Steve Landsburg goes "meta" on me

Steve Landsburg has what I think is the best response so far to my "Debt is too a burden on our children unless you believe in Ricardian Equivalence" post.

[Update: I strongly recommend Steve's latest post, which puts everything together.]

Steve says "I want to explain what [Nick] means, and why it’s wrong." But he doesn't really say I'm wrong. (I think that's just a rhetorical flourish!)

He does something more interesting. He takes a public choice perspective. He is asking who my audience is, and who I'm trying to convince. He goes "meta" on me.

Here is my version of Steve's argument. (The following are my words, not Steve's).

'What's wrong with you macroeconomists is that you think in terms of aggregates, not individuals.

Some individuals are Ricardian. They care about their grandkids, foresee the future tax burden on their grandkids created by the debt, and increase their bequests to their grandkids to fully offset that burden. So those individuals won't care whether current government spending is financed by taxing or borrowing. They don't care if the taxes fall on themselves or on their grandkids.

Other individuals don't care about their grandkids. They want to shift the burden of current government spending off themselves and onto their grandkids. So those individuals want current government spending to be financed by borrowing rather than taxing. They want the taxes to fall on their grandkids and not themselves.

So no individual will see any problem with borrowing to finance current spending. They either don't care, or else prefer it. Nick doesn't have an audience for his post.'

Again, those were words I have put into Steve's mouth. Read the original to decide if my version is fair and accurate.

I think it's a really neat argument. I didn't see it coming.

It's not just a "neat" or "clever" argument. It raises a rather fundamental question about any economic writing that is supposed to be policy-relevant. "Who's your audience?"

Here's my response.

Suppose I have a friend who cares about his grandkids, and who reads the New York Times, and believes everything he reads in the New York Times. And suppose the New York Times tells him that the debt is not a burden on his grandkids. What should I do? I should write an open letter to the New York Times saying that the debt is too a burden on our grandkids, unless we as individuals take offsetting action and increase our bequests to our grandkids in response. And hope that the people who write for the New York Times will be convinced by my argument and change their minds. Which is what I did.

(Again, just to repeat what I have said elsewhere, the fact that deficits may have costs on future generations does not mean we should not run deficits. Because deficits may have benefits too, both on us and on future generations. Nearly everything we do has costs as well as benefits, and we should consider both.)

In other news, Bob Murphy has done a 180 handbrake turn on the question of the debt burden. Well done Bob! To paraphrase (OK, totally distort) Keynes: 'When I hear a convincing counter-argument I change my mind; what do you do sir?'

I really wish all of us, myself included, could be always as open and honest (and funny) about changing our minds as Bob has been.

But what interests me most about this is how Bob describes how wrenching a paradigm shift it was. That's exactly how I felt when I made the same 180 turn in the 1980's. It ain't easy, when you have been so used to seeing the world one way, and convinced that is the right way to see it, to suddenly switch to seeing it the other way. It's jarring.

And, Bob is no Keynesian. Bob came to his original perspective from reading Ludwig von Mises, not Abba Lerner. This question of the burden of the debt cuts across the dimension of big government vs small government. Not everything is ideology.

Comments

[vimothy]

JKH,

Thanks.

I think I understand already that no real world outcome could violate an accounting identity, and agree that NFA = NFL at the aggregate level. But my instinct (often wrong), is that what I'm saying still holds.

Taxing to pay down bonds might be equivalent to default with no tax for the aggregate sector, but it is not equivalent at the level of bondholder vs non-bondholder household. The bondholder expects a certain level of real consumption from the taxpayer, equal to the real value of the bond. In the default scenario, he receives nothing.

Considered as an aggregate, household savings equals their tax liability; but the asset is not held by all households. In order to settle their obligation to the bondholders, households require infinite output, which they do not have. They cannot pay the tax; the government must default on the bond.

To get further perspective on where I’m coming from, one could consider an equivalent case in which the bond is owned by households in another country. Since the liabilities of the govt can no longer be seen as ultimate liabilities of the household sector, it’s easy to see that although we can have NFA = NFL at all times, the absence of default is not guaranteed.

And taxation is equivalent in flow terms to negative saving, so as NFA is taxed down, it unwinds the stock of NFA saving.

Right—but a real stock does not arise out of a sequence of nominal flows. As the nominal stock of debt is unwound, there’s no way to tell ipso facto what happens to the real stock. Perhaps the nominal stock is unwound to near zero, but the real stock does not change. Anything is possible when we consider the problem without conditioning on other real economic factors.