Wait, the National Debt Isn't a Burden to Future Generations?
January 23, 2012 at 9:37 AM It's a widely held belief that by growing national debts today we are burdening future generations. On Jan 1, however, Paul Krugman wrote an op-ed (and a blog post) arguing precisely the opposite. He says we are making a bigger fuss than we should:
Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing. They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments.
This is, however, a really bad analogy in at least two ways.
The first is that unlike an over-borrowed family, a government doesn't have to pay back its debts. As long as national "debt grows more slowly than the tax base" everything is a okay. The second is "a point almost nobody seems to get": while the over-borrowed family owes money to someone, governments like the US owe most of their debt to domestic individuals and entities. Or more simply, US debt is money we owe to ourselves.
This is because for every liability there is an asset. And when it is domestic entities acquiring assets backed by US liabilities, in aggregate they offset each other. The nation as a whole isn't any more or less wealthy. And because the same assets and liabilities will be inherited by future generations, their net wealth position doesn't change either. He adds that this view isn't entirely right because there are a lot of foreigners holding US debt. So for Krugman, the layman's worry about "passing on our problems to our children and grandchildren" is not wrong per se but overstated.
Krugman's piece promptly lit a 20+ day wildfire which swept across the econo-blogosphere.
(Jan 1-2) Nick Rowe: Sorry Mr. Krugman, but that's just plain wrong (part 1)
(Jan 2) Steven Landsburg: Krugman is right, in fact, he's more right than he even knows
(Jan 2) Nick Rowe: No guys, timing matters. Here's the proof (from the follow-up to part 1)
(Jan 6): Steven Landsburg: Not quite Nick. We can choose to save now. It's up to us.
...Fast forward through endless commentaries...
(Jan 20) Steven Rattner: Is this still a discussion? I can't believe this is a real discussion
(Jan 20) Dean Baker: Yes, Mr. Rattner it is a real discussion and you are wrong
(Jan 21) Paul Krugman: My Dear Lemmings! I never said debt didn't matter, just that it doesn't much as much
(Jan 22) Robert Waldmann: Wow, how can Dean Baker be this wrong
(Jan 22) Nick Rowe: Still no consensus... this is a sad day for everyone
It's been fascinating to watch, often difficult to understand, and still leaves me very confused. I didn't post this to debate the minutiae of either side. I posted it because it's another indicator of just how broken the study of economics is. Is increasing the debt good or bad for future generations? The question is simple enough. How can there not be more consensus among "the experts" for its answer? Truly baffling. I charge the reader to find another field of academic study more disjointed than the current state of macroeconomics.
Reader Comments (3)
Short version: we won the argument, I think.
I agree with you: This whole thing has been hilarious and makes economists look really bad.
I don't think the question was "good or bad". Bob Murphy changed his opinion on the topic without changing his policy preferences.
Which must means he's one of those indifferent non-Ricardians!