Stubborn is as stubborn does

Nick Rowe is simply one of my favorite, favorite economists alive today. When he generates a macro-economic model, I spend as long as it takes to grok it, and the time is always well repaid. And sometimes it takes me hours to get what Nick is saying in a model that probably took him minutes to knock off. In other words, in general, I am in awe of Nick's depth of understanding of the macro-economy. But...

On OLG models and government debt, he is simply stuck on one model, and can't see that we can easily model the exact opposite result! Yes, debt can have inter-generational distributional implications: but it can have them in either direction, or it can be completely neutral in this regard!

I can be walking down the street, whistling, and

1) Shooting random people nearby.

Or I can be walking down the street, whistling, and

2) Handing out sandwiches to needy people.

The fact that I can create a model in which 1) occurs no more proves that whistling causes mass shootings than does the fact that I can create an OLG in which:

A) The government issues debt;
AND
B) The government engages in inter-generational transfers of wealth from the young to the old,

Show that debt causes inter-generational transfers!

Because,  after all, it is easy to create an OLG model in which the government issues debt, and uses it to transfer wealth from the old to the young.  (For instance, issue lots of bonds, and use the revenue garnered to give every newborn $100,000!)

Or, I could create a model in which government debt transfers wealth from Earthlings to Martians. This model would not "demonstrate" that all issuance of government debt benefits Martians!

And lest the Martian example be considered too silly to have any relevance, consider a model in which government debt is used to continually transfer wealth to, say... the military-industrial complex.

The fact that there is a model A in which X occurs does not prove that X is occurring, and that someone questions whether X is occurring does not mean that they simply don't "get" model A!

17 comments:

  1. You flatter me Gene (but I like it!)

    Think of a model where an individual's risk of death in any year is a *decreasing* function of his age. Sort of like WW1 fighter pilots.

    In a model like that, an increase in the debt *might* be a transfer from old to young, because the young are less likely to be alive to pay the taxes to service the debt. (But it also depends on the birthrate, and whether the population is rising or declining, because some of the taxes will be paid by the unborn.)

    What makes debt non-orthogonal and positively correlated with transfers from young to old is the assumption that risk of death is an increasing function of age, plus you can't tax the dead.

    ReplyDelete
    Replies
    1. But you can't send the coupons to dead people either!

      By the way, have you read Mary Morgan's _The World in the Model_? I just reviewed it, and can send you my review if you would like.

      Delete
    2. Gene: you can have a negative government debt.

      Never heard of The World in the Model. Yes please.

      Delete
  2. "The fact that there is a model A in which X occurs does not prove that X is occurring, and that someone questions whether X is occurring does not mean that they simply don't "get" model A!"

    OK. But someone who says "debt is money we owe to ourselves, and future generations inherit the bonds as well as the tax liability" simply does not get it.

    BTW, you are the only blogger who has responded to my post. Notice the deafening silence from the Keynesian establishment? On this particular question, they really don't want to give me any publicity.

    ReplyDelete
    Replies
    1. Hello. Non-economist here. I cannot think of anyone who has ever said "debt is money we owe to ourselves, and future generations inherit the bonds as well as the tax liability". Also, I'm not sure there is a "Keynesian establishment". It seems careless to shove everyone in under a single umbrella. Half of them probably don't know who Keynes is.

      Delete
    2. Did you google for that phrase, Samson?

      And half of whom doesn't know who keynes was?

      Delete
    3. Samson, you have a habit of assuming anyone who disagrees with you is an idiot until proven otherwise. But on this post, you are really taking the cake.

      Hello. Non-economist here. I cannot think of anyone who has ever said "debt is money we owe to ourselves, and future generations inherit the bonds as well as the tax liability"

      Nick is responding to Krugman's latest musings on this topic. Look, Krugman even made "we owe it to ourselves" literally the title of his first post, to show how central this "insight" is to Krugman's case.

      Without hyperbole, then, we can say that you literally do not know the first thing in this debate.

      With Gene even admitting upfront that Nick is a formidable economist, maybe you could have said, "I'm sorry Dr. Rowe, can you point me to where someone said that? I've never heard of someone making that argument."

      You will get more from life if you shift your attitude.

      Delete
    4. Good rebuke, Bob, except I wouldn't say I was "admitting" Nick is a formidable economist, since this is not something I ever denied! No, Nick Rowe is a master of generating economic models, and I was not kidding for an instant when I said whenever he creates a model, I spend as much time as I need to to understand what he is up to!

      Delete
  3. There are two ways to finance a transfer payment of $100,000 to newborns:
    A) increase taxes today
    B) issue debt, and increase taxes in future.

    For a given tax system, and unless the average age of taxpayers increases by more than one year per year (because the young die sooner than the old), B transfers wealth from those born later to those born earlier, relative to A.

    ReplyDelete
    Replies
    1. Well, no, because the increased taxes in the future will go to pay future bondholders!

      Delete
    2. And if those future bondholders paid to buy the bonds, they are paying twice for those debt service payments. Once when they bought the bond, and a second time when they pay the taxes. It's like me paying the previous generation $100, so the government can take $100 out of my right pocket and put $100 in my left pocket.

      Delete
  4. "You have to pay more in interest on a 30-year mortgage" : "therefore 30-year mortgages are bad" :: "We owe the debt to ourselves" : "therefore debt is no burden to future generations."

    (For an even bigger hint: I can certainly come up with a model in which a 30-year mortgage is bad and a 15-year mortgage is good. That doesn't excuse Dave Ramsey's column. By the same token, just because Gene can come up with a model in which debt doesn't hurt future generations, doesn't excuse Krugman's columns on this. Krugman is way behind Dean Baker and--according to Nick Rowe--Simon Wren-Lewis. Krugman really hasn't followed all of the progress we made the last time around, whereas at least Dean Baker eventually conceded the theoretical point and retreated to an empirical one.)

    ReplyDelete
  5. At risk of injecting further ignorance into the discussion....

    Maybe the reason Bob and Nick don't see things Gene's way has nothing to do with economics, but has to do with Gene being a computer guy, and Bob and Nick are not so much (at least to my knowledge)?

    Gene's argument sounds a lot like the way computer guys think about coding -- they abstract the bejesus out of things to produce this structure, and then just 'point' the thing to whatever they want it to act on. So Gene is able to see this 'debt' thing as a structure that can act more or less in any which way, on any which object. (Gene is speaking 'object oriented.')

    Meanwhile, Nick and Bob consider 'debt' to be a very specific sort of thing which always 'points' one way, because that is the way it is procedurally structured. (They are speaking 'procedure oriented.')

    So, Gene sees in things which appear to non-computer people to be procedurally static as containing the potential for all sorts of plasticity and flexibility. And he probably thinks in terms of something like Mises idea that the burden of taxation cannot really be known with certainty as being a result of this kind of thing. The flexibility is not only potential, it is actually real and active but disguised towards most of us by the formalities of the procedure.

    But Bob and Nick say, no, Gene, the reality is in the procedure. See? Look at these guys writing checks.

    Or something like that...

    ReplyDelete
    Replies
    1. Maybe so, Scott. Something must explain the difficulties we all have on seeing this issue the same way!

      Delete
    2. It took me days to figure it out, playing around with bits of paper on my desk, representing bonds and apples. It took Bob hours, playing around with an Excel spreadsheet. It is very much one of those rabbit/duck things.

      I got an A in the only class in computer science I ever took! But that was in 1974, when we used coal-fired computers. I'm not a computer guy.

      Delete
  6. Not this again. I rigorously refuted Murphy's nonsense on my blog years ago. Kenblogic.blogspot.com scroll back a ways. Krugman gave an elegant refutation. Search for Krugman Santorum tax.

    ReplyDelete