Why Noah Smith doesn't get my point about the debt burden

Because aggregating across people alive at a particular time is not the same as aggregating across time periods in the lifetimes of a particular cohort of people. (See JP Koning on the Borges Problem  or Scott Sumner).

[Update: or does Noah get my point? because later on in the comments to his post he says: "Nick Rowe's point is that if the government borrows to consume, then it can effectively be shortchanging the future generation, whether that shortchanging is accomplished by reduced investment or by durable government commitments to future net transfers. This is also a good and valuable point." Dunno.]

[Update 2. OK, Noah does get my point. Sorry Noah. But there is some strange stuff going on in his model. See my discussion with Noah in the comments below.]

Noah Smith is a very smart guy, and a very good economist. And Noah totally misses my point about the burden of the debt on future cohorts. But because Noah is a very smart guy, and a very good economist, he is also beautifully clear in exactly why he misses my point. And I bet lots of other very smart people and very good economists are missing my point for exactly the same reason.

Here's Noah: "Now let's define "burden on future generations". That means that at some time T > 0 (t=0 being today), the potential consumption of the economy will be lower."

NO! That is NOT how we should define "burden on future generations". We should define it as "lower lifetime consumption (or lower lifetime utility) of future cohorts of people".

In comments, Andy Harless (who gets my point) tries to explain this to Noah. Noah responds to Andy:

"You're right that I could use that alternate definition of "generation". But the result would be the same, since a negative result for future times implies a negative result for future generations, since future generations live only during future times.....Also note that to state my point more completely, in my response above I should have written "a future cohort's consumption is just the union of the consumption values for various (i,t>0) pairs.""

NO! It's NOT the same. A future cohort's consumption is NOT just the union of the values for aggregate consumption at various future times when that cohort is alive.

When I was explaining my point about the burden of the debt on future generations, I deliberately chose an example in which aggregate consumption at all future times was constant, and unaffected by the debt. In other words, I deliberately assumed there was no "burden" in the sense in which Noah defines "burden". But I showed that there was nevertheless a burden to a future cohort.

Here is another example in which aggregate consumption is constant at all times and is unaffected by the debt. But the current cohort gains at the expense of ALL future cohorts:

Assume all output is consumed. Assume people live for 2 periods, produce 100 when young and 100 when old. Assume one person per cohort (so population is always 2). So aggregate consumption is 200 at all time periods.

In the baseline scenario each person produces and consumes 100 each period, so lifetime consumption is 200, and aggregate consumption per period is 200.

Now suppose:

In period 0, the young in cohort A consume 100. (Same as baseline)

In period 1, the old in cohort A consume 200, and the young in cohort B consume 0. Aggregate C=200. Lifetime consumption of cohort A is 300.

In period 2, the old in cohort B consume 150, and the young in cohort C consume 50. Aggregate C=200. Lifetime consumption of cohort B is 150.

In period 3, the old in cohort C consume 125, and the young in cohort D consume 75. Aggregate C=200. Lifetime consumption of cohort C is 175.

In period 4, the old in cohort D consume 112.5, and the young in cohort E consume 87.5. Aggregate C=200. Lifetime consumption of cohort D is 187.5.

And so on.

The government borrowed 100 and gave it to cohort A to consume, then slowly reduced the debt at the rate of 50% per period.

Every single future cohort has lower lifetime consumption, even though aggregate consumption is always 200 at all time periods. There is a burden on ALL future cohorts (though that burden asymptotically approaches zero as we go into the very distant future).

Here is a second example, where all future cohorts have lower lifetime utility, even though their lifetime consumption stays at 200:

Same as the first example, except the government only borrows 50, and then taxes all future generations to pay the interest on the debt, but leaves the debt unchanged at 50 forever. So all future cohorts consume 50 when young and 150 when old. But they have a utility function U=consumption when young x consumption when old. So their lifetime utility will be 50x150, which is less than 100x100.

Update: And if the rate of interest is positive (above the zero growth rate in this economy) then the government must (eventually) raise taxes to pay at least the interest on the debt, or the debt/GDP ratio will grow without limit until the young cannot afford to buy the bonds.

If Noah doesn't get it after this, then I will despair.

Does this mean that debt always creates a burden on future generations? Emphatically no. It is possible to construct different examples where lifetime utility goes up even if lifetime consumption stays the same (because the rate of interest is always negative). Or where lifetime consumption and utility of all future cohorts goes up even though aggregate consumption is unaffected (because the rate of interest is always less than the growth rate). Or the deficit could finance investment that increases future cohorts' consumption. There may be benefits as well as costs for future generations. But until people get my point, we can't talk about the benefits and costs sensibly.

Comments

[Kevin Donoghue]

Sorry if I'm being obtuse, but what you describe as government borrowing I would call confiscation. It's not news to me that the government can take from one group of people and give to another. But it's confusing to call that imposition the burden of debt. It's more like reparations imposed on the vanquished.

[Kevin Donoghue]

BTW, re your 2nd example: when Krugman writes:

...a debt inherited from the past is, in effect, simply a rule requiring that one group of people — the people who didn’t inherit bonds from their parents — make a transfer to another group, the people who did. It has distributional effects, but it does not in any direct sense make the country poorer. [my emphasis]

-- as I read it, he's already conceding in advance the point you make there. If a policy favours the old over the young, then it can certainly diminish lifetime utility, if the young have a greater capacity to enjoy consumption (true in my case at least).

[Nick Rowe]

Kevin: the government borrows from the young in cohort B, then it taxes the old in cohort B, and all future cohorts, to pay interest on the debt plus retire half the outstanding debt. Taxation is confiscation.

I don't know whether PK is conceding the point, or simply switching to Ricardian Equivalence (some people inherit the bonds) when it suits him. I really can't make head or tail of that post of his.

[Nick Rowe]

But all I needed to do in this post is to show that Noah is wrong when he says "a future cohort's consumption is just the union of the consumption values for various (i,t>0) pairs."

[Nick Rowe]

What is really embarrassing for us economists is that it seems to be a lot easier for even some of my heterododox non-economist critics to basically get my point.

JKH, as far as I can see, totally gets it. Dan Kervick, I think, basically gets it, and is haggling over details. Same with rsj. And those guys will come and haggle the details in this post, totally missing the point of this post -- which is that lots of really good economists are totally missing the point!

Oh God. I despair.

[JKH]

Nick,

You constructed your “counter-example” post in such a way as to disprove the claim that debt can’t be a burden on future generations unless something reduces future output. I think you succeeded in doing that by demonstrating a case where it holds and where future output isn't reduced.

This may be a trivial observation (although I don’t think so), but I think you proved something even stronger than that.

It looks to me that your logic holds independently of future output entirely – i.e. it always holds (provided there is eventual taxation, as you assumed in structuring your example).

And once again, the reason that it always holds is because of a decision to tax – for whatever reason.

(But to explain why the decision to tax is critical - one must understand that it’s because of the effect of the tax on the population of bonds outstanding – not because of the effect in transferring money from one bank account to another, as Krugman erroneously thinks is the explanation for why it's not critical.)

Again, the nature of the burden depends only on the loss of the opportunity to recoup the nominal purchasing power lost by purchasing bonds from the previous generation (or by straightforward lending to it as in your milk example), but being unable to reverse that cost out to the subsequent generation.

So Noah's following conclusion in comments is wrong I think:

“Paul Krugman's point is that a high level of existing debt does not mean that society as a whole has to bear a lot of "pain", since it owes most of that money to itself, thus making it qualitatively different from a household that has borrowed money from outside lenders. This is a good and valid point.

Nick Rowe's point is that if the government borrows to consume, then it can effectively be shortchanging the future generation, whether that shortchanging is accomplished by reduced investment or by durable government commitments to future net transfers. This is also a good and valuable point.

The points do not really conflict.”

http://noahpinionblog.blogspot.ca/2012/10/debt-and-burden-on-future-generations.html?showComment=1350168123822#c4418592659045964709

Yes, they do conflict at the end of the day. You demonstrated that the future generation can be shortchanged if the government borrows to consume – but as I noted above the reasoning you employed applies in ALL cases, regardless of how government borrowing is used or how effective it is - provided the government makes a decision to tax in the future for any reason at all in order to start paying the interest at least with tax revenue.

And I think this broad applicability if anything is reinforced by the flexibility of possible outcomes demonstrating this, as you illustrated here:

http://noahpinionblog.blogspot.ca/2012/10/debt-and-burden-on-future-generations.html?showComment=1350203921035#c2178303927502662192

And you've emphasized that again by including it in your post here.

Yes. Somebody – at least one - owes you a post – and probably numerous others.

And with about 9 months interest I reckon!

Your point is totally valid, yet orthogonal to almost everything that’s been written about it in the blogosphere.

P.S.

Jeez – I hope I haven’t written anything here that causes a retraction of “totally gets it”

:)

E.g. I don’t think I’ve contradicted this:

“Does this mean that debt always creates a burden on future generations? Emphatically no.”

But I think it is the case that taxes as described do create the conditions for a future burden – always.

P.P.S.

Regarding my comment earlier regarding interest on debt in your examples:

http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/10/how-time-travel-is-possible.html?cid=6a00d83451688169e2017ee4276629970d#comment-6a00d83451688169e2017ee4276629970d

To recap, if there is a primary surplus, that means the government has enough tax revenue to starting paying the interest cost of the debt in cash, rather than issuing bonds for that amount.

One way this could happen in theory, but still operationally, is the following:

For a given fiscal year, the government funds its total deficit with bonds. At the end of the fiscal year, because it has run a primary surplus, it ends up with surplus cash in its deposit account (e.g. either it’s the treasury account at the central bank or its accounts with the commercial banks.) That cash will then allow it to start buying back bonds it issued to cover the interest cost component of the total deficit.

So that sort of account is consistent with the interpretation of taxing enough to allow the government to start buying back bonds, thereby removing the opportunity of the current generation to sell those bonds to the next generation.

Or, the government could simply apply the cash during the year and not issue bonds for that amount in the first place. That account is consistent with the interpretation of taxing enough such that there is an opportunity cost in terms of the government not having issued bonds sufficient to cover the interest earned by the current generation, thereby precluding the opportunity of the current generation to sell such bonds to the next generation.

[Nick Rowe]

JKH: "But I think it is the case that taxes as described do create the conditions for a future burden – always."

You totally get it up to and including that point.

You are *maybe* a bit fuzzy on the conditions under which future taxes would or would not have to increase.

[JKH]

P.P.P.S.

Shoot - I STILL don’t have the words right on that (nagging) interest part.

I should just stop.

But maybe like:

“For a given fiscal year, the government funds its interest cost with bonds. At the end of the fiscal year, because it has run a primary surplus, it ends up with surplus cash in its deposit account (e.g. either it’s the treasury account at the central bank or its accounts with the commercial banks.) That cash will then allow it to start buying back bonds it issued to cover the interest cost.
So that sort of account is consistent with the interpretation of taxing enough to allow the government to start buying back bonds, thereby removing the opportunity of the current generation to sell those bonds to the next generation.”

That's a hypothetical operation. The paragraph after that is more like what actually happens.

[JKH]

Nick,

"You are *maybe* a bit fuzzy on the conditions under which future taxes would or would not have to increase."

I'd say I'm not only fuzzy, but oblivious - deliberately.

I leave the conditions that determine the tax decision either way entirely up to the economists. (I might have a few ideas on that, but they aren't necessary to make my point about your point.)

I'm just saying that your logic holds if a decision to tax has been made - for whatever reason.

[Min]

"In the baseline scenario each person produces and consumes 100 each period, so lifetime consumption is 200, and aggregate consumption per period is 200.

"Now suppose:

"In period 0, the young in cohort A consume 100. (Same as baseline)

"In period 1, the old in cohort A consume 200, and the young in cohort B consume 0. Aggregate C=200. Lifetime consumption of cohort A is 300.

"In period 2, the old in cohort B consume 150, and the young in cohort C consume 50. Aggregate C=200. Lifetime consumption of cohort B is 150. . . .

"And so on.

"The government borrowed 100 and gave it to cohort A to consume, then slowly reduced the debt at the rate of 50% per period."

Are these not distributional effects?

[Ritwik]

Nick

I posted this on one of your other threads as well, but since this is most recent, here goes.

Your point holds for overlapping generations, if 'generations' maps equi-outcome fiscal cohorts closely, or better than 'current taxpayers'. OLG models, including yours, sneak this assumption in. But it's not at all obvious or intuitive.

Lifetimes are heterogeneous. Births and deaths are continuous. Fiscal timeframes are usually much smaller than lifetimes. What is the net result? I don't know. Do you?

Are OLG cohorts with their own unintuitive, unspecified assumptions correct Borgesian categories to handle fiscal outcomes?

[ZDENPR]

Okay, Nick, so now you simply say that government can redistribute between various groups of society and, as a result, make one of the groups "richer" and another "poorer", including redistributing between the old and the young. No one contests that, I think. As I understand Krugman, this is actually the very point that he is making.

What is being contested, though, is the fact that issuance of (financial) debt within and economy PER SE can amount to an intertemporal distribution between the economy as a whole NOW and the economy as a whole at some future stage.

That is simply not true. All financial liabilities and assets in a (closed) economy always net to zero. By definition, so no matter how much debt you issue, the economy as a whole will not get richer or poorer PER SE (interest also accrues to somebody).

Any real effort can always be directed to reasonable things (improving your home or whatever) or stupid things (taking the time to break the windows in your neigbour's home). Debt (or rather the need to pay it back) is certainly a mechanism that "forces" people to make "an effort". It all comes down, however, to what people actually do in the REAL world. To make a slightly exaggerated point: If your cohort A starts a nuclear war in period 1, this is for sure going to result in "lower lifetime utility" for all next cohorts. But that has nothing to do specifically with debt, but everything to do with bad decision making. You simply demonstrate that we can screw up the world for our posterity. Which sure we can. But not simply by issuing debt PER SE, but by financing stupid things (and not financing smart things). But this is trivial, in my view.

BTW - what does the younger cohort consume in period 1 in your example?

[Nick Rowe]

Min: "Are these not distributional effects?" They are transfers that change the distribution of wealth across cohorts.

Ritwik: you are right. But this is already hard enough to explain. Everybody lives for exactly the same length of time, and every member of a cohort is taxed alike.

[Sergei]

It is obvious that debt, both public and private, is a burden because it is a liability which limits freedom. But I have hard time believing that IMF, etc think about the path of future consumption of a *particular*cohort* of population when they talk about debt burden and fiscal austerity.

Or do they? I am getting completely lost now.

ps. I am a non-economist.

[Kevin Donoghue]

Nick,
I see what you mean about JKH et al. But I really don't think your despair about the conventionally-trained is warranted. These OLG models can be quite tricky as any student knows. But with a bit of attention to notation and suchlike it's quite possible to see whether there's anything of substance being argued. My suspicion is that this is all semantics but I'm not sure. I'm still thinking about it. What more can I do? However I don't set much store by the fact that non-economists accept your point. Non-economists took the likes of William Greider seriously too, which is what prompted Krugman to write books like The Accidental Theorist and Pop Internationalism. Sometimes common sense works better than buns-and-burgers theory, sometimes it doesn't.

The key to understanding Krugman is to refrain from reading more into his words than his target audience would. For example: "what people mean when they speak about the burden of the debt on future generations...is that America as a whole will be poorer, just as a family that runs up debt is poorer thereafter." Here, he clearly does not intend 'poorer' to be equated with lower utility. He's talking about disposable income. In a closed economy the disposable income of a representative household is unaffected by the level of debt. In one respect I think you have refined Krugman's argument. He writes: "Suppose that after the 2016 election President Santorum tries to buy senior support by giving every American over 65 a gift of newly printed government bonds; then the over-65 generation will be made richer, and everyone under 65 will be made poorer (duh)." Your first example, above, shows how that sort of transaction can form part of a chain which harms a number of generations rather than just one. I don't think Krugman would dispute that. He would simply refuse to label it "the burden of debt" and AFAIAC he'd be right.

Sergei,
The IMF is mostly concerned with open economies, where the burden of debt mostly comes from (a) the fact that it's often owed to foreigners and (b) it distorts incentives. All parties to the present dispute are agreed on that, I think. This is really all about the theory of closed economies where (for purposes of the argument) distortions are assumed away.

[Ritwik]

Nick

I'm saying the reason your model, though obviously correct in its universe, is not breaking much ice is because our intuition of 'equi-fiscal outcome' is much more developed than an OLG model, or a Ricardian equivalence model, or a 'we owe the debt to ourselves model'. And our formal models are foreverprey to Wittgensteinian traps because they refuse to define baselines. (Also because, in economics and the internet, it seems to be a cardinal sin to ever admit that the other person is right.)

This might be another one of those cases where there is so much tacit knowledge that simple models, whether of the Dean Baker kind or the Nick Rowe kind, are actually very unintuitive.

[Sergei]

Kevin Donoghue, and why is private debt different whether it is an open or closed economy? For one thing changing all private contracts might be really difficult however changing the terms of the public debt is a much easier task. And it happens all the time. So how come private debt is completely ignored while public debt is given so much attention?

[Kevin Donoghue]

Sergei, those are interesting questions but way off-topic. I agree private debt deserves attention.

[Brett Reynolds]

Layperson foolishly sticking my head up to ask a question: Is this all because Krugman and Nick have different definitions of wealth, poverty, burden, etc?

[Nick Rowe]

Brett: No. It's because we define "the future" differently. Does it mean "future times", or "future people"?

[K]

Nick,

Here's the right geographical analogy:

Someone on the east coast *steals* some milk from someone further west, arguing that the victim can just steal it from someone even further west. Assuming the continent is infinitely big, no problem right?

You want to argue that the *first* thief places a burden on everyone else. The way I (and also the law) see it, every thief is equally culpable. Having been a victim yourself has no bearing on guilt. So it seems you need a very unconventional view of morality to view the problem in terms of transfers between people not concurrently alive.

There there are a few principal roots of the problem:

1) the political power imbalance that enables the old to steal from the young
2) the inability to identify with distant future victims (thieves often think like this - the victim has insurance right?)
3) the fallacy that humanity can last forever

[Min]

Moi: "Are these not distributional effects?"

Nick Rowe: "They are transfers that change the distribution of wealth across cohorts."

I brought that up because, IIRC, in 2011 Dean Baker explicitly stated that gov't debt could have distributional effects on future generations. Krugman, as I recall, did not state that, and was less precise overall than Baker.

[Nick Rowe]

But didn't Dean mean "distributional effects *within* future generations"? Dunno.

[K]

Well he's right then. There are no effects that transcend time. Each generation must make a decision to make up its loss by stealing from its kids.

[BSEconomist]

No no no. This is all wrong. Nick, I love ya, man, but no.

Look, your entire point is that the pre-debt distribution of consumption (within periods and across periods) is Pareto efficient and therefore the redistribution that debt implies makes future generations worse off. That's a fallacy, because it ignores the counterfactual and the benefits the debt generates through funding projects.

More importantly, when people come on the TV and talk about the future debt burden, THEY ARE NOT TALKING ABOUT WELFARE LOSSES FROM REDUCED CONSUMPTION SMOOTHING. That's the basic point of Noah, Krugman and Baker and when you attack them over this, to me, you come off as small (I'm sorry to be so frank, but it's true). Noah's right by his definition, you're right by yours--Noah's case is against the more common understanding of debt burden (that it makes us collectively worse off).

[Nick Rowe]

BSE: Thanks for being kind (I mean that)!

But I reckon that when people come on TV and talk about the burden they are talking about the extra future taxes (or reduced future spending) that will be needed to service the debt, and the burden that creates. And those future taxes DO make people worse off (perhaps via a loss in future welfare through less consumption smoothing, even though the TV people won't put it that way).

And the right way to argue against them is to say:

1. Yep. But think of the benefits too!

or

2. Nope, because r will always be less than g, so we can rollover the debt forever and never increase taxes.

[Peter N]

Debt is only well defined within a particular economic model. The reason is simply that it's a contractual relationship and depends for its existence on contract law, the creditor's realistic ability to draw on the coercive power of government to enforce it and social norms involving debt.

It is possible at any future point for the terms of the debt to be rewritten in bankruptcy, a government to interfere with the terms of the debt or, in many cases, for the debtor to just walk away. We put these under the general headings of systemic and counter-party risk.

When you pose your various hypotheticals, you include in them explicitly or implicitly rules concerning the future treatment of various debt instruments. If you assume such budget constraints are unconditionally binding, you impoverish your model to a point that it models scenarios that can never happen in practice (This is in the face of an average of something like one European sovereign debt default every 3 years).

This doesn't mean debt can't be a burden on the future, but rather that the means by which it is a burden require events which most of the current economic models deliberately ignore as unnecessary complications - like credit risk, revulsion and contagion, the role of financial firms in exploiting their superior information, divergence of interest and incentive between fund beneficiaries and fund trustees etc.

In short, Other Peoples' Money, the fundamental source of profit in the financial system.

You get several different kinds of burdens on future generations (regardless of how you define them).

1) Uncertainty through floating unrealized losses. For instance, the GSE's took huge losses at the beginning of the recession, but these losses weren't final. The GSE's had contractual rights with the originators that would force them to repurchase any loans found to be substandard on audit. They are now suing the banks to recoup FIVE YEARS later. In the meantime, nobody knows what the eventual financial status of the banks will be IIR BOA has another $20 billion of exposure not including any claims for punitive and consequential damages.

Of course handling these matters in the courts is expensive and slow. The lawyers are still working on Lehman and will be for some time.

2) Loss from contagion. Failure of one member of a class of assets increases the risk premium of other members of the same class. The friction from this can be extremely expensive, as it has been for Spain and Italy. The damage to their economies from increased cost of funds has been vastly out of proportion to any actual risk.

3) Revulsion can remove classes of securities from their moneylike status as low information repo collateral. This is an effective tightening of the money supply (of about $4 trillion).

4) Conflict over debt can force debtors and creditors into confrontations that damage both sides (and innocent bystanders) to an extent that vastly exceeds the amount of debt in dispute. The damage that the Greek debt crisis will cause Germany is enormous. For a start, it's forcing them and their major trading partners into recession.

5) In the US, political divisions fueled by intensive lobbying by interested parties has prevented any timely resolution to the mortgage crisis, while meanwhile a student loan bubble and crisis is becoming inevitable.

6) And we have to include under debt unfunded state and local government pension liabilities.

This is the real future burden, creating a swamp that our children will have to drain. It doesn't much matter how you categorize it, if you can force future resources to be expended, you create a burden.

[Kevin Donoghue]

Here's one way of explaining why I don't think Nick's story should be described as an illustration of the burden of debt. As he tells it, the consumption of the old in each period follows this sequence: 100, 200, 150, 125,... The consumption of the young follows this sequence: 100, 0, 50, 75,...

Suppose instead that the rip-off is reversed. It is the old who get 100, 0, 50, 75,... while the young get 100, 200, 150, 125,...
"Government debt" is negative. The government is in credit throughout. The lifetime income of the generations follows the sequence 200, 100, 250, 225,...

If Nick's example is to be called the burden of debt, what do we call this, the bounty of credit? It's neither. It's just one group of people being ripped off for the benefit of another; business as usual, some would say. The fact that the government is in the black throughout doesn't make it any better than the case where government is in the red.

[JKH]

Suppose a certain amount of debt is issued.

Suppose there are two possible future states of the world.

The first, R, where the debt is used wisely, and society is relatively rich.

The second P, where the debt is used unwisely, and society is relatively poor.

Consider future cohorts C (n) and C (n +1).

Suppose these two cohorts include all people living at some future point in time when a tax is imposed to pay down some of the debt (or cover interest on the debt as Nick has emphasized).

Suppose, at that time, C (n) holds all the bonds.

According to Nick’s model, C (n) will incur a debt burden equal to the amount of bonds and/or interest that this cohort will no longer hold in the form of bonds, as a result of the taxed being imposed. That should be clear from the model.

C (n) incurs that burden regardless of whether the world is in state R or state P at that time.

Nick’s model does not compare state R to state P under such conditions.

It compares the case of burden to no burden, implicitly under either intra-R or intra-P state assumptions.

The model is also unaffected by what the distribution of taxation is across C (n) and C (n+1).

If C (n) pays the entire tax or if C (n +1) pays the entire tax or if any combination of taxpayers from the two groups pays the tax – Nick’s model and its conclusions still hold.

Nick’s model concludes nothing about such comparative tax distributions, just as it concludes nothing about comparative future states R and P.

Obviously, the incidence of the tax makes a difference to the final wealth positions of members of C (n) and C (n + 1).

But it doesn’t change the marginal impact of the tax on the holders of the bonds, assumed to be C (n), in terms of the burden as defined.

The only thing that matters is the tax and the fact that C (n) no longer has the bonds that it would have had (and sold to C (n + 1)) without the tax.

That’s what Nick’s model says, IMO.

It shouldn't be criticized for what it doesn't purport to say.

And what it does purport to say can’t be proven false, IMO.

[K]

Kevin,

Exactly. Or you do it without debt at all. The old just tax the young to fund their retirement. It's just repeated theft, no more justified just because each generation was victimized by the one before it (see my geographical example above).

[Nick Rowe]

Kevin: Neat! The government taxes the old in cohort B, and lends it to the young in cohort C? Then slowly gives away the government credit at 50% per year? Either way, apples are (as if) travelling in time, either forward or backwards.

[Kevin Donoghue]

No, the government taxes the old in period 1 (they got 100 in period 0 when they were young) and gives the 100 to the young in period 1, etc. It's just your example with the signs reversed. Or did I screw up some numbers? I'll check.

[Kevin Donoghue]

Sorry, my (somewhat defensive) reaction was to assume the "Neat!" was sarcasm, but maybe that's not what you meant? Yes, the illusion of travelling apples is created in both your example and mine. But of course there's only 200 consumed in each period.

[K]

Nick,

Yes. But not without consent of each cohort to perpetuate the crime. *Any* cohort can say no thanks. That's not my problem. It's between you and your parents.

[Rob]

Govt debt can affect both the size and the shape of future output and the distribution of that future output.

If the govt borrows some money that would otherwise have gone into private investment and spends it on govt consumption instead then this will (other things being equal) have a real affect of the level and shape of future output.

If the govt makes a commitment at the time the debt is created to how the debt is going to be repaid then it is possible that the fulfillment of that commitment may lead to everyone in a future generation being worse off (or better off if you set up your assumptions differently).

However while effects of the first type (size of future output) are irreversible (goods consumed rather than used for investment cannot br recovered) the effect of govt commitments about debt repayment can be eliminated at the stroke of a pen if the future govt chooses.

For this reason I think that discussion about the effect of govt debt on future output are much more relevant to the real world than discussions of the effect that debt will have on the future distribution of consumption. Ricardian equivalence based on expectations of future govt policy is likely to bring those effects back into the present anyway.

[Nick Rowe]

Kevin: My "Neat!" was for real. (I'm not very good at sarcasm, so don't do it.) But I think we are saying the same thing about who gets taxed etc.

[Nick Rowe]

Thank God! I get some serious support!

[primedprimate]

An important corollary is that when r < g, the government should issue more debt for the sake of efficiency. Not issuing the debt is a form of waste. Or is there some alternative policy you would recommend for situations when r is less than g?

[JKH]

Kevin,

Nick’s model is about the debt and his definition of the debt burden.

It involves the cyclical sale of bonds from old to young.

That produces a cyclical transfer of purchasing power from young to old.

That process becomes impeded when taxation reduces bonds outstanding.

It’s the reduction of bonds outstanding that reduces the amount of purchasing power transferred from the young to the old, compared to the purchasing power the old gave up when they bought the bonds.

That is what constitutes the debt burden in Nick’s definition.

In Nick’s first model, that reduction occurs at some future time due to taxation at that time.

In Nick’s subsequent model, that reduction starts early. It resembles an annuity process whereby periodic taxation erodes the principal value of bonds outstanding steadily over time. The reduction in purchasing power transferred from the young to the old starts early and is progresses in steps over time. As there are progressively fewer bonds outstanding, the young purchase fewer bonds over time and retain more of their income for consumption. The old sell fewer bonds over time, and each successive cohort of the old still incurs a debt burden as defined, because what they are selling is less than what they bought, due to the annuity like nature of the taxation over time.

And as I said in my previous comment, the incidence of taxation is irrelevant to what Nick's model demonstrates.

So I understand all that I think/hope.

But I don’t understand how your latest inverted sequence develops over time relative to debt and tax patterns, or even what it has to do with debt or the inter-generational transfer of debt or with what Nick has defined as the debt burden.

Haven’t spent much time on it yet though – can you elaborate/help/kick start me on this?

[Dan Kervick]

Thanks for saying I basically get it Nick. But I don't think the point about consumption vs. investment is just a detail, and I think this is an issue Noah addresses too.

It seems to me that all you have shown is that if a society uses public borrowing at every given time to shift consumption from younger cohorts to older cohorts alive at that same time, then you can get long term outcomes like those you have described, with later cohorts suffering a net overall reduction in utility from what they would have enjoyed otherwise.

But if a society uses public borrowing to reduce aggregate consumption and boost aggregate investment, then you can get the opposite result.

I just don't want people to come away from your posts thinking, "Rowe has proved that public debt burdens posterity." You haven't shown that. You have just showed that public debt could be part of public choice regimes that burden posterity. But I want to claim it is equally true that public debt could be part of public choice regimes that benefit posterity. So one policy issue is how to make sure we get the latter rather than the former.

And I think the background context here is that there are a whole host of pundits in the public debate who don't get the more elementary point that when debt liabilities are transmitted from one generation to a later generation, debt assets are, as a matter of elementary accounting logic, transmitted along with them. They think that the future generation is stuck having to pay back debts, but that somehow the people to whom they are paying them back aren't part of that generation. You might think that error is too dumb even to be considered, but it's an error that is widespread and driving much of the public debate. Your counterexample isn't supporting this man-on-the-street common sense. You are accepting it is wrong and presenting a possible case in which later generations are nevertheless harmed by bad public choices involving public debt. But we can still borrow and not make those policy choices.

[Nick Rowe]

primed: " Or is there some alternative policy you would recommend for situations when r is less than g?"

There possibly is some, but I can't think of it. (An unfunded government pension plan might be called an "alternative" but it's really the same thing from the macro POV). If r < g, there's needs to be a bubble/Ponzi scheme, and the government might as well be the one that runs it (I expect that's debatable).

What scares me is if we don't know whether r will be less or greater than g in future.

Dan: "But I don't think the point about consumption vs. investment is just a detail, and I think this is an issue Noah addresses too."

Agreed, it's not a detail (though I have been assuming it away to make my point more clearly). It's a biggie.

But I think it matters which cohort owns that investment (or if the government owns it). And most of the economists opposing me just look at aggregate investment and ignore the fact that if the current cohort owns it, and *sells* it to future cohorts, that has no *direct* benefit on future cohorts. (It might have an indirect effect via higher capital stock leading to higher labour productivity leading to higher wages of the future young.)

It's exactly the same with debt owed to foreigners. That is no more or less a burden on future cohorts than debt owed to old guys at home.

[Noah Smith]

Nick: You appear to have misunderstood my claim. Check my reply to your comment on my blog for the full explanation.

"NO! It's NOT the same. A future cohort's consumption is NOT just the union of the values for aggregate consumption at various future times when that cohort is alive."

Correct. A future cohort's consumption is the union of some set of values of INDIVIDUAL consumption at the times when that cohort is alive.

[Nick Rowe]

Noah: I thought "i" was "investment"!

I'm sorry if I'm not getting the fact that you are getting my point.

But I still don't understand your post. Are you saying "If the government wanted to, it could borrow and spend, and then immediately pay off the debt by taxing all the people who are still alive but who weren't born when it made that decision to borrow and spend, so the debt doesn't create a burden on the unborn (unless it reduces future output)"?

[Kevin Donoghue]

JKH,
All I wanted to do was argue that the story Nick tells is not one of a debt burden, as simple Sean Citizen understands that term, but rather a simple consequence of the fact that government has power to tax and transfer. In my reworking the direction of the rip-off is reversed. In period 1 the government levies a tax of 100 on old cohort A and lends it to young cohort B to consume, then writes off half the outstanding loan in each period; in period 2 cohort B (now old) pays back 50 in tax, which the government lends to young cohort C to consume, etc. So at all times government is a net lender to the private sector. Angela Merkel would approve!

[Min]

Dan Kervick: "And I think the background context here is that there are a whole host of pundits in the public debate who don't get the more elementary point that when debt liabilities are transmitted from one generation to a later generation, debt assets are, as a matter of elementary accounting logic, transmitted along with them. They think that the future generation is stuck having to pay back debts, but that somehow the people to whom they are paying them back aren't part of that generation."

Very important point about the context of this discussion.

[Min]

@ Nick Rowe

I dunno, either. :)

[Greg Ransom]

Let's stop pretending that 'smart' = someone who can master a bit of mathematical formalism & apply it willy-nilly.

To put it bluntly, idiot savant does not equal 'smart'.

[Nick Rowe]

Greg: in general yes. But Noah is smart.

[Min]

I would like to make a comment on the following.

"In the baseline scenario each person produces and consumes 100 each period, so lifetime consumption is 200, and aggregate consumption per period is 200.

"Now suppose:

"In period 0, the young in cohort A consume 100. (Same as baseline)

"In period 1, the old in cohort A consume 200, and the young in cohort B consume 0. Aggregate C=200. Lifetime consumption of cohort A is 300.

"In period 2, the old in cohort B consume 150, and the young in cohort C consume 50. Aggregate C=200. Lifetime consumption of cohort B is 150.

"In period 3, the old in cohort C consume 125, and the young in cohort D consume 75. Aggregate C=200. Lifetime consumption of cohort C is 175.

"In period 4, the old in cohort D consume 112.5, and the young in cohort E consume 87.5. Aggregate C=200. Lifetime consumption of cohort D is 187.5.

"And so on.

"The government borrowed 100 and gave it to cohort A to consume, then slowly reduced the debt at the rate of 50% per period."

What happened at period 2? Why did cohort B give up all of their consumption to cohort A (somehow staying alive)?

After that, why did the gov't slowly reduce the debt over time?

An obvious answer to the last question is that people would like to even out their consumption, but doing so abruptly would penalize the older generation unnecessarily. (As for never doing so, see Zeno. ;))

What about the first question? If people prefer even consumption, why did they have a massive transfer from young to old? OC, there are any number of possibilities. Perhaps an epidemic afflicted the old without killing them, and cohort B spent 100 to take care of their elders. In any event, they took on the burden.

Then cohort C elected to take part of the burden of cohort B off of their shoulders, cohort D elected to take on part of the burden of cohort C, etc., etc.

Then the story becomes not that the gov't debt was a burden to cohorts C, D, and so on, but that it was the instrument through which future generations could share the burden of their forebears.

Boundary conditions matter. :)

[Noah Smith]

Heh. Thanks for saying I'm smart...

My proof says that given some assumptions (e.g. costless transfers), the consumption possibilities of any cohort not alive at time t=0 are independent of the stock of debt at time t=0.

So in your basic example, at time t=0, the government has transferred consumption from the t=0 young to the t=0 old. At time t=1, consumption is transferred from the t=1 young to the t=1 old through the mechanism of the exchange of government debt. But in this example, the government could implement a tax-and-transfer system at time t=1 that would exactly cancel out the consumption transfer from the t=1 young to the t=1 old. If this were done, the net consumption transfer across all 3 cohorts would be from the t=0 young (who are the t=1 old) to the t=0 old, with the t=1 young experiencing no change in consumption relative to the counterfactual in which the government made no t=0 transfers. So if this happened, the t=0 young (t=1 old) would be screwed. However, this generation is not a "future" generation in t=0, since it is alive at t=0. That's really the key to the proof - the definition of "future generation".

Now, if the government can pre-commit to future NET transfers, my proof obviously breaks down. In this case, government debt may entail a pre-commitment at time t=0 to transfer consumption from, say, a cohort alive at t=132 to a cohort alive at t=0. In this case, the debt can impose a burden on future generations, even using my definitions of "future" and "burden".

[Nick Rowe]

Noah: OK. I got it! (I think.) Any borrow-and-consume policy at time t0 is still reversible in its effects on cohorts born after t0 up until the time that all those alive at t0 are dead.

True. But Oh Man. Try explaining that to one of those guys on TV who complains about the burden on future generations! "It's OK, we have 100 years to increase taxes on anyone alive now and pay off the debt without making those born tomorrow pay any extra taxes. And we have a special new date-of-birth-contingent tax code that will let us do this."

[rsj]

Nick, I am making two points here:

1. Yes, it is possible to shift consumption among generations as you point out. We all agree it is possible.

But you are shouting "fire" in Noah's Flood, and when everyone jumps on you, you retreat to saying "I was only arguing that fires are possible. Look here how fires are possible! No one understands me!". I am not buying the wounded Rowe story.

2. I am not nit-picking but generalizing your point. Showing that the same transfers are possible with government interest rate policy instead of fiscal policy. And the same transfers are possible as a result of many other government activities or even private activities.

Really the more general way to think about this is with finitely lived cohorts that are re-selling to their successors some asset (in your example, government debt is the asset, and I pointed out that any market asset can play the same role). In that case, because the cohorts cannot hold the asset to term, changes in capital values can cause shifts in consumption from one cohort to another. JKH jumped on this and pointed out that the added tax burden had the role of reducing the value of the bond asset for the last generation. But really the market has a lot of ways of increasing or reducing the values of assets.

You are in Canada, so you must see all around young couples that are "tightening their belts" in order to be able to buy a house, while older incumbent owners get to go on consumption sprees as they sell their house outright or sell equity in their house. For Canada, that is the big story for intergenerational transfers, not anything to do with tax policy.

But both are examples of the same thing.

And as soon as you look at this more general picture, you start asking more questions that better flesh out your specific story and this phenomena in general.

For example, the generation that is screwed must not have expected to be screwed, otherwise it would have passed the debt onto someone else. Both in the more general asset story and in the specific case of government debt, there must be cooperation among all generations.

Remember that the generation controls government, so why would they not default on debt or pass it onto another generation? The example you provided is not consistent, because it doesn't include the fact that the generations currently living control government policy.

This is a cooperation game. Now, in some cases, you get cooperation. We don't look at the cohort living through the depression as taking advantage of the cohort living through the post war boom, even though debt to GDP ratios rose in one period and fell in another. Because it is viewed as an income insurance program, there is cooperation with government debt. But this effect is unlikely to occur for private assets.

In other cases, you get cooperation because of false expectations -- e.g. the young couple would not pay so much for land if they did not think they could re-sell it later for the same or more money than they bought it for. When expectations fail, they are stuck holding the bag. Similarly. there might be an external crisis that forces the generations currently living to reduce their debt burden, even though they control the government. At that point, the two generations still alive (and in power) have to split the burden somehow amongst themselves.

But in both cases, you see how unlikely it is for what you describe to actually occur, and how much more likely the private debt version is to occur. Yes, it is possible for fires to occur in Noah's flood, but it is the flooding that is the big problem here. Yet you classify this post under "fiscal policy" and not "monetary policy".

[Greg Ransom]

Sorry, having read too much David Colander on grad school education in economics and the "rocket scientist' filter using a formal matrix as a substitute measure of 'smart', I'm deeply cynical about the work "smart" used for any economist stamped out by the Grad School system set up by the guild of the economic professors.

[Noah Smith]

Noah: OK. I got it! (I think.) Any borrow-and-consume policy at time t0 is still reversible in its effects on cohorts born after t0 up until the time that all those alive at t0 are dead.

Yup. And not JUST that, either. Also, the inherited stock of debt never has to hurt future generations (which is a neat result, given that gross debt may vastly exceed the current income of everyone in the economy!)...

True. But Oh Man. Try explaining that to one of those guys on TV who complains about the burden on future generations! "It's OK, we have 100 years to increase taxes on anyone alive now and pay off the debt without making those born tomorrow pay any extra taxes. And we have a special new date-of-birth-contingent tax code that will let us do this."

Ah. Well, the public conflates a bunch of different things, and I'm sure any of the examples we've done on these blogs would mystify the audiences on CNBC. ;-)

[Nick Rowe]

Noah: "Also, the inherited stock of debt never has to hurt future generations (which is a neat result, given that gross debt may vastly exceed the current income of everyone in the economy!)..."

Provided we tax the people alive today to pay it off before they all die (including taxing the bonds they own) so nobody born after today has to pay any higher taxes?

[Noah Smith]

Yep!

The burden is never too large for one generation to bear.

AND, here's an interesting little corollary: If we impose 100% of the burden on one currently living generation, the maximum burden that can be imposed is the amount of consumption that has already been transferred in past periods! So if you look at the "burden" as being imposed at the date that the consumption transfer actually happens, then any stock of currently existing government debt can be paid off without any additional burden. In other words, in a certain sense the "pain" is all in the past!

[Noah Smith]

Wow, the comment system sort of mangled the line justification on that last comment...

But anyway, do you see that last point? Suppose today's old paid their dues back in their youth, and we stiff them today in order to break the chain and spare future generations from any burden. The maximum degree of "stiffage" that we will have to impose on the "unlucky generation" at time t=0 is equal to the total "dues" that they paid prior to t=0! In other words, it's always possible for 100% of the burden of debt to be imposed entirely on past time periods (though still on currently living people).

I think that is kind of a neat little result.

[Dan Kervick]

Provided we tax the people alive today to pay it off before they all die (including taxing the bonds they own) so nobody born after today has to pay any higher taxes?

Maybe I'm missing the point here Nick, but if the future government taxes the population to pay a gazillion dollar bond debt, then some people lose a gazillion dollars, but the bondholders gain a gazillion dollars. And if that future government doesn't tax away the gazillion dollars and defaults on the bonds instead, then the bondholders don't get anything but the taxpayers don't lose anything.

[Nick Rowe]

Noah: yep. Current cohorts cannot afford to buy more bonds than their total income, which they transferred to previous cohorts. But Grandma is going to be really unhappy if you cancel her bonds, and tell her that her pain is all in the past, when she saved up to buy the bonds!

[Nick Rowe]

Dan: But the bondholders had already paid a gazillion dollars to buy those bonds. So they aren't going to be very happy if they get taxed a gazillion dollars, even if they do get paid the gazillion dollars they are owed. They aren't going to be very happy if there's a gazillion dollar default, either.

[K]

Nick,

Well, grandma shouldn't have lent money to thieves. She should have noticed that somebody intended to stuff the grand kids (who apparently revolted). That's what happens when you finance crooks.

[rsj]

K,

Exactly. This really is just a special case of the more general phenomena of finitely lived agents planning on re-selling an asset and suffering or gaining from changes in the value of the asset when they re-sell. You have to address the issue of expectation failures -- grandma expects the grandkids to note vote in their own interest and stuff someone else even though she votes in her own interest and wants to stuff someone else.

Giving all the power to one generation and assuming distant generations are somehow bound by this assumes irrationality on the part of the victim cohort.

The proper way to look at all of these effects is via a cooperative game and expectations failures. Moving consumption around requires cooperation of *all parties*, and it is just inconsistent to assume that one of these parties cooperates in getting themselves stiffed.

To understand these types of transfers, you have to look at expectations failures. Everyone expects someone else to be the greater fool, for example. Then you can get a transfer ex-post that was not an expected transfer ex-ante.

But this has nothing to do with fiscal policy per se. Any long lived asset, whether government debt, a pile of gold, land, etc. can be the thing that is re-sold to the next generation, triggering ex-post transfers.

[Nick Rowe]

rsj: but people trust the government to do what it promised! How could you have fiscal policy otherwise? Or are you saying: it's fairies, all the way down?

[rsj]

Nick,

Yes, they do. And typically these consumption transfers are viewed as a good thing, because they are part of an insurance scheme. People understand that it is OK to deficit spend during the depression and raise taxes during the boom, because total consumption is being smoothed out.

They are OK with that type of cooperative game.

You are describing a different game, in which total consumption is constant.

In your game, there is no basis for cooperation -- it is zero sum.

[Dan Kervick]

Dan: But the bondholders had already paid a gazillion dollars to buy those bonds. So they aren't going to be very happy if they get taxed a gazillion dollars, even if they do get paid the gazillion dollars they are owed. They aren't going to be very happy if there's a gazillion dollar default, either.

They won't be taxed a gazillion dollars. They will be taxed the proportion of the the gazillion represented by their proportion in the population. If the bondholder are 1% of the population, then other things like income being equal, the bondholders will be taxed (.01)gazillion and everyone else will be taxed (.99)gazillion, then then the bondholders will be paid the whole amount.

You might say they will grip that they didn't get the whole gazillion, but that's no different than what would happen if the total public bond debt to them were only $1000, and it was paid via taxation as well. The bondholders would be taxed $10 collectively, everyone else would be taxed $990 collectively, and then the bondholders would get the $1000. It's all just shuffling around and redistributing the wealth that exists at that time - some winners and some losers, but the first-order financial impact society as a whole nets to zero. (Of course the redistribution might have second-order effects that are either positive or negative.

Same thing if the government just prints the money to pay the bonds. There is a reduction in purchasing power per unit of currency, and a redistribution of that reduced purchasing power, but as a first-order consequence no change in the society's output of goods and services, although the redistribution might have a second-order impact of a positive or negative kind on output.

[K]

rsj nails it.

Nick: " but people trust the government to do what it promised"

Yes. Also investment bankers. Big mistake. Sometimes people and institutions are corrupt. Borrowing money to have a party and then trying to stiff an unsuspecting victim is bad behaviour. Financing it when it's clear what's going on is just as crooked. Default is a perfectly moral choice if you neither incurred or benefitted from the loan. Passing it on to the next unsuspecting victim, however, is *not* a morally defensible option.

[Noah Smith]

Anyway, I think that the "pain can be all in the past" result is kind of interesting, for two reasons.

First of all, it means that the "burden" imposed by an existing stock of debt is essentially symbolic. Today's debt stock is a legacy of past intergenerational consumption transfers; it is basically just a written promise that the currently living "old" generation, which was made to suffer in the past, will be "made whole" over its lifetime (in consumption terms if not utility terms). Since the only way to make that generation whole in consumption terms is to make either the current young or the current unborn suffer, the only way to break the chain is to renege on the promise represented by the existing debt stock, either by defaulting, or by implementing "reverse Social Security" to cancel out the next link in the intergenerational consumption transfer chain.

Second, the "pain can be all in the past" result puts a cap on the minimum size of the burden that a debt stock can impose on all current-and-future people. The maximum minimum pain that can be inflicted on any current-and/or-future generation is just the size of the past consumption transfers suffered by currently living people. So suppose that in the past, people now alive had $1 of consumption confiscated. The maximum minimum pain that can be imposed on any current-and/or-future generation is $1, yet today's stock of debt may be $100T.

That means that the size of the existing debt stock does not give us any information about the size of the pain that must be suffered by some current-or-future generation as a result of past government transfers. I think that is interesting.

[Dan Kervick]

Today's debt stock is a legacy of past intergenerational consumption transfers; it is basically just a written promise that the currently living "old" generation, which was made to suffer in the past, will be "made whole" over its lifetime (in consumption terms if not utility terms).

In Nick's hypothetical example that is true, Noah. But is it true in the real world? We could just as easily say that the public debt stock is a legacy of past integenerational consumption suppression by the older generations in order to carry out more public investment for the benefit of the younger generations. Think of all the federally-provided goodies that the young in each generation benefit from - their education services, internal and external public security services, social insurance payments provided to their parents a share of which were spent on children, parks and playgrounds, etc. All that spending could have been used for hedonistic satisfaction of the older parts of population instead. But it wasn't. I think we need more detailed accounting, and not mere thought experiments, to tally up the balance sheet. But it is at least arguable that the younger generations in this generational chain don't need to be "made whole" at all, and instead always owe a debt that they can't really pay back in full, since the benefactors are largely dead, but can only discharge by sustaining the inter-generational social contract and "paying forward".

[Bob Murphy]

Nick, just chiming in to prevent you from going crazy: You are totally right on this stuff, and Krugman, Baker, and Noah certainly do not indicate that they "get it." You and Noah are kissing and making up in the comments here, but Noah wrote this in his original post:

The example Nick Rowe creates here is a case of higher government borrowing today leading to lower actual consumption in the future. He uses a "fruit-tree economy" with no capital (or if you prefer, with K fixed), so potential consumption in each period is fixed. In that sort of economy, it is impossible for anything to "impose a burden" on any cohort, using my definition of "imposing a burden".

One could not possibly write that, if he understood the very basic correction you are trying to make to the "it's not a burden if we owe it to ourselves" notion.

DeLong, on the other hand, gets it. That's why in his response to you, this go-around, he is saying stuff like, "...if we assume such-and-such, and I don't see any reason not to, then..." I.e. he is walking carefully around the minefield, to make sure he doesn't say something demonstrably false the way Baker and Krugman have been. I think they really don't get it, because if they did, they would just change their argument the way DeLong is phrasing it, to give different reasons that the "debt isn't a burden" right now.

[Too Much Fed]

"Assume all output is consumed. Assume people live for 2 periods, produce 100 when young and 100 when old. Assume one person per cohort (so population is always 2). So aggregate consumption is 200 at all time periods."

Noah Smith, are you using the same assumptions as Nick?

[Dan Kervick]

I hate to put it so bluntly, but it really seems to me that many people on the debt-as-a-burden side of this debate are building in a strong and evidentially unwarranted conservative stereotype of federal spending as a racket to buy extra crack for welfare mothers, rather than the expenditures of a more-or-less effective public enterprise that invests in the production of valuable public goods and services that benefit both the current lenders and their posterity.

[HJC]

A question for JKH:
"The net burden is the tax". Surely this is only a necessary but not sufficient condition? The conditions for determining the tax decision must be directly related to the debt, and not general economic conditions, otherwise the burden is not due to the debt per se. I know you are being deliberately oblivious, but surely this extra step is necessary?

[anon]

Dan, you're just smoothing over the burden, there's still a burden. That's what I've been wondering, though: if we should smooth the burden.

Simon Wren-Lewis says we should steadily but gradually try to move to (or back to after a crisis) an optimal debt level.

(He also says we should add a depreciation rate to the (real) interest rate to determine the debt burden.)

(Also, he's saying "normally" r>g, but I haven't seen any data on this.)

Nick, have you answered how this isn't a problem with NGDP targeting, yet? (Or private sector bubbles?)

Bob Murphy, have you read Dean Baker's latest post on the subject. He most certainly, "gets it." (I think he got it before, too, but just doesn't think this is an important problem when we're below full-employment.)

[Bob Murphy]

Anon, I haven't read Dean Baker's latest. I will right now. I concede in advance it's possible he "gets it" now, but as of his first volley of responses to Nick, no he didn't.

[Bob Murphy]

Anon: OK I'm checking in on Dean Baker. Here's what he said on Friday Oct. 12:

I saw that Nick Rowe was unhappy that I was saying that the government debt is not a burden to future generations since they will also own the debt as an asset. I had planned to write a response, but I see that Brad DeLong got there first. I would agree with pretty much everything Brad said. The burden of the debt only exists if there is reason to believe that debt is somehow displacing investment in private capital, which is certainly not true at present.

OK, so as of that point, he clearly, utterly, did not get it. I will check his next post too, though, since you claim he now has it. But unless he says, "Holy cr*p, I was totally wrong thus far in the debate," then he either doesn't get it, or is a chicken.

[K]

Nick,

If it's wrong for the first generation to have a party and hand the bill to the second generation, why is it not wrong for the second to hand it to the third? And if that is wrong, then how can the first generation be burdening the third? The second generation's decision to stiff the third is in no way justified by the bill they got from the first. They should have refused (defaulted) or paid it back (their choice). If they *decide* to take from the third, that is their responsibility. If I steal from you and you then steal from someone else and suddenly we are all thieving maniacs, that's your fault just as much as mine. Bad things happen to people. Generations too. They have to get over it, not take it out on someone else.

Which means we are only responsible for what we do to other people (and cohorts). Not for what they do to anyone else. And there are no burdens on future generations (just the ones we steal from).

[Bob Murphy]

Dean Baker from Saturday, Oct. 13:

In short, sorry kids – you haven’t given me a reason to oppose stimulus.

That was never the issue. The issue was, Baker's entire post, even as late as Friday October 12, was based on a totally erroneous argument for why debt "passed down" couldn't possibly be a burden to people in the future, so long as GDP in future year X isn't thereby depressed. This is totally wrong, and Baker is being coy by acting like he just needs to slightly tweak his position. Even the very *title* of his Friday, Oct. 12 post is wrong, as Nick has been demonstrating for the last year.

[Bob Murphy]

Oops sorry, the title of the October 10 Dean Baker post ("Children and Grandchilden Do Not Pay for Budget Deficits, They Get Interest on the Bonds") is wrong; the title of the Oct. 12 is talking about DeLong. But the first paragraph of the Oct. 12 post summarizes Baker's own view of his contribution in this debate, and it is chock-full of wrong statements. So by Baker's own summary of what his position has been, he has been wrong. That doesn't mean the government should run budget surpluses from now on, it just means Baker has been wrong to get his readers to focus on the "we owe it to ourselves so it can't possibly be a burden" angle.

[K]

I'm pretty sure my interpretation is exactly how Krugman is thinking, btw. He didn't say the burden couldn't eventually end up in the hands of the final cohort. He just described the mechanism whereby one generation can take from the next. I assume that the fact that this process can be repeated *at the option* of each generation was too obvious for him to bother stating.

[anon]

Noah, the pain is not "all in the past." If I wake up and find my bonds are now worthless you'd call this painless? "Stiffing" someone is painless? It's strange to called deferred consumption pain. (They perhaps harmed themselves, but I wouldn't say it's been "imposed.")

You're right that the "damage has been done," but all of the pain has not. (This seems like more semantics: "the economy didn't grow, so it could not have grown, you never had any bonds.")

Anyway, how much do progressive taxes mitigate past burdens already? Most bondholders are wealthy, right? (Or how much would they given a more progressive system?)

(Note: I agree with you that bonds are investments in the (future) economy that should not be expected to pay (real) returns beyond what the (future) economy can (reasonably) support. (If that is what you're saying.))

[JKH]

Nick,

It looks to me like the “Noah chain” is equivalent to an inter-generational gifting of bonds from the old to the young. At each step, the “Noah tax” undoes the payment of the young to the old for the bond. The “Noah tax” is a 100 per cent tax on inter-generational sales of bonds, imposed on the sellers and rebated to the buyers. The young get the bonds for free.

As a result, there is no consumption redistribution associated with the effect of the inter-generational transfer of bonds.

(Each generation holding the bonds earns an annuity of interest before selling them/passing them on to the next generation.)

But the “Noah tax” is entirely separate from the tax in your core example.

Call the latter the “Nick tax”.

The “Noah tax” effectively bequeaths bonds from one generation to the next.

It is budget neutral.

The “Nick tax” taxes bonds out of existence.

It is a budget surplus.

If actual bonds are taxed out of existence, there must be a budget surplus. If accrued interest for the current period is taxed out of existence, there must at least be a budget primary surplus.

The “Noah tax” transfers ownership of bonds without net funds transfer, but it does not destroy private sector wealth.

The “Nick tax” destroys private sector (really, non government sector) wealth. It destroys it for holders of bonds. And it destroys it for non holders of bonds if they pay some of the tax as well.

The macro evidence of the Nick tax is the reduction in bonds outstanding for the old to be able to sell to the young at some stage in the “Nick chain”.

There is a macro level burden. It is simply equal to the tax to pay down the bonds, because the tax destroys the wealth of the private sector (again, actually the non government sector).

The nature of the “burden” is manifested in fiscal policy. The burden can be defined as a fiscal policy that results in surpluses paying down the debt. Surpluses drain private sector wealth. That’s the burden.

In terms of the generational distribution machinations, anything seems possible for co-existing generations. You/Nick showed that the generation or generations that get taxed for the purpose of paying down the debt are worse off for it. And the tax burden shows up directly in the reduction of bonds available at some stage for sale from the old to the young, as per your example, which puts the old in a bond value deficit for their lifetime.

I imagine there are many permutations on the distribution of the tax when it is imposed. But somebody’s going to be worse off. And whether you structure who is worse off in terms of a crystal clear “future generation” or not doesn’t seem like a critical point, in my view. Somebody in the future is going to be worse off, and if "Nick’s chain" is long enough, it will definitely be a future generation. If "Nick’s chain" is not long enough, it will be a current generation grown older.

The debt will be a burden if you define burden as a past fiscal deficit policy that induces a future policy of surpluses in the sense noted above. The burden of the debt becomes the future destruction of the debt.

Finally, with respect to Krugman, it appears to me at least on the surface that he is overlooking the aspect of the effect of debt retirement in terms of the destruction of net wealth of the private sector, while focusing on the “pay it to ourselves” patina of mere bank account transfers. I just don’t see where he is acknowledging your point in that context.

Maybe I’ve misunderstood some things I’ve attempted to summarize here - please correct aggressively if that is the case.

.............

Kevin,

I personally found your reversal/inversion idea to be very interesting. If I were an economist and if I were a macro economist, I’d want to work that one through and make sure I fully understood it. I’m not and I’m not, but I still want to do that. I won’t do that here, but just wanted to touch on it briefly.

It appears to me that the general logic of Nick’s point is that the burden of the debt can be defined in terms of a function of a fiscal policy that progresses over time from deficits and debt to surpluses and debt liquidation – expansion followed by austerity. Future austerity is the burden in essence. Somebody at the front end benefits; somebody at the back end suffers.

It looks to me like your inverted example is one that can be defined as a function of fiscal policy that proceeds over time from surpluses and net lending to deficits and asset liquidation – austerity followed by expansion. Current austerity is the burden in essence. Somebody at the front end suffers; somebody at the back end benefits.

The bonds are important in “Nick’s chain” because they represent the historic initial conditions of expansion. And the expansion/austerity cycle is the macro key to Nick’s idea of the burden, in my view.

The lending is important in “Kevin’s chain” because it represents the historic initial conditions of austerity. And the austerity/expansion cycle is the macro key to your reversal of Nick’s idea into one where there is a future benefit rather than a future burden.

Looks to me like this is all about fiscal policy cycles.

But that’s all I have to say for now.

Does that make sense to you?

[Kevin Donoghue]

JKH,

Yes, that's right. At this point my only quibble with Nick is that he's using the term "burden of debt" to describe something which could just as well (or just as badly) be modelled as the Burden of Credit. In a manna-from-heaven economy of the kind he's considering it's all about who pays the taxes. AFAICT a generation which has zero debt and leaves zero debt to the next is no better off than one which buys a mountain of bonds when young and sells the same-sized mountain when old. If that's true, how can the debt, as such, be considered a burden?

But I should emphasize that my viiews aren't settled because this stuff is unfamiliar to me. It wasn't part of any course I did back in the 1980s. Back then I understood "the burden of debt" to refer to the fact that Ireland owed a stack of money to foreign creditors and nobody disputed that this was a burden which could sink us. And we didn't study OLG models, which turn out to have some weird properties.

Incidentally Stephen Williamson has now weighed in on this:

http://newmonetarism.blogspot.ie/2012/10/government-debt-and-intergenerational.html

[anon]

Bob, last January, Baker wrote this:

"Nick,

You are constructing a scenario in which there is a fix amount to be consumed across generations and you have required that the older generation consumes the full amount of any government debt issued during their lifetime. If those conditions hold, sure we all know arithmetic.

However, I see zero evidence for either condition. People in the world do leave inheritances, which means that they do not consume 100 percent of their assets.

More importantly, especially in the current context, output is absolutely not fixed. If the government deficit is used for investment (public or private) that increases output in the future, then there is no reason whatsoever that it need depress future living standards, even the older generation ate 100 percent of it. All you would need is that the return on the investment is greater than the interest rate. With the interest rate on long-term debt negative, this is a pretty low bar at present."

http://www.cepr.net/index.php/blogs/beat-the-press/educating-steven-rattner-on-government-debt

So, he seemed to "get it," at least, even if he didn't concede that it was "valid" until now. (And it has yet to be shown that he's wrong, and we do need to worry about this.)

Krugman also wrote this:

"First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation."

Which can be interpreted as saying that debt doesn't matter so long as the economy grows faster, not that it never matters, and couldn't *possibly* be a burden. (Just because something is possible doesn't mean it's probable or non-trivial.)

And this:

"So where’s the problem? Well, to pay interest on that debt, the government will have to raise a lot more revenue."

So it's not at all clear that he doesn't get this. (He might just be assuming it, or something very close to it, implicitly.)

He may think that outside full employment it's never a burden (because it offsets any costs), but at full employment the full costs of borrowing (interest burden) should be fully offset by tax increases.

[JKH]

Kevin,

"AFAICT a generation which has zero debt and leaves zero debt to the next is no better off than one which buys a mountain of bonds when young and sells the same-sized mountain when old. If that's true, how can the debt, as such, be considered a burden?"

Agreed - in that scenario

But Nick’s definition of burden is state contingent, as is his example.

It depends on the presumed incidence of a tax to pay down the debt – something I've been emphasizing since these discussions began.

The incidence of the tax is the manifestation of the burden, because the tax destroys private sector net wealth (i.e. disposable income).

The tax is imposed to reduce the debt, presumably because the debt is too large (for whatever reason).

So the debt is the cause of the burden because it has become too large, and must be reduced with taxes.

The burden manifests as volatility of fiscal policy - a cycling from deficit to surplus. The repayment of existing debt requires a budget surplus (although just a primary surplus will begin to eliminate interest accrued in the current period, which is an elimination of debt that would exist without a primary surplus).

To the degree that taxes might have been avoided by running balanced budgets or smaller deficits in the past, there might be no need to reduce the debt and therefore no corresponding burden. The burden is contingent.

[Peter N]

Noah,

you said:

"First of all, it means that the "burden" imposed by an existing stock of debt is essentially symbolic. Today's debt stock is a legacy of past intergenerational consumption transfers; it is basically just a written promise that the currently living "old" generation, which was made to suffer in the past, will be "made whole" over its lifetime (in consumption terms if not utility terms)."

The next logical step is "property is theft". All sorts of property are symbolic. Stock ownership, copyrights and patents, rights to exploit your own image, liens, easements and rights of way, spectrum rights, leases......

They're all just folders full of paper. What makes debt special isn't its nature, but rather the abuses to which it is put. You could probably configure equivalent abuses with other classes of assets given some cleverness and a society that believed that upholding your jiggery pokery was a sacred obligation.

RSJ has the right of it. You can only get a burden when the downstream agents either believe they can pass it on, don't perceive it, believe others will bear it or believe they have some form of duty to bear it. Ideally you would try for more than one of these arguments to achieve defense in depth.

A burden is inherently unfair when the bearer had no say in creating it and the mechanism of creation was in some sense corrupt. Defining corrupt, of course, is where it gets interesting.

[Peter N]

Kevin Donoghue,

you said:

"AFAICT a generation which has zero debt and leaves zero debt to the next is no better off than one which buys a mountain of bonds when young and sells the same-sized mountain when old. If that's true, how can the debt, as such, be considered a burden?"

The answers are the duty of diligence and moral hazard.

This is a much worse problem in a money economy than in an apple economy, because the principle good and the medium of exchange are no longer locked together.

If all I can do is buy, sell, borrow and eat apples, then I can never create a perturbation significantly larger than my maximum consumption of apples, which is limited both by the size of my stomach and the effect of the apples I consume on the current apple supply. Of course, at this point the model breaks down, for what is the spot price of an apple denominated in apples?

If OTOH I can create a 10 million apple debt without there being any need for anyone to handle 10 million apples and I can then securitize the debt and pass the risk on to others while making a profit on the deal, the picture is rather different. That's what makes discussion modeled on the apple economy misleading.

Similarly, governments have any number of ways of creating debt without delivering a commensurate social value. They often specialize in it.

[Lord]

It is not debt that is the burden but the change in debt, and one can view an increase in debt not just as a taking but as a giving. If cohort B wants to provide for their retirement they may tax themselves/issue bonds when young to provide for themselves when old. Having nothing to invest in they give the bounty to cohort A, a case of charity rather than taking. Ending of this can be considering a taking from future generations who won't have this debt to pass along.

[Wonks Anonymous]

I think some of Peter N's examples could fall under David Friedman's "A Positive Account of Property Rights" as something a small group of people might negotiate toward (stock ownership of a small entity, for example), while others don't (though they still may be desirable).
http://www.daviddfriedman.com/Academic/Property/Property.html

[o. nate]

I think Nick's example conclusively shows that in a fixed production economy it's possible for each generation to consume more than the next. However, at the limit, after a sufficient number of generations, the effect becomes immeasurably small. But the interesting thing to me is that this really has nothing to do with debt - the same exact pattern could be accomplished through government programs that transfer wealth between the young and the old (e.g., social security) even if no debt is issued to finance them.

[anon]

Nick, I was wondering if I buy a bunch of bottled water today and tomorrow there's a water shortage and I sell some of that water for twice as much as I bought it for would you say I was making water travel through time?

[JKH]

“The same exact pattern could be accomplished through government programs that transfer wealth between the young and the old (e.g., social security) even if no debt is issued to finance them”

It’s the same thing in effect, isn’t it?

Debt is a set of intended transfers. When you construct intended transfers that replicate the cash flows of debt, you construct the equivalent of debt. And the same effect holds either way, if you intervene with contingent transfers, as with the tax to pay off the debt in Nick’s example. And social security is debt in spirit and economic meaning, if not legally – subject to the same types of unplanned tax intervention contingencies as regular debt.

[JKH]

Nick,

Trills and thrills:

After reading your trill post again:

Suppose g is less than r.

Suppose g is approaching r from below, so that (r – g) is approaching zero.

Other things equal, according to formula, the trill price would seem to be approaching infinity.

From an analytic perspective, (r – g) = 0 and (r – g) less than zero both produce the same price result for the trill: infinity.

That means that the price for the trill is bounded as g approaches r – in the sense that even though the price is infinity, you can’t increase that price even if g moves through r.

Put another way, (r – g) = 0 is a lower bound for the trill discount rate.

This is analogous to the zero lower bound for nominal interest rates.

In both cases, the lower bound creates an option pricing structure for the instrument in question.

In the case of long US Treasuries, the interest rate won’t get to zero, notwithstanding Fed commitments etc., because interest rate risk and price risk becomes asymmetric as the lower bound is approached. Nominal interest rate risk is bounded on the downside by the zero bound, while unlimited on the upside. And the closer to zero the interest rate gets, the more asymmetric this risk profile becomes. It is in essence an extreme option risk skew. As the lower bound is approached, the market will begin to price in protection against that skew to upside volatility in interest rates and corresponding downside volatility to price. The 30 year bond yield won’t get to zero as a result. The reason the US Treasury yield curve is positive is that it is building in this asymmetric option risk protection. The only way around this is if the Fed buys all 30 year treasuries – but in that case, there is no 30 year government cash market to price. And if the market continued on with a 30 year derivative instrument instead, its pricing would continue to reflect the same type of asymmetric option risk.

I think the same effect happens in the case of trills. As g approaches r and (r – g) approaches zero, the discount rate for trills approaches the zero bound – because a zero discount rate prices the trill the same as a negative discount rate. So the risk of setting a discount rate closer and closer to zero becomes asymmetric – like an option and like the pricing of the US Treasury curve. So the market price builds in protection against the skew toward upside risk in the future discount rate by setting a higher discount rate than what you might otherwise expect if the interest rate risk were symmetric rather than asymmetric – just like the US Treasury curve.

The bottom line is that trill pricing will always be finite and will not be a very good indicator of the sustainability of any “weird” pricing environment – because the risk of being wrong is unbearable in its price consequences and that risk will be reflected in an effective adjusted discount rate that stops out before getting to zero – whatever the market expectation for the relationship between r and g.

You started out your post by discussing risk and uncertainty. But the construction of a market instrument doesn't remove that risk – it just prices it. And given the structure, it will price it very expensively – to the point where it simply won’t allow an effective zero discount rate to become the risk adjusted expectation that is built into the trill pricing.

[anon]

I've come to the conclusion the counterexample is essentially a straw man because:

1. None of the prominent people in this debate have argued that at full-employment we should continue to deficit spend.

2. All economic activity implies possible losses. There is nothing special about the deficit. If inflation grows faster than GDP under NGDP targeting for any time period the younger group will *always* be burdened by the older group.

3. Noah's point: in some sense any burden has *always already* occurred. In other words the damaged has been done. All that's left is to take an accounting and readjust if desired.

4. Given the distribution of bondholders, progressive taxation, and social insurance talking about the burden of the young may be a bit of a red herring if the burden falls predominately on the wealthy. (I'm unsure on this point but haven't seen much talk about it. I'm thinking given a poor outcome the wealthy who don't own bonds will be burdened by those who do. Bonds are like insurance for the wealthy. If things go bad they improve their relative position, if things go good their money was safe.)

5. For the hundredth time: it's not the principle of the debt it's the interest that causes a burden. All "principal" transfer payments result in winners and losers. Consider a unfunded trust fund in a steady state economy: even if there is no "final generation" to lose, the first generation wins, and everyone in between's utility is lowered. What's at stake with debt is *the return*. You could have a negative return, but again, this is true of all economic activity.

In conclusion: If Krugman, Delong, or Baker haven't warned about the burden of deficit spending at full employment it may be because they'd never recommend doing so. How many times has Krugman said that at full employment he'd be a deficit hawk? In Rowe's defense Krugman and Baker may have been unaware of what Noah's calling the "interesting" results of doing so. They may have simply been against it for other reasons.

So basically this is still the same old fight of, given current conditions, what should we do. Rowe seems to believe additional monetary stimulus is needed now. Why is that so if it may impose a burden? Perhaps he believes it is more "neutral" in its dispensation of burdens, but he seems to believe that any burdens it may impose are worthwhile.

The only alternative is a libertarian or Austrian morality tale about the dangers of government intervention: "let's sacrifice ourselves on the altar of long-run efficiency," or as Milton Friedman might say "it's up to the American people to determine how they will impose burdens on each other, not Bob Solow." (You could also be an intergenerational communist. Also, Noah has suggested a real-time tax transfer system: I have no idea how plausible this is.)

Have we learned anything? Yes:

The Jamie Galbraith/MMT idea that the Clinton surpluses were harmful is probably wrong. They say that surpluses destabilize the economy by creating too much private debt, but I don't know why more private debt is any worse. If they felt the economy was not at full employment yet, they could have called for the interet rate to fall further. Alternite

Similarly, Milton Friedman was probably wrong to suggest we shouldn't use surplus funds to pay down debt. (See Simon Wren-Lewis on the benefits and best ways of paying down debt.) (Too be fair, Friedman said it was a "moral" issue, but perhaps he did not understand the burden he may have been imposing.)

Finally, the Bush Tax Cuts were most definitely a bad idea. (The interest rate could have of course fallen, but even if they didn't want that then any stimulus should have been a temporary measure. Whether they unjustly favored the wealthy is another question I'll have to look into.)

(Also, note that people won't necessarily be fooled by "interest burden" transfers. They could respond by raising the prices of their goods and services offsetting a lot of this cost. For example: if the retired are receiving interest at the expense of workers the workers could raise prices, eliminating the burden in a similar way to Noah's tax story.)

[Dan Kervick]

I think Nick's example conclusively shows that in a fixed production economy it's possible for each generation to consume more than the next. However, at the limit, after a sufficient number of generations, the effect becomes immeasurably small. But the interesting thing to me is that this really has nothing to do with debt - the same exact pattern could be accomplished through government programs that transfer wealth between the young and the old (e.g., social security) even if no debt is issued to finance them.

Yes, o. nate! That's the way I see it too.

[Saturos]

Oh Gawd peoples it's really not that hard - amazing how good smart people are at confusing themselves (and each other)...

[Saturos]

If the government gives away my money, how on earth would it genuinely pay me back without imposing a buren on someone else (probably not born yet)?

[Peter N]

Saturos,

One thing that makes it hard is using a toy model of the economy and then applying conclusions from it to an economy that doesn't embody the assumptions of the model.

In the real economy there is no hard distinction between credit and money. This is, oddly enough, most true for those who seem last to accept it, for it's a result of saying that money is the low risk liquid asset which has the highest opportunity cost. Call this cost C. Now consider a liquid asset D that yields r. Its opportunity cost is C-r. Then as r goes to 0 D becomes more moneylike.

The logical conclusion from this is that liquid debt is inferior money. It may have less liquidity, more risk or a lower opportunity cost or some combination of these. You can also conclude that fiat money which has lower liquidity or higher risk than some other available form of money becomes less moneylike, which, of course, is exactly what you see in practice.

This concept is used in calculating the Divisia weighted M3 and M4 aggregates (which time series are worth a look). We can now see a difference with the apple economy. Destroying apple debt should have little real economic effect (it's hard to define, since it requires calculations on factors that aren't part of the model). Destroying monetary debt, however, is severely deflationary, since it is equivalent to destroying money.

Given that a large percentage of outstanding debt is held by pension funds and other holders in trust, the statement that "the redistribution might have second-order effects" has to be one of the all-time classic understatements. A modern economy is all about second order effects. These often dominate first order effects through the action of expectations and feedback.

It shouldn't be surprising that we're seeing a run-up in sovereign debt. The combination of need to prevent deflation and the political difficulties in confiscation of creditors will pretty well force this up to the point where the sovereigns' own credit comes into question.

[Lord]

There are burdens and benefits. In a balanced stable steady state, these are equal.

[JR Hulls]

I'm trying to understand the arguments from a policy point of view, so forgive me for a slight diversion. What the debt is to be used for seems to me to be the ruling point. As far as debt on future generations, it might be helpful to look at a counter example burden on future generations: what happens when the government does not spend money. If, as in the case of the US, tax breaks reduce revenues below the level to maintain infrastructure, the current generation receives a benefit, while passing on the costs of failure to maintain infrastructure and its impacts on utility and GDP to future generations. The same goes for education and the value of the work force, as amply demonstrated by the WWII G.I. bill and its very positive impact on future tax revenues. Therefore, if the government issues bonds to maintain infrastructure, improve the work force, etc. both present and future generations benefit.

I realize this is somewhat beyond the scope of this post, but it seems to me that the debate, while very intellectually interesting, is exceedingly academic as far as to policy directions unless it identifies the purpose of the bonded indebtedness. For instance, in 1933, the Hoover Dam cost $165 million or $1.25 for everyone in America, paid for itself out of revenues and still generates more than $400 million in direct revenues from electrical generation, not to mention the overall impact on massive increase in the agricultural tax base, and a host of other factors. On power alone, there is still $2.42 of admittedly devalued current dollar revenue for every $1.25 invested.

We can assume investments costs like that all day long without bringing into question the ability to repay sovereign debt, not to mention the stimulus benefits. Please see 'Dam the Economists' at http://somewhatlogically.com/?p=523 for details and links on the Hoover Dam project.

[Nick Rowe]

JR: absolutely. That's never been at issue. If the government borrows and spends on investments that benefit future generations more than the debt burdens them, I'm not worried at all. I would be worried if the government didn't do those investments.