Sunday, October 21, 2012

The Government Debt Debate is Getting Tedious

Robert Murphy, Gene Callahan and others are having a debate at the moment on whether government debt “robs” future generations. It’s getting tedious.

Here is Murphy’s latest post:
Robert Murphy, “Gene Callahan and Abba Lerner Insist on Plain English in the Debt Debate,” Free Advice, 20 October, 2012.
Robert Murphy tries to respond to a post of Gene Callahan where Callahan declares that Abba Lerner was right all along.

When Murphy and others have argued that government debt can “burden” future generations all they appear to mean is that taxes at that future point in time will transfer income from some people then to others then. This is actually nothing more or less than saying that government debt paid back in the future merely represents a redistribution of wealth then.

Murphy has not proven:
(1) that the aggregate level of private investment or consumption in the future will be reduced by deficit spending now;
(2) that the capital stock in the future will be reduced by government deficits now, or
(3) that present generations are somehow “robbing” future generations.
I repeat what I have said before: the notion of present generations “living at the expense of future generations” is utter nonsense. Any future generation cannot send real goods and services, money or assets back in time, and our wealth today is dependent on the real goods and services produced, owned and consumed today, not in the future. The repayment of future government debt comes from three sources:
(1) Central bank open market operations. This does not even involve taxpayers’ money at all: money used to pay back debt in this way is simply created by central banks.

(2) The government has the power to roll over much of its debt. As long as people keep purchasing the debt, there’s no problem.

(3) The government’s repayment might be from current tax revenues. But, with expanding GDP, the government has access to tax receipts which grow over time, which effectively means that the burden of interest servicing and paying back debt falls as the population rises, GDP grows and tax revenues rise. Since the US has a progressive tax system the “individual” burden of government debt repayment differs markedly depending on income anyway.

The future “individual” burden of government debt is simply a redistribution of money at a future time point or period, and, if the money is spent, a redistribution of real goods, services or assets within the society at some future point in time: it cannot be a robbery by present generations of future wealth, because there is no way that future, real goods and services can be magically transported back in time to today.
BIBLIOGRAPHY

Lerner, A. P. 1943. “Functional Finance and the Federal Debt,” Social Research 10: 38–51.

Lerner, A. P. 1948. “The Burden of the National Debt,” in Lloyd A. Metzler et al. (eds.), Income, Employment and Public Policy, Essays in Honour of Alvin Hanson. W. W. Norton, New York. 255–275.

Lerner, Abba P. 1961. “The Burden of Debt,” Review of Economics and Statistics 43.2: 139–141.

9 comments:

  1. "Any future generation cannot send real goods and services, money or assets back in time, and our wealth today is dependent on the real goods and services produced, owned and consumed today, not in the future."

    I'd go further than that and add that our wealth depends also on 'real goods and services *invested productively* yesterday'.

    Add that to the equation and the output potential of the future doesn't look anywhere near as bright given the quality of the current policy debate

    We are crippling tomorrow's real output capacity because of the fear of a few entries on a spreadsheet. It is utter madness.

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    1. Precisely! We are in fact robbing future generations of real benefit - and for what? On one side political expediency and the other to preserve income inequality? We ought to be educating people instead of pandering to their misconceptions.

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    2. "I'd go further than that and add that our wealth depends also on 'real goods and services *invested productively* yesterday'."

      Yes yes yes!

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  2. David Colander, a co-author of a 1980 book with Abba Ptachya Lerner (author of “The Economics of Control”) wrote that Lerner wanted to make it illegal to change prices without a permit in order to control inflation:

    Initially he [Lerner] toyed with various administrative wage and price control policies, but he found those lacking and soon gave them up. He replaced them, first, with a tax based incomes policy and ultimately, a market based incomes policy in which property rights in prices are set and individuals have to buy the right to change prices from others who change their price in the opposite direction. It was this idea that formed the basis of our market anti inflation (MAP) book. (Lerner and Colander 1980) Under MAP, rights in value added prices would be tradable so that any firm wanting to change its nominal price would have to make a trade with another firm that wanted to change its nominal price in the opposite direction. Thus, by law, the average price level would be constant but relative prices would be free to change. [page 12]

    ftp://ftp.repec.org/opt/ReDIF/RePEc/mdl/ancoec/0234.pdf

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    1. "Lerner wanted to..."

      In short, "Lerner the Man." Because ad hominem totally does discredit an argument that Rothbardians don't like.

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  3. LK: You posted on Bob Murphy's blog, and Major_Failure responded to one of your points by asserting: "Consequentialism is praxeologically impossible."

    Just want to take this opportunity to point out that anyone who rejects consequentialism on a priori grounds has placed themselves in the unenviable position of being literally unable to advertise their preferred social order or economic system on the grounds that it would be more prosperous. Because to do so would be etc etc.

    So, any time an apriorist tries to argue against a government action on the grounds that it will have a negative outcome, you can just wag your finger at them for being contradictory.

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    1. A:

      You are conflating implications and justifications.

      On the one hand, one can show how "my preferred ethic" will lead to more prosperity. On the other hand, this is not necessary to Intellectually justify that ethic. The justification can be made on grounds separate from the implications of it.

      All you are saying when you say that an a priori grounded ethic cannot be justified in terms of consequences, is merely restating the logical form of the ethic itself.

      You did not reveal any contradiction.

      I notice the level of maturity, or should I say LACK of maturity, in your name calling.

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  4. Oh my goodness, I called you Major_Failure. Terribly sorry! I know this is going to be hard for you to believe, and it's entirely because of another user elsewhere who uses that moniker, and this is not the first time I've made that flub. Won't happen again, for certain.

    Genuine apologies again.

    As for the contradiction, it lies, as you say, in the use of ends to justify one system as superior. Indeed, that is precisely the use I was calling to task. If you personally do not land in that pitfall, more power to you.

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    Replies
    1. (First "and" should be "but.")

      Delete