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Friday, January 06, 2012

Abraham and Isaac Sitting on a Fence...

they'd get right to work if they had any sense.

So, my first conviction: all the talk in Bob's post on the debt issue about "stealing" and "violence" is simply ideological baggage muddying the waters. The question of the morality of taxation and the question of whether or not present debt is a burden on future generations are surely separate issues, right? After all, we are talking present taxation versus future taxation in the debate currently spilling across the Internet. So, step one: no government. It's a red herring, as we'll see when we re-introduce it. And having "generations" muddies the waters as well. All we need to populate our model are the same people in different time periods, and the question becomes can the economy as a whole in period one impoverish the economy as a whole in period two by borrowing?

So first we have just Adam and me. We each grow apples. We each grow 1000 per year, out of which we consume 900 and save 100 for seed stock.

Now, Iy1 come to Adamy1 and ask to borrow 100 apples. I will pay him back 110 apples in a year. He reduces his apple consumption by 100 this year, planning to live it up next year. And Iy2 do pay Adamy2 back, by only eating 790 apples.

This is obviously a wash: the Year 1 cohort ate 1800 apples, as did the Year 2 cohort. All we did was to shift around who ate how many in each year.

 Now, let us make me the government. Iy1 come to Adamy1 and ask to borrow 100 apples. I consume 1000 apples, and Adam 800. In year 2, I come with my gun and collect 110 apples in taxes from Adam, then "pay them back" to him. I can consume 900 apples, and so can Adam.

Again, obviously a wash in terms of total apple consumption. What having a government did do was to allow a shifting in who gets to consume the apples. You may consider that immoral: fine, that's a completely different argument.

Our next scenario: Iy1 come to Adamy1 with a gun and tax him 100 apples. I consume 1000 apples, and Adam consumes 800. The next year, I announce, "It is the Jubilee! Let's have a tax moratorium!" Iy2 can consume 900 apples, and so can Adamy2.

It made no difference whatsoever whether I borrowed the apples from Adam or taxed him to get them! We each consumed the exact same amount in each year. I'd say Lerner is looking pretty good.

Then consider Bob's first example, in which, you may recall, we again have two periods of consumption: in period one, due to government borrowing and transfer, Abraham consumes 110 apples and Isaac consumes 90. In period two, poor Abraham has passed on, and Isaac consumes 100 apples. Now, instead of debt, have the government simply tax Isaac immediately for Abraham's feast. What happens? Well, in that scenario, in period one, due to government borrowing and transfer, Abraham consumes 110 apples and Isaac consumes 90. In period two, poor Abraham has passed on, and Isaac consumes 100 apples.

Hey, wait a second! That's exactly what happened with government debt!  So Bob's model shows us two things:

1) Transfers from one group to another diminish the wealth of those transferred from and increase the wealth of those transferred to; and
2) It doesn't matter if you do this with taxation or by issuing debt.

We can now introduce all sorts of complications. For instance, it is clear that if the borrowing results in a reduction in current investment and an increase in current consumption, future generations are likely to be worse off. But we all knew that already.

UPDATE II: In cleaning up this example, I saw that I made a claim about Nick Rowe's model that turned out to be mistaken. I have eliminated that claim here, and put in this note so no one thinks I am pulling a fast one: No, I made a mistake. (This is the horrible day I was telling Ken B. about in another context.)

5 comments:

  1. Gene,

    For my point of view this is nothing else than a fallacy of composition. When you are throwing the creditor and the debtor into the same basket you will obscure what happens. No matter what happens between the two in the aggregate it all looks the same. If the apples are paid back or not, though for the individual people that makes a huge difference.

    Say tax is only used for redistribution like assumed in all those examples. Then whenever someone is taxed he is burdened. Why? Because he gets nothing in return. Do you agree?

    So direct taxation means the burden of financing the redistribution is in the present. If you finance through borrowing in the present no one will feel the burden now, but only later in the future, when taxation is necessary to repay the loan. So as the tax also the burden was moved from the present into the future.

    It is right that from an aggregate point of view no real wealth was moved over time, but some people feel the burden. In the aggregate the total wealth a thief and I possess doesn't change when I get robed, but I am burdened right?
    And this is the reason why it is a democratic problem. People tend to vote for governments who promise them gains without burden now! How can you do that? With borrowing.

    So my conclusion is that through borrowing you do burden future generations. You are not doing it in the aggregate, in this sense Lerner is right, but that is a mere fallacy of composition. You do it by letting the present generation decide how much taxation is necessary in the future without giving the future generation a vote in the decision.

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  2. "For my point of view this is nothing else than a fallacy of composition."

    Well, all of everyone's analysis of these problems is from a macro viewpoint: Krugman's, Rowe's, Murphy's, mine, Kuehn's, Lerner's, etc: If you think the whole discussion is dumb, you are free not to join in. But instead, I think you have just missed the *point* of the discussion, which is, *on aggregate*, can the present impoverish the future by taking on debt? No one dounts that some people can win and some lose by re-distribution!

    "If you finance through borrowing in the present no one will feel the burden now, but only later in the future, when taxation is necessary to repay the loan."

    But I have just showed that is not necessarily true! You can try to show how my examples are crazy, but it is rather impolite to simply ignore them!

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  3. "Well, all of everyone's analysis of these problems is from a macro viewpoint: Krugman's, Rowe's, Murphy's, mine, Kuehn's, Lerner's, etc: If you think the whole discussion is dumb, you are free not to join in. But instead, I think you have just missed the *point* of the discussion, which is, *on aggregate*, can the present impoverish the future by taking on debt? No one dounts that some people can win and some lose by re-distribution!"

    Yes maybe I am really missing the point, but it seems I am not the only one since you accuse Bob Murphy as well...
    http://consultingbyrpm.com/blog/2012/01/future-generations-will-be-indebted-to-me-for-the-clarity-of-this-exposition.html#comments

    "But I have just showed that is not necessarily true! You can try to show how my examples are crazy, but it is rather impolite to simply ignore them!"

    I saw your example, and understood what you mean by it. And I didn't ignore it. It does exactly what I criticized. You aggregated all taxpayers together in one person! This shows exactly what I said, that in the aggregate it all looks the same. So this example didn't disprove but it confirms what I was saying. You have to split the taxpayers up into individuals like Bob did in his example. Although this seems to be exactly the point what I and Bob are missing according to you..

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  4. @skylien: "You have to split the taxpayers up into individuals like Bob did in his example."

    Uh, no one in the debate argues that it is impossible, through government policies, to hurt some individuals and help others!

    The question on the table is: does it make a difference to future generations whether transfers are done through taxes or through debt?

    And one can only sensibly answer a question like that by looking at whole generations.

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  5. Gene,

    After reading Bobs last two posts yesterday I am not so sure anymore of what Bob is trying to prove. Though his table shows exactly what I said. He has different people living in the same period of time but only some (Iris) got screwed.
    And I think I know how he can construct the model that all people within one period are screwed. If he had taxed Iris and John with 50 apples each in period 9 then both had a lifetime consumption of less than 200 apples (Iris 191 and John 150 apples). So you even had one period of time in which all people currently living are worse off than normal. But this is unrealistic due to the numbers that are chosen in the example. Usually those who will hold the bonds will gain if there is no default.

    I also wrote one post that maybe one should look at the starting point of this discussion, the layman's opinion. According to Buchanan it is not about every person living in one period of time... Whatever, it seems Bob and Daniel also are not so sure of each other's and of Krugman's point.

    "The question on the table is: does it make a difference to future generations whether transfers are done through taxes or through debt?"

    Yep as I already said multiple times. Through borrowing the tax burden is in the future therefor Iris has no chance to oppose the initial government transfer from the past. And because of this present generations are less likely to oppose government transfer programs then they otherwise would. So they not only put the burden in the future, they have a tendency to put a even bigger tax-burden into the future. It's a democratic issue. It is a public choice issue. No one mentioned that so far.

    I think Krugman is basically right what he says but wrong as he interprets the layman's opinion. But probably I still miss the whole point..

    Still nice to see how dynamic such a multi-blog discussions can become, although not easy to follow.

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