Matt Yglesias, spilt milk, and the debt burden

I visit Matt Yglesias' house (HT JeffreyY). I drink one litre of milk from his fridge. I write Matt an IOU for one litre of milk.

1. If Matt subsequently tears up that IOU, then I am richer and he is poorer. Taking the two of us together, in aggregate we are neither richer nor poorer if Matt tears up the IOU. Tearing up the IOU doesn't bring the milk back.

2. Therefore there is no aggregate cost to me and Matt of me drinking more milk from Matt's fridge and writing Matt another IOU.

1 is of course true. But 2 does not follow from 1. 2 is false.

We can't do anything about the existing stock of national debt. "It's no use crying over spilt milk", even if it was spilled down my throat rather than spilled on the floor.

But that doesn't mean there is no cost to spilling more milk. True, there's also a benefit, if I'm thirsty, and it's spilled down my throat rather than on the floor. But there's a cost too. If the government runs a deficit now, there is a cost to future taxpayers. Sure, there's a benefit too, depending on what the government does with the funds it borrowed. And we should compare those benefits to those future costs. But we shouldn't pretend those costs don't exist.

The existing stock of debt represents the costs of past deficits that cannot be undone. We can't turn back the clock. But the fact that we cannot turn back the clock on past deficits says absolutely nothing about whether we should run a deficit now. We need to compare the benefits to the cost to future taxpapers.

Matt Yglesias was defending Paul Krugman's recent posts on the burden of the past debt and the desirability of current deficits.

Here's Paul:

"Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing. They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments.

This is, however, a really bad analogy in at least two ways.

.....

Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves."

This post is based on Noah Smith's post, and on my original post.

Comments

[Nick Rowe]

Paul Rogers: I have unpublished your latest comment, in which you repeat your previous comment. Please do not comment here again.

[Winslow R.]

"The existing stock of debt represents the costs of past deficits that cannot be undone. We can't turn back the clock. But the fact that we cannot turn back the clock on past deficits says absolutely nothing about whether we should run a deficit now. We need to compare the benefits to the cost to future taxpapers."

I personally welcome your exploration of optimizing fiscal policy to determine whether or not it is a burden. :)

Unemployed labor seems to be an optimal target for fiscal policy given if it is unused, it is gone forever.

Providing a framework where government directed spending on unemployed labor is a net positive for future generations is a worthwhile endeavor. MMT has yet to convince a broad audience!

Too bad most examples from history involve war. Mark Thoma links to an LA Times article...

"South Korea, for example, during the meltdown of 1997-'98, implemented a Master Plan for Tackling Unemployment that accounted for 10% of government expenditure. It employed workers on public projects that included cultivating forests, building small public facilities, repairing public utilities, environmental cleanup work, staffing community and welfare centers, and information/technology-related projects targeted at the young and computer-literate. The overall economy expanded and thrived in the aftermath."

http://www.latimes.com/news/opinion/la-oe-papadimitriou-job-creation-20120105,0,607208.story?track=rss

Perhaps with this Canadian initiative could help us move into a new global phase, replacing arguably burdensome war with not so burdensome community service.

[Greg Ransom]

If this labor drains resources from production processes that promise superior output in the future, and the labor is put to use doing counter-productive things which will required labor and resources to fix in the future, then "putting unemployed labor to work" is a net negative.

Watch the video of workers expending labor and resources to dispose of "green" cars subsidized by the U.S. government ....

You have to look at the real world and think these things through -- wishing doesn't make things actual.

Winslow writes.

"Providing a framework where government directed spending on unemployed labor is a net positive for future generations is a worthwhile endeavor."