How Murphy Is Achieving His Result

Commentator rob, in this thread, has given a very succinct statement as to exactly the invalid maneuver Bob Murphy is using to get his "debt matters" conclusions:

"It does not matter if consumption remains the same in each period [in the counter-examples offered by myself and Steve Landsburg] because we are assuming that those who buy or sell bonds are not bearing any burden or making any gains if they voluntarily adjust their consumption as a result of the bond transactions."

Yes, rob has this exactly right. When consumption by the lender drops in period one, that doesn't count for Murphy and friends, because the lender reduced his consumption voluntarily. But when consumption by the taxpayer drops in period N, that counts, because that was an involuntary reduction.

Why is this maneuver invalid? Because judging a transactions benefits by its voluntary nature is a fine maneuver... ex ante. It's perfectly valid to judge, ex ante, that voluntary transactions are, on the whole, more likely to be beneficial for participants the involuntary ones. (Even this is not an a priori truth or anything of the sort: we may well judge that when someone is killing themselves with drink, and his friends have him involuntarily committed, that "he'll thank them later.")

But, of course, we are not looking at these scenarios ex ante, but ex post: we have Bob's whole spreadsheet, or Nick Rowe's whole example, right in front of us. And now slipping in some consideration of what someone might have anticipated at the time of some transaction is totally invalid. "Everything" (of relevance) has happened, and now, the only question is, "How did it really come out for everyone involved?" And, as Landsburg and I have shown, it came out the same (in monetary terms), whether the transfers involved occurred through taxation or debt financing.

Now, someone might protest, "But subjectively they weren't the same!" Perhaps not, but once we take such factors into account, our analysis becomes completely indeterminate. Perhaps the person taxed in period one suffers great psychological torment from being taxed. But perhaps the person receiving an unexpected transfer in a later period will experience boundless joy at this surprising bounty. All one can then say is something like, "Taxation? Debt financing? Who knows?" If we are going to run this sort of analysis at all, then we have to do so in terms of some objective results. And, objectively, Landsburg and I have shown that taxation and debt issue can have the same result in Bob's scenarios.

So, Bob is achieving his results by dropping out the loss of consumption suffered by government bond buyers because of ex ante considerations, but then looking at the entire situation ex post. This mingling of ex ante and ex post considerations invalidates the whole analysis.

UPDATE: Bob now says I am wrong, because:

"As I spelled out quite clearly, there is perfect foresight in my model. There's no distinction between ex ante and ex post, and people only derive utility from apple consumption..."

OK, I missed the place where Bob spelled this out. But it doesn't make me wrong, it makes me right for a different reason: With perfect foresight, it is wrong to ignore the deferred consumption of buying a bond but count that of being taxed because the taxpayer in period 1 will see he is getting a bigger transfer in period N that will compensate for his tax loss in period 1. It won't matter a lick to him whether his initial payment is voluntary or legally coerced. That, of course, assumes the tax burden can be made to fall on those who would have bought bonds. But the government must have perfect foresight as well, so they can do this

UPDATE II: For the life of me, I can't find where Bob spelled out "quite clearly" that the actors in his models have "perfect foresight." I searched his blog for foresight, and it doesn't appear in any of the relevant posts. Then, I re-read (re-scanned, really) the relevant posts, and didn't notice this being said through synonyms. I didn't see anything like foresight mentioned at all. But still, I am certain that Bob at least meant to put in that these actors should have perfect foresight.