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 
rjs,
You’re going around in circles.
See:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2015/02/debt-does-have-intergenerational-distributional-implications.html?cid=6a00d83451688169e201bb07ef2e98970d#comment-6a00d83451688169e201bb07ef2e98970d
Where I said:
“First, regarding your undoing example:
Reversing the process by which X causes Y undoes Y. That is logical.
And it is equally logical that not reversing it leaves Y as caused.
This is universally true, I suppose.
So yes, I see that.
It doesn’t seem too relevant to the proposition that X causes Y, though.”
Apart from that, you continue to circle around the central point, with red herrings and straw men.
Two knowledgeable economists Rowe and Wren Lewis have described this in almost exactly the same way. You either get it or you don’t. You have to think about it.
At the end of the day, it all amounts to accounting entries. You have to understand the difference between cross sectional distribution and time series distribution. The marginal primary surplus (i.e. the marginal tax at the end of the time series) is the essential point. Nick won’t appreciate this, but I believe the reason he has understood this is that he’s done the essential accounting for it. That’s what a spread sheet does.
I’d also appreciate it if you would try and resist the “impudent student” demanding conversation mode. Stop assuming and then advising me what I agree with, and just state your thoughts.
I’m not saying you’re an impudent student, but I’ve seen this particular style many times before, and it’s tiring. It distracts from engaging with people who are otherwise interesting and worthwhile to engage with.
Thank you.
Nick,
There is one thing (at least) I know I don’t understand about how you and SWL and RF are interpreting the economics of this.
It has to do with the emphasis you all place on the distinction between bequeathal and selling of bonds.
Consider the final time period where the tax is imposed.
Two scenarios:
One where young Z1 has bought the bonds from old Y1.
Young Z1 then gets taxed.
So old Z1 will have no bonds to sell and therefore no related consumption.
The second where young Z1 has inherited the bonds from old Y1.
Young Z1 gets taxed.
And old Z1 will have no bonds to sell and therefore no related consumption.
It seems to me that these two scenarios are identical in terms of the effect of a marginal tax (actually, a marginal primary surplus) on the marginal inter-generational distribution of consumption.
In both cases, old Z1 has no future consumption flowing from his ownership of a bond today.
The fact that in the first case he paid for the bond and in the second case he inherited the bond should not be an issue, IMO. It is the marginal effect on inter-generational distribution of consumption that is the issue. The fact that Z1 ends up with more net wealth in the case where he didn’t have to buy the bond is moot to that marginal intergenerational distribution effect.
That’s why I said earlier that in my stripped down version of the most bare bones model, the issue of the bequeathal/sale distinction is secondary and in that way not really relevant. The only relevant thing is the marginal primary surplus at the end of the game, which is also what I said several years ago.
Do I have this wrong? I know that the bequeathal/sale distinction seems central to the way you illustrate this. Roger Farmer seems to use it a lot also, but for additional reasons it seems that I don’t fully understand. Am I missing something essential here? If so, I don’t see it.
Is it possible that this distinction is more an inherent feature of OLG models, and that while OLG models have been used by economists in this debate, it is actually not essential in illustrating the specific intergenerational distribution issue that has been the subject of this debate?
JKH, my 2c,
I think the driver here is the consumption decision – and that needs to be paid. Old Y1 pays the consumption by selling assets (any, or using taxes). Without selling (taxing) it cannot eat the apples.
That’s why I think the debt is mostly irrelevant here.
Jussi,
I don’t know – I’d have to think more about what you’re driving at.
But in fact the core model here is about the interpretation of debt. That is the topic.
Also, it is interesting that Simon Wren-Lewis starts out with a pay as you go pension scheme as his first example, and then moves on to government debt.
But this slips over the fact that a pension scheme is a type of debt, more or less, because the plan is committed to pay the current retirees. That commitment is a form of liability, which is essentially debt. It’s just an actuarially structured debt or liability as opposed to a straightforward bond.
Nick,
I’m not sure I follow why I would need to do that if I understand the logic of what you’re saying. Or are you saying I don’t understand? I was trying to provide a real world example of the same phenomenon. Including a particular case where people on the earlier flight cause some people’s, on the later flights, luggage to never make it home.
My metaphor is the same phenomenon. Just flights and luggage not beers or lightbulbs.
In fact I think mine is better because you can then talk about what would happen if the next plane is bigger or smaller (change in capacity ie larger or smaller output) without torturing my metaphor.
Miami: I think I meant that suggestion for rjs. I think your plane metaphor basically works, and you basically get it.
JKH: I’m not sure I follow. Let me try this: suppose the first generation gets given new bonds by the government. If they keep their lifetime consumption the same as before, and simply bequeath their bonds to the kids, who bequeath them to their kids, etc., then nobody’s consumption changes. (That’s the Barro-Ricardian Equivalence result.) The first generation gets no benefit, and subsequent generations suffer no costs.
Why only basically?
That’s not meant to be standoffish. Just wondering what toy think I’ve missed.
I thought I did well to capture the same phenomenon with a real world example that anyone whose flown at all has likely experienced. It’s real, not abstract. Less knee jerk, “that’s not what reality is like”. They’re infinitely more likely to have experienced it first hand.
Miami: You understand it at least basically. I don’t know. Not easy to build interest rates into your plane metaphor. But yes, it works, and gets the point across. Have a look at my new post.
Nick,
I guess I’ve been assuming that the standard first step for the model is a redistribution of consumption in the first period. The government borrows from the young to make a transfer payment to the old which the latter use for consumption. That’s a one time effect up front. The young hold the bonds until old.
And from that starting assumption, the question is whether the young when they become old sell their bonds to the new young (which is assume to result in its own consumption redistribution) or bequeath them (which results in no consumption redistribution).
So I’ve assumed that the first period always has that asymmetry of the initial consumption redistribution. But the subsequent periods may go either way.
Then I concluded as above – that the intervening choice of selling or bequeathing the bonds wouldn’t change the nature of the tax effect at the far end. Somebody will be worse off at that end point of taxation.
But I see that wouldn’t be the case with your example.
P.S.
For some strange reason I have a real problem keeping the “primary surplus” definition straight in my mind, and I think I’ve been using it incorrectly throughout here. What I’ve meant to suggest throughout is a tax and a surplus sufficient to start paying down the debt.
JKH: I always have to stop and think about “primary surplus”. A primary surplus of 0 means the debt is growing at the rate of interest. I think that’s right.
I think that’s right also.
It’s the use of the word “primary” that sends me into counterintuitive convulsions. It’s smaller than a straight surplus.
I think.
“It’s smaller than a straight surplus.”
That’s not even right.
What I’m thinking is that the tax revenue required to generate a primary surplus is less than the tax revenue required to generate a straight surplus – by the amount of interest payable on the debt – other things equal.
But a primary surplus exceeds the amount of a straight surplus by the amount of the interest payable on the debt – allowing for either positive or negative primary surplus or straight surplus amounts
I think…
maybe…
probably not…
who knows
wince
Where T is taxes net of transfer payments, but not transfer payments of interest on government bonds:
Surplus = T – G – rB
Primary Surplus = T – G
Surplus = Primary Surplus – rB
Primary Surplus = Surplus + rB
“But a primary surplus exceeds the amount of a straight surplus by the amount of the interest payable on the debt”
Yep. (I think).
“OK. Sit down with pen and paper, and try to come up with a simple numerical example where aggregate consumption in any year is fixed, where the government pays off the debt, and no individual has reduced lifetime consumption as a result.”
I did just that. And what I keep coming back to, is that the period in which government purchases real output is the one in which costs must be born. That period has two generations, so it’s certainly possible for the burden to fall on one of them, or both of them.
For all other periods, no cost needs to be born, even if the government is redeeming a bond in the distant future. In that first period, when the government buys fruit and eats it, the older generation are the ones that bear the burden.
Here I am using stones in the OLG generation in which the young collect fruit. In the first generation, the old pay the full cost, because government sells an additional stone into the market, and uses the proceeds of their stone sale to eat the fruit. Therefore the stones that the old save are less valuable. The young pay bear no burden, and no subsequent generation bears a burden either. This is because when the government buys the stone from the economy, they tax the old to take one of their stones, and then throw the extra stone away. Now the old, as a group, do not really suffer because each stone left is worth more, so the old, as a group, still get all the savings of the young for consumption.
The only generation that suffered was in period 1, and it was the old of that period. But you can spread the burden equally, by taxing the young for 1/2 fruit and selling a stone for 1/2 fruit.
If you don’t like stones, you can imagine that the government introduces a new instrument — a paper bond that pays a stone next period. It still doesn’t matter because the market is already complete with just the stones, whose appreciation in value over 1 period is the reward for deferring consumption for that period, exactly as a one period bond. Once you have that for a 1 period bond, you can extend to any number of periods.
It really all depends on your taxation policy, and not on your financing policy.
RJS,
“It really all depends on your taxation policy, and not on your financing policy.”
The funny thing about bonds, the market value can fluctuate, but changes in market value do not affect the issuer’s financial position. For instance if the government sells 5% bonds and the market value of the bonds rises, the government does not have to pay market price to redeem the bonds.
If the government uses stones instead, and the market value of the stones falls (value of stones falls relative to all other goods), the government may end up buying stones when they are expensive, and selling them when they are cheap.
“because government sells an additional stone into the market, and uses the proceeds of their stone sale to eat the fruit. Therefore the stones that the old save are less valuable.”
And if the old get together to shut down the stone quarries? Does government open it’s own stone quarry and compete with the private market for supplying stones?