The issue is as follows. The Austrian economist Robert Murphy asks Keynesians a question about war and government bonds:
Robert P. Murphy, “A Sincere Question for the ‘We Owe It to Ourselves’ Camp,” Free Advice, 14 February, 2015.The crucial questions Murphy asks are these:
“Why do governments issue savings bonds to their own citizens during wars?Well, let that notorious socialist, statist, progressive fanatic Ludwig von Mises provide a provisional answer:
To be sure, a Krugmanite would totally understand why a government in a wartime crisis would issue bonds to foreign capitalists in order to suck outside real resources into the country. But why–using the “we owe it to ourselves” mentality–would a government decide to finance a war through bonds issued to its own citizens, rather than levying higher taxes? Either way, the people alive “pay for” the war effort, right? The next generation as a whole is totally indifferent to whether they inherit $0 in government bonds or $1 trillion in government bonds, right?”
Robert P. Murphy, “A Sincere Question for the ‘We Owe It to Ourselves’ Camp,” Free Advice, 14 February, 2015.
“A good case can be made out for short-term government debts under special conditions. Of course, the popular justification of war loans is nonsensical. All the materials needed for the conduct of a war must be provided by restriction of civilian consumption, by using up a part of the capital available and by working harder. The whole burden of warring falls upon the living generation. The coming generations are only affected to the extent to which, on account of the war expenditure, they will inherit less from those now living than they would have if no war had been fought. Financing a war through loans does not shift the burden to the sons and grandsons. It is merely a method of distributing the burden among the citizens. If the whole expenditure had to be provided by taxes, only those who have liquid funds could be approached. The rest of the people would not contribute adequately. Short-term loans can be instrumental in removing such inequalities, as they allow for a fair assessment on the owners of fixed capital.” (Mises 1998: 213).I will come to the issue of why it is better to issue a certain amount of government debt in wartime below.
But, first of all, note how Mises clearly rejects the idea that government debt per se to finance war impoverishes future generations: “[f]inancing a war through loans does not shift the burden to the sons and grandsons.”
I suppose that sends chills down many Austrian spines, for Mises sounds like he was channelling Abba Lerner here (to least to some extent). As Abba Lerner said,
“A variant of the false analogy is the declaration that national debt puts an unfair burden on our children, who are thereby made to pay for our extravagances. Very few economists need to be reminded that if our children or grandchildren repay some of the national debt these payments will be made to our children or grandchildren and to nobody else. Taking them altogether they will no more be impoverished by making the repayments than they will be enriched by receiving them.” (Lerner 1948: 256).But to return to Mises, on p. 96 of Robert P. Murphy and Amadeus Gabriel’s Study Guide to Human Action. A Treatise on Economics: Scholar’s Edition (2008), they apparently were aware that Mises held a view like Lerner’s:
“In attempts to discredit the argument that we owe the national debt to ourselves it is often pointed out that the ‘we’ does not consist of the same people as the ‘ourselves’. The benefits from interest payments on the national debt do not accrue to every individual in exactly the same degree as the damage done to him by the additional taxes made necessary. That is why it is not possible to repudiate the whole national debt without hurting anybody. While this is undoubtedly true, all it means is that some people will be better off and some people will be worse off. Such a redistribution of wealth is involved in every significant happening in our closely interrelated economy, in every invention or discovery or act of enterprise. If there is some good general reason for incurring debt, the redistribution can be ignored because we have no more reason for supposing that the new distribution is worse than the old one than for assuming the opposite. That the distribution will be different is no more an argument against national debt than it is an argument in favor of it.
8. The growth of national debt may not only make some people richer and some people poorer, but may increase the inequality of distribution. This is because richer people can buy more government bonds and so get more of the interest payments without incurring a proportionately heavier burden of the taxes. Most people would agree that this is bad. But it is no necessary effect of an increasing national debt. If the additional taxes are more progressive — more concentrated on the rich — than the additional holdings of government bonds, the effect will be to diminish the inequality of income and wealth.” (Lerner 1948: 260–261).
“On page 228, Mises critiques the popular claim that war bonds allow the costs of a war to be shunted onto future generations. This is silly because all of the tanks, bombers, etc. consumed by the war effort obviously come out of current production. Of course, a war impoverishes future generations, but only because they inherit a smaller stockpile of capital goods than they otherwise would have.” (Murphy and Gabriel 2008: 96).Did Murphy forget what Mises also said in the same passage?
Mises also said this:
“Financing a war through loans does not shift the burden to the sons and grandsons. It is merely a method of distributing the burden among the citizens. If the whole expenditure had to be provided by taxes, only those who have liquid funds could be approached. The rest of the people would not contribute adequately. Short-term loans can be instrumental in removing such inequalities, as they allow for a fair assessment on the owners of fixed capital.” (Mises 1998: 213).The meaning is not immediately clear, but we have some very good clarification from Mises’s earlier writings during WWI (Mises 2012 ) as examined by Richard M. Ebeling:
“To give one more indication of Mises’s thinking on specific policy alternatives and choices, there is a passage in Human Action in which he says, rather cryptically in passing, that there may be good reasons under certain circumstances to fund some government spending through short-term borrowing. One only understands what he meant by this by reading a lecture he delivered in 1916 on the problem of funding the costs of the government's war expenses.So that was Mises’ view, and most of it seems quite reasonable to me, and one can refer to Mises’ essay “On Paying For the Costs of War and War Loans” (Mises 2012 ) to see his views on this in full.
In this lecture, which is included in the forthcoming volume 1 of the Selected Writings of Ludwig von Mises, he praises the military successes of the Austrian army and the industriousness of Austrian businessmen in providing the manufactured goods required to fight the war. Mises reminds his listeners that borrowing does not enable the current generation to shift any part of the costs of a war to a future generation. Current consumption could only come out of current production, and this applied no less to consumption of finished goods designed for and used in war. Whether the war was financed by taxes or borrowing, the citizenry paid for it today by foregoing all that could have been produced and used if not for the war.
Then he explains to his audience what today often is referred to as the Ricardian equivalence theorem, named after the early 19th century British economist, David Ricardo. In his 1820 essay on the ‘Funding System,’ Ricardo argued that all that the borrowing option entailed was a decision whether to be taxed more in the present or more in the future, since all that was borrowed now would have to be paid back plus interest at a later date through future taxes; therefore in terms of their financial burden the two funding methods can be shown to be equivalent, under specified conditions. Ricardo, however, also pointed out that due to people’s perceptions and evaluations of costs in the present versus the future, they were rarely equivalent in their minds.
But Mises raised a different point in favor of certain benefits to debt financing for the government’s war expenditures. Many who would not have the liquid assets to pay lump-sum wartime taxes would either have to sell off less liquid properties to pay their tax obligation, or would have to borrow the required sum to pay the tax. In the first case, a sizeable number of citizens might have to liquidate properties more or less all at the same time to improve their cash positions, which would put exceptional downward pressure on the market prices of those assets. This would impose a financial loss on those forced to sell these properties and assets to the benefit of those who were able to buy them at prices that would not have been so abnormally low if not for the war and the need for ready cash to pay the tax obligation.
Secondly, to the extent that some citizens would need to borrow to cover their wartime tax payments, the private individual’s creditworthiness undoubtedly would be much lower than that of the government’s. As a consequence, the rates of interest these private individual's would have to pay would be noticeably higher than the rate at which the government could finance its borrowing. Thus, the interest burden from government borrowing that would have to be paid for out of future taxes would be less for the citizenry than the financial cost from them having to borrow the money in the present to cover all the costs of war through current taxation. Hence, it was both patriotic and cost-efficient, Mises said to those listening to his lecture, to buy war bonds in support of the war effort.
Thus, we find Ludwig von Mises explaining why, given the reality of government spending, under certain circumstances government deficit spending may be more desirable (from the taxpayers’ perspective) than a fully tax-funded balanced budget!”
Ebeling, Richard M. 2010. “The ‘Other’ Ludwig von Mises: Economic-Policy Advocate in an Interventionist World,” Mises Daily, March 26
Post Keynesians would go much further than Mises, of course.
I suppose they would say the following:
(1) pure taxation has severe disadvantages for the reasons Mises notes, but also because the rich and ultra-rich will still be left with a lot of income and ability to consume goods. Given the problems of war, a mixture of taxation, bond issues, direct central bank purchasing of Treasury debts, rationing and wage and price controls is a better, fairer and more effective way to control consumption, finance deficits and to ensure that there is a just distribution of scarce wartime goods. In fact, this is what Western nations, by and large, did in WWII, and it worked well.Further Reading
(2) Murphy asks:“The next generation as a whole is totally indifferent to whether they inherit $0 in government bonds or $1 trillion in government bonds, right?”Perhaps the next generation might be indifferent, but the current generation who live during the war are not indifferent.
Taxation takes spending power and reduces it permanently: bond issues allow repayment of spending power at a future date and offer a very safe asset in return for current abstinence from consumption. Obviously, wartime would require a very high and punishing level of pure taxation (if there were no bond issues at all), but the more bond issues a government can make, the less it needs to rely on excessive taxation. A policy of bond issues to current domestic citizens is a fairer and better method than pure taxation.
(3) following from (2), wartime bond issues – especially to the middle class and poor (via their bank and savings accounts) – have the great benefit of providing an asset that can provide spending power after a war: more spending on goods and services will create more aggregate demand and more investment and higher employment in the peacetime years that follow war. This is important since there may well be a danger of a collapse in aggregate demand. And in fact this is what happened after WWII in the US: when expectations had become optimistic, there was a private investment and consumption boom, which was in part fuelled by the drawing down of savings as corporations and businesses liquidated their bonds.
Even in WWI, Mises noted that a great deal of Austro-Hungarian state debt was held by poor classes:“The war loans [sc. of Austria-Hungary] are in the hands of domestic creditors, and so are most of the older Austrian and Hungarian government loans. It is erroneous to assume that only rich capitalists own state obligations. Our government securities were not issued solely to the rich and wealthy segments of the population. Directly or indirectly, their owners are largely the poor and poorest. The assets of savings banks and cooperatives are mainly invested in government securities, so that even the smallest savers have a stake, via the savings banks, in the continued servicing of the government’s debts.” (Mises 2012 : 224)So it is better to offer government bonds to banks and other financial institutions, at which the middle classes and poor hold their money, than hitting them all with punishing taxes. That is correct.
(4) Murphy asks:“The level of the debt they inherit just affects the volume of the transfer payments among them, but can’t make the next generation poorer, right?”It does not necessarily make them poorer in terms of real resources, unless, as Lerner notes (Lerner 1948: 256), foreigners own a lot of the debt and use their spending power to buy real resources in the future that reduce the domestic consumption of those resources.
“The Post-1945 Boom in America,” July 15, 2011.
“Why Did WWII Lift America Out of Depression?,” August 21, 2013.
“Mises on War Debt: Not What you would Expect,” May 9, 2013.
“Lerner on ‘The Burden of the National Debt,’” October 23, 2012.
Ebeling, Richard M. 2010. “The ‘Other’ Ludwig von Mises: Economic-Policy Advocate in an Interventionist World,” Mises Daily, March 26
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.
Mises, Ludwig von. 2008. Human Action: A Treatise on Economics. The Scholar’s Edition. Mises Institute, Auburn, Ala.
Mises, Ludwig von. 2012 . “On Paying For the Costs of War and War Loans,” in Richard M. Ebeling (ed.), Selected Writings of Ludwig von Mises: Monetary and Economic Problems Before, During, and After the Great War (vol. 1). Liberty Fund, Indianapolis. 216–226.
Murphy, Robert P. and Amadeus Gabriel. 2008. Study Guide to Human Action. A Treatise on Economics: Scholar’s Edition. Ludwig von Mises Institute, Auburn, Ala.
Great post. The problem with the entire framework of bond issuance as "borrowing" is that it ignores accounting. Both TSY securities and Reserves are Govt IOUs, both come exclusively from the Govt, calling issuing one type of Govt IOU (reserves) money printing and issuing another type of Govt IOU (securities) borrowing is totally misleading.
What difference does it make to consumption if the Govt issued $10 trillion in reserves instead of $1 trillion of reserves and $9 trillion in securities? The only people who are buying securities are saving anyway, there is no reason (and QE definitively proves this) that the owners of securities would rush out to spend their savings if securities were not available to save in. And the owner of a security can still spend anytime they want given that securities are the most liquid financial asset in the world (US TSYies anyway). So Im not sure what the point is supposed to be.
Securities accounts = CD accounts
Reserve accounts = checking accounts
"It does not necessarily make them poorer in terms of real resources, unless, as Lerner notes (Lerner 1948: 256), foreigners own a lot of the debt and use their spending power to buy real resources in the future that reduce the domestic consumption of those resources."ReplyDelete
So, you're saying Ricardian equivalence does NOT apply?
Ricardian equivalence is nonsensical:Delete
LK, this would be a good gotcha, if I hadn't already admitted that I had been totally wrong on this one point. That's why I'm Nick Rowe's bulldog on this stuff; I used to believe the opposite.ReplyDelete
And yes, it was this passage from Mises that initially gave me the erroneous view. What's interesting is that Mises in Human Action explicitly rejects Lerner when Lerner says "we owe it to ourselves."
"What's interesting is that Mises in Human Action explicitly rejects Lerner when Lerner says "we owe it to ourselves.""Delete
Why does he say that?
Ironically, it's in a footnote at the tail end of where you're quoting him above (page 229). But in particularly look at pp. 843-844 where he excoriates the view.Delete