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 
You are implying that under absolutely no circumstances would a primary surplus ever be a responsible fiscal policy decision.
Are you sure of that?
no, that’s not what I am implying. The issue is whether debts issued by people alive today are a burden on people in the future, who haven’t been born yet.
i.e. whether it’s possible for people in the future to make payments to people in the past who are dead.
Obviously that is impossible. Time travel doesn’t exit.
people in the future can make payments to other people in the future, and they can also destroy financial assets by taxing them without replacing the taxed assets. What they can’t do is send things through a time machine back to people living in the past.
*exist, rather than exit.
Philippe: have you read my time-travel post yet?
I doubt that analogies can prove that the laws of physics are wrong, to be honest.
Nick,
the Krugman quote from your time travel post:
“First, however, let me suggest that the phrasing in terms of “future generations” can easily become a trap. It’s quite possible that debt can raise the consumption of one generation and reduce the consumption of the next generation during the period when members of both generations are still alive.”
That’s not time travel. That’s one group of currently existing people vs another group of currently existing people.
No laws of physics were violated in that post. And it’s a very short and very simple post.
“No laws of physics were violated in that post”
So you agree that time travel is impossible (at least time travel into the past).
Well, someone today got to eat one apple more, and someone not yet born got to eat one apple less 100 years in the future, and no apples were created or destroyed, so it sure looks like that one apple traveled back in time! 😉 The physics guys must be wrong!
My other trick: converting meat into vegetables, so we can take food out of the mouths of carnivores and feed it to vegetarians. Take meat away from carnivores, swap it for vegetables with an omnivore, and give those vegetables to the vegetarian. Magic! (Or just take money away from the carnivore, so he eats less meat, and give it to the vegetarian, so he eats more vegetables, and watch the market do the rest.)
hey presto, physics is wrong and so is Krugman.
A creates debt – A is in political power
A sells the debt to B – A is in political power (otherwise B might refuse and e.g. default) —-> A gains $ and B loses
A dies (positive effect)
B sells the to C – B is in power —-> B gains $ and C loses
B dies (no change)
C pays the debt – C is in power but decides to pay back the debt, bequest the bonds or default them
C dies (negative effect by choice)
I fail to see how government debt is meaningful here – doesn’t the cohort in power always have the power to decide the intergenerational distribution? It could very well use other means like taxes or transfers.
Isn’t it also obvious that the next generation will always inherit everything as the older generation dies – so the real decision for the older generation in power is only how much they save vs consume?
Jussi,
I’ll take a shot at the first point.
In a simple world, with a combined treasury and central bank, the government would make a transfer payment today by crediting somebody with money and just leaving it at that – no debt, unless you want to define non-interest bearing money as a form of debt.
Then it would tax somebody tomorrow (if that is the policy) with the reverse operation.
Interest bearing debt comes into it if the government wants to control interest rate levels in some fashion – otherwise, nominal interest rates will just remain at zero. So the government will sell debt to drain excess money, etc.
So debt is an institutional feature for the control of nominal interest rates by the government, in some sense.
(This simple set up is sort of an MMT-Mosler world.)
All that said, maybe the power to tax back money in a non-interest bearing world makes money a form of de facto debt where the government has a call option to buy back the money it has issued by imposing taxes. It can create a tax asset (tax receivable) at will to do this. Nice work if you can get it.
Nick,
I like the time travel analogy.
It’s one of the more useful physics analogies I’ve seen for economics.
In fact it’s the only useful one I’ve seen.
Although rabbit holes threaten where the analogy is mistaken for literalness.
@JKH
If you think in terms of non-interest bearing money I reckoned that Nick will shoot and say that in this case it is only about nominal values, the additional money will just mean higher prices. I reckon he will add that if this is only a temporarily change, the money is drained back by taxes, the prices are not affected. So money and debt share a lot of common from this point of view. Could Nick rewrite the model using money only?
But my problem is that I don’t see how is it possible to “tax somebody tomorrow” (i.e. that cannot be the policy). There is no way to force the future generations to run surpluses to drain the money back. Thus the cohort in power can only decide the current distribution and inflation. I’m making here an assumption the “government decision” ~= “interest of cohort in power”? And also that the older/owner generation is in power. I think we have to make this assumptions?
And the second point is I think related but deeper – the only real variable is consumption vs investments for every cohort in power.
I think it is related because that the underlying assumption here is that the government spending is wasteful (i.e. more of consumption than investments). So running deficit means less investments which is obviously a burden. But the debt burden is then a moot point – it would be more effective to say that consumption more today is an additional burden to our children? And certainly we should also mind the circumstances the debt is incurred, it might just mean higher production today which might mean higher investments regardless.
Jussi: money is an asset where r < g. If r < g for bonds, you can run a sustainable Ponzi scheme, where the government issues new bonds, rolls over the debt+interest forever, and never needs to raise taxes on future generations, because the debt/GDP ratio is falling.
Jussi,
By “tax tomorrow” I didn’t mean to infer that it was a policy decision today.
Just a future event, de facto, determined by a future government, based on conditions at the time.
I don’t think Nick meant this as a policy decision today either.
Think of a future surplus as a future government response to the increasingly apparent difficulty of the debt load inherited from a past government.
It’s a contingency for today’s government to consider, but not a forward contract or commitment to a future surplus.
On the deeper issue, I’m just considering the bare bones logic of “we owe it to ourselves” versus intergenerational transfer, other things equal. So those other things are important but not essential to the point of the core distinction, IMO.
If A consumes more and incurs debt, I agree, that it’s a burden. But A can just consume more, and not incur debt, and that’s the very same burden. And IMO the same intergenerational transfer. Why do we force the debt be a part of the picture, what is the core distinction?
@Nick: Old discussion but what if we abolish reserves/cash and force the banks to use the government debt instead of the reserves to balance their books? We would still have bank/deposit money. The repo/money(sorry) market is today a big part of the picture, the debt is often used like money between the banks. It is not like the CB has all the control or that money/debt has a clear-cut distinction, IMO.
Farmer has linked to you on this, but people are still missing a point about public debt – it is different that just a loan – and a lot of this discussion is about any loan – you get the money now and pay back principle and interest over time or later in one lump – it is a simple exchange equation with an interest kicker. No one misunderstands that.
The concern here is much different – so maybe this helps people see why they need to write and say something different when they talk about govt financing where debt is used to get the cash RATHER than taxation.
You chose which line to put yourself into, it is a govt defined set of lines and it is a govt who needs cash to pay current period outlay needs:
Line 1, they give you a tax bill and you pay this bill by giving them cash.
Line 2, they say they will cut your taxes by an amount AND give you a tradeable asset in the same amount instead (compared to line 1, this amount is a doubling of the net worth position of the people in line 1).
No surprise there is absolutely NO ONE from this blog in line 1, everybody gets into line 2. (And who gets into line 1 and why,ignorance perhaps? This is a good question too.)
BUT, of course, the govt then tells everyone that you must qualify to get into Line 2 – you must already be wealthy enough to have portfolio diversification where low-yielding public debt is ok (it’s safe, it forces the govt to keep Line 1 open for a long time). So 90+% of the people in lines 1 and 2 have to be in line 1, and get and pay a tax bill.
This is an incredible deal for the people remaining in Line 2, and for any heirs or lucky friends they have.
NOW DO YOU SEE THAT THERE IS SOMETHING TO BE UNDERSTOOD HERE (and it is not a discussion about how a loan works inter-temporarily).
Line 2 is just a completely nutty public financing scheme, on its face. Well, it certainly is nutty in a very wealthy place (unless, plainly, the wealthy control everything).
Clearly it would be better if the govt just printed the cash rather than give an asset/wealth to a person while they cut their taxes too.
JF: suppose generation 1 gets the transfer payment (they are better off) and generation 3 gets the tax (they are worse off). What about generation 2, who get neither transfer payment nor tax? By Revealed Preference, generation 2 are (slightly) better off. They could have kept doing what they were originally doing, but chose to buy the bonds instead, because they preferred to.
Jussi: therefore, using fiscal policy rather than monetary policy to increase AD, does indeed result in a benefit to savers.
A versus B, an empirical question: how much debt is purchased by succeeding generation(s), and how much is bequested. One measure: Gabriel Zucman roughly estimates that about 60% of US wealth is inherited.
https://twitter.com/gabriel_zucman/status/455692241760047104
Does this mean that roughly 40% of this year’s gov deficit is removed from future cohorts’ consumption?
Steve: maybe. But we need to know the marginal propensity to bequeath assets, with respect to a change in debt. The average propensity doesn’t tell us that.
This issue has nothing to do with whether successive generations inherit their bonds or buy them, IMO. (That’s where I would streamline Nick’s presentation.) If they get taxed to pay for a primary surplus, there is a cost. If they inherit their bonds, they end up with nothing, when they believed they had an asset with value and no tax liability related to it. If they paid for their bonds, they end up with nothing, when they believed they had an asset with value and no tax liability related to it. They’re down from what they believed they had in either case. That’s the cost. And the benefit went to whoever got the transfer at the beginning of the daisy chain.
It seems the burden on the future generation is entirely due to that generation’s political decision to run a primary surplus. But isn’t that decision completely separate from prior generations’ decisions to run debt-financed deficits? JKH remarks that the decision to run a primary surplus could be the effect of the “difficulty of the debt load inherited from a past government.” But since a gov’t with its own currency controls r, why would a gov’t ever have trouble with its debt load? Japan has huge debts with no problems servicing it or rolling it over. In other words (I think), what’s wrong with a future of r < g?
Jared,
I agree it’s still a choice along the lines of how you describe it.
But for Krugman to argue that “we owe it to ourselves” is the end of the story, and to make that a coherent argument, he would have to qualify it very specifically by adopting your argument as part of it.
He didn’t and he wouldn’t. In other words, Krugman would never say that governments should always run deficits. He never has and he never will.
So, given that, if there is any question at all about a government aiming for a primary surplus at some point – i.e. to pay down some portion of the debt – then the size of the debt that has been inherited is obviously a factor in formulating that sort of strategy.
K just missed that piece, which is what Nick has addressed.
To be sure I understand here. I’m pretty sure (from this and the ’11-’12 discussions) that the effect Nick’s discussing is only one effect of gov deficit spending — the debt side. The other effect, higher current spending, is not considered. i.e. if the purchases are consumption expenditures (driving somewhat greater investment now by producers to produce more consumables), or invested directly in long-lived (and presumably productive) assets like infrastructure or whatever.
That right?
That effect assumes that at some point there will be a tougher government borrowing constraint relative to the counterfactual of not borrowing and spending now. But if economic growth is higher/faster due to higher spending today–if it that makes the future pie bigger–the borrowing constraint is pushed out and up. So if borrowing and spending now increases the future pie by enough, the the budget constraint rises along with the debt. Within some limit, it never bites harder than in the counterfactual of not borrowing and spending today.
??
Jared: “But since a gov’t with its own currency controls r,…”
Only temporarily, without eventually triggering explosive inflation. We are talking very long run here.
Steve: for example: if the government borrows to finance investment, and if that investment creates returns big enough to service the debt, then taxes don’t have to increase. No burden. There are other possible examples. Depends on the model.
OK… so isn’t it fair to say that current debt spending imposes a burden on future generations ONLY if the spending generates high inflation? But isn’t that also true of monetary policy? If loose monetary policy creates too much inflation, then that will also create a burden on future generations. Why pick on debt spending?
Nick,
Is anybody getting the point of your post?
(And the previous ones)
I think I am getting it (but maybe not). The point was to show that, contra-Krugman, debt spending in period 1 can impose costs in period 2 (under certain conditions); and those who benefit in period 1 are not around to pay the costs in period 2, hence intergenerational redistribution (time-travel). But my line of questioning was attempting to show there’s nothing unique about debt-financed spending in terms of intergenerational redistribution. Whether spending is debt or money-financed, private or public, the condition that induces the need to impose costs on the future generation (high inflation), is equally present (or not present). Now, maybe you and Nick agree with this. If so, great. If not, where am I mistaken? And if you do agree, then while Krugman’s use of “we owe it to ourselves” is a bit misleading, his overall point that debt does not impose an additional burden on future generations is still true.
Jared,
I think I touched on that point in a previous comment, but maybe too obliquely.
So your issue is whether or not there is a distinction between money financing and debt financing in terms of this “we owe it to ourselves” issue in contrast to intergenerational transfer of costs and benefits.
In my earlier comment, I suggested there is no distinction. If deficits are money financed, and if there comes a point where the government wants to pay down cumulative money financing, it will do it in the same way as is the case for debt – by running a primary surplus.
But Krugman’s post is not about the distinction between debt and money financing at all. It is about “we owe it to ourselves” in the context of debt financing, which is the standard mode of government finance. The fact that you can substitute non-standard money financing for debt financing and run through exactly the same argument as we have done for the issue of “we owe it to ourselves” versus intergenerational transfer means that his post is still misleading and that Nick’s point still holds. By no means does the substitution of money financing for debt financing validate his argument from the perspective of its completeness. It is incomplete.
The one other case I recall of somebody making a big deal of embracing the “we owe it to ourselves” meme is Warren Mosler of MMT fame. Strange bedfellow for Krugman.
I think in Mosler’s case it reflects MMT’s deep aversion to the very idea of a primary surplus. It’s like ideological kryptonite, which tends to cloud the analysis of the surplus effect. “No grandchildren involved” was one of his favorite expressions. Very similar to Krugman’s message.
A creates debt
A sells the debt to B —-> A gains $ and B loses
A dies (took advantage over B)
B taxes C (and runs surplus) and pays back the bonds B is holding —-> B gains $ and C loses
B dies (no change)
C taxes D and transfers the wealth to itself (e.g. pensions)
C dies (no change, no debt inherited)
So A’s debt didn’t lower anyone’s consumption down the line and the debt was paid back. The debt doesn’t, IMO, have intergenerational consequences (- or more than other means the cohort in power can use to exploit the next generation).
When you are in an accident, you get an insurance payout, which is paid for by monthly premium payments. Yes, the premium payments are a cost, but you may be better off with the insurance anyways, particularly when you don’t know when the accident will happen. In the same way, government attempts at stabilizing nominal income flows necessarily mean deficit spending during recessions and possibly running primary surpluses in boom periods. That does not mean that the generation that is unfortunate enough to experience the recession is somehow taking advantage of generations that are in the boom period. Because no generation knows, ex-ante, whether it will be in a recession, it is a good deal to have the fiscal stabilizers in place as a matter of policy for all generations.
That was ex-ante, but look at ex-post: prolonged periods of unemployed are devastating to the lifetime earnings of laid off workers. Firms during recessions cut back on research and development, and total capital stock of the nation is lower than it otherwise should be. Even the children of the generation experiencing the recession benefit from being raised in a home where their parents are employed or receive benefits rather than being on the street. And their children also benefit. Similarly, the benefits to the stock of capital and knowledge are cumulative, so benefits of deficit spending flow to future generations together with costs.
Next, an OLG model is not a really good model to apply here because of the massive concentration of financial assets in the economy, and the observed behavior of wealth accumulation across age cohorts (most — almost all — cohorts in the economy rely primarily on transfer payments such as social security to fund their retirement, while a small group of cohorts — the ones who hold the majority of financial assets — are better described as conducting Ricardian bequests).
Also there is the matter of getting the interest rates wrong. Just as the benefits to recession fighting flow to future generations, so the debt service costs of risk free debt have historically been less than the growth rate of the economy. Yes, occasionally governments run small primary surpluses, but the sum total of such surpluses is insignificant in relation to the decrease in debt/GDP that occur during boom years. Only a very small portion of the debt is ever “paid off” by any generation — most of the debt is just rolled over as GDP outgrows it.
Finally — and Nick will hate this — government debt, given that it is risk free (not talking about Euro area debt here) serves as a cash equivalent and so increases overall liquidity in the economy, providing a benefit to every generation as well.
Now I understand the desire to look at government debt through Barro’s eyes — assume no unemployment, full market clearing, no wealth inequality, smooth deterministic output, a risk free rate higher than the growth rate, zero benefit to deficit spending (e.g. no multiplier), and no relationship between recessions and the rate of accumulation of physical, intellectual, or human capital (because there are no recessions in Barro’s model).
In that case there is a powerful argument against deficit spending, just as assuming the patient is always in perfect health creates a powerful effect against performing surgeries of any kind. But that’s a pretty low bar to set when assessing the efficacy of surgeries. In fact, it’s misleading. This is my problem with this post.
Yes, there is a cost, but there is not a net cost, to either the current generation, or future generations, of deficit spending as an income stabilization policy.
Jussi,
TR (treasury) issues bonds to B
TR transfers funds to A
A consumes
B sells bonds to C
B consumes
C sells bonds to D
C consumes
Treasury taxes D
D sells bonds to Treasury
D doesn’t consume
The counterfactual is the case where Treasury doesn’t tax D and D continues on to consume
(I.e. the counterfactual is that Treasury never runs a primary surplus and never buys back its debt)
A benefited
D incurred a cost
The cost associated with A’s benefit is borne by D
(It certainly isn’t borne by anybody in A’s generation, because somebody has a bond they will be able to sell)
So somebody in generation A benefits and somebody in generation D bears the cost – in a way that wouldn’t have been the case without either the initial transfer at the time of A or the primary surplus at the time of D. That is undeniable at the micro level, notwithstanding that aggregate output and consumption for each generation in their respective times is not necessarily affected or illustrated by this alone. A macro effect is also possible. The macro effect would depend on knock-on aggregate demand consequences etc., which tends to be the case with the contractionary effect of primary surpluses. I think it’s clear that Nick’s model demonstrates the micro factor at a minimum, which is all that was claimed.
In fact, this sort of intergenerational transfer (micro certainly and macro probably) is quite consistent with “we owe the debt to ourselves”, when “ourselves” is considered to be a moving generational target over time. It’s just that “we owe the debt to ourselves” doesn’t negate intergenerational transfer of costs when there is a primary surplus. Krugman neglects to consider that.
As a variation on the above, suppose the holding of bonds and the tax liability is split between two different members of the final generation D.
Suppose D1 holds the bonds.
And D2 incurs the tax liability.
The government taxes D2 to pay D1.
D1 consumes.
D2 reduces consumption relative to the counterfactual of not being taxed.
D2 would not be in that position without the original transfer to A and the primary surplus tax imposed on D2.
So “we owe it to ourselves” holds in the sense that D2 is taxed to pay off D1, both in generation D.
But that does not negate the intergenerational transfer of the cost from generation A to generation D.
After all, D1 does not experience a (net) benefit in this scenario. D1 is just exchanging bonds for cash – that is neutral. Yet D2 still incurs a net cost of the tax. That is the cost due to the original benefit of the transfer to A, a member of an earlier generation.
Conversely, generation A might have been taxed originally to pay for the transfer instead. But it is bond issuance that transfers the cost over time until that tax is imposed on the later generation D.
Krugman’s error is one of omission – like Mosler.
JKH,
I’m not disagreeing that Nick’s model show how the debt can be used to exploit the next generation. And they can use it again. And I can see how selling bonds is quite convenient way to coerce the next generations. And the selling action doesn’t feel as active than tax-and-transfer. But in the end, in theory, both are decisions by the cohort in power – there is nothing specialness in government debt regarding intergenerational transfer. IMO it is all about the decision at the current time by every generations.
So I’m disagreeing with this (as this is something else than consumption vs investment decision):
“we can take apples out of the mouths of yet unborn future generations, and eat them ourselves.”
We cannot, it is not our decision. We just decide how much we eat of current production (given Nick’s example) and coerce our (born) children. Our children’s decision is beyond us. They are free to coerce or not their children – it is not like the debt makes them in anyway to coerce the next generation.
So I agree that along the chain the products can indeed “time travel” but I disagree with the notion that debt is needed for this to happen. It only needs that every link of the chain, each generation, pass voluntarily the counterfactual deficit forward by the vehicle of choice (e.g. selling bond or pension scheme).
“We cannot, it is not our decision”
Fair enough.
That’s a nuance I didn’t notice especially.
Although I would say that the probability of a primary surplus (policy decision) by a future government increases with the size of deficits the current generation chooses to run (other things equal).
That’s far different than saying that debt definitely needs to be paid off in the future, but its directionally correct I think. It’s also implicit in conventional policy thinking, although the rationale may not always be correct.
I’ve been viewing the model more as a scenario – as opposed to an expectation.
So the full analysis of things should include the possibility of a primary surplus scenario, etc.
“I disagree with the notion that debt is needed for this to happen.”
Divide the financial world between debt and equity (meaning equity as a measure of net worth, perhaps but not always meaning equity securities).
The transfer payment upfront is a transfer of equity (net worth) to the private sector.
The tax at the back is a transfer of equity from the private sector.
Everything in between is debt in such a model.
MMT has the useful terminology of “net financial assets” or NFA. Nick’s model translates to the NFA construct. A transfer payment increases private sector NFA, which is an increase in private sector equity (net worth). Taxes reduce NFA, which is a decrease in private sector equity. Nick’s model shows the incidence of both payments at the micro level, more or less. The destruction of NFA at the macro level corresponds to “the burden”, and if it occurs in the future, it is intergenerational.
I do not disagree. My emphasis was in theory. A high enough level of debt very likely has practical implications even in this non-distorting taxes setup.
JKH at 06:45 (my previous comment was on 06:14)
I think I can get that (NFA being familiar concept). That makes it clear how the debt/NFA can be used as a time traveling vehicle.
But change in net worth only makes the consumption possible, it doesn’t mean the actual decision to consume or eat apples more. And as per the quote: we can construct the “time travel” without debt (or change in NFA). In that sense debt is nothing special (see equity model below). It is not like NFA would necessarily be an account how much intergenerational deficit has been incurred and passed forward.
I’m not sure I agree with this:
“Nick’s model shows the incidence of both payments at the micro level, more or less.”
Does it mean about the same as Nick here:
“we can take apples out of the mouths of yet unborn future generations, and eat them ourselves.”?
In theory, NFA doesn’t change the fact that every generation are deciding the wealth/consumption distribution of their time between young and old. Plus regardless of their choice of distribution, they can decide how much debt they left behind.
My twisted version of the model (inspired by NFA not being that different):
###
Consider two possible worlds:
World A: Us old people bequeath our private assets, equity, to the next generation (as a freebie).
World B: Us old people sell our private assets, equity, to the next generation (they pay us for the assets).
See the difference?
In world A the next generation inherits the assets inherent in the equity, and really does inherit the liabilities (remember NFA) too. It gets given a liability, and gets given the corresponding asset too.
In world B the next generation inherits the asset inherent in the equity, but does pay (money, NFA) for it. It gets given a liability, and does not get given the corresponding asset. It pays for the corresponding asset…
(In theory disclaimer)
###
I certainly appreciate the fact that equity is direct ownership of underlying (apple trees?) and the government bonds are not. But Nick’s model, in my mind, assumes total dictatorship of ruling cohort, then it doesn’t matter whether the ownership is direct (by law!) or indirect by taxation (by law!).
Can we now say that the equity was burden of unborn children?
Btw. I especially liked other Nick Edmonds’s view on this:
http://monetaryreflections.blogspot.co.uk/2014/10/can-outside-wealth-be-burden-on-future.html
The first comments touched debt / money distinction, again he is IMO spot on.
I’ll just re-emphasize a couple of points I’ve already made in comments.
The fact that the model works for money as well as bonds does not mean it doesn’t work for bonds. The fact that the model is illustrated with bonds does not mean it doesn’t work for money. Bonds are just the conventional means of government finance. So in that vein, this point that it works for more than bonds (“debt” in one interpretation) is a red herring and a straw man. It works for anything that the government wishes to issue on the right hand side of its balance sheet – money, bills, or bonds.
On the debt/equity distinction, I’m using the term equity in the following way. Suppose a household balance sheet includes real estate, bonds (including government bonds), and equity securities as assets. Suppose it has no debt. Then the equity I’m referring to is the entire value of that balance sheet – net worth as normally depicted on the right hand side. If the household had issued a mortgage to a bank, its equity position would be smaller by the value of that mortgages. Similarly, suppose a government balance sheet includes money, bills, and bonds on the right hand side. For illustration purposes, assume away all assets. Then then government has negative equity equivalent to its net liability position. In the context of the model being discussed here, a transfer payment is a transfer of equity from the government to the private sector. A tax is a transfer of equity from the private sector to the government.
Suppose the full generational series is:
A, B, C … Z
Suppose the level GDP never changes. There is nothing in the model to preclude this.
Then what the model says is that a transfer payment to A1 is a benefit to A1 and a tax on Z1 is a cost to Z1.
It doesn’t say that the GDP during the lifetimes of Z is less than the GDP during the lifetimes of A. It doesn’t say macro resources are being transferred back in time, obviously.
It says there is a cost benefit distribution from the future generation to the present generation – IF the future government decides to taxes Z1. It is conditional in that sense.
I think the reason most people don’t get this is that there are so many red herrings and straw mean swirling around the simplicity of the model, ready to attack it.
Nick Edmonds in the post you refer to didn’t attack the model, but I do think he went beyond its central point by inviting ideas such as Godley-Lavoie type endogenous deficit determination and money supply and money velocity and unused wealth, etc. This model is very much targeted and focused on one idea only. All these tangential considerations don’t negate it.
The Wren Lewis post linked to by both Nicks totally gets Nick Rowe’s idea.
I should have mentioned – since the model refers to goods and services (such as apples), the assumption is made that the transfer payment is used for consumption by A1 and that the tax results in a reduction of consumption by Z1.
That does NOT mean that GDP expands by that amount at the time of the transfer payment or contracts by that amount at the time of the tax. There are distribution effects within each generation, and THAT does not mean there is not an inter-generational cost/benefit transfer effect.
And once again – the model is intended to depict a simple scenario that illustrates a point.
The fact that other factors may come into the mix doesn’t negate that point (straw man disease, highly contagious).