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Wednesday, October 17, 2012

What I Have Been Getting At

Let's leave aside the question of whatever Baker and Krugman meant during the great debt flame wars. I will just try to clarify what I have meant.

Let us say that there have been several hammer killings in the news lately. This leads to calls for the outlawing of hammers, since they are "deadly weapons." But others point out that it is not hammers that are the real problem; no, it is murderous intentions. Hammers are also used for many worthy purposes. There is nothing inherently murderous about them; if hammers are banned, murderous people will simply pick up a rock or stout tree branch to kill their victims.

Now, you certainly can't show the latter set of people are wrong by showing how it is possible to murder someone with a hammer! But that is what I see Rowe and Murphy doing with their examples. We could just as easily contrive an example in which debt is used to fund capital projects that raise the consumption of future generations at the expense of the current one: just take Bob's table, and borrow from Old Al in step one to fund an investment that eventually raises the consumption of Young John. And, as mentioned in the previous post, Bob's result can be duplicated with taxes.

So, the people who say "Our national debt is a burden on future generations" are pointing at the wrong culprit: it ain't the hammer that's the problem, it's the murderer. And it ain't the debt, it's the transfers.

Look, this question is totally separate from what level of government spending we should have. Any given level of spending must be financed through some combination of debt and taxation. The question is, should we prefer taxation, since debt "burdens future generations?" And the right answer, as I see it, is "No," because you can transfer money from the young to the old via either method of financing.

4 comments:

  1. Let's leave aside the question of whatever Baker and Krugman meant during the great debt flame wars. I will just try to clarify what I have meant.

    Gene, I have known what you meant all along. It's because you kept insisting that Nick and I were wrong for attacking Krugman--you did it just recently in the post I linked to--that I kept hammering the point.

    If you had said from the outset, "Yes Krugman and Baker are using an invalid argument to reach a true conclusion," I would have been pretty happy with that. We could quibble about what people mean in the context of "running up a debt today" and how that necessarily implies higher taxes down the road, but if you wanted to be a stickler and say it was the future taxes, not the debt per se, I would have been fine with that clarification.

    It was when you kept saying that *this* was Krugman's point all along, that I was going nuts.

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    1. OK, I *may* have been wrong to impute my view to Krugman: I don't know. That is why in this post I dropped that point: it seemed silly to keep disagreeing about what someone else may or may not have meant.

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  2. Look, this question is totally separate from what level of government spending we should have.

    It's totally separate analytically, but not politically. If it's really true that everybody alive today can enrich himself at the expense of future (non-voting) generations by spending a lot and then running a deficit, then insisting on balanced budgets will probably mean lower spending.

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    1. But, they can do the same thing just by transfers without the deficit. Now, it could be that it is easier to pull it off through debt financing, because that is an easier pill to swallow than taxation. If *that* is what you are saying, then I agree.

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