Tuesday, October 23, 2012

We Can Only Transfer Consumption Between Those Present at the Table

Let us create a new version of Bob's table as follows:

Period 1: We transfer 65 apples from Young Bob to Old Al.
Period 2: We transfer 99 apples from Young Christy to Old Bob.

OK, at this point, Bob is up 34 apples, and Al was up (he's dead now) 65. And here's the punchline:

Period 3: Old Christy says, "Screw this materialism business: Young Dave, take 197 of my apples. I can get by on 1."

Period 4: Old Dave say, "Young Eddy, I recall Old Christy's generosity. Just eat your 100 apples: let's cease all of this milking the young to benefit the old.

In this scenario, the position of Al and Bob is exactly the same as in Bob's. And this shows us that all of the latter rows in Bob's spreadsheet were utterly irrelevant to the position of Al and Bob. Al benefited at the expense of Bob. And Bob made up for that by benefiting even more at the expense of Christy.

And that's it. Neither of them benefited at all from Dave, or anyone else in any latter row. Whether or not Old Christy tries to make up her loss from Young Dave or not first of all doesn't change their positions one tittle: they are dead. And secondly it is completely beyond their control: they are dead.

If this table was a table of childhood beatings in a family, it would be fundamentally mistaken to say that "Al and Bob beat the next 65 generations of their descendants!" Al beat Bob, and Bob beat Christy. Neither of them can control whether Christy will beat Dave, or anything else beyond that.


  1. Sad to say (you'll agree) we agree.

    I'm struck by RPM's stubbornness. Especially as it involves a strained artificial reading of Krugman.

    1. I am actually happy we agree. The fact that someone who would want to see Krugman wrong sees things this way is re-assuring.

    2. Take a look at my comment chez Murphy where I look at the first loan in Bob's series of 65, and forego the following 64 loans. We are making related points. Or the same paoint in different ways really. The first loan affects those alive only (no inheritance) and it is *subsequent* actions which push the effect along.

      Bob's argument is an optical illusion. He does not have one generation screwing 65. he has 65 consecutive transfers amongst the living arranged to reduce some notional sum by 1 each phase.

    3. Yes, Ken, I think you analysis is exactly right.

  2. My other anology is an STD passed from partner to partner. Did you really truly get it from some guy way back in the chain?

  3. This argument proves too much.

    For instance, Lerner, Krugman, and Baker all said that debt is only not a burden if it is internally held. If foreigners hold the debt, all bets are off. But in your example it doesn't matter what nationality Christy is.

    Or suppose I max out my credit cards. It's possible (though unlikely), that Visa will just forgive the debt, in which case I won't be burdened by having to pay the money back. That doesn't mean that my running up the credit cards is irrelevant to the burden I will bear later on paying off the debt.

    1. No, it proves exactly the right amount. It is utterly irrelevant to Al and Bob's position what Christy does about the debt. But of course it is relevant to Dave, *who is alive at the same time as Christy*, what she does with the debt!

      Similarly, if the Chinese hold all of the debt, that is relevant to a whole future generation of Americans because they will have to pay the Chinese, *who are alive at the same time they are*.

      And if we just enlarge of our view of that "generation" to include all people in the world alive at that time, rather than just American people, Lerner's and Krugman's point holds just fine.

  4. As everyone get a fixed (pre-transfer) endowment of 200 apples it is obvious that once old Al has consumed 65 apples on top of his endowment that everyone else in the model will have to consume a total of 65 less.

    This would be true if the transfer was done by theft, bonds or taxation.

    There are probably an infinite number of ways you could use tax and bond policy to orchestrate the future generations failing to consume these 65 apples and soon Bob will have covered them all.

  5. Just to show my magnanimity: Blackadder, Gene is right that the China example doesn't work for you. In that case, we'd have Al getting apples from an adjacent table from Young Lu, etc., and then in period 8 (say) BOTH Hank and Iris pay 5 apples to Old Yi, and thus the people "alive in period 8 as a whole" are collectively poorer.

    Look Gene, I don't know how many times we have to go over this. Nick picked this model ON PURPOSE to fulfill ALL OF KRUGMAN'S ASSUMPTIONS. So you're not zinging us, by pointing out that this outcome is consistent with what Krugman said. We did that ON PURPOSE.

    The reason was to show that Krugman's description of such a world, and what could happen, was incredibly misleading. Yes, we're not using a time machine to physically take apples from the future, but I think these illustrations show that there is a very meaningful sense in which the present gets more utility and more consumption if it runs up a deficit and eats it.

    A government IOU is, by definition, a claim on future taxpayers. How in the world is issuing such a thing not a burden on future taxpayers? Maybe you offset in response to the issuance, but creating more assets today, that are simultaneously liabilities on future taxpayers, is the essence of people in the present gaining at the expense of people in the future. Just like if I have the legal ability to auction off claims on your car, I can impose a burden on you. Sure, I might auction of your car for $10,000, the use the money to send your kid to school and thus help you on net. But the act of me auctioning off a claim on your property is surely a transfer of wealth from you to me.

    1. "A government IOU is, by definition, a claim on future taxpayers. How in the world is issuing such a thing not a burden on future taxpayers? "

      Bob, it is. NO ONE denies that it is! What the "other side" is saying is that the payments made by those taxpayers go to future bondholders, in a way that exactly offsets those burdens.

      It is not analogous to a household borrowing from VISA; no, it is analogous to my left hand borrowing from my right hand. The latter activity cannot possibly make "future Gene" poorer.