tag:blogger.com,1999:blog-17232051.post4319391600450292520..comments2024-03-18T22:32:52.802-04:00Comments on Noahpinion: Debt and the burden on future generations, Part MMMVIIINoah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger71125tag:blogger.com,1999:blog-17232051.post-63485804809013979942013-10-09T05:50:20.180-04:002013-10-09T05:50:20.180-04:00funny how as economists you just have theoretical ...funny how as economists you just have theoretical concepts about "investment" and "consumption". what about the cost effectiveness of government spending or the level of returns on investments? seems to me that these are not fixed, and the increased borrowing today is leading to lots of waste that with a little bit more discipline (imposed by lack of money) could be avoided. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-62600914641559526352012-11-20T03:43:48.985-05:002012-11-20T03:43:48.985-05:00Which members of future generations?
I could see ...Which members of future generations?<br /><br />I could see that government debt might, under most circumstances, hurt the descendants of John D Rockefeller or Sam Walton, relative to the "no government debt" option. For the average person, the situation is different.neroden@gmailhttps://www.blogger.com/profile/07475686367097445497noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-40277519220832140642012-10-24T17:52:36.014-04:002012-10-24T17:52:36.014-04:00Aziz,
"It's just double-entry book-keepi...Aziz,<br /><br />"<i>It's just double-entry book-keeping. The credit and debt adds up to zero in aggregate. If the older generation all sell their debt to younger people then the younger people still inherit the proceeds.</i>"<br /><br />Since the credit and debt cancel each other out, any money paid for the credit is a net loss for the younger generation. So only if the money paid for the credit is zero - that is the credit was <i>literally</i> inherited or otherwise handed over for free - is there no net loss for the younger generation.<br /><br /><br /><br /><br />martinnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-44391162901236901472012-10-19T07:41:49.222-04:002012-10-19T07:41:49.222-04:00Do public assets benefit future generations?
What...Do public assets benefit future generations?<br /><br />What if debt is used to build public assets that increase in value over time?<br /><br />The argument about debt burden only makes sense if BigG privatizes everything so there are no public assets. If people believe that BigG can create assets that are more valuable in the future, then they will be less likely to favor tax cuts for the wealthy and spending cuts on the public as many of our wealthy elites wish to achieve. The debt burden argument is made to support tax cuts for the wealthy. Of course it is a bogus, Machiavellian, argument intended to mislead the public.<br /><br />-jonny bakhoAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-41222997727087935202012-10-18T00:56:55.618-04:002012-10-18T00:56:55.618-04:00You're right...it does look very suspiciously ...You're right...it does look very suspiciously like tax choice! How cool is that? Thanks for pointing out that Easter Egg. Well...I guess since we're close to Halloween it would be more appropriate to say thanks for connecting me to another person who believes in <a href="http://www.i4m.com/think/parables/great_pumpkin.htm" rel="nofollow">the Great Pumpkin</a>. And it's your PhD adviser no less! Haha...nothing like good ole confirmation bias.<br /><br />Based on the rule of threes...all you need is to stumble over one more believer and then you'll believe in the Great Pumpkin as well! Pretty soon the belief will reach the tipping point and then it will go viral. <br /><br />Man, how in the world did the idea of trick or treating go viral? Kids dress up as goblins and then go around threatening violence if people don't give them candy. Given that economics is based on the concept that there's <a href="http://en.wikipedia.org/wiki/There_ain't_no_such_thing_as_a_free_lunch" rel="nofollow">no such thing as a free lunch</a>...I think we can blame Halloween for all our economic problems. <br /><br />Incentives matter...right? Instead of shouting "trick or treat" kids should shout..."check out my report card!" Hmmm...yeah...Christmas gets the incentive aspect right. It also at least tries to instill the idea that giving is better than receiving...nobody likes a Scrooge. Yet, who doesn't become a Scrooge when it's time to pay their taxes? <br /><br />I really like how your adviser recognized that taxpayers are alienated altruists...<br /><br />"There is joy in giving, and by providing a choice of which organization to give to, my hope is that the joy of giving would be only partially muted by the requirement of giving to some appropriate organization."<br /><br />Tax choice is going to turn tax day into the best holiday ever! Well...except for the minor detail that taxpayers would be able to make their contributions at any time throughout the year. But I'm sure that there will be a week of festivities and celebrations leading up to April 15. Perhaps we'll build giant figures that represents the deficit and then burn them on April 15. Kinda like <a href="http://en.wikipedia.org/wiki/Falles" rel="nofollow">the Fallas</a> in Spain. Xerographicahttps://www.blogger.com/profile/14978832439622230018noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-2736230162317454782012-10-17T18:53:11.860-04:002012-10-17T18:53:11.860-04:00Hey Xerographica, don't look now, but my PhD a...Hey Xerographica, don't look now, but my PhD advisor is a fan of something that looks suspiciously like...dare I say it...tax choice... <br /><br />http://blog.supplysideliberal.com/post/30196025443/no-tax-increase-without-recompenseNoah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-90237150337213534512012-10-17T03:26:59.667-04:002012-10-17T03:26:59.667-04:00I rally don't see how your proof works. In sho...I rally don't see how your proof works. In short: K_T equals K_0 plus the sum of investment between t=0 and t=T-1 (possibly with correction for physical depreciation)... How van you then conclude that only I_0 matters? Couldn't, just to focus on something, D_0 have no effect on K_T-1 and still depress I_T-1 in which case K_T would be force lower?Michael Ahttps://www.blogger.com/profile/07588307948122711848noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-89959216118607544692012-10-16T04:21:26.423-04:002012-10-16T04:21:26.423-04:00Noah,
First off: I disagree with your framing main...Noah,<br />First off: I disagree with your framing mainly because as far as I can tell very little government debt has ever been repaid. The vast majority is depleted through inflation and the remaining principle rolled over. Which doesn't seem to come into your model and I think has a very large effect. To be precise about it as long as once in while real rates go negative it's more than possible for the debt stock to remain bounded in the limit which means this isn't a Ponzi scheme. (incidentally I can't prove it yet but I think this happens pretty much automatically assuming rational government responses). <br />Moreover, say we didn't have government debt at all. That would be a massive limitation to the capital market which would effect not only present and alive generations but future generations too- take institution with very long intergenerational liabilities, basically life insurers and pension funds. Having a positive debt balance may actually be socially very useful. <br />Finally, you allude to this but I'm not sure the effect is given a strong enough weighting: inequality seems to be stubbornly persistent and there's not too much of a leap of faith to assume that this happens due to a large number of intergenerational transfers within families. Say we have a progressive tax system and therefore the wealthy pay most of the taxes. But these same people own most of the debt and therefore the net transfer is greatly reduced for these individuals. So we’re only really limiting the consumption possibilities of the wealthy, who have the lowest marginal utility anyway….<br />Your answer of ‘it depends’ is obiosully true. But I’m not convinced the simple model works to think about these issues…<br />Brett<br />Brett Manningnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-28530617569222844072012-10-16T03:13:34.789-04:002012-10-16T03:13:34.789-04:00The last paragraph should have read:
"So tha...The last paragraph should have read:<br /><br />"So that when r is less than g, like now, bonds allow the wealthy to save with relatively low risk. But when r is greater than g, at worst, the wealthy have improved their position relative to each other."anonnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-71415532670048267432012-10-16T03:04:52.667-04:002012-10-16T03:04:52.667-04:00Noah,
I've written an atrociously long commen...Noah,<br /><br />I've written an atrociously long comment over at Rowe's blog. While I'm hoping for some feedback as to just how wrong it is, I thought I'd try to ask something of it here.<br /><br />To what extent is there agreement that none of this matters when we're not at full employment?<br /><br />Doesn't all economic activity, including NGDP targeting, imply possible burdens? If so why do we focus on the debt? Couldn't inflation grow faster than GDP under NGDP targeting? Wouldn't this burden the young?<br /><br />How much does progressive taxation and social insurance mitigate the harm done by debt burdens? So that when rg, at worst, the wealthy have improved their position relative to each other.anonnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-65149669679636979032012-10-16T02:01:40.140-04:002012-10-16T02:01:40.140-04:00Andy Harless —
It's just double-entry book-ke...Andy Harless —<br /><br />It's just double-entry book-keeping. The credit and debt adds up to zero in aggregate. If the older generation all sell their debt to younger people then the younger people still inherit the proceeds. There is no net burden unless the debt is hugely offshored..<br /><br />The thing that concerns me is that the interest payments are a transfer from the taxpayer to creditors. But that's not the same thing as a generational burden, because all the interest will still end up being inherited.Azizhttp://www.azizonomics.comnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-16718991479662399462012-10-16T01:47:40.744-04:002012-10-16T01:47:40.744-04:00These are clear areas where government debt decrea...<i>These are clear areas where government debt decreases the "burden" on future generations, and are broadly consistent with recent empirical facts on interest rates and wealth inequality.</i><br /><br />That's neato.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-38800557592037209472012-10-16T01:39:52.450-04:002012-10-16T01:39:52.450-04:00I think this is all very interesting, but I find i...I think this is all very interesting, but I find it somewhat disturbing that this is all framed outside of the voluminous existing literature on intertemporal debt dynamics. In particular, the "it depends" result of the comment stream seems to be similar to the original Diamond result. Much more interesting is what's been derived since then particularly on the provision of liquidity track, as in Woodford (1990) and Holmstrom and Tirole (1998). These are clear areas where government debt decreases the "burden" on future generations, and are broadly consistent with recent empirical facts on interest rates and wealth inequality.<br /><br />Even Andy's above comment (which I agree is very interesting) is very reminiscent of Drazen's article on debt in an economy with human capital transfer.<br /><br />It's just (my opinion) much nicer to see these results (positive and negative) in fully worked out models with fully fleshed out assumptions.John At Riskhttps://www.blogger.com/profile/07346395746333775016noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-53610674167516834482012-10-16T00:44:11.955-04:002012-10-16T00:44:11.955-04:00That is interesting, but let's make it the top...That is interesting, but let's make it the topic for another post! :)Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-77304664544013690772012-10-16T00:27:39.037-04:002012-10-16T00:27:39.037-04:00OK, start with a Rowe-type model with no capital o...OK, start with a Rowe-type model with no capital or private debt. You will get your result that the maximum burden on a generation is determined by the amount of consumption they forego when young, and of course this is true regardless of how much debt there is. On the other hand, the older generation owns the debt, and they have the right to redeem it (if we assume it's rolled over each period) and use the proceeds for consumption. So in principle, they can impose an arbitrarily large maximum burden on the younger generation up to the total value of the debt, and indeed any debt that is not part of that maximum burden -- debt that is not redeemed to use for consumption -- is debt they will own when they die and will therefore show up as a bequest. So (assuming the government doesn't pass any new laws mandating transfers across generations or do any new borrowing), the maximum burden on the young equals the total debt minus the total bequests they will receive. So what happens if the debt is really huge, so huge that the younger generation is not even able to forego enough consumption to pay for it (for example if it's bigger than the country's total product)? In that case, the older generation is mathematically obliged to leave bequests, even though they are legally able to consume as much of their assets as they wish. What will happen if they try to leave infeasibly small bequests? Default of some sort, either outright or via inflation. So, in other words, when the debt is very large, the older generation's willingness to leave bequests determines whether the debt is sustainable. I just thought that was interesting.Andy Harlesshttps://www.blogger.com/profile/17582263872850949568noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-89164387063957614352012-10-15T18:15:22.405-04:002012-10-15T18:15:22.405-04:00"But because you and Nick Rowe convinced ever..."<i>But because you and Nick Rowe convinced everyone that "debt imposes a burden on future generations", the government canceled the infrastructure-building plan AND the concomitant borrowing</i>"<br /><br />You mean we should assume that the government is too dumb to know the difference between borrowing to finance an asset and borrowing to finance consumption? And that future generation should blame Nick and me for not anticipating the government's stupidity? Or for not tricking the government into buying an asset it didn't think was worth buying by pretending that there was no cost?Andy Harlesshttps://www.blogger.com/profile/17582263872850949568noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-16371096271001346422012-10-15T18:08:42.791-04:002012-10-15T18:08:42.791-04:00"there should be an aggregate burden of 0 as ..."<i>there should be an aggregate burden of 0 as the new credit inheritance balances out the new debt</i>"<br /><br />I don't understand this. Are you just assuming that each generation will inherit offsetting credits? There's nothing that obligates people to leave bequests for the next generation. The ownership of government bonds means that old people have a claim on the country's output. If they wish, they can pass that claim on to their children. Or if they wish, they can exercise the claim during their own lifetime and consume something that their children could otherwise have consumed.Andy Harlesshttps://www.blogger.com/profile/17582263872850949568noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-20167004614496763642012-10-15T14:58:02.383-04:002012-10-15T14:58:02.383-04:00Transfer resources through time is a difficult tas...Transfer resources through time is a difficult task. Especially to the past.<br /><br />I think people who worry about how society is transferring resources from the future to the present are really optimistic in our ability to time travel.<br /><br />Even transferring resources to the future is quite difficult. We usually do that by using our productive capacity to create goods that have the lowest possible depreciation rate.<br /><br />But given how much we do transfer to the future I think it's quite impressive that people think we are actually stealing from the future.<br /><br />If someone come to you complaining about what we are leaving to our children say: "A gigantic, never before seen capital stock, along with some of the best institutions yet to be in the world"<br /><br />Actually I think if time travel were possible we should redistribute resources from the future to the past on a utilitarian basis. We should also have open time borders so people could go to the future or to the past if they wanted.<br /><br />That being said, of course we can transfer resources from one generation from another quite easily if they are sharing the same time-frame. And I worry deeply about it. But I think people often confuse one thing for another.Arthurhttps://www.blogger.com/profile/16882185097545470347noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-16734627704518335172012-10-15T13:21:43.130-04:002012-10-15T13:21:43.130-04:00Yep, coming soon...Yep, coming soon...Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-13757773337121180402012-10-15T12:58:50.999-04:002012-10-15T12:58:50.999-04:00Noah,
Anyway we could get a concise summary of th...Noah,<br /><br />Anyway we could get a concise summary of the commenting between you and Rowe in the main article? Jefftopiahttps://www.blogger.com/profile/05005211633248766565noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-44258655405208006542012-10-15T10:47:58.748-04:002012-10-15T10:47:58.748-04:00Nope. Debt is not a sufficient condition for gener...Nope. Debt is not a sufficient condition for generation inequity, because there can be borrowing within generations. Think about that...Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-65304202990415420792012-10-15T09:01:11.604-04:002012-10-15T09:01:11.604-04:00The other day I thought of you when I wrote this.....The other day I thought of you when I wrote this...<br /><br />"Right now I'm just like Noah. I'm building pragmatarianism like Noah built his boat. Noah had his skeptics just like I have my skeptics. Jetboogieman is certain that pragmatarianism is one of the stupidest ideas ever. Even though I'm very confident he's wrong...I would never force him to board my boat. Yet, he believes there's nothing wrong with forcing taxpayers to board bogus boats. How can that be right? He's a skeptic who doesn't appreciate the value of skepticism, <a href="http://econlog.econlib.org/archives/2012/04/i_doubt_the_bus.html" rel="nofollow">doubt</a> and disbelief." <a href="http://www.debatepolitics.com/economics/138969-interests-consumers-interests-human-race.html" rel="nofollow">The Interests of Consumers are the Interests of the Human Race</a><br /><br />Did you click on the link that says "doubt"? If so you'd have read where Arnold Kling said, "I doubt the business model." Oh man, for some reason that line really cracks me up. "We doubt the business model!!!" is exactly what all the skeptics were saying when Noah was building his boat. How many times throughout history have people doubted the business model? I mean...isn't that our history in a nutshell? <br /><br />A few times people have brought up the issue of borrowing in a pragmatarian system. My response has been that it would be completely up to each government organization and its supporters/taxpayers. In other words...the entire government wouldn't be able to default on its debt because each government organization would be solely liable for any money that it borrowed. Obviously you're a big fan of public education...so I'm sure you'd give them some of your taxes if you had the opportunity. How much money could the Dept of Education borrow before you started to get nervous? But the more important issue would be what they were planning to spend the money on...right? <br /><br />It's no different than having a close friend mortgage his home to finance a business idea. The more you trusted the business model the less nervous you'd be for your friend. But the real truth of the matter would only be revealed by how much of your OWN money you'd choose to invest in his business. And that's why markets work and why the government does not work. But getting the government to work would be as simple as allowing taxpayers to put their taxes where their mouths are. And if you doubt my business model then really take a long hard look at the value of having the freedom not to board my boat. <br /><br />Incidentally...being one of your fiercest trolls and all...I really hope you detest Noah and the Ark references. The first time I met an old Army buddy named Frank I distinctly remember him telling me, "yeah yeah yeah...a currency, open and earnest and a hot dog." Xerographicahttps://www.blogger.com/profile/14978832439622230018noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-25929094757659018792012-10-15T08:08:38.988-04:002012-10-15T08:08:38.988-04:00Well it is certainly not necessary--you get the ex...Well it is certainly not necessary--you get the exact same effect with a pay-as-you go pension scheme, for example, if it has some finite end date. As for sufficiency--it is sufficient if the debt has to be repaid at some finite date in the future. Either the government's net balance is zero in all periods, the government never repays the debt (it gets rolled over indefinitely), or some generation gets screwed.Matthew Martinhttps://www.blogger.com/profile/10254244795963585737noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-19758719433582591432012-10-15T03:15:57.545-04:002012-10-15T03:15:57.545-04:00Noah,
It would be much more helpful (unless the t...Noah,<br /><br />It would be much more helpful (unless the task has been catered elsewhere in greater force) to hear stylized historical examples of how sovereign borrowing affected future consumption. <br /><br />The issue in the street relies on people's reasoning-by-exemplar intuition of the economy. So the American Economy is like a business who needs to maximize exports (credits) and minimize imports (debits). Fallacy. And the American Government is like lazy Uncle Lenny borrowing from Cousin Sam, and of course Sam will want his money back. <br /><br />The real impact of the political economy of the question is I think posed from the Uncle Sam and Cousin Lenny perspective. And from that perspective, the old Chicago quip that we're borrowing money from ourselves, not from Cousin Sam makes a lot of sense. Could you address that if you think it's a bad dismissal of the issue?<br /><br />And again, what matters is the evidence. And the best we have is ex post and anecdotal, probably. So what of it? Has government borrowing appreciably and reliably skewed consumption and production possibilities down over successor generations? My (cursory) understanding is that in fact the evidence seems to lean both ways, and not at large magnitudes. That suggests to me that government borrowing is just not a large elasticity variable on growth in the long run, which would take a lot of air out of the zany political fight that's always going on about the deficit.<br /><br />I appreciate George Lakoff's perspective here -- the debate over fiscal austerity seems to have a *lot* more to do with the ethical symbols of profligacy versus responsibility involved.<br /><br />Keep up the strong work.<br /><br />Graham Petersonhttps://www.blogger.com/profile/01026808626031607339noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-2228938236658423222012-10-14T18:04:53.871-04:002012-10-14T18:04:53.871-04:00Noah, so what's the point? A progressive tax s...Noah, so what's the point? A progressive tax system could mitigate some of the burden, but we're still prone to cyclical burdens?<br /><br />Or is a "smart" tax like you're suggesting a practical possibility. If not, could we still easily determine each individual's burden? (People could look it up on the internet.)anonnoreply@blogger.com