Nick Rowe:
Worthwhile Canadian Initiative: The burden of the (bad monetary policy) on future generations: You can try to kill zombie ideas. Or you can try to reframe them. I'm fed up with killing the "The national debt is not a burden on future generations because they will inherit (sic) the bonds as well as the debt so they will owe it to themselves" zombie. I already killed it a year ago…. [I]f you don't believe in Ricardian Equivalence, and you think the old generation sells the bonds to the next generation, and then consumes the proceeds from that sale, then don't say that the next generation "inherits" the bonds. They don't inherit the bonds, they damned well pay for them. And if they pay for them, and at the same time pay taxes to pay interest and/or principal on the bonds they have already paid for, then that next generation is paying twice.
Oh God, I don't want to have to argue this all over again! Can I just use the argument from authority? Please? My authority is Brad DeLong. Brad DeLong knows his macro. The very fact that Brad DeLong did not jump all over me last year when I said that Paul Krugman was wrong about the burden of the debt proves that Brad DeLong knows I am right. There is just no way he could have managed to stay silent if he had thought I was wrong!…
Well that is certainly tempting fate!
Especially because I have to do something on the plane from London to Tokyo, and watching "Prometheus" doesn't seem attractive somehow…
Let's move into an overlapping-generations model. It is true that the next generation has to buy the debt from the current generation, but the next generation also gets to sell the debt to the generation two generations forward. Thus the real wealth of any generation will be equal to (a) its Haig-Simons income, plus (b) any difference between the value of the real capital stock it buys and inherits from its predecessor and the value of the real capital stock it sells and bequeaths to its successor.
If we hold constant the value of the real capital stock the next generation sells and bequeaths to its successor--and I see no reason why we should not--then incurring a larger national debt in this generation will burden the next generation only if it means (a) a less productive economy--lower Haig-Simons income--in the next generation, or (b) a smaller real capital stock bequeathed and sold to the next generation. Assume--and I see no reason why we should not--that the influence of the present on future productivity comes through the capital stock, and we are reduced to one factor: the way the present burdens the future is by transferring a smaller real apical stock to it.
That is where Dean Baker is coming from. And that is a perfectly fine place to come from. So why doesn't Nick Rowe appear to come from there?
I think he really does. In Nick Rowe's world the next generation's taxpayers are taxed to pay off the debt--and so they are losers. And in Nick Rowe's world the next generation's debt-holders are not gainers. They spend the debt-service payments they receive because bought the debt from the current generation. If they had not bought the debt they would have bought real capital instead, and would have financed their spending via dissaving. Thus the next generation's taxpayers are losers, and the next generation's debt-holders are not winners.
But, Dean Baker would correctly say, the reason that the next generation's debt-holders are not winners is because they acquire debt instead of rather than in addition to real capital--that the current generation invests less in building up the capital stock. What causes the burden is not that government debt is issued, but rather that the issuance of government debt crowds out the formation of useful capital.
No crowding-out of investment, no burden of the debt on the future.
Thus the argument that issuing debt burdens future generations is really an argument that issuing debt right now crowds-out investment by shifting resources from forming capital to working for the government, or that holding debt in the near future crowds-out investment by making people feel wealthier and shifting resources from forming capital to producing consumption goods and services.
Those are fine arguments to make, and they have a lot of validity.
But, still, if you want to argue that issuing debt in a time of deficient aggregate demand burdens the future, you need to make that argument that there is crowding-out of investment--and you need to recognize that both forms of crowding out, both crowding out via expanded government purchases and crowding out via expanded consumption driven by wealth effects, are smaller and perhaps much smaller than at full employment.
Thus when Nick Rowe writes:
But what I really want to do in this post is reframe the question. Because, deep inside every zombie, there is something that wants to stay alive. If monetary policy were doing its job right, and getting Aggregate Demand where it ought to be, nobody would be arguing for bigger deficits to increase Aggregate Demand. Obviously…. [N]obody would have to argue for imposing a debt burden on future generations just to increase Aggregate Demand now. Which means that ultimately it's bad monetary policy that is responsible for that burden of debt on future generations.
And the longer monetary policy stays bad, and the bigger the debt gets, the more worried I get about that future burden. With nominal interest rates near zero, and real interest rates sometimes negative, there is nothing to be worried about right now. But recovery will mean a rise in nominal and real interest rates. If recovery gets postponed much longer, I'm going to start to worry whether (e.g. Japan's) fiscal authorities will be able to afford a recovery.
He should be writing something different: he should be writing: "bad monetary policy that leads to either government purchases or consumption crowding out of capital formation."
Seems to me it would be much more productive right now to worry about how do we maintain normal levels of net investment in a high government debt post-interest rate normalization environment than to propose sending the economy back into recession in order to reduce government debt accumulation. Recession and high unemployment in the short- and medium-run are problems. Low investment in the medium- and long-run are problems. Government debt is a tool to avoid the first and a source of risk of the second. But it is better to keep your mind focused on the things that are real problems.
