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.