The Debt Burden, Continued

Michael Stephens | October 18, 2012

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. …

As a generational matter, we pass a whole economy, society and environment to our children. Unless we have given them a really bad education, they would be crazy to opt for a government with a lower national debt in exchange for a weaker economy, a worse infrastructure or more damaged environment.

Nick Rowe took exception, kicking off the discussion here.  Brad DeLong responded to Rowe here; Mark Thoma responded here; and Baker responded here and here. Paul Krugman also weighed in, and then addressed the particular issue of foreign ownership of debt.

Comments


8 Responses to “The Debt Burden, Continued”

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  1. Comment by paul — October 18, 2012 at 2:56 pm   Reply

    These guys are all hopelessy lost. I started to comment over at Nick Rowe’s place but halfway through realized I would have to chase him down a thousand what-if rabbit holes to even get close to a place where the issue could be discussed rationally on system terms without all of the fog of conventional economic theory (snake oil).

    We will just have to wait for the funerals. It would be nice if they would stop teaching though so they don’t ruin any more young minds.

    Note to self…As soon as someone identifies him/herself as an economist, stop listening.

    • Comment by Andrew — November 7, 2012 at 3:09 pm   Reply

      Agreed. Dean Baker was perfectly clear and obviously correct. I’m not always a Mosler fan, but the fundamental notion is that he brings to the table is that we (as the people of the world) get to consume what we produce, and in a relatively short time frame. That’s it. All the stuff about bonds and debts and interest is just about who decides what should be produced, who decides who should do the production, and who gets to do the consumption. It really is that simple.

      These guys need to look at the economy sans money and see if what they’re saying still makes sense. It often doesn’t.

  2. Comment by Nick RoweOctober 18, 2012 at 7:01 pm   Reply

    The funny thing is paul, I find it a lot easier to explain my point to (heterodox) non-economists than to economists. It’s a lot harder to explain it to an economist who was once taught that “the debt is not a burden because we owe it to ourselves”, and that “our children will inherit (sic) the bonds as well as the liability to pay for them”. (“sic”, because the kids mostly *buy* the bonds, rather than inherit them, unless you believe in Ricardian Equivalence, of course.)

    The “we owe it to ourselves” argument seems to have come from von Mises, via Abba Lerner. I was taught it as an undergraduate, and so was Bob Murphy. It was a helluva struggle for me and Bob to escape that orthodox perspective. And now me and Bob are making converts everywhere, so waiting for our funerals won’t help you keep that tired old “we owe it to ourselves” orthodoxy!

  3. Comment by Greg Hannsgen — October 19, 2012 at 7:41 am   Reply

    In addition to the links, you might mention “The Case against Intergenerational Accounting: The Accounting Campaign against Social Security and Medicare,” by the team of Jamie Galbraith, Randy Wray, and Warren Mosler. ( http://www.levyinstitute.org/pubs/ppb_98.pdf ) Quite a team of authors on that policy brief, which is also pertinent to the debate! More from the Institute on the fiscal policy debate is coming soon.

  4. Comment by paul — October 19, 2012 at 9:28 am   Reply

    “me and Bob are making converts everywhere”

    That’s unfortunate.

    “waiting for our funerals won’t help you keep that tired old “we owe it to ourselves” orthodoxy!”

    That wasn’t my argument, although that will do in a pinch when talking to lay-persons. My argument is simply this:

    There is no explicit liability held by the citizens to re-pay the “debt”. Any liability is held by the government which will always be able to satisfy in perpetuity. No “burden”.

    Now, if you want to bring implicit liabilities to the argument, they can be made both ways, and the list is endless.

    If the government makes the choice someday that the “debt” should be paid down, that will create a “burden”.

    If the government pursues policies that increase inflation or drive us into deflation that will create a “burden”.

    These are all choices made by the government, not a function of the arithmetic of debt itself.

    My biggest criticism of mainstream economics (and your brand too whatever it is) is that it is either unaware of or chooses to ignore the implications and should I say, mathematical straight-jacket that system relationships place on an economic system, or any system for that matter. It renders most of your arguments moot (including the one before us).

  5. Comment by paul — October 19, 2012 at 9:34 am   Reply

    Nick,

    “I find it a lot easier to explain my point to (heterodox) non-economists than to economists.”

    Your point isn’t so complicated that it should need a lot of explanation. It’s just wrong, that’s where the problem lies.

  6. Comment by Nick RoweOctober 19, 2012 at 12:18 pm   Reply

    paul: “If the government makes the choice someday that the “debt” should be paid down, that will create a “burden”.”

    It’s great to see you say that. Because a lot of people have been telling us that’s wrong, because “we are paying those taxes to ourselves as interest+principal on the bonds”. And those are the people we have been arguing against.

    “These are all choices made by the government, not a function of the arithmetic of debt itself.

    My biggest criticism of mainstream economics (and your brand too whatever it is) is that it is either unaware of or chooses to ignore the implications and should I say, mathematical straight-jacket that system relationships place on an economic system,…”

    Which is precisely where we get into the implications of the government budget accounting, and whether or not it imposes a mathematical straight-jacket that prevents governments choosing and makes the future burden a function of the arithmetic of the debt itself. You can’t just ignore those systems relationships when it suits you.

  7. Comment by paul — October 19, 2012 at 5:05 pm   Reply

    “we are paying those taxes to ourselves as interest+principal on the bonds”

    Nick,

    I hope you are merely relaying what “they” say here and it’s not what you believe, because taxes don’t “fund” the interest on the bonds (unless the government decides they should…something it hasn’t done in 150 years).

    “Which is precisely where we get into the implications of the government budget accounting, and whether or not it imposes a mathematical straight-jacket that prevents governments choosing and makes the future burden a function of the arithmetic of the debt itself.”

    “whether or not it imposes a mathematical straight-jacket that prevents governments choosing”

    There are mathematical straight-jackets. One being that it is impossible for a closed economy to borrow from itself and increase it’s own level of net financial assets. The new assets must come from an external source. Thus the National Debt is not debt in the normal sense of the word. It is misleading to say otherwise. Public debt (in the US) is an accounting abstraction necessary to inject net financial assets into a closed system. The bond-issuing mechanism is a Rube-Goldberg contraption designed to reduce the chance for inflation.

    The government’s choices (which are political in nature althoug they shouldn’t be) can create additional constraints which are completely voluntary. This is the position of MMT…that other than the mathematical constraints the framework is based on, all constraints are voluntary.

    I maintain that the two systems (political and economic) are completely separate and detached from each other.

    The amplifier is separate from the speakers. We don’t analyze them together, we do them separately and match the loads.

    Combining the two creates complexity and confusion. The analyses must be approached independently. If there is an interaction between the two systems, that can be analyzed separately also.

    My biggest problem is with folks that conflate the relationship between the political system and the economic system (almost everyone). In engineering this kind of problem definition tends to render the solution indeterminate.

    The fact that the political system can and will make poor (or puposefully skewed towards a particular group) choices is not really relevant to an analysis of whether a system is sustainable or not. It doesn’t help to claim like “the Sun may burn out” in order to make a point that something bad can happen down the road. We make choices based on likelihoods…we play the percentages.

    Governments have shown they can and will make any choice necessary to suit their pupose. Math systems on the other hand leave no questions about the system unanswered.

    If you are in general agreement with these things then we are on the same page and I apologize if I accused you of something you aren’t guilty of.

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