You can try to kill zombie ideas. Or you can try to reframe them.
I'm fed up with killing the "The national debt is not a burden on future generations because they will inherit (sic) the bonds as well as the debt so they will owe it to themselves" zombie. I already killed it a year ago, in six posts: one; two; three; four; five; six. Now Dean Baker (HT Mark Thoma) is again repeating this zombie idea. (Mark, don't you realise it's a zombie?)
Udate: Brad DeLong responds. Dean Baker responds. (Update^2 Mark Thoma responds too). [Update^3 Paul Krugman responds. And I was planning a quiet weekend!] This is great! Finally now, if we can only convince Brad and Dean to work through a simple numerical OLG example (which is what it took to change my own mind 30 years ago), we might finally kill this zombie.
If you really do believe in (Barro-) Ricardian Equivalence, then when you say that the young generation "inherits" the bonds from the old generation, you mean that literally – they inherit the bonds as a freebie. And if so, then OK, the debt really isn't a burden on future generations, but only because the old generation makes sure it isn't a burden by giving the bonds to their kids as a freebie.
But if you don't believe in Ricardian Equivalence, and you think the old generation sells the bonds to the next generation, and then consumes the proceeds from that sale, then don't say that the next generation "inherits" the bonds. They don't inherit the bonds, they damned well pay for them. And if they pay for them, and at the same time pay taxes to pay interest and/or principal on the bonds they have already paid for, then that next generation is paying twice.
Oh God, I don't want to have to argue this all over again! Can I just use the argument from authority? Please? My authority is Brad DeLong. Brad DeLong knows his macro. The very fact that Brad DeLong did not jump all over me last year when I said that Paul Krugman was wrong about the burden of the debt proves that Brad DeLong knows I am right. There is just no way he could have managed to stay silent if he had thought I was wrong!
But what I really want to do in this post is reframe the question. Because, deep inside every zombie, there is something that wants to stay alive.
If monetary policy were doing its job right, and getting Aggregate Demand where it ought to be, nobody would be arguing for bigger deficits to increase Aggregate Demand. Obviously.
Some people might argue for bigger deficits because they thought that the government had some great investment opportunities, where the future benefits of those investments would exceed the costs of future debt. Schools and stuff. That's OK; let's add up the benefits and costs and try to see if they are right.
Some people might argue that the interest rate is below the growth rate, and will stay that way, which means the economy is dynamically inefficient, ponzi schemes are sustainable, and what the economy really needs is a government-run ponzi scheme which really would not be a burden on future generations, because the debt plus interest would be rolled over forever, with no tax increase on any future generation. That's OK too, if you can convince us your assumption is correct.
Some people might argue that future generations will be richer than we
are, and we ought to make them worse off to make us better off. Even
that's OK. What has posterity ever done for us?
But nobody would have to argue for imposing a debt burden on future generations just to increase Aggregate Demand now. Which means that ultimately it's bad monetary policy that is responsible for that burden of debt on future generations.
And the longer monetary policy stays bad, and the bigger the debt gets, the more worried I get about that future burden. With nominal interest rates near zero, and real interest rates sometimes negative, there is nothing to be worried about right now. But recovery will mean a rise in nominal and real interest rates. If recovery gets postponed much longer, I'm going to start to worry whether (e.g. Japan's) fiscal authorities will be able to afford a recovery.
Worthwhile Canadian Initiative 
“If monetary policy were doing its job right, and getting Aggregate Demand where it ought to be, nobody would be arguing for bigger deficits to increase Aggregate Demand. Obviously.”
Is that real aggregate demand?
Two points
1. While war may be politically necessary and even good, I had thought economically they and the destruction they cause were always bad, but I am having second thoughts about that. I am beginning to think war can be better than depression. Costs are great with both, but may be even greater with the latter.
2. If you feel debt can be a burden on future generations, wouldn’t an appropriate response be to literally print money and not just finance an increase in government debt? No one is confused whether debt represents an asset or not as none is created and there can be no future burden. It wouldn’t increase inflation under current circumstances but would shorten the time to return to normality. Simply zeroing out the deficit or declaring a tax free holiday on the fiscal side could do this. While some will be concerned about fiscal discipline over the long term, the monetary side could reinforce it and focus on what it does best, fighting inflation.
Sorry, Nick, your article is just a bunch of nonsense.
You mix up the “real world” (motorways, houses, etc.) with the financial world (IOUs). In the real world, savings are good and debt is bad – savings here means more unused resources available for the future (such as oil, or unharmed nature), debt implies, for instance, bequeathing a contaminated river or deplented fisheries or damaged roads and houses to your kids.
In the financial world, though, more savings means less consumption, and very often (depending on “animal spirits”) less investment, since investment is demand-determined. Financial savings will, therefore, probably undermine the future production capacity (the PPF boundary changes).
It is obvious, that an economy can never run out of “money”, it can only run out of “real resoruces”.
The amount of “real resources” available in an economy is, however, dependent not just on their sheer volume, but also on the available production technologies. More spending NOW can make (and, actually, typically makes, as other commenters have pointed out) the lot of the next generation better (depending, of course, on what you spend the money on, but that has NOTHING whatsoever to do with debt), as it improves the infrastructure (repairs roads, etc.) and technology used for the extraction of resources (more efficent plants, etc.).
Financial debt is only a distributional issue. But not, as you mistakenly assume, a problem of intertemporal distribtion between the present and the future, but a problem of distribution here and NOW (some people get interest payments from someone else). In double entry accounting, each liability has an asset to it. And to every debtor, there is a creditor. The net financial value of assets – liabilities is always zero. But in the process of taking out credit and paying it down, lots of very useful REAL stuff gets produced, making people better off materialilly.
BTW. Ricardian equivalence is balderdash.
I read your post with interest after reading Dean Baker’s post of 10/12. You are obviously frustrated at having to knock down what you call Zombie ideas. Let me suggest that instead of speculating about why Brad DeLong failed to respond to an earlier post and using it as evidence of his views, and presenting arguments by tone of voice, you try to respond to the points made specifically and on their own terms and try to demonstrate why they are wrong. By way of example, Baker argues that borrowing in the current economic environment can boost demand, increase investment and thereby increase the wealth of future generations. As you are aware he has numerous other arguments. they are generally presented in common language. You may believe them wrong but your post is unconvincing as you don’t deal with them on their own terms. “They don’t inherit the bonds, they damned well pay for them” — Means?? The future generation will find itself citizens of a society created by their forebears. Are they better off or worse off if their forebears borrowed to create roads? Borrowed at 2% rather than 4%? It seems somewhat ridiculous to maintain they are inevitably worse off because the principal amount of debt is greater. Try a thought experiment: A constitutional amendment is passed allowing the government to disclaim all existing debt but leaves all currency outstanding. It becomes virtually impossible for the government to borrow in the future excect, perhaps, at exorbitant interest or unusual security arrangements. The amount of debt the future generations are left with is sharply reduced or theoretically eliminated. Are they better off?
Debt’s ‘burden’ is measured by the debtor’s income. Income is the dog that wags the tail. Want to make debt a ‘burden?’ Just toss a lot of people out of work and lower the pay and benefits for the remainder.
In absolute terms our government has an immense capacity to retire debt. Much more than is possible in the private economy simply because it can lower rates and devalue currency. No one really knows the upper boundaries here, either. Everyone’s just guessing. But no matter what the limits are, the determinant is debtor incomes.
Oxbird: I very happily agree, and have said so several times, that deficit spending may have benefits on future generations too, and that in some cases those benefits will exceed the costs. Like schools or roads.
Nick Rowe wrote, the “next generation is paying twice.” How is that? One payment is a consumption (tax), the other is an investment (in bonds).
ZDENPR wrote:
In the financial world, more savings means less consumption and very often less investment, since investment is demand-determined.
If people consume less, then it seems logical to infer they are saving more.
And, their savings, typically, would not go under a mattress.
Granted, today’s options are severely limited, due to the Fed’s low interest policy, and debt is encouraged, rather than saving.
But the saving from less consumption will be put somewhere, to earn interest or some type of growth.
He also wrote:
Financial savings will, therefore, probably undermine the future production capacity.
More spending now has nothing whatsoever to do with debt.
It is obvious you are of the bent toward living for today, rather than sacrificing for tomorrow.
If spending has nothing to do with debt, then how what was the over $1 trillion of government debt last year spent on – nothing?
Don Levit
O.K., Nick, I give up. How many angels?
The state borrow (from local investors or foreign investors) in the form of bonds bearing a fixed interest for a stated period of time)
With the tax paid by economically ACTIVE citizens it pays interest on the bonds
The question now remains on what has the borrowed money been spent on:
If spent on infrastructure that has helped in growing or maintaining economic activity AND that infrastructure is still valued at the same value of the bonds to be repaid, then the generation that repays the bonds is practically paying for the infrastructure. If the perceived value of the infrastructure is higher than the value of the bonds, then the next generation has a bargain.
If though the original income from the bond sale is used to pay pensions or unemployment benefits, then very little intrinsic value is left in the economy when the bonds become due, therefore the next generation is left with burden to have to pay for something that has no value.
Don Levit wrote:
“If people consume less, then it seems logical to infer they are saving more.
And, their savings, typically, would not go under a mattress.
Granted, today’s options are severely limited, due to the Fed’s low interest policy, and debt is encouraged, rather than saving.
But the saving from less consumption will be put somewhere, to earn interest or some type of growth.”
Well, you can ask any businesswoman if she is going to increase the productive capacity of her business in the face of DECLINING sales. The problem is that if you save (financially), there is no way for the others to find out what you will be spending your money on!
And yes, “financial saving” will be put “somewhere”, but even under the best of financial systems, the delay (before the bank finds a borrower; today, for instance, no one wants to borrow at rates that are record low!) in spending MIGHT by itself set off a negative feedback loop resulting in smaller (financial) expenditure (and thus income, and thus savings!) across the economy! (In the face of a slight drop in sales, business A might order less machines it uses to manufacture it products and fire some employees; faced with decling sales, business B (machine manufacturer) might buy less raw materials and fire some people; business C (say a mining company) may decide to mine less iron or whatever and also fire a couple of employees because its principial client, businesses B, just canceled some orders; fired employees may decide to cut on their expenditure and will not buy any of the products they used to from business A, which experiences another drop in sales, etc.).
Moreover, in the financial system that we have, you have tons of possibilites of non-employment inducing investment (shorting stock of a company, for instance) which reduce income for people and entities with a higher propensity to spend (basically making the delay discussed above longer).
Plus, investment via the financial system is connected to debt – and people or companies might not be willing to take out credit (in the face of dropping sales, for example)!
So in an economy far from full employment, saving is a problem, not a benefit!
(We are talking finance here, NOT real resources).
The only way that an economy can provide for the “rainy day” is by building something REAL and REASONABLE (not by accumulating IOUs of somebody else, in an economy, there is no “somebody else”).
This way, REAL saving is, economically speaking, positive (i. e. you do not stay in bed – that is you are not consuming you “free time” -, but go and make something useful – a table, for instance). But this is something completely different.
BTW – Uneymployment benefits or pensions are normally spent on and generate demand for very useful things (such as food, housing, transport, etc.). If it were not for the spending coming from unemployment benefits and pensions, a lot of the productive capacity for these items would not be arround.
As far as government debt is concerned – the government does not need to borrow its own IOUs from somebody else. It can just spend by issuing them. So government bonds are just a political convention; a product of, in my view, confused economic theory.
Frank Nes wrote, paying for “pensions or unemployment benefits” then… “the next generation is left with burden to have to pay for something that has no value.”
As ZDENPR wrote, paying for pensions and unemployment benefits “generate demand.” This demand creates jobs. Who is most hurt if these jobs are not created? It’s the NEXT GENERATION (i.e. the twenty-somethings that are currently facing very high unemployment). So many people NOT having a job in their twenties is the greatest destroyer of the NEXT GENERATION. Skills not being developed is a huge loss in human capital, not to mention a loss in financial growth by the twenty-somethings (salary increases and savings). Umemployment in one’s twenties destroys one’s wealth for the rest of one’s life.
Could you compare the size of the intergeneration transfer due to debt with the intergenerational transfer due to Social Security and Medicare?
Jeffrey: in principle, they are the same thing. Empirically, which ones are bigger? I don’t have a clue about the US. For Canada, IIRC, and very very ballpark, I think all three are around the same sort of size. I would have to do some digging to get a better estimate than that, and it’s not my comparative advantage. Somebody else reading this can probably give a better answer.
While the public debt of a country is important, what’s more important is the total debt burden(both public and private). In the US (and most of the developed world), it seems like much of the rise in public debt has come from the fall in private debt. If we try to cut the public debt(austerity), this will not only be painful and deflationary, but could cause the debt/income ratios to stop falling the way they have been(at least in the US). Wouldn’t a better solution just be to keep monetizing the government deficits until we see inflation (and interest rates) rise? Then, we could start practicing austerity.
There has been a little bit of deficit monetization(QE), but I’m talking about monetization on a much larger scale. If it becomes inflationary, we cut this back. It seems to me that austerity doesn’t even succeed very well in fiscal terms because it causes output/incomes to fall in a deleveraging which makes it harder for the debt/income ratios to fall.