Suppose you claim that it is impossible for a debt to create a burden on future generations unless: it causes a reduction in investment that reduces future output; the higher future taxes cause disincentive effects that reduce future output; it is owed to foreigners so we have to pay part of our future output to foreigners and have less future output for ourselves.
Suppose I then come up with one counter-example, with no investment, no disincentives, and no foreigners. Where the debt can't reduce future output, because I'm holding future output constant. But where the debt does make some future generation worse off.
Doesn't that prove that your claim is wrong?
You don't start complaining that my counter-example is "unrealistic", because I'm assuming output is constant, or making some other assumption you don't think is realistic. It's a counter-example.
Here's my (old) counterexample:
Assume: closed economy; no investment or real capital of any kind;
lump-sum non-distorting taxes with zero collection costs; positive real
interest rate and zero real growth; exogenous full-employment level of
output; apples are the only output good; apples cannot be stored;
identical agents; overlapping generations; no funny stuff.
Suppose the government makes a transfer of 100 apples to the current
cohort, financed by borrowing. Does that create a burden on future
generations?
The government borrows 100 apples from each of cohort A, then gives
each person in cohort A a transfer payment of 100 apples. It is exactly
as if the government had simply given each person in cohort A an IOU for
100 apples. That IOU is a bond.
So far there is no change in cohort A's consumption of apples.
Cohort A then sells the bonds to the younger members of cohort B. So
each person in cohort A gets an extra 110 apples (assume 10% interest
per generation), which he eats. Cohort A then dies.
Cohort A is better off. Each member of cohort A eats an extra 110
apples. In present value terms, those extra 110 apples are worth 100
apples at the time the transfer payment is made.
Cohort B eats 110 fewer apples when young, but 121 extra apples when
old, and they sell their bonds to cohort C. Although cohort B eats 11
more apples in their lifetimes, the present value of their total
consumption of apples is the same. The rate of interest must be high
enough to persuade them to eat fewer apples when young and more apples
when old, otherwise they wouldn't have bought the bonds from cohort A.
So cohort B is not worse off.
But (given my assumption) the debt is rising faster than GDP. The
government knows this is unsustainable. It cannot rollover the debt
forever, because eventually the next cohort will be unable to buy the
bonds from the older cohort. So the government decides to pay off the
debt by imposing a tax of 121 apples on each young person in cohort C,
which it uses to buy back the bonds from cohort C.
Each member of cohort C eats 121 fewer apples.
Cohort A eats more apples, and cohort C eats fewer apples. It is
exactly as if apples travelled back in time, out of the mouths of cohort
C into the mouths of cohort A. (With interest subtracted as they travel
back in time through the time machine.)
P.S. For those of you who missed last year's argument, here is Bob Murphy's excellent (and very funny) review. HT Daniel Kuehn.
Worthwhile Canadian Initiative 
“Suppose the government makes a transfer of 100 apples to the current cohort, financed by borrowing”
Zero real growth assumes that government performs a stabilizing function in the economy. I.e. it borrows anti-cyclically. Do you assume cycles away?
I can’t really understand why people are arguing with you on this.
1. Under certain plausible conditions, debt imposes a burden on future generations.
2. (Useful) investment provides a benefit to future generations.
3. It’s possible to offset the burden through other government or private actions.
I’m sure I haven’t read (much less understood) every position in this debate, but it seems to me like everyone basically agrees with 1 through 3 above. It’s true that 1+2 or 1+3 may not impose a net burden, but describing that as “Debt never imposes a burden on future generations” is clearly false.
Sergei: It’s a C O U N T E R – E X A M P L E.
Ryan: me too. But then I remember the trouble I had getting my head around it 30 years ago, and escaping from the “we owe it to ourselves” gestalt.
Exactly, Nick. Well said. I had a similar argument when I mentioned “what if a magical pony appeared from the sky and stole all of the apples from Cohort B? They would then be worse off than Cohort A! You can’t say my idea is unrealistic, it’s a counter-example!”
Crucial to Nick’s argument is the claim that “Cohort A then sells the bonds to the younger members of cohort B.” Why would they? What is it about a rise in government debt that actually induces the two cohorts to do that deal?
There are several cause-effect chains or transmission mechanisms here that MIGHT lead to the above deal being done, but this is complicated and I have doubts. For example, assuming extra government debt has no effect on the price of bonds, those extra bonds are extra assets that younger cohorts COULD PURCHASE with a view to boosting their retirement incomes. But if everyone is already happy with their retirement arrangements, why would A and B would do the above deal?
It is reasonable to (1) concede that you have disproven the original assertion but (2) argue that the case for which you have disproven it is not an interesting case and (3) modify the original assertion by adding a condition that makes it more interesting. That’s essentially what I did in the comments section of your original post, and you provided a counterexample to the modified assertion. Specifically, I said to add the condition that we are below full employment when the debt is issued, and you showed (to my surprise) that it could still be a burden. What frustrates me now is that you won’t make that argument “in public.” (I don’t think you ever did a blog post on it.) Instead you’re arguing the semantics of the full-employment case. I think the slack case is where it gets interesting: even though there are apples sitting on the ground that people can just pick up and eat and would otherwise just rot, it turns out that, by eating those apples via government debt we are taking apples away from a future generation. That’s counter-intuitive but it’s true (at least for some reasonable cases). In that case it’s not just a counterexample; it’s a realistic one: in the comments section of Dean Baker’s latest post, I used myself as an example and talked about how I would screw over the next generation if the government borrows money to make a transfer to me while the economy is below full employment.
I suppose I could write a blog post about this myself. But that would have to wait until I finish my quarterly economic outlook, otherwise my boss will get mad that it’s not done.
Bill: your magic pony is a foreigner, and reduces the output of apples available for domestic consumption.
Ralph: cohort A is going to die, so wants to sell its bonds and consume the proceeds before that happens. And if the price is right, individual members of cohort B will want to buy those bonds, consume less when young, and consume more when they are old.
Andy: you are right, of course. I ought to do a post where we start out with deficient-demand unemployment. And I think I could show that in some cases the next generation would be worse off and in other cases the next generation would be better off on net. (Though in both cases monetary policy ought to be able to do the same job with no burden at all on future generations, which was the point of my last post.) But my brain is too fried to do it properly. And I keep on having to take the argument back to step one.
1a. Lets assume debt is a burden. How? We force everybody to pay 10% in real terms for no economic growth. Why? Wait until conclusion
2a. Conclusion: debt is a burden
3a. What part of “debt is a burden” dont you get?
1b. Lets assume parallel lines intersect
2b. Parallel lines intersect
3b. What part of “parallel lines intersect” don’t you get?
The latter case of intersecting parallel lines is the layman understanding of Lobachevsky geometry. Funnily enough it is a wrong understanding of Lobachevsky.
But who is claiming that it is impossible for any government policy to not lay a burden on future generations under any possible condition?
If the government builds a bridge that no one wants, that places a burden on future generations.
If the government lowers interest rates causing an asset bubble, then that places a burden on future generations.
If the government doesn’t engage in fiscal policy when it should, causing liquidation of capital, then this places a burden on future generations.
“Suppose you claim that it is impossible for a debt to create a burden on future generations unless: it causes a reduction in investment that reduces future output; the higher future taxes cause disincentive effects that reduce future output; it is owed to foreigners so we have to pay part of our future output to foreigners and have less future output for ourselves.
“Suppose I then come up with one counter-example, with no investment, no disincentives, and no foreigners. Where the debt can’t reduce future output, because I’m holding future output constant. But where the debt does make some future generation worse off.
“Doesn’t that prove that your claim is wrong?
“You don’t start complaining that my counter-example is “unrealistic”, because I’m assuming output is constant, or making some other assumption you don’t think is realistic. It’s a counter-example.”
Nick, I do not have a dog in this fight. I like all of you guys. 🙂
However, when you made your first post last year, I had already read Dean Baker about the putative future burden of the national debt. I went back and read him again, and I read Krugman. I did not believe that they were making the claim that you thought that they were. Your counter-example was against something that they did not say, IMO. Instead of proving that the national debt would be a burden on future generations, a claim that Mankiw appears to make in his textbook, you proved that, given what I called a crazy assumption in addition, the gov’t might have to default eventually. Whether we would call that a burden is another question. (Mankiw says that a future generation would have a lower standard of living.)
IMO, the reason that your colleagues now object that your counter-example is unrealistic is that Baker and Krugman, in their original posts, were assuming that things would go along pretty much as they always have. They may not have stated that assumption, but it is a common one. They did not, IMO, make the extreme claim that the national debt could under no conceivable circumstance become a burden.
Nick, your counter-example is fallacious. It begs the question. No, not “begging the question” meaning raises the question, it relies on the question’s original assertion for its own answer, it is therefore not falsifiable.
The better answer is that the borrower failed to take into account lack of growth, he knew his assets would not cover his debt liability and so he know the debt would be a burden. Your counter-example proves nothing.
The real answer about debt is that sometimes it is a burden, sometimes it is not, it depends on what happened to the assets behind the debt. Your examples are as fallacious as the naive assertion I referred to that in an elementary macro sense, we borrowed national debt from ourselves and therefore don’t owe anything. It’s an accounting tautology and tautologies are fallacious and uninformative.
“with no investment, no disincentives, and no foreigners. Where the debt can’t reduce future output, because I’m holding future output constant” why is the interest rate on government debt larger than the growth rate of the economy? Seems to m that if you made your model consistent you have a Diamond-like sustainable Social Security system…
Interesting counter-example. However, I am puzzled by your assumption of a positive interest rate. Where there is persistent zero growth, surely there would also be a persistent zero interest rate? Unless of course you LIKE having no growth.
Have to agree assuming a constant interest rate is a real weakness of this model. In any realistic scenario, the rate would fall to zero no matter what the government promises, whether through discounting of the ious or inflating away of their value. It is just a promise that can’t be kept. Like promising 4% growth.
Brad: thanks for dropping by!
Brad and Frances Coppola: If the rate of time preference proper is positive (it might be), then the rate of interest could exceed the growth rate.
But yes, if r is less than g, then we are in a totally different world. (I think of that as the Samuelson 1958 world). Provided r is less than g forever, there is no burden on the debt, because you never need to raise taxes on future generations to service the debt. Debt is good, in that world. (Provided you don’t create too much debt and force r above g).
You’re last post did not read to me like it was saying:
“Don’t assume that government debt is harmless to future generations – I have previously provided an example that shows that it can in fact be be harmful”
It read to me more like it was saying:
“Don’t use government debt to raise AD because it harmful – use monetary policy instead”
The second statement seems to assume that government debt is always harmful which doesn’t follow from your counterexample , which only tells us that under some circumstances debt may be harmful but says nothing about how likely these circumstances are to exist in the real world.
The rate of interest may, but that just means the rate rises over time as the next generation becomes less and less willing to accept certificates and taxes make up the difference until production falls. That is where you flash one of those 110 apple certificates and get handed some rotten apple from last year.
Rob: OK. I can think of examples where deficit financed government expenditure would be a good thing. Like maybe building schools. But I would want to build those schools and finance them by borrowing even if we didn’t need more aggregate demand. Use monetary policy to keep aggregate demand at the right level, and use fiscal policy to do good microeconomic things.
“Use monetary policy to keep aggregate demand at the right level, and use fiscal policy to do good microeconomic things”
I agree with this – I just don’t think one can arrive at that conclusion from the OLG models alone.
This is really a social question, not a purely economic one. After all, you’re talking about dividing future society into creditors and debtors. If the debtors come to believe that the creditors are taking an unfair advantage and thus getting to consume more than their share of current production, they will attempt to repudiate, socialize or inflate their way out of debt. This is obviously not in the creditors’ interest.
If you have a regime of constantly increasing per capita real debt, sooner or later creditors will begin to believe that they won’t receive the real value for their assets that they had planned on (indeed, it may well be mathematically impossible given the ratio of debt to production), either because of inflation or repudiation. They then will lobby the government for policies that favor their interests (like austerity). They don’t want the debtors (who are probably the majority) to devalue their assets. They will also try to improve the quality of their assets.
This should have a familiar look, I think.
I’m still not sure why these effects you have added by building a model in which you can shift period-t consumption from the period-t young to the period-t old are large relative to the Okun Gaps closed by expansionary fiscal policy. Could you enlighten me?
Brad: they may or may not be. Assume a multiplier of around one. The benefits of higher GDP to today’s cohort will be then roughly equal in magnitude to the burden of lost consumption on future cohorts. (Of course, if monetary policy could close the Okun Gap, there wouldn’t be that debt burden on future cohorts.)
If r>g, the primary burden of the debt on future cohorts is equal in magnitude to the debt itself. That is certainly not peanuts.
Let me pose a different question: it is common for people who deny the primary burden of the debt to allow that there may be a secondary burden, due to the disincentive effects of distortionary taxation. IIRC, most estimates of the excess burden of taxation are a lot less than 100% of the revenue collected. It doesn’t make sense to talk about that secondary burden and ignore the much bigger primary burden.
This is certainly not to deny that there can be benefits too from deficit spending. And those benefits will sometimes exceed the costs. Especially if we are talking about government investment, and real interest rates are low or even negative. But the burden on future generations is a cost, and should not be hidden. (Though, if monetary policy could do the same job of increasing AD, why not do that instead?)
Rob: “I agree with this – I just don’t think one can arrive at that conclusion from the OLG models alone.”
Agreed.
Peter N: if you are saying that the distribution of wealth between current and future cohorts is a political question — I agree.
Wouldn’t cohort A get only 90.9 extra apples, rather than 110? The present value of the bonds is less than 100 apples, not more, isn’t it?
@Nick
Typing < carelessly makes the blog interpret it as HTML code and the rest of your comment may disappear. Type < instead (& followed by “less than”).
Nick, it seems to me that based on your earlier discussion in the previous post you have changed your argument from the old one you advanced in those earlier posts. Your old claim was:
1. Unless Ricardian equivalence is true, then debt is a burden on our descendants.
But now you are asserting something like:
2. Unless Ricardian equvalence is true, then if our descendants purchase our debts from us, and we don’t spend what they pay for the purchase in ways that ultimately benefit our descendants, then the debt is a burden on our descendants.
You’ve even said that you are including under the category of burdens such a thing as a “negative burden”, which is another word for an asset. So I don’t think there is a whole lot left of your claim. You’re saying that unless Ricardian equivalence is true, debt burdens the next generation – except in those cases where it doesn’t.
But beyond that, I would like to argue that even in your bad-case scenarios, it is not the debt that is the burden, but the descendants’ decision to purchase the debt that in some cases turns out to be a bad deal for them.
Make it simple: Suppose that The Public borrows 1000 apples from Bob, who is himself a member of The Public and gives Bob in return a bond for 1100 apples to be paid in five years. Suppose Bob’s son then buys the bond from Bob for 1050 apples. Suppose The Public eats the 1000 apples borrowed from Bob and the gluttonous Bob then eats the 1050 apples his son gave him.
Now suppose every member of The Public dies suddenly – from apple poisoning perhaps. They are replaced in their social positions by their heirs – The New Public – which includes Bob’s son and which reaches the age of majority at the very same same time, and takes over all of the rights and obligations of The Public. Bob’s son has a public bond for 1100 apples, which The New Public then pays off. It seems to me that these three things have happened:
3. There was a transfer within the older generation of 1000 apples from Bob to The Public during the era of The Public.
4. There was a transfer within the younger generation of 1100 apples from The New Public to Bob’s son, during the era of The New Public.
5. There was a net transfer from the younger generation to the older generation of 50 apples.
So in conclusion we can say that both Bob, and by extension The Public of which he was part, received a net gain of 50 apples. And we can say that Bob’s son received a net gain of 50 apples. And we can say The New Public of which Bob’s son was part, suffered a net loss of 50 apples. But notice:
6. It is not the debt that burdened the younger generation. The debt itself only resulted in a transfer within that generation of 1100 apples. That might be a bad thing because of its bad distributional consequences, but it is not an intrinsic generational burden (and if we told a different story in which all of the members of The New Public purchased part of Bob’s bond, then we don’t even get the distributional harm.) The net generational loss resulted from the decision of Bob’s son to purchase the bond from his father. He gave 1050 of his generations’ apples to his dad, and in return the other member of his generation gave him 1100 apples. So he made out well; but his generation lost out.
7. If Bob’s son had not purchased the debt, and had only inherited his dad’s bond when Bob died, then there would have been no generational loss.
8. If Bob had died without selling his bond and as a result his asset and The Public’s liability had simply been extinguished, then there is no effect on the next generation at all – only an initial transfer within the older generation.
So it’s not the debt issuance that was the problem. It was the younger Bob’s decision to purchase some of that debt from the original lender that created the problem for his generation.
And again, this bad case scenario all depends on the fact that we are talking about apples and extra consumption by the older generation – instead of extra investment by the older generation. If what The Public had borrowed from Bob had been bricks, and if Bob’s son had used bricks to purchase Bob’s bond, and if The Public and a more philanthropic Bob had then used the bricks to build schools to educate their heirs, then the next generations would have suffered a net loss of 50 bricks, but received a large benefit in the form of an education.
If I’m reading the model as outlined by Bob Murphy correctly, as long as the long-term growth rate is expected to exceed the real rate on government debt, then it is unambiguously welfare-improving to keep selling coupons for wealth created by future growth to the present generation, until the real rate equals the growth rate.
It’s what private actors would do, if any private institutions were expected to last that long, but of course governments are the only issuers of multiple-decade-long bonds.
Is this right?
Phil: if cohort A gets the bond worth 100 apples (by assumption) when they are young, and sells it for 110 apples when they are old, they get to eat an extra 110 apples when old.
david: thanks. That has caught me out before.
And now Paul Krugman has responded. And I was planning a quiet relaxing weekend!
If you can, you could edit your 06:09 PM comment to restore what followed <, I’m curious what you wanted to say to Brad.
david: Ooops! I didn’t notice that. Edited. Thanks.
Dan: “But beyond that, I would like to argue that even in your bad-case scenarios, it is not the debt that is the burden, but the descendants’ decision to purchase the debt that in some cases turns out to be a bad deal for them.”
It is individually rational, but collectively irrational, for the young in cohort C to buy the debt from the old in cohort B.
In my hypothetical example, agreed Nick. So maybe they shouldn’t do it?
And in the alternative example in which the goods the younger generation uses to pay for the debt are to be invested in ways that benefit posterity, rather than consumed, then the purchase of the debt is not even collectively irrational.
I believe your overall case, going back to those older posts, is all based on the stereotype that public borrowing is all motivated by the borrowing cohort’s desire to live high on the hog, rather than its desire to increase public investment.
I haven’t even brought out the case of r < g, which I know you have already accounted for.
Can’t help but feel a lot of the objections are due to a sense that government debt is being bashed rather than due to objections to the abstract OLG framework being invoked.
And of course a lot of the older endogenous types don’t think g is exogenous to the amount of debt being raised at all, which just confuses the issue.
But who is claiming that it is impossible for any government policy to not lay a burden on future generations under any possible condition?
Right rsj. Nick’s original claim was that debt is a burden unless Ricardian Equivalence is true. But it seems to me the claim now is just that there are possible cases in which the issuance of debt, combined with certain ways of transmitting that debt to the next generation, ends up imposing a real cost on the next generation. But who would ever have argued against that? Here’s an easy way: The public borrows a billion dollars from Slippery Sam at 11 million percent interest. When the debt comes due, the public has to print the funds to pay it, causing astronomical inflation that utterly destroys the purchasing power of every one but Slippery Sam – which doesn’t even help him much since the economy ceases to function. That’s a counterexample too.
And the odd thing is that we are now living in the aftermath of a collapse of private debt. That is in most places (but not Canada, where house prices continue to go up).
The popping of this bubble is an enormous burden on successive generations, and even in Canada, there are huge transfers from young families purchasing their first home to incumbent owners who take delivery of capital gains due in large part to low interest rates as set by the central bank.
Yet there is zero discussion of how monetary policy creates burdens for future generations. And this is the the big story of our generation, completely missed by standard macro, and certainly missed by Nick’s paleo-monetarist macro.
So why even talk about the potential burden of government debt imposed by fiscal policy, when the big story of our era is the actual burden of private debt imposed by monetary policy?
How about assuming:
debt is denominated in medium of exchange
wealth/income inequality
too many apples gives the person a bellyache or other GI problems
“Cohort A eats more apples, and cohort C eats fewer apples. It is exactly as if apples travelled back in time, out of the mouths of cohort C into the mouths of cohort A. (With interest subtracted as they travel back in time through the time machine.)”
Could there be something else traveling in time?
rsj said: “Yet there is zero discussion of how monetary policy creates burdens for future generations. And this is the the big story of our generation, completely missed by standard macro, and certainly missed by Nick’s paleo-monetarist macro.”
Not enough microeconomics. Not enough questioning of assumptions. No mention of the retirement market.
And, “So why even talk about the potential burden of government debt imposed by fiscal policy, when the big story of our era is the actual burden of private debt imposed by monetary policy?”
because both types of debt can impose a burden?
savings of the rich = dissavings of the gov’t (preferably with debt denom in med of ex) plus dissavings of the lower and middle class (preferably with debt denom in med of ex)
imo, need to discuss how gov’t debt and private debt are similar instead of different.
I don’t get this analogy…You’ll have to pardon me if this sounds stupid, but apples disappear after you use (read: eat) them…Money, however, is spent and ends up in the hands of someone else…It doesn’t disappear…Please, tell me why this analogy is supposed to work?…
Nick,
As was the case a year ago, your argument depends totally on the assumption of a future tax.
And as was the case then, your argument is valid based on that assumption.
And that is what your counterexample here assumes.
The purpose of the future tax is to reduce debt.
In effect, the tax “destroys” bonds.
That destruction of bonds prevents some future generation from selling those bonds to the next generation.
And that prevents that same future generation from gaining the benefit of an inter-generational transfer of apples/money that otherwise might have occurred.
And that’s all your argument depends on.
Those who claim the opposite case only assume that there is no such tax.
And that’s all their argument depends on.
i.e.
its actually the assumed destruction of debt that causes the future burden
and, generalizing from your title, why is it so difficult to sort out the dimensions of counter-factual space in economics?
Nick:”Though in both cases monetary policy ought to be able to do the same job with no burden at all on future generations, which was the point of my last post”
Monetary policy does the job and one of the consequences is the increase of the private debt. But the burden logic applies to the private debt too.
JKH: “its actually the assumed destruction of debt that causes the future burden”
Nearly agreed. It’s the tax to service the debt. If the present Value of those tax liabilities equals the value of the debt (which it does unless you can Ponzi), it’s the same thing.
“Those who claim the opposite case only assume that there is no such tax.”
That isn’t correct. They say “we are paying the tax to ourselves, so it isn’t a burden”.
JKH nails it and boils it down to the essence. I completely agree with this.
The point is of course obvious: If you start some kind of scheme where the working population supports the non-working (old, retired) population, and you end it at some point, without giving the “last” generation the chance to reap the benefits, then of course they get shafted.
However, the problem of supporting the retired population does not go away, just because you end one particular scheme to organize this support and to allocate consumption among the population.
Your model presents a false alternative: The only way to allocate consumption between the old and young generation living at the same time in the model is by way of the bond scheme. If there is no bond scheme, then there is no re-distribution of consumption from young to old. Thus there can be a generation that has to carry a net burden, because they don’t receive a transfer from a younger generation (since the “game” ends).
But in the real world, old people have to eat, need medical care, need a place to live, anyway, and whatever they consume, members of the younger generation cannot consume. So you always need to distribute consumption to the old generation, and there is no possible scenario under which the old generation does not place a “burden” on the young generation. There is no choice but to re-distribute, and the bond scheme is only one way to do this.
So sure, it is conceivable that at some point a younger generation decides to end a particular re-distribution scheme, to not replace it by anything else, and to let their retired parents starve (although politically this is extremely unlikely, because old people vote), and then obviously this is a net burden on the people who starve, and who supported their own parents and don’t get anything out of the system.
In reality, if you end the “bond retirement system” and retire the debt, so that there is no way to “save” for retirement, the burden of care would fall back onto family and relatives, and they would once again have to reduce their consumption, in order for the old to consume anything. But debt or no debt, this transfer has to take place in any civilized society.
Shining Raven,
You could equally well think of it as a “stock scheme.” When we are young we build capital assets whose expected output is adequate to support us when we are old. No intergenerational transfer required unless you count revenues from renting out stuff we made when we were young. It’s the same thing as the bond scheme assuming the bond proceeds were invested in productive assets.
The real difference between the stock and government bond scheme is that government tends to be captured by the old who can use the bond scheme to take consumption from the young who aren’t necessarily willing counterparties to the deal. The old are the agents of both parties.
Shining Raven: “But in the real world, old people have to eat, need medical care, need a place to live, anyway, and whatever they consume, members of the younger generation cannot consume. So you always need to distribute consumption to the old generation, and there is no possible scenario under which the old generation does not place a “burden” on the young generation. There is no choice but to re-distribute, and the bond scheme is only one way to do this.”
First point: a bond scheme is only one way to redistribute. For the other ways, see my post “You can’t escape demographics: quit whining and deal with it.”.
Second, we do not know what level of consumption is sustainable with the type of population structure we will have once the baby boomers retire and we’re faced with a seriously inverted population pyramid.. Back in the 1960s, before Canada began its attack on poverty among the elderly, the image of despair was a lonely old lady eating cat food. Now seniors have the lowest rate of poverty of any demographic in the population.
Sure, seniors have to eat. But how much, and what, is another question. It’s not going to be steak and caviar for everyone. Maintaining the rapidly swelling older population in the style to which they wish to become accustomed will break the bank.
Nick,
There’s either a tax or there isn’t.
If there isn’t, there’s an increase in the deficit as the counterfactual to the tax.
If there is an increase in the deficit, there’s an increase in the debt.
So the tax avoids the increase in the debt in the counterfactual.
In that sense, counterfactual debt is destroyed – although granted, I appear to be “cheating” slightly in that counterfactual-type interpretation. But there’s a bit more:
Actual debt is destroyed if the tax covers more than the interest, which was my assumption. I recall this issue from last year’s discussion. I think I’m assuming a primary deficit in saying all this, and you’re assuming primary balance in effect. With primary balance, it is the interest compounding of the debt that eventually strains the system at the margin. But to my point, that doesn’t preclude a primary deficit in conjunction with that. I think you are assuming the “minimal case” for a future burden in that sense, whereas I’m being more general. My general case isn’t wrong; it’s just not absolutely necessary to prove your point?
“Those who claim the opposite case only assume that there is no such tax – That isn’t correct. They say “we are paying the tax to ourselves, so it isn’t a burden”.
My point there is that if a correct counterargument to yours exists, it must rely on the assumption that taxes won’t be paid, whereas your argument relies on the assumption that taxes will be paid.
And I think your further point is that an incorrect counterargument could interpret the economic effect of the payment of taxes in the wrong way, as per your explanation.
Subtle difference there – the payment of taxes is a necessary condition for a correct counterargument – but insufficient as a correct argument unless the argument interprets the payment of taxes in the correct economic way. And I think the correct way is as I described above, primary balance or primary deficit.
meant:
“the non-payment of taxes is a necessary condition for a correct counterargument”
shoot
meant:
“the non-payment of taxes is a necessary condition for a correct counterargument – but insufficient as a correct counterargument argument unless the argument interprets the payment of taxes in the correct economic way.”
whatever,
But you’re right; if they’re arguing that paying the taxes to ourselves is the reason why there’s no burden, that’s incorrect
how about:
payment of taxes is the destruction of counterfactual debt under primary balance and actual debt under primary surplus?
(I’m going to fast and tripping here; sorry)
9:52 should read:
“I think I’m assuming a primary surplus in saying all this, and you’re assuming primary balance in effect.”
disaster – sorry