Robert Waldmann (and others) on Dean Baker (and hence Paul Krugman) and the burden of the debt on future generations

January 22, 2012 · by wciecon · in Fiscal policy, Macro, Nick Rowe · 159 Comments

Robert Waldmann here.

Bob Murphy here.

Richard Williamson here.

I've done my bit, and have failed. Robert Waldmann may succeed. If Robert Waldmann fails too, that would be very bad for the credibility of economics blogging.

159 comments

Frances Woolley · January 22, 2012 - 1:45 pm · Reply→

Good to see that irony of PK writing about the value of debate on the econblogosphere, while studiously ignoring the intellectual firestorm burning all around him, has not gone unnoticed.
Richard Williamson · January 22, 2012 - 2:27 pm · Reply→

Nick: Honoured to be linked to.
Frances: Couldn’t agree more.
Kevin Donoghue · January 22, 2012 - 2:47 pm · Reply→

The credibility of economics blogging isn’t helped by statements like “the current generation sells the bonds to future generations.” Huh? Like, F.Y. Edgeworth travels forward in time and sells me his portfolio of consols? Presumably he has an OLG model in mind. But how does that work? In an OLG model the young buy asssets from the old. Nobody says they have to pay any more than they want to.
Robert Waldmann’s most convincing argument is that there’s a paper by Peter Diamond which makes the case. Fine, I’ll read it when I get the chance. In the meantime I’ll just have to suspend judgement on whether Dean Baker understands that model better than Robert Waldmann.
richard · January 22, 2012 - 3:22 pm · Reply→

“intellectual firestorm”
Is it a firestorm, or just a lit match?
Min · January 22, 2012 - 3:35 pm · Reply→

richard: “Is it a firestorm, or just a lit match?”
Better to light a match (or candle) than to curse the darkness. Even better to do both. 😉
Nick Rowe · January 22, 2012 - 4:24 pm · Reply→

Kevin: It’s in the collective interest of the next generation to refuse to buy the bonds; but it’s in the individual interest of each member of the next generation to buy the bonds.
Diamond’s paper is one of the classics in OLG theory. But there’s no need for you to read it. You are familiar with OLG models from Benassy. Just set up your own very simple OLG model. Say, 2-period, U=ln(C1)+Bln(C2), (or even U=C1+BC2 will do fine)Zero population growth. E1=100, E2=100, say, so r=1/(1-B) in autarky. Then have the government do a bond-financed transfer to the first cohort, then lets the debt grow at rate r, then since this is unsustainable, the government eventually increases taxes to stop the debt growing. Watch what happens to the utility of the cohort that pays the higher taxes.
From my own experience, and others’, it seems that economists only get this point after they have worked through their own example. I worked through an example in the first of my posts I linked to. Bob Murphy did too. But it’s embarrassing that we have to work through an OLG model to understand something that’s obvious to the average uneducated idiot on the street, who then turns out to be right after all.
nemi · January 22, 2012 - 4:42 pm · Reply→

Funny that no one gets upset when a economist say something like “free trade is good for everyone” – which, in addition to being trivially easy to show how it might fail to hold theoretically, does not even come close to being true in reality.
Nope – lets instead debate why something that is not true in reality (except, possibly, at a trivial level) could be the case theoretically.
I don´t even think it is about ideology. Economists are simply the worst social scientists ever.
Robert Waldmann · January 22, 2012 - 4:49 pm · Reply→

Thanks for the link. I would somewhat distinguish between Baker and Krugman. Baker is taking Krugman’s side, but Krugman was careful not to make as strong a claim as Baker did. He didn’t mention crowding out investment because of Ricardian non equivalence, but he also didn’t assert that it was impossible.
Robert Waldmann · January 22, 2012 - 4:57 pm · Reply→

Kevin Donoghou
I am indeed talking about an OLG model. I was just visiting my parents along with my daughters hence generationS as there were 3 generations of adults around.
Yes the young choose to buy the bonds. But of course it is nicer to be given something than to buy it. Baker asserted that the current generation has no choice but to give the bonds to the next generation. This is false and critical to his argument.
Nick
I assumed that sooner or later I would have to explain that only if the younger generation(s) could act collectively could they get the bonds for free by all refusing to buy them and waiting for the old to die, but that it is in the interest of each young saver to buy bonds. Thanks for making the point for me and thanks again for the link.
Richard Williamson · January 22, 2012 - 5:03 pm · Reply→

Nick: I think one of the things that went wrong was that the original way the argument was specified involved assuming away ‘distributional’ issues – and this turned out to be an illegitimate assumption. I used to think something like “If you assume no change in output and even distribution of claims to output at all points in time, then how can the debt be a burden? (Duh?!)”. The turning point, at least for me, was realizing that when you have OLG you can’t just assume away uneven distribution of claims to output. With OLG this assumption requires older cohorts gift bonds to future cohorts, and (initially) I didn’t realize that was implied by the assumption.
At least, that’s how it looks to my non-economist brain.
Robert Waldmann · January 22, 2012 - 5:11 pm · Reply→

Nick
Oops I seem to have repressed my memory of what Krugman wrote. It isindeed the full Baker. I have read one of your old posts and I dispair as it is vastly clearer than my effort.
When was that seminar (you with red face). Diamond published in 1965. I thought the matter was settled then until Barro unsetled it with a clever but totally unreasonable paper. But really, Barro’s paper gave about 10 reasons why there isn’t Ricardian equivalence so it should have left the issue settled (they were in footnotes so people could write thm up and publish them as critiques and he could tell editors to publish the critiques (and get cites) and later note that he had answered the criticism citing the footnote.) this is the man who once said and I quote “sometimes a critical cite is worth more than a favorable one. I’m just speaking from casual empiricism heh heh heh. I am sure he knew exactly what he was doing — he was Fukayaming bit.ly/wlbiNc
JKH · January 22, 2012 - 5:24 pm · Reply→

Krugman says:
“What I was actually saying, of course, is that debt is a liability that we pass to the next generation — but it’s also an asset that we pass to the next generation.”
He can wiggle out of this further (if he wants to) by saying that debt is a burden only to the degree that future taxes required to retire the debt are a burden. Otherwise, it doesn’t matter if future generations inherit or buy the bonds, because such a day of tax reckoning is never assumed, and taxation is the binding constraint that makes this a burden issue in the first place.
So if he ever feels fully pressed on the issue, he can come back and say:
“Taxes? Of course taxes could be a problem. But I was talking about debt, not taxes.”
The other way he can wiggle out of it is to acknowledge the threat of taxation, but include a “consolidated definition” of future generations to always include both counterparties to any bond trade or any inheritance prior to taxation.
Bob Murphy · January 22, 2012 - 5:27 pm · Reply→

@Kevin Donoghue: I implore you not to roll your eyes and think this is some anti-Obama plot that a few of us have dreamed up. There really is something very wrong with Baker and Krugman’s analysis on this. They are making a simple error. You think you’re being clever by talking about time machines, but the only way for that “insight” to work is if every parent dies at once, then their kids emerge out of pods and take over the factories. Then the kids all die, and the grandchildren emerge, see some Treasury bonds on the ground, and some of them say, “Mine! I got dibs on that tax revenue!” The real world is closer to our OLG models.
@Everybody: Chronologically, this started with a David Brooks op ed, then Dean Baker attacked it, then Krugman linked to Baker with approval, and started elaborating. So Krugman and Baker really “are one” on this, because Krugman linked to the most egregious exposition of Baker, and said it was fine.
Nick Rowe · January 22, 2012 - 5:45 pm · Reply→

Robert Waldmann may have a better chance of success than me. He was right to cite Diamond 65, which makes his claim harder to ignore. (I am kicking myself for not having done so.) Plus, nobody could say he is an austerian or monetarist and use that as an excuse to ignore him.
Richard Williamson: there are really two distributional issues: distribution within a cohort; and distribution between cohorts. We are making the claim that bond-financed deficits affects distribution between cohorts. That it may also affect distribution within a cohort is uncontroversial.
Nick Rowe · January 22, 2012 - 5:57 pm · Reply→

JKH: “He can wiggle out of this further (if he wants to) by saying that debt is a burden only to the degree that future taxes required to retire the debt [or pay interest on the debt NR] are a burden.”
Correct, [with my edit, which is probably what you meant].
Bob: “@Kevin Donoghue: I implore you not to roll your eyes and think this is some anti-Obama plot that a few of us have dreamed up.”
No chance of that now that Robert Waldmann has joined in. This cuts across politics.
And just to re-emphasis, just because the “we owe it to ourselves” argument is invalid, doesn’t necessarily mean that deficits are a bad idea. E.g. if the deficit finances investments like schools that benefit future generations the benefits to future generations may exceed the costs; if you’re a Keynesian who believes that (only) fiscal policy can kick-start the economy back to full-employment, you could very easily argue that future generations’ getting jobs will be well worth them paying higher taxes; etc.
J.V. Dubois · January 22, 2012 - 6:10 pm · Reply→

I am utterly disapointed about where this discussion ended. Krugman – a selfportraied zombie slayer – seems to be raising a zombie right after it was shot directly in the head. And he is not a bit ashamed. I think that with all that effort so many blogers put into explaining it in so many different ways, there can be noone out there who could not get it. I admit that I had to come through some internal struggle myself, but it took me just a few hours (and comments), most of the time just following how this affects other things I assumed as granted (such as a free lunch stemming from growth higher than interest rate.) In order to preserve my current belief that Krugman is in principle interested in honest discussion, I will pretend that he maybe really just did not catch up with all this.
And now just completely off-topic. I was recently following the whole progressive tax debate. Is there any good source about the tax incidence for various types of taxes and income/wealth groups? Maybe just an idea for next blogpost for Frances?
Mandos · January 22, 2012 - 6:15 pm · Reply→

From nemi:

Funny that no one gets upset when a economist say something like “free trade is good for everyone” – which, in addition to being trivially easy to show how it might fail to hold theoretically, does not even come close to being true in reality.
Nope – lets instead debate why something that is not true in reality (except, possibly, at a trivial level) could be the case theoretically.
I don´t even think it is about ideology. Economists are simply the worst social scientists ever.

I know, isn’t it fascinating?
Kevin Donoghue · January 22, 2012 - 7:15 pm · Reply→

Nick, Robert, Bob,
Thanks for the replies. Rest assured that when I say I suspend judgement on whether Baker and Krugman are wrong I mean just that and no more. I’m not assuming that you guys are wrong either.
I had a quick look at the Diamond paper. Obviously it’s not fast food. As yet I don’t see how it deals with my main objection to the notion that each generation can stitch up the next: the young are stronger and fitter than the old, so why don’t they just tell them to use their bonds as toilet-paper? Putting the matter less graphically, why should they buy the debt at face-value? It must be obvious that as the debt grows the risk of default increases, whether this is done explicitly or through inflation, particularly if it is seen to be impeding real growth.
Kevin Donoghue · January 22, 2012 - 7:24 pm · Reply→

With regard to intellectual firestorms: Brad DeLong is still bitching about Edmund Burke, 222 years after the publication of the Reflections. THAT’s what an intellectual firestorm does. Believe me, the world will little note, nor long remember, what we have to say about David Brooks and the OLG model he could have used to make his case.
Nick Rowe · January 22, 2012 - 7:43 pm · Reply→

Kevin: OK. You might want to just read my old post (my first link above) for the simple version.
“As yet I don’t see how it deals with my main objection to the notion that each generation can stitch up the next: the young are stronger and fitter than the old, so why don’t they just tell them to use their bonds as toilet-paper? Putting the matter less graphically, why should they buy the debt at face-value?”
If all of the next generation clubbed together and colluded to form a buyers’ cartel, that is exactly what they would do. (Or they might elect a new government that defaults on the debt). But as an individual member of the next generation, I can gain by defecting from the cartel, and buy up some of the debt cheap. The standard assumption here is that there are large numbers of both buyers and sellers of bonds, so the price is determined in competitive equilibrium. (And since in reality time is continuous, and so there are no discrete cohorts living for two discrete periods, all buying bonds at the same time, it would be very difficult in practice for all members of several cohorts of youngish buyers to collude against all members of several cohorts of oldish sellers.)
Yep. Us lot won’t have quite the intellectual longevity of someone like Burke. But this is a $64 trillion question, so we aren’t arguing about peanuts here.
Kevin Donoghue · January 23, 2012 - 4:57 am · Reply→

Nick, I read your first post. I thought the comments from Andy Harless made the most sense. Frances said “Your story is a perfect description of a Pay As You Go pension scheme.” I thought so too, which means it’s not a good description of a bond market. I’ll look at the other posts later.
You don’t need a cartel to push down the price of government debt. My Irish government bonds are worth quite a bit less than I paid for them but AFAIK there’s no cartel trying to stitch me up; just a lot of people who see a significant risk of default, which was unthinkable just a few years ago. In the case of a default in an OLG model I presume it’s the old generation whose consumption suffers, since I can’t see it working any other way.
JKH · January 23, 2012 - 5:02 am · Reply→

Nick,
“Correct, [with my edit, which is probably what you meant]”
Hmm … a bit tricky
The burden on your final cohort C depends on the scenario where they bought the bonds from the prior cohort, and get taxed at the end to repay the bonds, which prevents them from reselling the bonds to recoup their initial outlay.
The interest they receive while owning the bonds is separate from what they paid for them.
If they get taxed for the interest, they pay the tax with the interest coupon. It’s a wash. They don’t lose relative to their original outlay for the bonds.
If taxing to pay interest alone is considered a burden, burden would have to be defined as including earning net zero cash interest (on a cohort basis), rather than the coupon rate of interest.
This seems like an opportunity cost more than an outright burden. The bond holder has not lost any of his original principal value of the debt, net.
By contrast, an outright burden is clear in the case where the principal amount that was originally paid for the bonds isn’t recouped by selling the bonds prior to being taxed.
Is the (separate) opportunity cost of not earning net cash interest the right definition of burden for this problem? If so, should that be made explicit?
I’m not sure which is right.
Yancey Ward · January 23, 2012 - 11:42 am · Reply→

In the case of a default in an OLG model I presume it’s the old generation whose consumption suffers, since I can’t see it working any other way.

Irrelevant.
anon · January 23, 2012 - 2:47 pm · Reply→

I’m failing to understand this too.
Baker asks, “Where does the money go when the old sell their bonds?”
Rowe responds, “The old use the money to buy goods produced by the young.”
In that case the young have both the bonds and the money from the old. AND any goods they fail to consume before they die.
I think the problem I have with Rowe’s model is the interest rate is permanently above the rate of growth. Rowe calls have the interest rate below the growth rate a ponzi scheme, but what about having the interest rate and growth rate even? That seems more sensible to me.
Personally, I believe interest rates on governement debt should only keep up with price inflation. Governemnt bonds should be thought of as savings accounts, not sources of income. The return on investement should be what the state spends the funds on.
Min · January 23, 2012 - 3:24 pm · Reply→

Richard Williamson: “I think one of the things that went wrong was that the original way the argument was specified involved assuming away ‘distributional’ issues – and this turned out to be an illegitimate assumption.”
Baker does not assume them away. He says that they are relatively small. The debt/deficit hawks are scaring people with a burden that they do not define. Baker assumes, I think correctly, that the ordinary meaning of the burden of debt is the perceived burden of the debtors, and that people are scared because that is what they imagine. They would be unhappy if they had additional personal debt equal to their proportional share of the national debt, and do not feel good about passing that burden, or an even larger burden, on to future citizens. But future citizens will include both debtors and creditors, so that way of thinking is too narrow.
Under certain conditions, the distributional issues can be truly problematic. However, the same argument about the burden of future debt was made during the Great Depression, and the distributional problems did not turn out to be so great.
There have been many gov’t defaults. Surely there is at least one real life example of passing on the burden of debt to future citizens. Bueller? Bueller?
Nick Rowe · January 23, 2012 - 4:16 pm · Reply→

Min: “Surely there is at least one real life example of passing on the burden of debt to future citizens. Bueller? Bueller?”
Canada, where we ran budget surpluses for over a decade until about 3 years ago when the recent recession began, is one very clear example. And any other time where there was a primary budget surplus (adjusted) for inflation was also a time when tax rates were higher and/or government spending was lower than it would have needed to be if it weren’t for the need to pay interest on the debt.
That’s real people getting a worse deal from government because they had to pay the bills run up earlier.
Nick Rowe · January 23, 2012 - 4:26 pm · Reply→

anon: “In that case the young have both the bonds and the money from the old. AND any goods they fail to consume before they die.”
Forget the money; it just circulates from one pocket to another then back. Look at the goods. The young produce goods, give them to the old, and the old eat the goods. In return the young get a bit of paper which says “IOU” on it. And when the young ask “who’s signature is on this IOU I own?”, the reply is “your signature; you owe it to yourself, as tax payer!”. As a group, the young got ripped off. Unless they can do the same ripoff on the next generation…and kick the can down the road a bit.
Read my old post (first of my links in the post above) for a fuller exposition.
Min · January 23, 2012 - 5:11 pm · Reply→

Nick Rowe: “Canada, where we ran budget surpluses for over a decade until about 3 years ago when the recent recession began, is one very clear example [of passing on a debt burden to future citizens].”
Thanks, Nick. From your hypothetical, I would never have guessed that that was what you meant by the burden of national debt. 🙂
As I said, different people in this debate do not seem to mean the same thing by the “burden of debt”. 🙂
Kevin Donoghue · January 23, 2012 - 5:28 pm · Reply→

Nick, I notice that in comments on his blog Dean Baker acknowledges that there are possible worlds in which what you and Robert Waldmann say is true. So as far as that goes you win the debate. How we should think about debt in the real world is a more difficult question. I never studied growth theory as a student and I certainly don’t grok Diamond’s model.
Nick Rowe · January 23, 2012 - 6:04 pm · Reply→

Kevin: Yep. I think we have now convinced Dean Baker that the “we owe it to ourselves” argument is invalid. Which is a major success for Robert.
The way I think of it is that the future tax liabilities are a burden. Whether or not there are offsetting benefits is an empirical question. It depends. On a lot of things. Most obviously, on what the money is spent on. Some highly-productive investment that directly benefits future generations? No contest. (Though, even then, the benefit might have been even greater if it had been tax-financed rather than bond-financed, but that’s perhaps quibbling.). The main question is what sort of model we have. I can imagine a sort of Keynesian model (not a regular Keynesian model) where there are 2 equilibria, and the economy is stuck in the bad equilibrium, and a purely temporary tax cut can do a “kick start/pump-priming” job of pushing the economy into the good equilibrium, where it will stay, even if taxes are subsequently increased again. (Scott would legitimately ask “Why can’t monetary policy do the same job with no future tax burden?”, but set that aside.)
The thing that scares me the most: I see economies like the US and Japan stuck in recession with slowly mounting debt/GDP ratios. And the longer they stay in recession, running deficits, the bigger the debt/GDP ratio will be when they do eventually exit. Add the ageing boomers, with their medical bills and dissaving on top of the higher interest rates that normally come when you exit a recession, and things could be very nasty.
That’s an (extra) urgency to getting out of recession. There’s an extra urgency to having a serious sort of monetary policy. OK, the US is starting to look a bit better (so I hear, and hope). But Europe?!!
anon · January 23, 2012 - 6:06 pm · Reply→

Nick, I’m a math challenged non-economist so my ability to understand your first post (and your reply to me) is poor.
Why would the government set the interest rate permanently above the growth rate?
If you object to the interest rate being below the growth rate (ponzi scheme), you should object to it being above the growth rate (prisoner’s dilemma).
People should lend to the government because they prefer to (safely) delay consumption, not because they are hoping to game the system.
Nick Rowe · January 23, 2012 - 6:06 pm · Reply→

And the “we owe it to ourselves” zombie reappears yet again:
http://www.project-syndicate.org/commentary/skidelsky49/English
Scott Sumner · January 23, 2012 - 7:10 pm · Reply→

It’s very disturbing to find out that Paul Krugman doesn’t pay attention when people correct his errors. Does that mean he won’t pay attention to the fact that Noah Smith just pointed out that his criticism of me was bogus? I was expecting an apology any day now.
Ramanan · January 23, 2012 - 8:22 pm · Reply→

“The peace of mind of a conscientious American must be disturbed every time he is reminded that his government is 250 billion dollars in debt. He must be shocked by the frequent announcement that every newborn baby is burdened, not with a silver spoon, but with a debt of $1700.”
http://www.jstor.org/pss/1336267
“…The book [Our National Debt] permits lay readers to retain misconceptions of the nature of public debt and exaggerated impressions of its present size. The amateur is bound to project to a national scale his own experience of private debt. To him “debt” is a frightening word, and counting debt in billions staggers his imagination. But a national debt is a burden on the nation analogous to the burden of a private debt on an individual only if the nation is in debt abroad.”
Different times – 1950 – when the US was a creditor nation. But is James Tobin wrong?
Is a newborn born in the US born with a debt of $40,000?
Nick Rowe · January 23, 2012 - 9:15 pm · Reply→

Ramanan: “But is James Tobin wrong?”
Yes. Flat out wrong.
Ralph Musgrave · January 24, 2012 - 1:50 am · Reply→

This entire argument started with Nick assuming (no reasons given) that oldies sell bonds to youngsters. That was in his original apples economy.
That assumption is guaranteed to produce the answer he wants, namely that oldies pass a burden on to youngsters. Angels and pinheads spring to mind.
As someone interested in REALITY rather than angels and pinheads, I’m interested in whether oldies REALLY DO sell bonds to youngsters, and to what extent this increases the burden passed to youngsters.
I suggest that burden passing only occurs to the extent that oldies want youngsters to fund the former’s retirement. Plus changes in the size of government debt will not influence the size of pension income that people aim for. Ergo expanding government debt will not increase the amount of burden passing. Ergo government debt is not a burden on future generations.
Kevin Donoghue · January 24, 2012 - 3:55 am · Reply→

I’m sure James Tobin is quite right to reject the idea that “a national debt is a burden on the nation analogous to the burden of a private debt on an individual.” It is an unhelpful analogy.
To the extent that I can make sense of the Diamond model, the problem seems to be that real debt is net wealth in a non-Ricardian world. It’s a substitute for real capital in portfolios, so its presence affects the accumulation of capital and hence the future wealth of the nation.
If that’s what’s going on in the model then it’s certainly worth asking whether something similar goes on in reality. But it’s not something that analogies with household wealth will help us to understand.
Nick Rowe · January 24, 2012 - 7:38 am · Reply→

Ralp: if you are arguing for Ricardian Equivalence then what you say makes (at least logical) sense to me. But if you believe in Ricardian Equivalence then you cannot argue that bond-financed lump-sum tax cuts/transfer payments stimulate consumption demand. Make you mind up. Which is it?
Kevin: Yes, the basic insight is that in an OLG non-Ricardian world with no bequests, bonds are net wealth to the current generation(s) that own them, and a liability on some future generation of taxpayers. Introducing capital into the model adds an additional complicating effect: people save in bonds rather than real capital, and the lower capital stock reduces the MPL and hence real wages of the young workers in the next generation. The analogy with household wealth works fine for the basic insight, but runs out of legs when it comes to helping us understand that additional complicating effect on MPL and W/P.
Kevin Donoghue · January 24, 2012 - 8:44 am · Reply→

“…people save in bonds rather than real capital….”
Please be careful Nick. You could be the cause of an avalanche of blog-posts from Scott Sumner and David Glasner, writing things like that. S(t)=I(t)=K(t)-K(t-1) so the realized saving has to equal the growth in the capital stock. That’s why I’m happier saying that bonds are a substitute for real capital in portfolios.
I have trouble seeing that there’s a meaningful problem in a world without capital, but I’m working on it.
Nick Rowe · January 24, 2012 - 8:59 am · Reply→

Kevin: “That’s why I’m happier saying that bonds are a substitute for real capital in portfolios.” 😉 OK! (But here we have one cohort’s saving by buying bonds matched by another cohort’s and/or the government’s dissaving by selling bonds.)
“I have trouble seeing that there’s a meaningful problem in a world without capital, but I’m working on it.”
Yep. That’s the hard bit to see at first. I could only see it when I tore up two pads of paper and made green sheets apples and white sheets bonds and shuffled them around on my desk! Us macroeconomists have been so trained into aggregating across agents in a given time period (Y=C+I+G+NX) that we just can’t see it any other way. For this question, we need to aggregate across time periods to look at the lifetime utility (or, more simply, Present Value of consumption) of a given cohort. Once you get the intuition in a world without capital, you can add the capital back in and see how it modifies the results.
nemi · January 24, 2012 - 9:31 am · Reply→

“But this is a $64 trillion question, so we aren’t arguing about peanuts here.”
The debt is not peanuts. The intergenerational redistributional effects, if any, that is due to government debt are.
Ramanan · January 24, 2012 - 9:35 am · Reply→

Nick,
Assuming away the external sector (whose importance Tobin understood), was every newborn born in the United States born with a debt of $1700 in 1950?
Or else to make the numbers more intuitive shift forward to 2012. Is every newborn born with a debt of $40,000?
If he pays it off in the first year of working/earning, he is doing well!
nemi · January 24, 2012 - 9:43 am · Reply→

PS: However, if this debate makes economists more sensitive to the notion that it is not only the size of the pie that matters, but also the distribution, that would be a great accomplishment.
The standard assumption, that the pie can (and will) be redistributed according to each generations social welfare preferences (which supposedly are independent off the current distribution), is truly bizarre.
Nick Rowe · January 24, 2012 - 9:59 am · Reply→

nemi: “The debt is not peanuts. The intergenerational redistributional effects, if any, that is due to government debt are.”
Why? Because you believe the old “future generations will inherit the bonds as well as the tax liability” argument that I’ve shown to be invalid?
“PS: However, if this debate makes economists more sensitive to the notion that it is not only the size of the pie that matters, but also the distribution, that would be a great accomplishment.”
The distribution across generations matters too, not just within generations. That’s the distributional question that all the “we owe it to ourselves” people are denying.
“Functional Finance (MMT) ignores intergenerational distribution and says it doesn’t matter!!” How’s that for a slogan? 😉
Ramanan: “Is every [US] newborn born with a debt of $40,000?”
Yep. (Assuming your arithmetic is correct). Probably much bigger than that, once you include unfunded liabilities on healthcare etc. given demographics (though I’m not sure on the US/Canada comparison there). Unless he can pass it on to the next generation after him.
Have you guys read my first post on this?
http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/12/debt-is-too-a-burden-on-our-children-unless-you-believe-in-ricardian-equivalence.html
Ramanan · January 24, 2012 - 10:21 am · Reply→

Nick,
Yes, I had read it but I got the impression that your tone was such that it’s wrong to consider newborns being born with a debt but the debt is a burden in another sense etc.
That is the reason I clarified and the reason for my posting here.
(Yes my numbers were just rough – more like an indicative).
Nick Rowe · January 24, 2012 - 10:59 am · Reply→

Ramanan: OK. I would say it is roughly right to say they are born with a debt. The twist is that they might be able to pass on that debt, plus interest, to the next set of newborns.
anon · January 24, 2012 - 11:07 am · Reply→

Nick, I’m still hoping you’ll respond to my question about why the governement would keep the interest rate PERMANENTLY above the growth rate?
Perhaps Krugman and/or Baker (and/or Delong) are assuming the interest rate will be at least kept (roughly) even with the growth rate.
I also think money and trade should be assumed instead of apples. Apples seem to function as a “better than gold” standard. With money and trade the young should always be able to pay their debt.
When you say “forget about money” it seems you would be talking about money illusion/inflation scenarios in the real world. Which could be a problem. But couldn’t that be a problem without debt?
Nick Rowe · January 24, 2012 - 12:02 pm · Reply→

anon: in some models the interest rate will be permanently above the growth rate. In other models it will be permanently below the growth rate. It depends on a lot of things, like: time preference; if you earn income when you are young or old; return on capital; etc.
In earlier posts I made clear that if the interest rate is permanently below the growth rate (as in Samuelson 1958) you get a very different result, because the debt+interest can be rolled over forever, so there is (or needn’t be) any future tax burden.
http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/01/the-30-years-debt-burden-non-war.html
Now, maybe you are asking: “Why can’t the central bank just set an interest rate permanently below the growth rate?”
Here’s the answer: because maybe (depending on the things I have listed above) that interest rate would be too low to be sustainable without eventual hyperinflation. There might be excess demand for output at that low an interest rate. If so: the central bank would either have to raise the interest rate; or else the government would have to raise taxes to tighten fiscal policy to reduce the excess demand. And either way taxes have to increase, either immediately or later.
Nick Rowe · January 24, 2012 - 12:14 pm · Reply→

anon: “Perhaps Krugman and/or Baker (and/or Delong) are assuming the interest rate will be at least kept (roughly) even with the growth rate.”
If that’s what they were assuming they would have said so, and said that taxes never needed to be increased, and so there can’t be a burden. Instead, they did acknowledge the possible disincentive effects and distortions created by higher taxes.
By the way, AFAIK Brad DeLong has stayed right out of this argument. If he thought I was wrong he would have come down on me like a ton of bricks to defend Paul Krugman. He knows his stuff.
The young could always inflate away the real burden of the debt with an unanticipated inflation. That pushes the burden back onto the previous generation of old bondholders.
Min · January 24, 2012 - 12:17 pm · Reply→

Ralph Musgrave: “As someone interested in REALITY rather than angels and pinheads, I’m interested in whether oldies REALLY DO sell bonds to youngsters, and to what extent this increases the burden passed to youngsters.”
As I asked before, in real gov’t defaults, who gets stiffed?