Friday, October 19, 2012

Future Generations Have Not Planned Anything at All

Ryan Murphy contends that, if Ricardian Equivalence is not true, then:

"Debt becomes a burden on future generations when they have not planned for it. Meanwhile, the people who invested in treasury bills of whatever did plan for that money to be there."

This is an apples and oranges comparison. Of course future generations have not planned for a debt burden. They have not planned for anything at all: that will have to wait for the future, when they are one of the current generation. And sure, someone in the current generation who bought treasuries presumably planned to do so. But his future  progeny have not yet planned to inherit them, since they will only come to exist in the future. Ah, but what if this bond holder sells his bonds before dying? Well, then he will have cash or stock or something else to pass on to his heirs. What if he spends all of that on a huge party? Yes, that impoverishes future generations, but that is because he consumed his capital stock. Treasury debt is tangential in that case. (And note that that analysis extends easily to the government itself: If money is diverted from capital formation to consumption through borrowing, that will impoverish future generations. But so it will if it is diverted from capital formation to consumption through taxation.)

So, for future generations, some people will be surprised to find they are born with obligations they had no part in bringing about, while other will be similarly surprised to find they have assets they did nothing to earn. If we posit that all of this debt is held within the country, I don't see how this can be anything but a net wash.

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