Does Government Debt Impose a Burden on Future Generations/Periods/People? #12,143
I think (after a lot of effort) that I’ve internalized Nick Rowe’s modeling of this question (follow links from here) pretty well conceptually. His answer is Yes.
There have been thousands of posts and comments across the blogosphere since Nick took Krugman to task on the issue a couple of weeks ago, and Nick has been remarkably generous with his time in helping people understand his thinking. (A kudos also to Bob Murphy.) And it’s worth pointing out that Krugman hasn’t really responded to the core argument head-on. Feel free to follow the threads.
Here’s Nick’s model in brief, in my words:
Government borrowing/bond issuance today — considering only its costs, not the potential up/downsides of the associated spending — propagates incentives into the future, like waves are propagated when you throw a rock in a pool. Those incentives cause the old people in every period to consume more than the young people. In each future period, parents will eat some of their kids’ lunch.
Each generation consumes the same amount as they would have otherwise (because first you’re young, then you’re old, first you’re a child, then you’re a parent). But if government eventually has to tax to pay back the debt, the young people in that period are forced to consume less over their lifetimes, because they don’t get to eat their kids’ lunch.
(Nick acknowledges the point that Jamie Galbraith and others have been making for years: if the future GDP growth rate is higher than the interest rate, on average, the taxation never needs to happen, so the burden is never imposed.)
Here’s why I haven’t updated my priors much based on this thinking:
1. The wave model of propagated old/young bond-buying/spending patterns, extending to eternity, doesn’t seem plausible to me intuitively. It seems like the rock-in-the-pool ripples would probably flatten as they spread through time — maybe (?), as discussed in various posts and comment threads, because over the generations a certain percentage of parents bequeath their bonds to their children. That leaves us with “we’ll have to tax to pay for it eventually, so somebody will have to consume less,” which is pretty much where we started.
2. I wonder whether a real agent-based dynamic simulation modeling of Nick’s scenario, with continuous time and using differential equations, would give the same results. I’m not enough of a mathie to even guess, but I wouldn’t be surprised to see very different patterns and/or results.
3. The huge majority of government bonds are bought and traded not by people but by institutions (many of which — this seems significant — are licensed to create credit money and associated debt ex nihilo, and use government bonds as debt collateral in that process). Those institutions don’t have generations — birth/death, parents/children — and they don’t consume real goods (much). Again, my intuition tells me that these facts would bring complex dynamic interaction effects into play. While it might suffice to simplify by modeling things “as if” children were buying bonds from their parents, I don’t feel confident that that’s true.
4. The question Krugman was really asking, underlying his “is debt a future burden” locution, was: A. should we be taxing more or less? and B. should we be spending more or less? (Hence, should we be borrowing more or less?) Since I’d expect to see complex interaction effects from any of the four sources/uses choice combinations, isolating the question in this way seems like a questionable analytical technique. It’s kind of (not wanting to offend, can’t resist the word) petifogging. I’m not at all sure it provides useful information when divorced from the relevant context.
5. Semantics: assuming the model’s right, that we’re forcing a future generation of people to pay for their parents’ (our?) extra consumption — but not changing the amount that all future people will consume in toto — should we call that “a burden on future generations”? I’ll leave that to the philosophers.
I may (still) be displaying an inadequate understanding of the model in some points here, but I think there’s enough of merit above to discourage certainty — to question the ultimate utility of the model.
In short, if I was running a business of any size (yes: I have done so), with any decent amount of money on the line, I would 1. not give a huge amount of weight to the results of this model, and/or 2. be asking for a much more sophisticated analysis.
Which (#2) leaves us again where we were, wrestling with many/most of the big questions of growth macro.
So when Nick says “I thought we all had this debt burden stuff sorted out 30 years ago,” I agree. The answer was “maybe.” (Especially given the long-term historical reality of the Galbraithian scenario described above.) And in my mind it still is — with a little more weight on the “burden” side.
one has to distinguish between reasons for which the government borrows…arguably, if its for sending this generation a check so they can buy more trinkets at walmart it is a whole lot different in terms of how it impacts future generations than borrowing to build the interstate highway system, for instance…
@rjs This model ignores how the money is spent (assume that has net zero effect on future growth/prosperity), which *may* be a crucial flaw, but it’s an effort to tease out a particular answer — the effect of borrowing now versus taxing now.
Steve
this is such utter nonsense that it should be kept to private meeting rooms among certified economists.
you begin by ignoring on purpose.. “potential upsides of associated spending” which is the whole reason for borrowing… and end with a ripple too small to detect except in the imaginary world of economists pretending to be particle physicists.
this has NO sane relevance to ‘should we be taxing / spending / borrowing more or less.
and every business knows it. so does every government.
Steve:
To answer the question . . . yes. Yes, in a static environment. We are not living in a static environment. We are not suffering the same problem as the Europeans and the population is growing which in itself generates greater GDP (unless we embrace the Wall Street model of growth ithout Labor input). Whether legal or illegal, immigration impacts GDP. So does the future generation pay exactly the same amount in present dollars as divided by a larger population? If I understand (and I may not) what is being said in the article, it is not the same amount per individual and even then we are not discussing inflation and cheaper dollars and the growth of GDP.
The larger problem and greater than future debt abnd which little is being said about, is how do we get the percentage of the NonInstitutional Population in the Civilian Labor Force to grow again?
“I think (after a lot of effort) that I’ve internalized Nick Rowe’s modeling of this question (follow links from here) pretty well conceptually. His answer is Yes.”
Nick Rowe assumes that the gov’t will borrow for a long period of time at an interest rate greater than inflation plus GDP. That does not seem to be borne out historically. In addition, it is obviously a terrible gov’t policy. OC, if there is no gov’t debt, there is no problem, but it is the idiotic policy that is the main culprit.
In the modern world of fiat currencies, it is obviously not true that the gov’t must stand, hat in hand, hoping that the bond vigilantes will lend it enough money. We do not dig money out of the ground anymore. What is the ultimate source of our money? Not the bond market. Not Los Ricos, although they and their friends the bankers like to pretend that they are.
Now, the Euro zone is different. With the Euro they have, in effect, a gold standard, and like Nevada and West Virginia, do rely upon people to buy their bonds. During the Great Depression, it helped for nations to go off the gold standard. Unfortunately, in our Not So Great Depression, it is very difficult for Euro zone countries to go off the Euro. 🙁
Propagating waves that are never dampened. Observe the real world much?
After the previous AB positng on this I followed a few links and ended up at
http://consultingbyrpm.com/blog/2012/01/future-generations-will-be-indebted-to-me-for-the-clarity-of-this-exposition.html
where Bob Murphy is convinced he has proved something. The post was already so old I saw little point in adding my dismay that anyone could think his apples model was useful. He has a simple model where there CANNOT be any useful thing for a government to do anything with taxes much less anything with debt. There is not any purpose to private debt either.
Being able to create a model where all government action is pathological does not tell us anything about a world in which some government action can be helpful.
(And then I accidentally posted it in the wrong place. I should take that as a cue, but instead, here I am posting it agin where I meant to.)
SW
I have a model of the real world in which no waves are ever “dampened” unless they exchange energy with something else… cause an electron to move or a window to rattle.
I have no idea if this is the way the real world really works and particle physicists do not return my calls.
ive had quite a bit of frustration with this ongoing debate, steve… i fail to see how it has any policy implications; it would seem that if you need a bridge today, you borrow for it today, rather than let everyone tumble into the river…
“if the future GDP growth rate is higher than the interest rate, on average, the taxation never needs to happen, so the burden is never imposed.”
this is not true 1) once the government debt > 100% of GDP. if Government Debt = 125% of GDP for instance, then GDP growth has to be 25% than the interest rate, 2) historically very often
Just wondering. Is the word model used as an alternative to “just guessing”? Or maybe the word model is being used to suggest that what is being described is somethiing more than the modeler’s considered opinion, possibly an educated opinion, but only an opinion none the less.
Maybe we would all be better served by the field of economics if it stuck to describing the facts as they occur and drawing conclusions from those observed facts. Maybe the field of economics should stop modeling the relationships between economic phenomenon and then making suppositions about what those models suggest for the future. In other words, maybe a little less bull shit and a little more concrete measurment would be useful and not so misleading. I know its not as much fun, but its a lot more akin to a scientific endeavor.
Jack
or even the other way around. there is nothing wrong with creating a mathematical model and seeing if it leads to new insights, which may or may not apply to the real world.
but that’s not what happens in economics. someone creates a “model” and if it leads to conclusions that are congenial to political interests it is trotted out as proof that X policy is “right.” and when X policy doesn’t work that is always because someone somewhere broke a tribal taboo and the gods are punishing us with other things not being equal.
what was entertaining about this model the last time it was brought out was the vehemence and contempt of those who insisted that we were too stupid to understand the difference between buying a bond and inheriting it. it is as if i offered a “proof” that the moon was made of green cheese and somewhere in my proof was a step that went ‘two plus two is four..”
and when people objected to my proof i said “what is it about two plus two that you are too dumb to understand?”
economists would like us to think they are like physicists and are building on a program of deep theory and practical experiment.
what they are are the intellectual descendants of snake oil salesmen and con artists. specialists in the fast talk and the plausible argument… plausible both to the rubes and to the educated clergy.
and no, i don’t think all economists are dishonest, or that all economics is foolishness… but enough of it is that no one needs to feel bad if he remains skeptical of any given proposition or of “economics” as practiced in the media generally.
I conceptualize it more simply.
You can spend now without borrowing or taxing, inflating the money supply and reducing purchasing power now, or you can spend money equal to the amount you tax, taking approximately the same amount of money out of the system that you put in, or you can spend now by borrowing, which avoids reduction of purchasing power by taking money out of circulation. If you borrow, then you need to either inflate later to pay the debt without borrowing or taxing (soft default/payment), or you can tax (hard payment), reducing the money supply at that point in time, or you can kick the can by rolling over the debt, or you can hard default, reducing the assets of the bondholders directly.
I don’t think it is an unreasonable suggestion that governments which borrow have to do so at current rates which are in excess of inflation. There is a portion that is just related to international accounts (government to government borrowing/lending, the governmental equivalent of short term commercial paper), but for private investors, you *should* have to return something that is higher than the anticipated rate of inflation unless the risk premium on all other assets is incorrectly priced.
Continued:
If they have to borrow at a rate higher than anticipated inflation, and don’t supplement with “printing” to pay part of the debt, then kicking the can eventually will also drag on the ability of the government to go about it’s business in non-trivial ways.
The debt servicing is the part that ultimately should have a net effect, it seems to me. Everything else is essentially capital neutral unless there is an efficiency variance between governmental and non-governmental spending.
J.Goodwin: “I don’t think it is an unreasonable suggestion that governments which borrow have to do so at current rates which are in excess of inflation. There is a portion that is just related to international accounts (government to government borrowing/lending, the governmental equivalent of short term commercial paper), but for private investors, you *should* have to return something that is higher than the anticipated rate of inflation unless the risk premium on all other assets is incorrectly priced.”
Yes, you should. You do that by giving them a share of GDP growth. That is still sustainable. 🙂
min
in other words government borrows for the same reasons, and subject to the same constraints, as business. you hope to spend the money in such a way that it makes you richer down the road… or at least staves off an event that would make you poorer.
note that not paying off the debt is a form of borrowing more… and that is subject to the same concern as the original borrowing. clearly at some point the “interest” may become “burdensome.”
there are remedies for that, or preventives.
all of which seem to me to be quite obvious without higher math.
Government borrowing/bond issuance today — considering only its costs, not the potential up/downsides of the associated spending — propagates incentives into the future, like waves are propagated when you throw a rock in a pool.
In all seriousness, I have absolutely no idea what the hell this means.
Those incentives cause the old people in every period to consume more than the young people. In each future period, parents will eat some of their kids’ lunch.
In all seriousness, has anyone ever spent time with an old person? What do they consume more of? Food? No. Automobiles? Not a chance. Education? Get real. Housing? Maybe, if you count the cost of assisted living, but not everybody ends up there.
What old do people consume the most of is health care.
But it’s hard for me to believe that putting great gramma out on an ice floe is going to do a hell of a lot for school lunch programs. Though it will feed the walruses, come to think of it.
Models are only useful to the extent that they relate in some way to reality. When that fails, the model, no matter how elegant, is something akin to intellectual masturbation.
We use the ideal gas law to uderstand the real properties of real molecules that do not ever behave as the model predicts. Economists decide that when the model and reality don’t agree, it is reality that’s wrong.
JzB
coberly: “in other words government borrows for the same reasons, and subject to the same constraints, as business.”
No, it does not. Both the Democratic adminstration under Clinton and the Republican administration under Bush II realized that they did not really want to pay off the Federal debt, nor to stop borrowing money. Greenspan agreed. Bad idea.
Some of what gov’t does is like a business, like building and maintaining highways and educating future citizens, but that is far from the whole story.
As for budget constraints, what business can create their own money?
Sounds a lot like a free lunch.
But things aren’t free. Something is going somewhere. There can’t be a scenario where everyone gets richer indefinitely. That’s the promise of pop economics and room temperature fusion.
J.Goodwin: “Sounds a lot like a free lunch.”
Yes, it sounds like one, doesn’t it? But the point is, the day of reckoning, with sensible policies, can be put off until disaster strikes. And I mean something like war or the Yellowstone mega-volcano erupting. Then the burden of past expenditures pales in comparison with current woes.
Now, we may not want to put off the day of reckoning. For instance, if we construct something with an expected lifetime of 75 years, we would like to pay it off over that time period. Nick Rowe would call that passing on the burden of debt, but it would be entirely appropriate to do so.
J.Goodwin: “There can’t be a scenario where everyone gets richer indefinitely.”
IIUC, with economic growth, economists believe that that is possible. 🙂 I am somewhat skeptical, as I believe that much of our modern prosperity is based upon pollution and depletion of natural resources. How well we can do without that remains to be seen. However, the only historical example that I know anything about, Tokugawa Japan, conserved its resources and had economic growth, besides. There is hope. 🙂
“There can’t be a scenario where everyone gets richer indefinitely.”
Here’s one: more wealth is created than consumed.
Economics is so far away from the real world it makes my head hurt.
Of course there is one way to fix the you have to pay it back feature, issue consols (perpetual bonds) Like the UK did for many years. These bonds are never intended to be paid back, but rather pay interest forever. Of course these were issued in a period of low inflation, and its not clear who might buy these today.
No country has ever paid off its natoinal debt. We’ve hae a national debt since 1776 and never paid it off. I don’t recall the sky ever falling.
And there can be a scenario in which standards of living are generally rising. We had it right here during the 50’s and 60’s. It used to be called the American Dream.
During that time, govt never paid down the national debt, but it became realtively smaller over time, since GDP growth was considerably lager than debt growth.
More words to get to Troy’s point.
We did it. It worked. Then Reagan happened.
JzB
Min
you take me up too sharply. can i get away with saying that “normal” government borrowing is just like normal business borrowing? malignant (cancerous) borrowing seems to be something that only a government can get away with for any length of time.
as for creating money as a form of “borrowing”… well that also seems to be something only governments can do. i believe… don’t know very much… that creating money is a normal function of government simply because an increased supply of money is necessary to keep up with increased “productivity,” but the creation of “excess” money as a way to pay bills in the absence of “product” is, well, malignant.
Min
I agree with you here, but if over a long run the “money” printing or borrowing leads to a mismatch between money, debt, and product… nothing particularly terrible needs to happen. just the value of “money” changes much the same way as the price of bread might change (for reasons other than inflation, such as bad harvests or better cake).
Min
I agree with you here, but if over a long run the “money” printing or borrowing leads to a mismatch between money, debt, and product… nothing particularly terrible needs to happen. just the value of “money” changes much the same way as the price of bread might change (for reasons other than inflation, such as bad harvests or better cake).
Troy
i am not sure that “wealth” that is not “consumed” means anything. i consume bread. but if i buy a picture, or a house that has “extra” value because it is beautiful… then i am “consuming” that wealth (without consuming it.)
“wealth” that no one “pays for” is just trash (as far as the economy is concerned).
Lyle
i don’t know how well that worked. seems to me that if you were the government you’d have to find a way to default if you couldn’t pay the damn things off and get rid of them. or you could issue a higher interest bond that did mature, and buy back the “consols.”
then i am “consuming” that wealth (without consuming it).
yes, you answered your own question.
Wealth is that which provides the utility human needs and wants, ie. a ham sandwich, which is a what I call “direct” wealth. “Indirect” wealth — classicly know as capital wealth — is that which assists in the production of direct wealth, eg. the Eisenhower Interstate System.
From this analysis it is plainly obvious that it is possible for everyone to get weathier over time, but neoclassical economics was invented to prevent people from understanding this.
then i am “consuming” that wealth (without consuming it).
yes, you answered your own question.
Wealth is that which provides the utility human needs and wants, eg. a ham sandwich, which is a what I call “direct” wealth. “Indirect” wealth — classicly know as capital wealth — is that which assists in the production of direct wealth, eg. the Eisenhower Interstate System.
From this analysis it is plainly obvious that it is possible for everyone to get wealthier over time, as durable goods, human capital, and infrastructural wealth is accumulated faster than it is consumed/lost.
But neoclassical economics was invented to prevent people from understanding this, to provide the cover story for why poverty is always at the door.
then i am “consuming” that wealth (without consuming it).
yes, you answered your own question.
Wealth is that which provides the utility human needs and wants, eg. a ham sandwich, which is a what I call “direct” wealth. “Indirect” wealth — classicly known as capital wealth — is that which assists in the production of direct wealth, eg. the Eisenhower Interstate System.
From this analysis it is plainly obvious that it is possible for everyone to get wealthier over time, as durable goods, human capital, and infrastructural wealth is accumulated faster than it is consumed/lost.
But neoclassical economics was invented to prevent people from understanding this, to provide the cover story for why the wolf is always at the door.
then i am “consuming” that wealth (without consuming it).
yes, you answered your own question.
Wealth is that which provides the utility of satisfying human needs and wants, eg. a ham sandwich, which is a what I call “direct” wealth. “Indirect” wealth — classicly known as capital wealth — is that which assists in the production of direct wealth, eg. the Eisenhower Interstate System.
From this analysis it is plainly obvious that it is possible for everyone to get wealthier over time, as durable goods, human capital, and infrastructural wealth is accumulated faster than it is consumed/lost.
But neoclassical economics was invented to prevent people from understanding this, to provide the cover story for why the wolf is always at the door.
troy
actually, you answered my own question. i failed to realize the sense in which you were using “consumed.”
but speaking of ham sandwiches, i often try to explain to people that if i know today that forty years from today i will absolutely have to have a ham sandwich, how much should i pay to guarantee that it will be there? the “present value” of a ham sandwich forty years from now is NOT the answer. I think this pertains to the question at hand, because it is “illusion” to talk about the price of things in the future as if they were commensurable with things today, we will want and value things differently in a way that is not explained by “inflation” or paid for by “interest.”
But why not just look at the real world?
http://market-ticker.org/akcs-www?singlepost=2830228
At the federal level it is massive amounts military spending. 40 cents of each discretionary dollar goes to the military – not roads, not schools, not welfare. But our future kids need tanks to drive.
Lyle
I’m not sure how well that worked out. I’d like the option of paying it “back” and being rid of the debt. With a regular bond, I pay interest of 3 dollars a year for 30 years, say, and then I give the man back his hundred bucks. Then I may need to borrow “another” hundred bucks, and start paying interest of 3 dollars a year… With your consols I simply skip the “pay back, borrow back” step.
Unless of course I want to just pay it back and stop paying that interest. Of course instead of paying back the hundred bucks I could just put in in the bank and earn interest myself.. my head begins to hurt. I begin to see this the way economists see it. This way lies madness.
Interestingly in the past much longer bond terms existed, a number of 100 year bonds, and a few 150 year bonds were issued (150 means its likley the great grandchildrens problem). Note that the consols were issued. These paid for the 7 years war, the British side of the American Revolution, and the Napoleanic wars, interestingly the rate decreased over time. There are still some outstanding now paying 2.75% and although they can be called, the interest rate is to good for the government to call them. Actually they are among the older forms of government finance.
coberly: “can i get away with saying that “normal” government borrowing is just like normal business borrowing?”
I object to taking the analogy between business and gov’t too seriously. The purposes and practices of business and gov’t are different, and sometimes opposite. For instance when businesses are borrowing and spending, gov’ts should often be taxing, cutting back, and paying down debt, and vice versa. When businesses are cutting back, gov’ts should often be spending and taking on debt. Like now. At such times to talk about gov’t constraints, or to say, like Obama did, that people are tightening their belts and the gov’t should, too, is worse than counterproductive. Like being on a small ship, and when the passengers rush to one side of the boat, the captain orders the crew to go to that side, as well. Better, IMO, to keep the ship of state on an even keel. 🙂
coberly: “as for creating money as a form of “borrowing”… well that also seems to be something only governments can do. i believe… don’t know very much… that creating money is a normal function of government simply because an increased supply of money is necessary to keep up with increased “productivity,” but the creation of “excess” money as a way to pay bills in the absence of “product” is, well, malignant.”
I don’t know about malignant borrowing. I think that there was some unwise borrowing during the Reagan era, but “malignant” is a bit strong. 😉
But I do agree that as the economy grows it needs more money. And I think that providng that money via issuing treasuries is not a good idea. But that is how we have set things up. If we had had a cushion of, say, $2 trillion instead of debt, we would probably be in better shape right now, both politically and economically. But I suppose if we had that much money that we were not paying interest on, Los Ricos would be sad, so we don’t do that.
jazzbumpa: “No country has ever paid off its natoinal debt. We’ve hae a national debt since 1776 and never paid it off.”
Well, for all intents and purposes the Andrew Jackson paid off the national debt in 1835. (It was a campaign promise.) I think that there was something like $300,000 in debt left. And the debt remained negligible in 1836, as well. Then we got a depression in 1837. There is a good possibility that there was a causal connection between paying off the debt and the depression. A lot of people even thought so at the time. Jackson certainly drained money from the economy.
Jazz
It’s a matter of how one defines old. That’s the problem with speaking in broad generalities, especially when speculating about future events. The mathematical model would be: (Approx.A)(Approx.B)=Vague Notion of Occurence.
Sorry, that’s not scientific enough. Rather, (A)(B)=VNC, where A=an assumption and B =another possibly related phenomenon, and VNC=a wild guess based upon one’s political and social ideological slant.
Using consols to pay for wars makes a lot of sense. Today in the U. S. most of us believe that we are benefiting from the American Revolution. Why aren’t we paying our share? 😉 With consols, we could still be paying for it. 🙂
J. Goodwin:
“There can’t be a scenario where everyone gets richer indefinitely. “
How would you describe the last 5,000 years?
did you share the view that public debt is a burden on the generation on born,discuss in full with references.
send ur findings to my mail box (chrisigiemonuh@yahoo.com