what government intervention results in.
“Therefore the generic statement that “public debt is a burden to future generations” is false.”
Non sequitur. This does not follow from what you said.
I have my own proof for why debt burdens future generations:
http://consultingbyrpm.com/blog/2012/01/my-names-bob-and-i-have-a-debt-addiction-problem.html#comment-31295
I think that I am done with this topic as my intention was not to convince anyone but primarly to validate certain arguments and reasoning paths which I used. Thank you for an opportunity to exchange arguments and personal opinions.
Time will tell who is mostly right and who is mostly wrong. We may both be mostly wrong as well.
[…] This old post on the question of how to make sense of the claim that government debt places a net “burden” on future generations—the question of whether there’s an economic case to be made that supports the common claim that today’s public debt levels are an immoral burden on our children and grandchildren—generated a fair amount of discussion here. The issue has been revived again in a recent back-and-forth that some of our readers might find interesting. The latest round began with a post by Dean Baker, who said this: A moment’s reflection shows why the debt is not a measure of inter-generational equity. At some point everyone alive today will be dead. At that point, the bonds that comprise the debt will be held entirely by our children or grandchildren. The debt will be an asset for the members of future generations that hold these bonds. This can raise distributional issues within a generation. For example, if Bill Gates’ grandchildren own the entire U.S. debt there will be important within generation distributional consequences, however this says nothing about inter-generational distribution. … […]
public debt is burden to future generation, the government should reduce their expenditures so as to make money available to the citizens and increase standard of living