I say it's all in the 'If'

Nick Rowe attempts to explain OLG models again:

"...if you use debt to finance transfers to the old in generation A [, t]here is no way you can do it without making some future generation have lower lifetime utility."

I spent some time with an OLG model, and after a while I understood the model. At the very least, I could clearly see how wealth was being transferred from the young to the old. And from the moment I grasped the model, it seemed to me the key was the transfer payments, not the debt. So yes, if you transfer wealth from the young to the old, you transfer wealth from the young to the old! And that happens whether you transfer it using debt or taxes.

7 comments:

  1. BTW I was perhaps too snarky on my blog about this; but I get riled up you know...

    This is fine, Gene, what you've written here. Except it doesn't exonerate Krugman. Krugman has been saying it is physically impossible for government fiscal policy in period 1 to have any impact on people who will be born in period 50. And the OLG models show that he is simply mistaken.

    Again: You agree that your point here has nothing to do with whether bonds are held domestically or abroad, right? I mean, if the way you are showing that debt per se isn't the issue, is by saying it's more fundamentally about taxes and subsidies, then you agree that whether bonds are held by Americans versus Asians is totally irrelevant, right?

    If so, then can you see why Krugman titled posts "Debt Is Money We Owe to Ourselves" drives Nick and me up the way? He keeps focusing on something that has nothing to do with it. He really doesn't see the OLG stuff.

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    1. Ken is right, Bob: YOU really don't see the meaning of the model you are brandishing. And I agree with your statement elsewhere that we have not made one iota of progress in this debate. And I understand why.

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  2. Of course this shows Krugman is correct. The transfers can be stopped at any time. It is the transfers in period n which affect those living in period n.
    Further, transfers do not deplete the total stock, so do not impoverish in aggregate any future state of the world. Which is exactly Krugman's contention.

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  3. > after a while I understood the model. At the very least, I could clearly see how wealth was being transferred from the young to the old...

    I am confused by this statement. Are you admitting that you did not understand some aspect of Bob and Nick's argument before? And now you do? If so, then great. Progress.

    And are you *additionally* saying that it is possible to replicate this transfer structure by taxing young people and paying old people with the proceeds in the current period? I don't think Bob and Nick would disagree with you.

    I think the complaint that Bob and Nick (justifiably) have is that Krugman seems to be saying that it is *impossible* to construct a debt-based transfer system like the one described in Nick's OLG model. The fact that a coherent structure *can* be constructured is a refutation of Krugman's position.

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    1. Only if the debt is inherent to the transfer. What myself and Ken B and Steve Landsburg have been saying is that it is the transfers that are relevant, and not the debt.

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    2. Do you agree with this statement:

      Krugman seems to be saying that it is *impossible* to construct a debt-based transfer system like the one described in Nick's OLG model. The fact that a coherent structure *can* be constructured is a refutation of Krugman's position.

      ?

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