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June 09, 2010

Comments

AJ

Paul Myners made the same point today, saying 'there was "nothing progressive" about a government that had ran up huge debt that would impact on later generations'.

I hope it gradually dawns on its supporters that the outcome of Labour's time in office has been hugely regressive, with a fantastic transfer of wealth and opportunity from young to old and poor to rich (plus some tinkering at the margins on incomes). Was that by incompetence or design?

By the way, Cameron does talk explicitly about an objective of his cuts being to reduce the burden on future generations.

Phil Ruse

I think the government *has* broached the subject of interest payments, only they've avoided using the language of 'exploitation'. The figure I heard quoted was £70 billion in interest payments alone by 2015. Yikes - which I expect is the reaction they were looking for!

The "don't cut because it will hurt the economy" is the argument they need to overcome - I don't believe it a valid argument (the cost of borrowing will go up if we fail to control the deficit) but I can see it's persuasiveness to those wishful thinkers seeking to avoid any pain.

Tom

Yes, we'll leave debt to a future generation; but we also leave them infrastructure paid for by that debt. Crossrail, HS2, new schools... these will be of far more benefit to the next generation than the current one.

Jim

How much benefit does the future generation get from paying out too much in benefits now, or employing loads of people on 'non-jobs' such as '5-a-day vegetable advisors' etc then Tom?

In fact I can't see that much of what the govt spends results in much that the future generations can physically use. Most of it is consumption for today, not investment.

pablopatito

I thought Keynes was on about fiscal expansion over the course of a single economic cycle, not between different generations. Its a short-term plan, not a long-term one. Thus, I thought Darling was planning to make cuts after the economy moves into strong growth.

I don't see how borrowing money in the short term to educate children and build hospitals would become a burden on those children when they grow up.

Luis Enrique

What are the risks involved with a "keep spending" policy, and how are "progressive" ends served if those risks come to pass?

Let's say we accumulate say another £30bn of debt over the next few years, and the interest rate starts to rise and investors become unwilling to lend to the UK Govt at low rates. I'd have thought higher costs of debt service obviously aren't helpful to progressives, but what about the likely response: printing money to pay our debts and causing inflation. How should progressives think about that possibility?

I suppose it's a tax on savers who are less likely to be poor, but not much fun if you happen to be a poor person who has scraped together some savings.

I wish some economist was capable of describing the risks, the probability distribution, as opposed to just opining on what's most likely. All I read those who view a sovereign debt crisis as unlikely (so that's anywhere between 0 and 49% chance) or likely (between 51% and 100%). And likewise when we are told about how cuts going to prolong the recession, I'd like to know what the probability distribution around expectation that looks like. It's quite possible that the "cut" path has a worse expected value but the "don't cut" path has nastier tail events. But perhaps progressives don't think the tail event (a sovereign debt crisis) is so bad.

Without knowing the outcome probability distributions associated with various choices, Lord knows how we are supposed to decide, and that's before we start thinking about whether progressive evaluate the outcomes differently to non-progressives.

Paul

I'm not sure why you say we are imposing a burden upon future generations who have to pay the interest bill. The debt is owned by us - it is our savings - so all the interest returns to us or our heirs. In any case, for a sovereign government with its own currency, paying interest is just a case of crediting a bank account. There is no real cost to anyone.

Luis Enrique

Paul,

Think about the real value of the nominal quantity of money our heirs will be getting repaid, if the govt uses printing presses to repay it. Also, if I give my heir £100 then inflation being whatever it is, that's what he gets. If I give my heir a £100 govt bond, that's the same but with the addition of my heir having to endure higher taxes / lower govt spending if the future govt is having to pay down debt.

donpaskini

I've never really understood this intergenerational argument.

High house prices favour rich older people, sure, but they also favour their children, because the wealthy older people use their savings to buy them a flat or two when they go to university, help them get on the property ladder, pay for them to go to university and graduate without any debts etc. etc.

And high house prices are bad for poor younger people who can't afford to buy, but just as bad for poorer older people who rent rather than own property.

I am also deeply sceptical about the Nick Clegg argument that stopping young people going to university, cutting jobs for young unemployed people, closing down playschemes, shutting playgrounds, sacking teachers and so on is an example of intergenerational justice.

Paul

Luis,

If you are saying that our heirs will suffer because of inflation, then you should also say that the debt burden is less because of inflation, it evens out. On your second point, you could equally well say that £100 govt bond is like £100 cash plus extra yield for your heir.

Luis Enrique

Paul,

Good point, true about inflation also meaning real debt burden will be lessened. But not lessened enough to make the future burden of taxpayer funding its repayment "no real cost". To do that, you have to argue that borrowing and spending today raises the path of future income sufficiently; if you can do that then you really do have a free lunch.

I think your second point is a wash - there is no extra yield - cash equivalent to face value of the bond also has a yield when invested, and holding the bond is just one way of investing its face value, if you see what I mean.

Paul

Luis,

I think this is exactly the point. We spend today to increase demand from its current depressed level, thus increasing real GDP.

On the second point, the non-government sector as a whole has nowhere to invest sterling other than in govt bonds or increased reserves with the Bank of England. The govt issues bonds to provide extra options to savers and absorb excess reserves, not because it needs the money in order to spend.

Luis Enrique

Paul,

Well, temporarily closing the output gap or engineering a durable change in the path of GDP are very different things. The latter is required for debt repayment to have no intergenerational burden type issues, I'm not sure even Krugman et al. would claim that's what fiscal expansion in recessions does.

On the second, sterling can be lent to consumers, firms and foreign governments.

Paul

Luis,

I think it is all about the real economy. I am saying that debt repayment is never a burden for any government at any point in time per se. I don't see why future generations will suffer unless there is a lack of real resources for them. After all, suppose the govt built a huge stash of GBP in its account at the Bank of England. How will that help future generations?

Sterling can be lent to consumers, firms and foreign governments but what do they do with it? They are all part of the non-govt sector and they either pass it on to other parts of the non-govt sector, buy gilts or put it in uk banks' reserves.

Neil

A little late to the party, aren't we Chris?

"The principle of spending money to be paid by posterity, under the name of funding, is but a swindling futurity on a large scale." – Thomas Jefferson, 1816.

Luis Enrique

Paul,

OK, I hope I see where you are coming from. Why does borrowing reduce the quantity of real resources available to future generations? I suppose there might be some reasons for believing that fiscal expansion / contraction moves total real output, so expansion now means future contraction & shrinkage. The other thing to ask for any given quantity of real output at any given time, what does debt do to the allocation of that output between the young and the old, as of that date. Doesn't expansion shift the allocation in favour of the young and contraction in favour of the old?

I suppose you may not believe that expansion now implies future contraction. I think it can do.

(still not with you on the second thing; I thought we were talking about some 'extra yield' you got from inheriting a bond rather than cash. but this is incidental).

Ralph Musgrave

IT IS A PHYSICAL IMPOSSIBILITY TO IMPOSE A BURDEN ON FUTURE GENERATIONS. E.G. IT IS PHYSICALLY IMPOSSIBLE TO USE CONCRETE AND STEEL PRODUCED IN 2030 FOR INFRASTRUCTURE INVESTMENT IN 2010. DOH.

There are a few minor and near irrelevant exceptions to the above rule. But basically the whole idea of "imposing a burden on future generations" is codswallop.

Ed Seedhouse

If we can pass a debt on to future generations, why can't future generations pass that same debt to their descendants and so on forever?

The whole idea of passing a financial burden onto future generations is simply incoherent. It is one of those formulations of words intended to look very scary that, upon rational examination, turn out to be utterly meaningless.

For every borrower there must, ipso facto, be a loaner. For anyone who owes there must be someone else owed. Therfore at any given moment the total net debt of humanity is exactly zero. And this will be true for any future time as long as we have a financial system. There is no "debt" to pass on.

Tom

"Now, feel free to object to this reasoning. I’m not sure about it myself"

I think my main objection is that it's too late - I'm 36 and my generation is already paying for the exploitation from the Thatcher attacks on the welfare state and thereafter. It's therefore doubly exploitative that the generation before not only benefited from the more generous pre-Thatcher state (and things like lower house prices which are related) and now, in power, admonishes me to shoulder the burden on behalf of future generations - I can't save for my son's higher education, pay higher rail/bus fares, pay more VAT, see an effective cut in wages (already had this for two years, and adding 500,000 unemployed to the market isn't going to help) and so forth without seeing my standard of living eroded and I'm one of the lucky ones in that I'll probably hang onto my job - not a few of my cohort will be shortly kicked onto the dole queue.

It would be nice to assume that the millionaires in the Cabinet and their non-dom backers would share the pain but somehow I expect they'll pass when the plate's handed round, they're Tories.

ian  amor

Is it not time to stop the bleeting , for whatever reason .If all focussed on solving the solution it would be much nearer a solution..

Essentially there is only one way and the quickest ..new business to creat wealth and in the knowledge based area ;because it is the quickest .

The technology is available and GB has many brilliant original thinkers ..if only we coulod harness that talent .

Singapore is a role model how this can be done ..The significant thing is we could do it much quicker ..

ian

Luis Enrique

Ed,

That would make sense (I think) if the quantity of debt being passed on was stable, in some sense, but there are times when debt is being accumulated rapidly and times when debt is being paid off rapidly, and I think that has genuine, coherent, meaningful inter-generational effects.

pablopatito

Ed,

Aren't we borrowing from the Chinese now, and our children will have to then pay back the Chinese children in twenty years time. So we're just talking about a delayed transfer of UK wealth to China. Which is probably a good think for humanity in general, but not for the UK specifically.

Fred Kapoor

@donpaskini me neither, it seems like everything is more confusing than what it should be. I also liked the comment by @Luis Enrique " there are times when debt is being accumulated rapidly and times when debt is being paid off rapidly, and I think that has genuine, coherent, meaningful inter-generational effects."

Neil

@Ralph: Don't be silly. Of course it's possible to impose a burden. When the government takes on debt, it assumes the responsibility for paying back that debt. Since the government has no source of income other than taxes, and since those taxes are paid for by the work of British citizens, the government is effectively promising its creditors the labour of future generations.

Or to put it more provocatively: Selling our children into tax slavery.

Ralph Musgrave

Louis Enriques: The fact that debt is rising or falling is irrelevant: Ed Seedhouse’s point above still stands. That is sums owed and sums borrowed net to nothing. Put another way, those who don’t own Gilts pass on a liability to their children (the obligation to pay taxes to fund interest and repayment of the national debt). But those who do own Gilts pass on an asset. The sum is always zero in a closed economy.

Pablopatito has hit on about the only way that it is possible to pass on debt to the next generation. That’s where a country owes a significant sum to another country. This is relevant in PIG countries, but near irrelevant elsewhere because while for example foreigners do own a significant chunk of UK National Debt, UK individuals and entities own singnificant chunks of other countries’ national debts. The two cancel out more or less.

Re Neil’s point, I think that is answered in the above para but one. I.e. government is only a middleman. National debt is an asset for one portion of the population and a liability for another portion. For an entire generation, the two net to nothing.

Luis Enrique

Ralph,

Yes in a closed econ debt nets out, but this doesn't mean changes in gross debt have no inter-generational implications. I could send you my intermediate-macro notes!

yes Neil has missed the fact that somebody's debt is somebody else's asset.

Ed Seedhouse

Luis: "That would make sense if the quantity of debt being passed on was stable, in some sense"

It is stable, the total net financial debt of humanity is always exactly zero by definition.

"but there are times when debt is being accumulated rapidly and times when debt is being paid off rapidly"

But no matter how rapidly or slowly it is being "paid off" it's net total remains always at zero. When debts are being paid quickly then loans are being eliminated equally quickly.

"and I think that has genuine, coherent, meaningful inter-generational effects."

You can think this all you want, but where's the evidence?

What has easily observable "coherent, meaningful, inter-generational effects" is the real wealth created or destroyed by the real physical economy, the actual activities of people as opposed to the movements of money.

For example, when we've sucked up all the oil future generations will have none.

Financial debt, on the other hand, has no such effect.

Alex

"This fails on two counts. First, this recession could be a supply shock as well as a demand one; it might have permanently reduced potential GDP"

Okay, "could" does not mean "was".

But anyway, this criticism is incoherent. It turns into what Brad DeLong described as:

"a great forgetting of technological and organizational knowledge, a great vacation as workers develop a sudden extra taste for leisure, or a great rusting as the speed with which oxygen in the air corrodes speeds up and so reduces the value of large things made out of metal"

http://delong.typepad.com/sdj/2009/09/economic-history-and-modern-macro-what-happened.html

"It's only fair that we share at least some of this pain"

That sounds remarkably Austrian.

"Secondly, it's not obvious that this objection has moral force. Workers in the west can afford to be exploited by bosses, but this doesn't stop Marxists complaining. Nor do libertarians stop complaining just because rich people can afford to pay taxes. If exploitation is wrong, it doesn't become right simply because it's victims are rich."

That criticism makes no sense whatsoever. Remember, the point was that aggregate demand should be stimulated by government, and this makes the people of the future richer. It's not that they are rich, it's that they are MADE rich. It's not exploitation to make someone richer in future.

Plus what Ed Seedhouse said.

Luis Enrique

Ed,

come on, I have already written that in a closed economy debt nets to zero, so why do you think repeating that it nets to zero is going to constitute some sort of rebuttal? Obviously I am talking about, in this instance, gross public debt, and the intergenerational consequences of changes in that stock of gross debt.

The easiest conceptual framework to see this is the "overlapping generations model" used in macro, where in any given period there are two generations, young and old, and in each period the old die, the young become old and a new generation of young is born. In that setting, it's quite easy to show that changes in gross debt can benefit of burden certain generations.

I think this is without assuming that changes in taxation to finance the debt have an impact on total real output, but I'd need to double check that.

As for evidence, well that's a good question. I'm not sure what evidence for or against this would look like.

Here is one paper on the subject I found by googling. I haven't read it:

http://www.jstor.org/stable/3440288

Neil

Ralph - so it's OK for the government to sell the labour of my unborn children to somebody else, so long as the buyer is British?

I guess in that case you'd have no objection whatsoever to turning all your assets over to me, because your loss and my gain (over the entire population of the two of us) net to nothing.

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