I visit Matt Yglesias' house (HT JeffreyY). I drink one litre of milk from his fridge. I write Matt an IOU for one litre of milk.
1. If Matt subsequently tears up that IOU, then I am richer and he is poorer. Taking the two of us together, in aggregate we are neither richer nor poorer if Matt tears up the IOU. Tearing up the IOU doesn't bring the milk back.
2. Therefore there is no aggregate cost to me and Matt of me drinking more milk from Matt's fridge and writing Matt another IOU.
1 is of course true. But 2 does not follow from 1. 2 is false.
We can't do anything about the existing stock of national debt. "It's no use crying over spilt milk", even if it was spilled down my throat rather than spilled on the floor.
But that doesn't mean there is no cost to spilling more milk. True, there's also a benefit, if I'm thirsty, and it's spilled down my throat rather than on the floor. But there's a cost too. If the government runs a deficit now, there is a cost to future taxpayers. Sure, there's a benefit too, depending on what the government does with the funds it borrowed. And we should compare those benefits to those future costs. But we shouldn't pretend those costs don't exist.
The existing stock of debt represents the costs of past deficits that cannot be undone. We can't turn back the clock. But the fact that we cannot turn back the clock on past deficits says absolutely nothing about whether we should run a deficit now. We need to compare the benefits to the cost to future taxpapers.
Matt Yglesias was defending Paul Krugman's recent posts on the burden of the past debt and the desirability of current deficits.
Here's Paul:
"Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing. They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments.
This is, however, a really bad analogy in at least two ways.
…..
Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves."
This post is based on Noah Smith's post, and on my original post.
Worthwhile Canadian Initiative 
Nick: “But it would require a collective decision by the cohort to do that.”
The collective action is for example via debt repudiation by the government. Or cancellation of the pensions/health care of A or, if B was OK with the scam, the pensions/health care of B. There’s always recourse. If the old man was a drunkard, stick it to him!
What’s missing here is a strong sense of the superior output aspect, although it exists (in the realm of those with differential tastes in whiskey).
Let’s consider a different example — and the output of shade. Your production good is a small poplar tree (grows 8 ft plus per year) on the south side of the house which requires no maintenance. You can cut the tree down and use the limbs to construct temporary shading over your windows — until the leaved soon dry and fall off.
Or you can wait for the tree to grow and eventually provide shade for the whole house year after year after year.
There is a choice set before the tree owner between a small output now, or a far greater output later.
A Keynesian might say, lets boost output now by using idle labor and idle small trees, in conjunction with the the diversion of other resources to help with the tree cutting, etc. If we borrow from Jack to pay for the additional diverted resources taken away from other uses, we can simply pay Jack back later, an in total we we all be in the same state of total wealth, simply transferring resources temporarily from Jack to us, and then later back the other way. And we’d be ahead the short term shade provided temporarily by the leaves on the cut limbs.
But over the long term, in fact, we out out the massive shade provided by the grown poplar tree, producing output continuously for decades.
Nick writes,
“Greg: I think I sort of see it. Take a horribly crude and oversimplified example. You lay down a stock of raw whisky to age, with either a 5 year or a 10 year tamper-proof time-release lock on the barrel. “K” looks exactly the same in both cases, since the “historic cost” (yes, those are “scare quotes” around “historic costs” because we both understand that point) of the investment are exactly the same in both cases. But the time-structure of production is very different in the two cases. And it matters for planned future consumption.”
Consider another example. You have 3 crappy iron hammers and everything else you need to forge and shape knives.
Where are to scenarios, assuming the same beginning production goods, inputs, and the same labor time:
(1) You use the crappy hammers to quickly turn out a set of six dull and crappy knives that don’t last more a week or so — by the time the 6 knives are made all 3 of your hammers have cracked and detonated.
(2) You use the 3 crappy hammers to build a very strong hammer that won’t crack — a process with takes greater time heating the coals, waiting for cooling, etc. (When not working, you use your labor time for other tasks, as you did also under the other scenario). You end up destroying the crappy hammers in the process, you then turn to using your remaining labor time assign to this iron working to carefully hammer out 5 very strong and very sharp knives that won’t crack and last for decades.
In the first case, you have the output earlier, because your production process is shorter — but your output is far inferior.
In the second case, the output is far superior, because your production process is longer — although you have to sacrifice waiting till a later time to have your output.
Now, we can borrow from Peter & Paul to finance either process (1) or to finance process (2).
When we pay them back later after financing process (1) in the aggregate we are worse off — in the long run we have few goods and inferior goods.
When we pay them back later after financing process (2) in the aggregate we are better off — in the long run we have more goods and superior goods.
If incentives tend to channel private borrowing in a private allocation system toward production process (2), and incentives tend to channel government borrowing in a government allocation system toward production process (1), government borrowing now & government taxing later will make us worse off than the private alternative process / system.
Nick,
You probably saw it, but this week’s post by Fatas and Mihov seems to get it right:
http://fatasmihov.blogspot.com/2012/01/debt-does-not-matter-spending-and-taxes.html
Nice discussions.
I checked some SFC literature and language of national accountants and seems they have always measured burden as a flow, not stock.
So one sees burden used for households as the interest plus principal payments in any given period such as a quarter or a year. (i.e., repayment of principal paid in one period, not the whole principal) And similarly the tax burden.
In the international case, the burden is the total interest paid to foreigners in any given period.
Paul Krugman had a recent post on the US net investment income of the balance of international payments, which to everyone’s surprise (actually a few who track it) has remained positive and that there is no debt peonage in his way of putting it. I disagree with him because he is talking of the potential future as well as present — faster the attempt of the US to bring unemployment down (by either fiscal or monetary means), the quicker this will turn negative.
Ramanan,
I think the issue being discussed is, in effect, the net burden – including the case of using the definition of burden that you cite.
The key question relates to the interpretation of “we owe it to ourselves”.
To some, that implies zero net burden – which it does on the surface, including the case of using your definition.
But that fails to consider the relationship of the debt to future taxation.
So the analysis has to focus on whether “we owe it to ourselves” is the right or wrong interpretation of net burden. And it’s not necessarily the case, because it depends on the incidence of future taxation.
BTW, all of the discussion in this debate that relates to the effect of government investment in NPV positive projects, etc. is actually peripheral to the central question of taxation. The central question is the connection between debt and future taxation – regardless of how government NPV projects may slow the growth of debt, other things equal, for example.
The net burden is the tax.
Etc.
P.S.
The fact that the government owes the debt to the foreign sector is of no consequence to the question of whether or not there is a net burden for a future generation of the domestic sector (which IS the question).
The government comes to a point where it taxes the domestic sector to pay down the debt.
It swaps the proceeds of the tax with the foreign sector in exchange for extinguishing the debt at maturity.
The bond maturity transaction in and of itself has no effect on the domestic sector.
But the tax that is paid to fund the bond maturity transaction is a net burden for the generation that exists at the time when the debt is paid down – just as it is in the case where the maturing bond is owned by the domestic sector.
JKH,
Yes I figured the points from reading all the comments.
I guess both saying debt is a burden and debt is not a burden are misleading.
Here is how I see it (now). If B was insufficiently powerful (too young, whatever) to be properly represented when A enriched themselves at the governments expense, then B is under no moral obligation to recognize the incurred liabilities. The solution is to repudiate the bonds. This is not unlike how we traditionally treat stolen goods or proceeds of crime (in this case fraud). If you have bought stolen goods (the bonds) then you are likely to take a loss even if you were an unwitting participant. If B does not repudiate the bonds then they are likely to end up taking the loss when C does repudiate them. The moral of the story is that if you are the victim of a scam, the solution is not to perpetrate the same crime against some other helpless victim. The solution is to blow the whistle and try to reclaim your losses. Since nobody is forced to victimize the next generation there is no way that A can burden future generations other than B who has an obligation to take recourse as soon as they are capable.
JKH,
The fact that the government owes the debt to the foreign sector is important in my view. More importantly, it is the net indebtedness of a nation but in many cases, the public sector picks up an important piece of this.
For to service the net debt to foreigners, interest has to be paid and as far as interest on government securities held by foreigners is concerned, taxing and paying it off.
(I understand an MMT ultra-quibble which may enter in all this – saying taxes are destroyed and a narrative along those lines 🙂 – that is an NB for someone who may want to interrupt)
Just one example: A poor nation faces high unemployment: The government can relax fiscal policy to counter this but because of this relaxation, and the increase in income due to this the nation may suffer a widening of the trade deficit and as a result a higher net indebtedness to foreigners. Since the government of this poor nation cannot keep doing this, it has to adjust demand sometime in the future – such as by higher taxation. So in this sense, there is a burden entering the game.
Good points, Ramanan.
But a few moving parts that should be separated out in my view.
Expansive fiscal policy can affect the current account deficit, yes.
But the current account deficit doesn’t necessarily NEED to be funded with government debt.
So the fact that government debt may end up being held by foreigners is separate issue from the current account deficit per se.
And we’re back to the question of whether or when the government will need to tax in order to pay down its debt.
And that is the issue here.
Not that fiscal policy may affect the current account deficit, although that is a separate and very important issue that you have hammered home on the MMT blogs, to your credit – (although not necessarily from the MMT guys 🙂 )
K,
That does illustrate the potential burden on B.
I suppose B could organize a boycott or buyers’ strike on the bonds – A can’t even square its own financial position unless B agrees to buy its bonds.
That would force A either to will the bonds to B, or tear them up out of spite.
As far as organizing is concerned, B has a lifetime to put pressure on the government to stop spending so much, as opposed to being forced to raise taxes to the point of running surpluses to pay down debt.
The net burden is the massive lost output.
Opportunity costs rule.
“The net burden is the tax.”
I agree with Audrey:
“Do you think there are economists out there arguing to borrow a bunch of money to spill milk?
Because this is certainly the way you’re coming across in your discussion at large.”
Until and unless Nick wants to make the argument that Krugman and whoever else he’s trying to attack are arguing in favor of borrowing to spill milk, his whole argument stinks of a Mankiw-like disingenuity.
I guess my point is that yes, all else being equal, more debt now means less consumption in at some unknown point in the future. But in reality we can say with pretty strong certainty that all else will not be equal in the future. If you’re going to buy Keynes at all, at minimum there will be multiplier effects from the deficit spending. But even if you aren’t, what happens with the business cycle may very well not mean higher tax rates in the future (#4 in Nick’s prior post). But even without that, the future will be influence by so many other fiscal, tax and monetary policy decisions that I just don’t see it as at all credible that deficits now mean taxes later so there’s no point in fiscal stimulus.
JKH,
Yes I understand very well that “But the current account deficit doesn’t necessarily NEED to be funded with government debt.” and I have an example which isn’t surprising – Australia.
It certainly makes the argument more involved – cases like this 🙂
It could as you probably pointed out, also be the case that foreigners hold a lot of government bonds independent of net indebtedness. I assume that would have been the case with foreigners holding a lot of US Treasuries well before the US turned a net debtor nation.
And of course, the reasoning does depend on behavioural assumptions – my point being that external debt has all the characteristic of intuitive debt under this assumption. The government has to keep taxes high to keep domestic demand low and in this way from the households’ point of view, higher taxes are burden and from a nation’s viewpoint, interest paid is the burden. In the special case when foreigners’ holding as a proportion of net debt is high, one can give the intuitive explanation that taxpayers are taxed in part to pay interest to foreigners.
Paul: “Until and unless Nick wants to make the argument that Krugman and whoever else he’s trying to attack are arguing in favor of borrowing to spill milk, his whole argument stinks of a Mankiw-like disingenuity.”
Google “No use crying over spilt milk”, “bygones are forever bygones”, “sunk costs”; understand the important role of this idea in economics; then retract your accusation.
We can certainly pass a real burden onto later generations by using up irreplaceable resources, such as fossil fuels. They will then have to find ways to do the same things with other resources, such as sustainable energy or even hydrocarbons from the solar systems gas giants. Either may or may not require them to spend more time and effort obtaining energy, which, if the latter is the case, is definitely a burden on them. They have to spend more time and effort getting energy and have less time to do other, more enjoyable, things.
But it is easy to show that the idea of passing a monetary debt on to future generations is nonsense. Assume that we can. Generation one passes it’s debt to generation two. Well, what stops generation two from passing on it’s bigger debt to generation three, and so on forever? Nothing! Sure the debt will keep increasing but it’s only a nominal debt, not a real debt. And any generation can pass it to the next one forever. So since it never has to be paid it’s not a burden and that contradicts the original assumption.
As for taxation to hold inflation in check, so long as there is enough purchasing power for humanity to purchase all it can produce, how is this a burden? You are just getting rid of money that is of no use to you because you can’t buy anything new with it once everything has been bought. All you can do is bid up prices and that can be stopped by simply removing enough purchasing power by taxation so that you can’t bid up the prices any more, but still you can buy everything you want.
Ramanan,
“In the special case when foreigners’ holding as a proportion of net debt is high, one can give the intuitive explanation that taxpayers are taxed in part to pay interest to foreigners.”
Maybe – “taxed in part” arguments get a little more complicated. However, unless the government is running a budget surplus (indicating “net tax” or “net burden”), the debt is expanding. And as long as the debt is expanding, the “we owe it to ourselves” argument rules, I think.
E.g. the “Ponzi condition” of the interest rate less than the growth rate means in theory the debt could expand forever. So suppose the debt does expand forever. And suppose it does turn out that the foreign sector buys all the bonds issued by the government. And suppose the current account deficit exactly matches the expansion of the debt. That means the foreign sector is funding the entire deficit, de facto. So the foreign sector in this case has literally taken over the “we owe it to ourselves” paradigm of deficit financing. And under the assumptions, there will be no need for taxes from the domestic sector to pay off the debt. So there is no net burden according to Nick’s model.
I think that example means that as the interest rate on the debt approaches the growth rate, the interest on the debt approaches accounting for the entire current account deficit – which would mean that the current account deficit approaches the size of the services deficit (interest) without any goods deficit. Not sure. But it works so long as foreigners don’t won’t to sell their bonds back to the domestics in exchange for goods.
AFU,
“So since it never has to be paid it’s not a burden and that contradicts the original assumption.”
It doesn’t contradict the original assumption. It’s a different assumption.
The original assumption (a scenario really) was that the debt would be paid down with taxes. The conclusion from that is that the debt is a net monetary burden (or real burden in Nick’s apple model). And Nick’s model (and my accounting model in the monetary case) shows how its a burden.
Assuming a scenario of indefinite debt expansion doesn’t contradict any of that. It’s just a different assumption. And its completely complementary in terms of the conclusion.
Ramanan P.S.
“I think that example means that as the interest rate on the debt approaches the growth rate, the interest on the debt approaches accounting for the entire current account deficit – which would mean that the current account deficit approaches the size of the services deficit (interest) without any goods deficit. Not sure. But it works so long as foreigners don’t won’t to sell their bonds back to the domestics in exchange for goods.”
i.e. still no net tax burden, obviously
and if the foreign sector is in effect financing the entire interest on the debt, its difficult to invoke the “taxed in part” argument – because all taxes then must be directed toward domestic uses, by construction
I visit Matt Yglesias’ grand Coolee Dam. I take charge of the dam.. I write Matt an IOU for one Grand Coolee Dam
1. If Matt subsequently tears up that IOU, then I am richer and he is poorer. Taking the two of us together, in aggregate we are neither richer nor poorer if Matt tears up the IOU. Tearing up the IOU doesn’t eliminate the dam, which still stands.
2. Therefore there is no aggregate cost to me and Matt of me taking ownership of Matt’s Bonneville Dam, and writing Matt another IOU.
1 is of course true. And 2 is equivalent to 1. Therefore 2 is just as true as 1.
I visit Matt Yglesias’ grand Coolee Dam. I take charge of the dam. I write Matt an IOU for one Grand Coolee Dam
1. I notice Matt’s 1,000,000 idle hand shovels. I take I take charge of Matt’s idle hand shovels. I write Matt an IOU for 1,000,000 hand shovels. I notice 1,000,000 idle workers. I put the 1,000,000 idle people to work filling in the reservoir behind Grand Coulee Damn making use of the 1,000,000 previously idle hand shoves. The economy returns to full employment. All idle capital goods are put to use — and used up — all of the hand shovels are eventually broken or worn out.
2. If Matt subsequently tears up the IOU’s for Grand Coulee Damn & the 1,000,000 shovels, then I am richer and he is poorer. Taking the two of us together, in aggregate we are neither richer nor poorer if Matt tears up the IOU. Tearing up the IOUs doesn’t eliminate the dam, which is sits there — but now with no reservoir standing behind it. Nor does tearing up the IOUS eliminate the physical remains of the shovels, which exist as broken parts littered all about Grand Coulee Dam.
3. Therefore there is no aggregate cost to me and Matt of me taking ownership of Matt’s Bonneville Dam, and writing Matt another IOU.
1 is of course true. So is 2.
But notice what matters here. 1 and 2 are trivially true. Substantively, what matters is that,in aggregate, taking the two of us together, we are much poorer if we have destroyed the electrical generation and water storage and distribution capacities of Grand Coulee dam — and broken our shovels to boot — all because of the efforts which were made possibly by my ability create full employment in labor and capital via the appropriations made possible by the issuing of government enforced IOUs allowing for the legal transfer of resources.
As for 3, we don’t know what the aggregate cost is of your taking ownership of Bonnerville Dam might be, unless we know what you do with it, and compare the to what Matt would have done with it.
“The original assumption (a scenario really) was that the debt would be paid down with taxes. The conclusion from that is that the debt is a net monetary burden (or real burden in Nick’s apple model). And Nick’s model (and my accounting model in the monetary case) shows how its a burden.”
But of course that’s an assumption that is irrational in a modern financial system. The government can always pay off the entire debt simply by creating money. Now that’s probably a bad idea and it’s probably a good idea for the Government to issue debt so people who want to save safely can do so. But it is wrong to say that the government funds it’s spending with debt. It issues debt as a service to the economy but when the economy is not producing anywhere near it’s capacity it is silly to say that the necessary deficit must be paid by issuing debt.
Of course we are talking about the national sovereign government, not Provinces or Cities. They have to earn revenue in order to spend it. But the Canadian government does not and there are situations in which it shouldn’t. The real problems we face are not financial but physical, and the physical problems are long run while the financial “problem” can be cured quickly and relatively painlessly.
We then still have to figure out how to arrange an economy that is sustainable into the distant future, but we’ll never be able to do that if we keep being enslaved to monetary illusions.
By the way I am the “FBU” you were talking to. I don’t know why I thought I should do that – I have no desire to remain anonymous.
Ed Seedhouse (Just in case my name doesn’t get attached to the response this time)
–Nick Rowe comments:
–“Google “No use crying over spilt milk”, “bygones are forever bygones”, “sunk costs”; understand the important role of this idea in economics; then retract your accusation.”
No, Nick. YOU’RE the one making the accusations of major economists being clueless. Don’t deflect.
So YOU google “Krugman wants to issue bonds and use the money for spilt milk/whatever…” and if you find anything remotely credible, I’ll happily retract.
Until then, I remain convinced you’ve just set up a big fat straw man.
In the real world, we do have capital.
If government debt crowds out the production of new capital goods, then there is less output in the future.
This effect exists if we assume a complete absence of markets, money, contracts, etc.
If Robinson Crusoe spends more time gathering coconuts and less time repairing the hut, when Crusoe Jr. inherits, he has to fix up the hut and has less time to gather coconuts.
Rather than Crusoe and Crusoe Jr., consider generations living in an “ideal” socialist commonwealth where mankind has taken its destiny into its own hands and directs all production and consumption (present and future.)
Everyone agrees that something like this is possible, and that maybe government debt in a market economy would could have an effect something like this–less capital accumulation.
The Lerner position is that if we assume that this does not happen, then there is no way that government debt can create a burden for future generations.
One way to see the Buchanan position is that if Lerner is right, then we are saying that debt financed government spending makes today’s bond holder worse off and the beneficiaries of the government spending better off.
Buchanan’s view is that no, the bondholders are not worse off. Presumably, they are slightly better off. It is an exchange. It isn’t a gift or a confiscation of income or wealth.
Rowe’s story is that the bondholders sell the bonds and consume later and they receive consumer goods produced by young people. When those young people are old, they will sell the bonds and get consumer goods from younger people, and so on.
I think the Lerner/Krugman assumption is that the bondholders just give them to their children. (You know, bondholders are rentiers–the exploiting capitalist class.)
Anyway, the beneficiaries of the government spending and those who bought the bonds are all dead now. And so, we just have the children. Some of the children just have these bonds that were a free gift. If there is a default, then they just don’t get the gift. If, instead, interest and principle payments are made, then it is a tranfer, with the taxpayer (the working class) worse off, and those capitalst kids inheriting the bonds better off. (Doesn’t it make punative taxation of interest income look just?)
Of course, if we look back to the original bond buyer, who we are assuming just wants to give a bequest of bonds so that his children can collect this future transfer, then no longer can we assume that the bondholder is really better off if this future transfer is conditional.
For example, suppose the bond contract was personal–you literally cannot transfer it to your heirs. Suppose that when you die, all government bonds are subject to a 100% wealth tax. Under those conditions, our capitalist class bond buyers would be giving gifts to fund the current government spending. Or.. maybe they wouldn’t have bought the bonds.
Now, suppose we lie, and tell the bond holders that these are transferable promises that you can give to your children, but really, we don’t plan on paying.
Well, there are benefits from government services, and the bond buyer is happy like before (he,he,he.. sucker.) And then, the spoiled capitalist children fail to obtain surplus value from the working class, so they are worse off than they would have been if the tranfers were made, and the workers are better off.
The Buchanan view is that treating government debt in this way is unreasonable. The bond buyer is no worse off and a bit better off because, in this situation, the children of the capitalist will earn income at the expense of the working class. Or, more generally, the future bond holders will earn income from future taxpayers.
If they really aren’t contracts, then.. what are we talking about? Again, what is the burden of government spending when it is funded by giving people thank you notes? Well, in that case, the those giving away the wealth to fund the government spending sure enough bear the burden and there is no burden to future generations. Oh, unless we start imagining that they might have given the money to their children instead of to the government (capital accumulation.)
Ed,
“But of course that’s an assumption that is irrational in a modern financial system. The government can always pay off the entire debt simply by creating money.”
It’s not irrational.
I don’t know if you’re coming from the MMT perspective or not (doesn’t really matter, since most of MMT is just accounting), but your interpretation lends itself to some observations from what I would refer to as some of the better insights of MMT.
We know that there’s no effective issue of solvency from a fiat currency issuing perspective. That’s another way of saying what you’ve said about the operational capacity for money creation to replace debt, which I agree with.
But the reason for paying down debt with taxes doesn’t necessarily have anything to do with the issue of solvency.
It may have everything to do with the issue of real resource capacity and inflation pressures.
So paying down debt with taxes is simply a form of fiscal tightening for those reasons.
And that’s a very rational proposition unto itself.
Now how likely is it that a fiat currency issuing government need go into surplus, (which is the precondition for paying down debt)?
Well, it’s not exactly the favourite dream of MMT’ers, but it happens. It happened in the US, and it happened in Canada, in a very meaningful way.
The point of Nick’s post is that it demonstrates the nature of the burden when it happens.
Now as far as the government paying off the debt with money creation is concerned, that’s irrelevant to the issue of the potential future tax burden. That does absolutely nothing to change the fact of the cumulative deficit. The cumulative deficit is now just intermediated into the financial system by banking system deposits instead of debt securities. The cumulative deficit remains. It’s just not accurate to label it as debt, because there are no debt securities outstanding.
And the fact that there are no debt securities outstanding in your scenario again does not change the fact of the existence of a cumulative deficit. And it does not change the fact that potential real capacity and inflation pressures may cause the government to tighten fiscally, to levy taxes, and to pay down the cumulative deficit or at least some of it (Nick’s logic only requires that a non-zero portion of the debt be paid down). And when the government runs a surplus to pay down the cumulative deficit, it will remove deposits from the banking system instead of removing debt. That’s the only difference, and it’s an irrelevant difference in terms of the logic of Nick’s model.
Bill Woolsey,
Regarding Rowe/Lerner/Krugman:
Agreed – that Nick’s model depends on the final cohort buying rather than inheriting the bonds.
If the final cohort inherits the bonds as a gift, that final cohort will end up whole and experience no net monetary or real burden in Nick’s model.
The inheritance event effectively transfers the burden back to the previous generation, which will absorb the net burden unless they too inherit the bonds from the generation before them.
And so on, regressing back to the generation that bought the bonds at tender and who also received the transfer payment. That first generation, which ended up with a net benefit in Nick’s model, would also end up flat instead if they bequeath the bonds to their descendents, instead of selling them.
In summary, if the inheritance chain is complete from start to finish, there is no net burden for any generation from the issuance of the bonds to their repayment with taxes.
I suspect this was all obvious to you, but I thought I’d write it out anyway.
Re MMT’s taxes and “real resources” angle, did any MMTers ever comment on Landsburg’s “man who can’t be taxed” article, which drew a lot of heat from the DeLong/Krugman axis last year?
JKH,
The interest rate less than growth rate condition has a lot of loopholes in my view. It was first used by someone named Evsey Domar and I don’t know why most Post Keynesians believe it as if it is obvious (though not all). I know we have been in part of the discussion – as in not one-to-one but generally with many commentators around. I guess the discussions digressed because there are so many issues around this which are related. It’s a bit difficult to summarize what I want to say, but in such “proofs” it is assumed that the primary balance does not get out of hand, i.e., it is bounded.
In the extreme case think of a 1% rise in CAD every year. i.e., 3% now, 4% next year, 5% the following year etc. Assuming a positive private sector balance, both the fiscal deficit and the current account deficit rise forever. If growth is somehow increased (with the aim of bringing ratios down or keeping them from growing), it is self-defeating because a domestic led growth will lead to an even more widening of the CAD. Hence an export-led growth is required.
How does this logic “fail” in a closed economy? A widening of deficit means a widening of private sector surplus and hence more consumption and higher national income and as a result higher taxes and lesser fiscal deficit- automatically stabilizing. For the case of the open economy if foreigners do not exchange their assets for goods, debt ratios can keep rising. However, there are realistic (very) situations in which they keep rising and domestic demand has to be controlled if its needed to prevent them from rising. Or else other institutional means.
Of course the stand that the process (i.e., rising debt ratios) can continue forever without an issue is a slightly different matter. I once had an argument with someone and he sorta figure out my points but my point was why bring in the condition r<g in the first place.
That still leaves open the possibility that exchange rate market forces will lead to a “balance”. However it is mentioned in “MMP” (no typo) that it may not work but it is not an issue since the imbalance is not thought of as an imbalance. And this is presented as a dissenter view and I dissent with this dissenter view.
“but my point was why bring in the condition r”
Second last para – didn’t appear correctly for some reason.
but my point was why bring in the condition r less than g.
How relevant is what happens to the bonds between when they are issued and when the government pays them off to the overall story?
Unless I have oversimplified this then the important thing seems to me is that the government gives the apples raised by the initial bond sale to the first cohort, and eventually taxes the later cohort to pay off the bold holders. The story would as work as well even if the bonds were initially sold to outsiders. The important thing is that it is possible that a different group of people may benefit from government borrowing than the ones who have to pay it off, and these different groups may be in different cohorts.
Ramanan,
“but in such “proofs” it is assumed that the primary balance does not get out of hand, i.e., it is bounded”
not a complete response here, but the algebra assumes that the growth rate g generates a growth in spending and tax revenue of g, etc. and that growth trajectories overall are smooth extrapolations – so that’s an ideal type of assumption relative to the real world
probably wouldn’t help the debt math either if the United States did a leveraged buyout of the Eurozone
🙂
“Now how likely is it that a fiat currency issuing government need go into surplus, (which is the precondition for paying down debt)?
Well, it’s not exactly the favourite dream of MMT’ers, but it happens. It happened in the US, and it happened in Canada, in a very meaningful way.”
MMT, as I understand it anyway, and as stated on Bill Mitchell’s blog several times IIRR, does envisage times when the Government sector should go into surplus, mainly to reign in inflation.
The surpluses in Canada and the USA were not for that reason and MMT blames them in large part for the crash. If the government runs a surplus then the combined private sector and external accounts must be in deficit. This is not in doubt as it is a simple accounting identity, true by definition.
Now Steve Keene ascribes the crash to hugely increased levels of private debt, which is far larger than the public “debt”. As far as I can tell he advocates a different “get out of jail fast” solution but MMT agrees that it is the levels of private debt that caused the problem.
But, if the real economy is running at full capacity (including the external sector) then inflation starts up and at some point you take money out of the economy by running a surplus.
A fiat currency government does not have to run a debt to fund a deficit. The debt is a service as Government bonds provide the safest possible means of saving for those who wish to save without risk.
Arguing over whether huge government deficits and debts are dangerous and undesirable is like arguing whether jumping out of a window from the 10’th story is dangerous and undesirable.
We can argue about the theory of gravity and general relativity and air friction and terminal velocity and whether people have wings till we’re blue in the face. Or we can ignore all of that and look at what actually happened to people who jumped out of 10’th story windows.
This debate turns on the same issue Hayek’s debate with Lerner over collectivist planning turned — the constant re-evaluation of alternative costs and gains involving alternative uses of production goods. And Lerner’s conceit in both cases is the same — relying on the fantasy that resource allocations directed by government on the basis of backward aggregated sums of stipulated valuations stocks can magically retain and communicate meaningful future oriented valuations across time. E.g, we are to image that simply because we have stipulated that “no production of capital goods has been crowded out” based on past aggregated valuations, that this prior “stock” of valuation / production goods magically retains its “stock of valuation” into the future despite the fact that the government has re-arranged all valuational relations — especially in the domain of production goods and processes — based on BACKWARD LOOKING and NONRELATIONAL measures of “value”. In fact, when the government borrows, it disrupts the valuational relations of production goods — and even if according to a backward looking valuational measures of “aggregate output of new capital doors” there has been no loss of output, in the only perspective meaningful to economic valuation — the future relational significance of goods — there will have been an alternative cost loss because forward looking private entrepreneurs would have re-arranged production relations to fit the new relational conditions, while the assumed perspective that sees past valuations as fixing a non-crowded out “stock” of new capital goods will leave us with goods which are out of valuational sync with the newly created, post-debt production relation situation.
And this doesn’t even get into how government would take resources away from greater valua creating alternative production processes — which only Lerner’s assumption of impossible magic prevents from taking place.
“If government debt crowds out the production of new capital goods, then there is less output in the future ..
Rather than Crusoe and Crusoe Jr., consider generations living in an “ideal” socialist commonwealth where mankind has taken its destiny into its own hands and directs all production and consumption (present and future.)
Everyone agrees that something like this is possible, and that maybe government debt in a market economy would could have an effect something like this–less capital accumulation.
The Lerner position is that if we assume that this does not happen, then there is no way that government debt can create a burden for future generations.”
“The Lerner position is that if we assume that [loss of new capital production or “crowding out”] does not happen, then there is no way that government debt can create a burden for future generations.”
But this BEGS THE QUESTION at the HEART of economic science — what gives production goods their valuational significance?
Production processes get their valuational significance via a constant future looking re-configuration of alternative production combinations and pathways. If massive government borrowing and non-forward looking / non-economic government resource allocation throws a massive monkey wrench into the gears of the production system, there is no way to calculate a comparison of what is or what is not a comparative “loss of capital production” or is or is not a “crowding out” of production or investment, matching up some aggregate valuational benchmark of past “output” and some aggregate valuational measure of post-borrowing “output” any more than the old Soviet Union had any measure besides the changing quantity or weight of “nails” in different time periods as a measure of constant, increasing or decreasing “output” of new capital goods (I.e. nails).
“Well, it’s not exactly the favourite dream of MMT’ers, but it happens. It happened in the US, and it happened in Canada, in a very meaningful way.”
Last time the U.S. was in surplus I don’t remember anyone cursing previous generations for their profligacy. Everyone was pretty happy about it.
I hope folks know the history of what happened in the Soviet Union, re nails.
If the government requested increasing output in nails according to the metric of weight, nail factories would produce giant, very heavy nails.
If the government requested increasing output in nails according to the metric of quantity, nail factories would produce incredibly tiny and thin nails by the billions.
In each case, according stipulation for “greater output”, the Soviet economy would be counted as having “increased production” — irrespective, of course, of the RELATIONAL significance of that “output” to all other trains of consumption and production goods in the economy.
“any more than the old Soviet Union had any measure besides the changing quantity or weight of “nails” in different time periods as a measure of constant, increasing or decreasing “output” of new capital goods (I.e. nails).”
“but the algebra assumes that the growth rate g generates a growth in spending and tax revenue of g, etc.”
Nice point JKH, my point being that sustainability analysis requires one to show that tax revenues grow at g and expenditure doesn’t grow faster than g, instead of assuming it in the proof.
“Last time the U.S. was in surplus I don’t remember anyone cursing previous generations for their profligacy. Everyone was pretty happy about it.”
The cursing of MMT’ers about that same surplus now probably makes up for it.
Ransom:
I don’t get it.
Is the burden of government debt on future taxpayers anything other than an alternative framing of the allocation of present production between current and future goods? Lerner says no. Buchanan says yes.
Whether or not we can, as a pratical matter, determine what is happening to the allocation of resources between future and present goods in response to anything, including a budget deficit, is another issue.
My way of thinking about budget deficits (and according to Murphy, Mises’ view as well,) balls these things together. The way I would put it, the opportunity cost for the government bond buyer is purchasing capital goods. Neither they, nor their heirs benefit much from the debt. (I think there is a change in real interest rates, and so some benefit.) Those receiving the benefits of the government programs benefit, and those who pay future interest and principle bear the burden.
Rowe (and Murphy has been doing this too,) has constructed an all consumption, fixed capital example that shows that there can be a shift of consumption from the future–basically, step by step. This is an important argument.
Buchanan, on the other hand, had something else in mind. My interpretation was that treating the payments of interest and principle during the current generation as just an arbitary transfer means that the deficits in past generations weren’t really being financed by debt. Buying bonds isn’t giving gifts or paying taxes. They weren’t worse off, and really, were a bit better off. But that is only true if the interest and principle payments occur in the future. And there are people who lose from the transfers in the future. I am pretty sure that Buchanan wasn’t thinking about shifting consumption by an overlapping generations model.
Much of the discussion here has been of the ponzi business. One of the comments I liked best was the question of which generation gets to enjoy the benefits of the ponzi scheme? I would think that each generation should share it equally. Since the benefit is finite, how much doest that provide for each generation going on to eternity?
By the way, will human society as we know it exist forever? In particular, can any particular nation state be assumed to exist forever? In particular, if the U.S. one day becomes a wilderness, or is mostly under the sea, what happens to these bonds? Default? When the Americans all emigrate (to outer space) do the debts follow them? What if they die off because couples choose a one child policy?
To get more fantastic, when Americans start turning into beings of pure energy, how is the national debt settled?
The ponzi scheme assumes there is always a future generation.. forever.
I suppose if the world ends suddenly, then we have default, but the bondholders don’t have anything to lose, having no futher opportunity to consume and no decendants to receive inheritances.
Too science fictiony? Well, mabye the “ponzi” plan is really just as unrealistic.
“I hope folks know the history of what happened in the Soviet Union, re nails.”
This is just name calling. No one in the MMT camp wants to eliminate markets. Personally I am not and never have been a socialist, and think markets are a great human invention up there with the wheel, fire, and bureaucracy. To imply that I want a Soviet system is just odious.
But the evidence is clear that markets are unstable unless properly regulated, and MMT offers a way to keep them stable at least so far as the monetary economy goes. Moreover it is neutral on the question of how big the government sector could be. Even if the only thing government did was supply money MMT would still work from their viewpoint.
I prefer government to be “right sized”, doing things that government does best and leaving the rest to markets. Natural monopolies are best run by Government, population wide insurance schemes work best if run by government as a straightforward consequence of the law of large numbers.
Even my libertarian friends agree that the police and the army need to be run by government. A “free market” system cannot operate when the mafia is free to intervene and no one is there to stop them.
You may agree or disagree with my viewpoint on what and what not should be run by governments, but MMT, if it works, works regardless of the size of government.
“Rowe (and Murphy has been doing this too,) has constructed an all consumption, fixed capital example that shows that there can be a shift of consumption from the future–basically, step by step. This is an important argument.”
To me, this seems trivial — although it is patent that Krugman and Lerner often gets even trivial matters wrong (see Hayek’s “Two Pages of Fiction” on Lerner).
If a thief steals my bank account and spends in on the last 3 days of my mothers life trying to keep her from a natural death, there has been a generational transfer of wealth.
If the government borrows my bank account and spends it on the last 3 days of my mothers life trying to keep her from a natural death, there has been a generational transfer of wealth — and then later taxes me again to retire that debt, there has been a generational transfer of wealth.
The magicians sleight of hand from Krugman and Lerner is the attempt to hide this transfer by hiding the transaction in unearned premises that “capital investment has remained the same” — somehow we a suppose to simultaneously (1) increase government promoted consumption now and at the same time (2) maintain or increase future private production output later, and do this without transferring goods inter-generationally. The mind boggles at how any “re-allocation” mechanism could magically pull that one off, give the fact of scarcity and heterogeneity and on-going inter-relational valuational and production process changes over time, etc. (Facts which Krugman & Lerner constantly ignore).
They are simply imbedding logically — and mathematically –incompatible premises while telling everyone that “by assumption” this incompatibility has been ruled out in advance (a statement which itself is among the logically incompatible statements).
One of the magicians slight of hands used by Lerner and Krugman et all is to pretend that there is a cardinal or time-univocal metric which would provide an accounting metric to show us by summing up “stocks” that debt financed government spending can both shift current consumption within the current generation and maintain future productive output for later generations.
But no such metric exists within the economic way of thinking (changing marginal relational valuation across time and subjective alternative cost evaluations by entrepreneurial actors) — or within the real world of real people in the actual private property world making use of local knowledge and changing relative prices while coordinating their consumption and production processes across time.
Individual choosers can compare their expected outcomes involving relations between particular alternative production and consumption choices — using the economic way of thinking — but governments and economists cannot aggregate stocks using a univocal and cardinal metric across goods and across time in any sense that has a meaning from the economic point of view, the only point of view that allows us to coordinate alternative production processes across time in an economically relevant fashion.
Lerner here, and in his work on collectivist economic planning, assumes away the problem re-evaluating and re-coordinating production goods processes given scarcity, limits to knowledge, heterogeneity — while at the same time asserting the false pretense that he doesn’t assume these away.
These things don’t go away because he asserts as a premise of his model that these problems don’t exist by assumption.
“Is the burden of government debt on future taxpayers anything other than an alternative framing of the allocation of present production between current and future goods? Lerner says no.”
From the economic point of view (marginal valuation, alternative costs, etc.) the most important thing that government debt and the burden of government debt do is make a economically meaningful or coherent “alternative framing of the allocation of present production between current and future goods” strictly impossible.
And from a pragmatic point of view utterly improbable to the point where it is impossible any any non-magical world we will ever live in.
But the intent of Krugman and Lerner is to make the for-all-purposes completely impossible world seem to be the world we actually live within.
If you look under the hood the assumptions are magical. If you accept impossible cardinal accounting metrics in violation of the economic point of view, the impossible becomes magically “tractable” and imaginable.
Wow, Ed. I didn’t imply or suggest any such thing. What you write has nothing to do with what I wrote.
“The cursing of MMT’ers about that same surplus now probably makes up for it.”
Well, the prediction by MMT that big government surpluses would lead to trouble happens to have come true. That might, of course, be just luck. But the prevailing orthodoxy among economists at that time was that a crash like the 1930’s just could never happen again. Reality disproved them, yet will they recognize that there was something terribly wrong with their belief system and they need to adjust it to fit? Nope.
If MMT is wrong, fine. Prove it. Show where the fallacy is. But you won’t be able to do that even if it is fallacious until you understand what it actually is saying, and the comments on this thread appear to me to show that this has not been done by it’s “critics” who are not actually criticizing it but instead criticizing their incorrect beliefs about what it says. Well, straw-man beating is nothing new, and it doesn’t seem it will go away soon.
Even Krugman dismissed MMT by claiming it says something that it simply does not say. Steve Keene has some objections which may well be pertinent, but no one is listening to him, either. He has, if I follow his reasoning and I think I do, shown that neoclassical economics prevailing model has a built in contradiction. If it doesn’t, then show why it doesn’t.
Until someone does that I will continue to believe that some paradigm like MMT or Keen’s gives us a chance to understand how economies actually work, unlike the current orthodoxy.
Buchanan says you can only think about these things using the logic of subjective marginal valuation by individual evaluators/choosers. Lerner says you can think about these things — e.g. no loss of production output across time — assuming cardinal metrics and aggregates “stocks” that have meaning across time irrespective of individuals constantly re-coordination production processes on the basis of individual subjective evaluations as the margin in the context of changing relative prices and changing local knowledge. This is the only way that Lerner can say that the forced re-distribution across time and between production and consumption processes via massive borrowing and taxing by the government can be assumed as output neutral.
Bill writes,
“Is the burden of government debt on future taxpayers anything other than an alternative framing of the allocation of present production between current and future goods? Lerner says no. Buchanan says yes.”
Shifting costs via force — i.e. the promise of forced taxation in the future and present borrowing allowed by the promise of that force — SHIFTS the time costs of consumption and production across time.
It’s going to NECESSARILY alter ALL of these relative relations between time structure production and consumption plans.
And what it will unavoidable do is make consumption now less costly and provision for future output more costly — and only by “magic” will the government no how to re-coordinate all production and consumption processes to avoid this fact.
Similarly, it is equally true that only via magic would private individuals be able to re-coordinate production and consumption processes. But of course,
I wrote,
“And what it will unavoidable do is make consumption now less costly and provision for future output more costly — and only by “magic” will the government no how to re-coordinate all production and consumption processes to avoid this fact.”
The assumption of that public debt and future tax increases changes nothing in terms of output and consumption across time can be true only on the assumption of “and then a miracle occurs” — and this miracle is made to appear by non-economic thinking using cardinal stocks and aggregate modeling shifting “value” across time in boxes full of univocal “value” unrelated to changing marginal relations between production processes and consumption processes taking place through time.