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Friday, October 19, 2012

And Yes, Krugman Understood This Fine All Along

Just to make sure I get Murphy mad again, I have re-read Krugman, and he is not making any false statements or misunderstanding the OLG models, when he writes:

"It’s quite possible that debt can raise the consumption of one generation and reduce the consumption of the next generation during the period when members of both generations are still alive. 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)."

All the OLG models show is that if you keep doing the above sort of thing again and again, generation after generation, you will again and again make the old wealthy at the expense of the young. At every point in every one of the OLG models I have seen, what we have is a series of transfers from the young to the old occurring during the period when members of both generations are still alive. Wow, if we keep doing such transfers, they will keep having the same effect. As Krugman says, duh.

Now, there might be some real-world significance to this feature of the OLG models Rowe and Murphy construct, if it turns out that, in the real world, we always find ourselves taxing the young to pay off older bondholders. But, in that case, it is still not the government debt per se that is hurting future generations. The problem then is this feature of the tax system. (And no, not merely taxation per se, either, but the fact the tax burden falls on the young and payments flow to the elderly.)

6 comments:

  1. Perhaps it would be good to look back at the exchange that started this whole debt debate.

    Speaking about the differences between progressive-era politicians and the politicians of today, David Brooks said the following:

    Back then, there was a moral horror at the thought of debt. No matter how bad the economic problems became, progressive-era politicians did not impose huge debt burdens on their children. That ethos is clearly gone.

    In response, Dean Baker said the following:

    As a country we cannot impose huge debt burdens on our children. It is impossible, at least if we are referring to government debt. The reason is simple, at one point we will all be dead. That means that the ownership of our debt will be passed on to our children.

    Paul Krugman then chimed in, agreeing with Baker and adding the following:

    [T]he debt we create is basically money we owe to ourselves, and the burden it imposes does not involve a real transfer of resources... And as Dean says, talking about leaving a burden to our children is especially nonsensical; what we are leaving behind is promises that some of our children will pay money to other children, which is a very different kettle of fish.

    Can we agree that these arguments by Baker and Krugman are flawed?

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    Replies
    1. Blackadder, don't bother. This is pointless.

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    2. Yes Gene, you got me mad again.

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  2. Gene, please email Krugman and say to him:

    "Dr. Krugman, a big fan. One quick thing: When you tell your readers that the debt finance stuff can't make 'future Americans as a whole' poorer, you knew full well that every single American born in 2013 and later, could be poorer, right? I've got a knucklehead who thinks you were denying that. So can you confirm that everyone alive today can consume more, and force everyone born in 2013 forward to consume less, by debt financing and the taxes needed to finance it?"

    Gene, do you actually think Krugman is going to agree to that? And if he does, you think that's what his readers thought he meant all along?

    You guys really are nuts.

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    Replies
    1. "you knew full well that every single American born in 2013 and later, could be poorer, right?"

      Through inter-generational transfers among the living. Just like he said in the quote above. What, you think Krugman believes a transfer like that can work today, but won't work if done 50 years from now?!

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  3. Right Gene, because then not "every single American born in 2013 and beyond" would be poorer. They would break even or some would be net losers or some net winners. Krugman wasn't seeing that the old folks in 2016 could win, at the expense not just of the young folks in 2016 but every single human after that.

    ReplyDelete