Consider two possible worlds:
World A: Us old people bequeath our government bonds to the next generation (as a freebie).
World B: Us old people sell our government bonds to the next generation (they pay us for the bonds).
See the difference?
In world A the next generation inherits the tax liabilities inherent in the bonds, and really does inherit the bonds too. It gets given a liability, and gets given the corresponding asset too.
In world B the next generation inherits the tax liabilities inherent in the bonds, but does not inherit the bonds. It gets given a liability, and does not get given the corresponding asset. It pays for the corresponding asset.
World A is the world of Barro-Ricardian Equivalence, where government debt has no intergenerational distributional implications.
World B is the world of Buchanan and Overlapping Generations models, where government debt does have intergenerational distributional implications.
World A is not Paul Krugman's world. Paul is not a fan of Barro-Ricardian Equivalence. So why does Paul suddenly switch to talking like someone who believes in Barro-Ricardian Equivalence when he says:
"Antonio Fatas, commenting on recent work on deleveraging or the lack thereof, emphasizes one of my favorite points: one of my favorite points: no, debt does not mean that we’re stealing from future generations.
….
Debt has distributional implications, and it may have macroeconomic effects because of those distributional issues. But again, all this is within the current generation; it’s not about the present versus the future."
and:
"And the problems with public debt are also mainly about possible instability rather than “borrowing from our children”. The rhetoric of fiscal debates has been, for the most part, nonsense."
Even in: a closed economy; with no investment of any kind; and purely lump-sum non-distorting taxes, we can take apples out of the mouths of yet unborn future generations, and eat them ourselves. Time travel is possible.
Dammit! I thought I had this whole point about debt burden on future generations sorted out back in the great debt blog war of 2011/12.
Or, ignore me. Listen to Simon Wren-Lewis get it right.
Ours the task eternal.
(Antonio Fatas, by the way, is correct in saying that if the government issues debt to buy real assets, and if future generations inherit (as a freebie) those real assets as well as the tax liabilities inherent in the debt, it can all cancel out.)
Worthwhile Canadian Initiative 
NR: The kids who own the bonds pay taxes to themselves to service the bonds. But if the kids also paid their parents to buy the bonds, they paid twice for those debt service payments. If they inherit the bonds from their parents as a freebie, they only pay once. BIG DIFFERENCE.
Likely a stupid point, but let’s consider the following-period; I have something like this in mind
O D
Y O
– Y
where in the first period we have old, young, and not yet born, and in the following period a new young generation is born, the young become the old, and the old from the previous period die – and thus have to transfer all their assets, including any money they received for their bonds in the previous period (or other assets bought with that money) to others. So beyond the fact that they / the government may choose to distribute those assets differently amongst the newly old and young than if they had given away their bonds, I don’t see how it represents theft from future generations.
ignormaus: “- and thus have to transfer all their assets,…”
“transfer” can mean “give away as a freebie”, or it can mean “sell, and consume the proceeds”. That’s what makes the difference.
If it means “sell”, then the old get to consume extra apples that had been produced by the young, but the young expect to get compensated with extra apples to consume when they are old and sell the assets to the next generation.
Bonds are property. Being property, they require maintenance. It is the maintenance of bonds that can become problematic for future generations.
Bond maintenance includes maintaining bond records, plans for bond placement or payoff, plans for payment of interest, and plans for protection of the rights of bond owners. All of these maintenance requirements become an obligation of future generations.
Consider the inter-generational aspects of bond transfers. Bonds as property are no different than other property such as stocks, land, or machines. The transfer of each example is a simple title transfer. In itself, title transfer has no macro-economic consequences. It is the maintenance of bonds that has potential for problematic impact on future generations.
Assume that when a government issues debt, it issues a bond and receives money. The money is immediately spent and dispersed widely in the economy. The money immediately becomes difficult to recover for return to the bond purchaser. The difficulty grows with repeated borrowing and spending event. The need for bond maintenance increases with each bond sale.
Nick says (I am paraphrasing) that debt DOES cause problems for future generations. I certainly agree. The maintenance of a debt becomes a problem that grows as the amount of debt grows.
Nick Rowe – I loved this one above from 7:46 “The kids who own the bonds pay taxes to themselves to service the bonds. But if the kids also paid their parents to buy the bonds, they paid twice for those debt service payments. If they inherit the bonds from their parents as a freebie, they only pay once. BIG DIFFERENCE.”
Look now, current period, it is the reverse (a wealth transfer to the first generation) if taxes are foregone on those who get the bonds. If taxes match the outlays needed to faithfully execute the public’s laws – then there are no borrowing in the first period, no problem in the second.
Economists just need to state plainly and clearly in all these discussions, in my opinion: here is what they should say, ‘the first thing to understand is that govt budgets should be balanced if economies are OK (but not necessarily when they are not OK)’. I am not trying to debate what OK means, of course; that is up to others to say.
I think that is all we “ignorant peasants” are asking. Though admittedly I did ask Prof Krugman to come out and plainly say he is against redistribution wealth-transfers upward as one of thing self-govt does as a public finance scheme. I suppose I’d like it if all economists would say that too.
Nick, You convinced me a few years ago. I feel the same in having to constantly push back on the “helicopter drops are sure to work” claim. Sisyphus and I both give you our sympathy.
Roger: it’s the taxes that are needed (or may be needed) to service the debt that are the cost on future generations, yes.
JF: yep, but the devil is in the details, because there are some cases where it’s good to run a deficit, even if the economy is doing OK. Like if it’s to finance (good) investments, or if r < g and will stay < g.
Thanks Scott. Most economists who read my posts on the debt burden seem to get the point, though it sometimes takes a bit of convincing, and they disagree on details (which is fine). But I’m not sure if my message is getting out there, to Paul Krugman, and maybe others.
Funny thing is, I don’t actually care a lot about this topic, as a policy question. In Canada, for example, I don’t know if the deficit is too big or too small. You can make a good case either way. But dammit, I do want economists to at least get the economics right! When good economists like Paul Krugman keep getting it totally wrong, it’s embarrassing!
Nick,
The intergenerational buy/bequeath distinction seems a bit oblique to the point you want to make. I think there’s another way to get to the same conclusion. In doing so, I would avoid the bequeathal scenario. I don’t think it’s necessary to make your point about the real potential for intergenerational distribution effects.
It seems intuitive to me to treat intergenerational bond transfers by purchase as standard, in the context of treating the rollover of government debt as standard (i.e. no primary surpluses).
A primary surplus with debt retirement would be interpreted as “exceptional” in this context (but still appropriate to consider). And it is this surplus effect that reveals the potential for an intergenerational burden.
I come to the same conclusion, with the analysis transformed a bit. In particular, the explanation of the final stage would be different. You say:
“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.)
Yes, the national debt is a burden on future generations.”
I would extend your description one more iteration:
Suppose young C pay the tax that pays off the bonds. But notwithstanding that tax, young C experience no net effect on their consumption at that point. They would not have consumed in either case – with or without the tax – it was only a question of whether their money went to buy bonds or to pay tax. It is only when they reach the point where they become old C, co-existing with young D, that their burden becomes evident. Old C have no bonds to sell to young D, so old C forgo consumption. That is what is different than the previous cases.
But even then, there is still no reason to assume that aggregate consumption for the combined cohorts of old C and young D changes from what it would have been without the earlier tax. Only the distribution changes. Without the tax, old C would have consumed. With the tax, and without the bonds, they consume less, with young D consuming that difference as an addition to their consumption without the tax.
Thus, the tax burden does not bite as a constraint on consumption until young C ages to old C – and even then it is not an aggregate burden.
Again, I think it is this aggregate constant (other things equal) that Krugman was probably thinking about when he referenced future generations – effectively meaning multiple generations in the future – where the aggregate consumption is unchanged.
But the intergenerational distribution across different cohorts changes as per your model.
Anyway, I think all of that is consistent with the message of your post, which is about the intergenerational distribution implications of debt. One must just explain that to mean the implications for different cohorts as they co-exist at the same time, where one original generation is seen to be adversely affected. It does not pertain to cohorts collectively viewed at the same time, where there is no adverse effect on consumption in aggregate.
Nick,
Maybe splitting hairs but:
“…but the devil is in the details, because there are some cases where it’s good to run a deficit, even if the economy is doing OK. Like if it’s to finance (good) investments, or if r < g and will stay < g.”
Even if r < g, a government can still run into trouble if the annual change in debt outpaces the difference in the interest rate and the economic growth rate.
r = 3%
g = 5%
Annual debt growth = 5%
Annual interest payments will grow at about 8% per year (3% interest + 5% debt growth) while tax revenue will grow at 5% annual in line with economic growth. Sure the government can try Ponzi finance (make a portion of interest payments from new bond issuance) but I have to wonder how stable that would be. Why wouldn’t ‘r’ explode to infinity as government in essence extends maturity to an infinite time horizon?
Would r stay at 3% if a person was forced by the government to hold it’s bonds for a time longer than they were planning? Suppose I buy a ten year bond and ten year bond rates are 3%. I believe that there is a 50% chance that my ten year bond will become a 30 year bond (because the government will force me to roll it over). Would I accept 3% on the bond or demand a higher rate of return?
Yes, Nick, this was sorted out in 2012: you were shown to be wrong on this point. People don’t sell their bonds to future generations: they sell them to whomever will buy them, which might well be people older than them. I created a model in which debt was transferred to older people, if you recall.
Government debt and inter-generational transfer are orthogonal issues.
I think in Nick’s model the younger generation doesn’t own (at birth) nothing even political power. So they always have to work or be supported by the older generation (bequeaths etc).
The government debt doesn’t change this does it? The generation in power can always tilt the game on their favor but even then it can be made without government debt.
Gene: “Government debt and inter-generational transfer are orthogonal issues.”
You can’t tax the dead. To prevent an intergenerational transfer, you need to tax only the cohort who benefited from the debt, and pay off the debt completely before they all die. You would need a complete set of age-contingent taxes to get that, so only the class of 55 gets to pay the taxes to service the class of 55 bonds. (And if everyone sells bonds to people older than them, they eventually run out of people to sell them to.)
With debt, the taxes come after the benefits, and some of those who benefited will be dead and won’t be pay the taxes, and some of those who pay the taxes won’t have been born at the time of the benefits. That’s what makes it non-orthogonal.
Here’s a model in which debt is negatively correlated with transfers from young to old:
Assume the risk of death in any year is a decreasing function of age. And that the birth rate is less than the death rate, so the population is declining over time. Increase transfers today, financed by debt. The people who are alive in future to pay the taxes will (if the birth rate is low enough) on average have been born earlier than those who benefit from the transfers.
If debt postpones extra taxes, and if those who pay extra taxes in year t+1 are on average born later than those who pay extra taxes in year t, then debt means a transfer from those born later to those born earlier. Unless you have a population that is aging faster than one year per year (so every year the average age of the population increases by more than one year), or age-contingent taxes (where the tax you pay is an increasing function of age, holding income constant), you get my result.
Nick, no problem, I do try to look on the bright side of life.
You may have a point, but I’m not convinced. To convict Krugman of inconsistency, you need to show that his rejection of Ricardian Equivalence logically requires him to reject the proposition: debt is money we owe to ourselves.
You have not shown this. I don’t believe you can. I can reject Ricardian Equivalence on the grounds that some households (or even immortal dynasties) won’t save a temporary tax cut, without conceding that intergenerational complications are important. There’s no inconsistency in that.
I don’t think Krugman is blind to the fact that, in OLG models, burdens can be transferred from one generation to another. AFAICT he just doesn’t see that point as having much practical relevance. In fact I can’t think of a case where he has used an OLG model for any purpose whatever, though I guess he must have done at some time in his career.
Nick,
I’m still recalling where I got to on this several years ago.
Which I think was that whoever bears the marginal tax burden in the event of a primary surplus is de facto the generation to which the burden has been transferred.
If the young hold bonds that they’ve purchased from the old (a not unreasonable assumption), and if the young are taxed with a marginal surplus, then the young are out of luck in terms of net wealth (no bonds) and future consumption when they are old (no bonds to sell).
If for some reason the old are taxed, they bear the burden. It doesn’t really matter whether they are taxed before or after they sell their bonds. And even then, the old can be considered a future generation by those at the start of the bond purchasing chain.
(But, as per Krugman), aggregate consumption for co-existing cohorts is not necessarily affected by the tax alone. For example, if the young are taxed, their consumption pattern when they are young doesn’t necessarily change – they pay the tax instead of paying for bonds. It changes when they are old because they have no bonds, but the then young pick up the slack.)
So two things are key to determining the effect:
a)The occurrence of a primary surplus
b)The identity of those who get taxed at the margin for that surplus
Isn’t it that simple?
Am I missing any of the basics of your point with that?
Kevin: I’m trying to think of a vaguely sensible model where Ricardian Equivalence is false, and at the same time all the bonds are bequeathed to the kids. It’s easy to get a half and half model, but a 50%/100% model is hard.
“I don’t think Krugman is blind to the fact that, in OLG models, burdens can be transferred from one generation to another. AFAICT he just doesn’t see that point as having much practical relevance.”
Then why doesn’t he say that, instead of just repeating the “we owe it to ourselves” fallacy? It would be so much easier for him to say “sure, but people live a long time, and we will bring the debt/GDP ratio down again soon, and so most of the debt will be paid off by people who are alive today, so the burden on the kids will be small. Plus, we want to borrow to build roads, and the kids will benefit from those roads.”.
Just you wait! Any day now, he will be walking along, reading my posts, see a blinding light, and Paul will become Saul!
JKH: it’s pretty much that simple. We might want to add the sort of obvious point:
c) those in b will probably be born later, the longer we wait to run that surplus.
Kevin: plus, he totally missed the point of Antonio Fatas’ post, which was explicitly talking about cases where the debt was offset by the government buying assets. This strongly suggests he can’t see the difference for future generations between borrowing to buy assets and borrowing to finance transfer payments or tax cuts.
Nick, the “Debt Is Money We Owe To Ourselves” post is accompanied by a picture showing the two huge spikes in UK debt caused by the Napoleonic wars and the two 20th century world wars. Nobody was borrowing to build roads. The money was mostly spent on high explosives. Was Victorian Britain an economy crippled by debt, full of young people cursing the older generation for the debt burdens imposed on them with no assets to match? No, they were singing:
When Wellington thrashed Bonaparte,
As every child can tell,
The House of Peers, throughout the war,
Did nothing in particular,
And did it very well;
Yet Britain set the world ablaze
In good King George’s glorious days!
Honestly, debt is not a burden. The effects you are interested in result from changes in debt. And if those effects were empirically significant, the Victorian era would have been a bleak time for Britain, with each generation painfully shrinking the burden it had inherited from the previous one. It wasn’t like that.
OH NO! NOT THIS AGAIN. I read Krugman’s piece and immediately came here to see what you have to say. Then I jumped into comments fully expecting people supporting you. I was a fool and I believed that great blog war of 2012 where the opposition was utterly beaten and disintegrated was not fought for nothing. And to everyone who does not know about it yeat it was a really tough war. There were many people dragged into it, some constructing verbal stories, some constructing models and I think that there was somebody making a computer program for this. Go read Nick’s links and then come back.
But it is even worse then that. Some very smart people and longtime readers of this blog and who were part of that war like JKH are armed and ready to fight again. Is this what happened to Krugman? Are we living in some weird version of Groundhog Day? I do not understand.
This is a great post. Thanks.
For those who have touched on state and local govt finance (not current period budgeting; related but different), you will clearly know that when you finance the building of an asset that you determine serves the public for quite some time then you should figure some way to smooth out the costs across the generations served – duh, public debt has been used as a financing tool for millenia for these reasons. Also, historically, public debt was used for another common sense reason – if you taxed the large sums needed to finance the building from across the current-period population (trying to reach those use benefit from the new asset, which is not the few wealthy who may never use it) you would throw yourself into a tailspin economically – and that really makes no sense. This last point has a political matter and taxation matter to it, of course.
What is interesting to me now, at least for the US, Europe and Japan where there are huge wealth positions accumulated now, we need less to be concerned about sources of taxation because of the huge accumulation while it is still true that the current-taxing of the general population to build such a sensible new “public-good’ asset can produce harm.
Since I consider that much of this huge new wealth accumulation was a windfall of political-rents (like the tax-cut-and borrow from the same group scheme that is the topic of this thread) and including the rent-seeking outcome/fact that productivity gains over the last 30 or so years flowed to the wealthy and not into the general wage population – the public should consider raising taxes on this windfall-wealth instead of so much debt that spreads to the general population and across generations, even for the building of long-lived public good assets. Of course, pragmatism also says you should be borrowing when the rates are so low. Obviously we should do a bit of both.
It is a political question of how to finance (tax and borrow), and even the notion of what one considers a good asset is a political question (as the wealthy often do not want to agree with this notion if it is used to justify taxation of them).
This blog thread is helping inform and to bring more light to the places where the political questions need to be decided. Thanks again for that.
Nick: “I’m trying to think of a vaguely sensible model where Ricardian Equivalence is false, and at the same time all the bonds are bequeathed to the kids.”
It doesn’t seem hard to me. Maybe I’m missing something? Consider a two-period “manna” model with two types of household: thrifty patricians and spendthrift plebs. The government consumes and levies taxes in both periods. The only asset is the government’s bonds, which are all held by patricians. (The plebs have a higher rate of time preference.)
Now suppose the government cuts current taxes, leaving its current and future consumption unchanged. The plebs promptly increase current consumption. To keep aggregate consumption unchanged, the patricians must be induced to reduce consumption; it’s not enough for them to save the amount of the tax cut, they must save enough to accommodate the plebs’ increased consumption. So the real interest rate must change, no? Ricardian Equivalence doesn’t hold, but Krugman’s “Debt Is Money We Owe To Ourselves” claim makes perfect sense.
Kevin: 200% of GDP x (say) 4% interest = 8% of GDP to keep the debt constant. If GDP is growing at (say) 3% that falls to 2% of GDP to keep the debt/GDP constant. It’s manageable. And if GDP per capita is growing over time, at (say) 1% per year, so about 30% per generation, the kids would still have been much richer than their parents.
Plus, the Victorians (unlike certain countries today) were not likely to “demonstrate” (in the Victorian sense).
Post WW2 inflation did a lot to reduce debt/GDP. Grandma’s bonds were partly confiscated, but she didn’t understand what was happening.
(I was watching Baldrick’s historical walks on TV Ontario last week. He was walking around Cornwall, talking about my ancestors and those like them, who were free traders before it was cool. All because of the tariffs needed to finance the debt from fighting the French.)
JV: “OH NO! NOT THIS AGAIN.”
Just what I thought too! And it was just after Groundhog day.
(But I’m pretty sure that JKH gets it. JKH just has a different way of saying things, but it comes out the same, eventually.)
JF: thanks! Yep, the debt question is a question about smoothing out the costs over cohorts in a sensible manner. Not an easy question to answer, but much better than either extreme simplistic answer.
Kevin: that’s a 50/50 model. 50% of the burden of the debt is born by the plebs’ kids, who will be paying higher taxes and consuming less. The interest rate only rises half as much as if all were plebs. (And if the plebs’ kids don’t pay taxes, it’s a redistribution of wealth from the infinitely-lived patrician dynasty to the current generation of plebs, which will raise the natural rate.)
Nick, perhaps I wasn’t clear. When the old die any non consumed assets are distributed. the important question here is whether they consume any more as a result. The act of selling assets is not sufficient. They have to burn through the money they receive. assuming that they don’t do that literally all the money must return to the living. They may however consume more perishable resources than otherwise. But that probably has limits. They can eat better but not necessarily more.
No one seems to be embracing the ‘bonds are property’ theory. Inter-generational transfer of debt is much easier to follow if we carefully consider the property aspects of bonds.
No one will deny that gold is property. Now consider the discovery of the American hemisphere which resulted in a vast increase in the supply of gold. At that time, gold was money. It follows that more gold property was accompanied by an increase in the money supply.
The historical record tells us that the period of gold discovery and increase in money supply was accompanied by an increase in economic activity. Jumping to the conclusion, I think that the prospect of traveling to a newly discovered continent seeking money (seeking new property in the form of gold) destabilized the old economic order and incentivized increased economic activity.
Fast forward to fiat money. We can think of the creation of a bond as creation of property. In a stable fiat system, the economic result of the creation of a NEW bond is identical to the discovery of NEW gold.
I emphasize NEW because ONLY NEW, destabilizing, property-increasing-events lead to increased economic activity. The increase realized will persist until the new gold mines are exhausted or in the case of fiat money creation, until the annual increase in money supply is stopped. (Gold mines provide annual employment, an annual fiat deficit funds government economic activity)
The total economy records increasing amounts of gold property while the gold mines are running, and increasing amounts of debt property while the annual deficit is increasing.
I will leave it to the reader to consider the effect on the economy if government decides to reverse the property creating events. What happens when government decides to put gold into a vault and retire debt?
Would this be an inter-generational transfer of wealth or would this be a reorder of economic goals and activity?
ignoramus (“ginormaus” would be a better name!): Yep. If there’s a bond-financed transfer of $100 to the old, then unless the old increase their consumption by $100 before they die, they will leave increased bequests (in some form or other), so the burden on future generations will be less than $100.
@Nick:
Nick: “50% of the burden of the debt is born by the plebs’ kids, who will be paying higher taxes and consuming less.”
I don’t see it that way. Measured by manna consumed, the losers are tomorrow’s plebs and today’s patricians, while the winners are today’s plebs and tomorrows patricians. So it’s a +25/-25/-25/+25 model, if I understand your terminology correctly.
The crucial point, though, is that (a) Ricardian Equivalence doesn’t hold in this world; but (b) debt can be described as “money we owe to ourselves”.
Nick,
“World B: Us old people sell our government bonds to the next generation (they pay us for the bonds).”
But the next generation decides how much to pay for the bonds. They are not obliged to pay anything for them. If they don’t want to buy the bonds, their price falls to zero, and it’s the oldies who get nothing for the bonds. So the next generation only buy the bonds if they think it is worth it, and then they can decide later whether to tax themselves to pay off the debt.
There is only a burden on another generation if one generation (which owns the debt) taxes another, which is alive at the same time, to pay off the debt. That is redistribution within the group of people alive at one point in time, not time travel.
@Kevin Donoghue:
Can you define “we” and “ourselves”?
With the broadest definition of “all of humanity throughout infinite time and space,” then all debt is trivially owed to ourselves and this is a null-argument.
With the narrowest definition of “a particular demographic and social cohort alive at this very moment,” (say, “old patricians” or “young plebeians”) then debt is externally owned and owed, and this is a live argument.
The trick is that all of our arguments are implicitly indifferent to redistribution within “us”, but we care a great deal about redistribution between “us” and “not us”, suitably defined.
Majro: I agree. In a world of ricardian Equivalence, default would not change the distribution of wealth across generations. It would only change the distribution of wealth across dynasties, if some held more bonds and paid less taxes than others.
Kevin: I really had to think about that one.
An individual old patrician can, if he chooses, keep his consumption exactly the same, and bequeath all of his transfer payment to his kids. If he chooses to consume less and bequeath more than his transfer payment, then he revealed prefers doing so. And if the old patrician already has assets and was planning to save, the increased rate of interest gives him an additional positive wealth effect.
Philippe: If the next generation collectively refuses to buy the bonds or pay extra taxes to service the debt, then yes you can’t impose a burden on future generations. But for each individual, taking his own taxes as exogenous, the rate of interest will in equilibrium be high enough that it is individually rational to buy the bonds. What is true for all is not true for each.
Majromax: Can you define “we” and “ourselves”?
That’s the crux of the matter. I take Krugman to mean all of us who are alive at any given time. In the example I’ve been discussing, a tax cut raises the consumption of today’s plebs and reduces that of today’s patricians.
On my reading, Krugman isn’t trying to make any subtle point, so yes, it’s trivial. As Kenneth Duda remarked in his first comment: “the conventional “Eek! Debt!” view is nonsense” — that’s really all he’s trying to say. Krugman isn’t opposing Nick Rowe’s argument; sadly, he’s just not interested in it.
Nick: An individual old patrician can, if he chooses, keep his consumption exactly the same, and bequeath all of his transfer payment to his kids.
Yes, which tells us that the real interest rate must change, since the plebs will certainly increase their consumption. Of course an individual pleb can do so too, but I’m assuming he won’t. So if revealed preference is what interests you, everyone is better off with the deferral of taxes! WTF?! I think that touches on a point you’ve made in another context, about seemingly paradoxical implications of optimization; but I don’t recall the details. Note however that at a higher interest rate, the PV of the bonds is reduced. If I was teaching this model I think I’d spend a bit of time thinking that aspect through, but I’m not so I won’t.
BTW, I wasn’t thinking of young & old plebs & patricians; this 2-period model just has thrifty patricians who own bonds, and spendthrift plebs who don’t.
Krugman:
“But again, all this is within the current generation; it’s not about the present versus the future.”
That tells you right there that he’s being ambiguous in the use of the word ‘generation’.
He’s equating current generation with ‘the present’.
Which means the current generation includes presently co-existing old and young cohorts according to him.
Which means it includes more than one generation according to Nick’s use of the word.
Which means its just a current (intra-generational) distribution problem according to Krugman.
Which means its an inter-generational distribution problem according to Nick.
Sloppy writing on K-man’s part.
In any event, he’s never addressed Nick’s point – not 2 years ago, not now.
the real point being that somebody is going to lose or bear the burden of the debt in the event of a primary surplus – i.e. whoever is taxed for it
JKH,
people talk about the burden on future generations. Krugman correctly points out that time travel is not possible.
Krugman’s role in the interpretation of the term ‘time travel’ is moot – in the context of his wider trail of terminological ambiguity.
Whoever gets taxed for a primary surplus is paying the price for debt previously incurred – since the normal use of a primary surplus is to pay down debt – and that holds notwithstanding that the proceeds of the tax get transferred to somebody in the present who gets to use it.
Philippe: My post on how time travel is possible
JKH,
“Whoever gets taxed for a primary surplus is paying the price for debt previously incurred”
In that case, one group of currently living people is being taxed to pay another group of currently living people. They might even be the same people. Future people are not being taxed to pay past people.
That’s right and that’s what I just said.
But you’re not understanding the point.
Which is that future people are being taxed to pay for the debt incurred by past people.
Here is my version of time travel, in the spirit of how Nick uses the term (although I haven’t checked back to his previous post yet):
Today:
The government makes a bond financed transfer to A.
Tomorrow:
The government taxes B to pay off the bond.
Interpretation:
B is the future generation that has borne the burden of the original debt – because the government has decided to tax finance the retirement of debt and has chosen to tax B for that purpose – and B by construction lives in a later period than A.
Net:
A is up $ today.
B is down $ tomorrow.
That is time travel in terms of benefit and cost.
But that does NOT mean that B has paid A.
It means B has paid bond owner C today.
But that is NOT a net benefit to C.
It is merely an exchange of one asset for another from C’s perspective.
Cross sectional asset exchange is not inconsistent with cost/benefit time travel.
JKH
“future people are being taxed to pay for the debt incurred by past people”
But the payment is only going to future people, not to past people. The future people paying the tax might even be the same future people who are receiving the payment (or they might not be). However, time travel is impossible so future people can not be taxed to pay past people.
geez
that’s just what I said too
you’re not getting the point at all
the time travel is in terms of cost and benefit
not in terms of the clearing system for today’s payments
the payment clearing system is cross sectional
the cost benefit equation is time travel
cost/benefit is not that simple though, because the debt might have been used to improve future conditions.
true
its an other things equal type calculation for sure
the future generation can impose a cost on themselves by taxing themselves to pay off the debt which they have bought from the past generation, but that is a cost that they impose on themselves rather than a cost that is forced on them by people who are now dead.
true
running a primary surplus is a choice
but that choice implies the judgement that the debt has become a burden
“that choice implies the judgement that the debt has become a burden”
in what sense is it a burden? The future generation voluntarily buys the debt from the past generation, which then dies. The future generation is under no obligation to tax themselves to eliminate the debt, so why is it a burden to them? As I said, they can impose a cost on themselves by taxing themselves to pay it off, but that is their choice – not something which is forced upon them.