|0:36||Intro. [Recording date: March 14, 2012.] Russ: Our topic for today, particularly on the national level, and particularly for folks in the United States, though we may bring in some issues related to debt around the world. We want to try to get at what is a very complicated issue, which is often called the Burden of the Debt. Is there a burden of the debt in the future? Some people say that when the United States borrows money today and pays it back down the road, as long as the bonds are bought by Americans, the phrase we often here is: We owe it to ourselves. And: therefore there is no debt burden. No burden of the debt on future generations. A lot of people find that unintuitive, and we're going to talk about whether that's true or not. And we are going to draw on some writing by Paul Krugman and also James Buchanan, I expect, in talking about the different views of debt. So, I want to start with a family. A family that goes into debt to buy a house. Is there a burden of that debt in the future? What's sacrificed, and what's gained, I think is useful. Again, a lot of people argue that that's a bad analogy for debt at the national level. But I want to start with the family level, the personal level, because I think it's a useful way to set the debate and discussion. So, when a family borrows money and goes into debt, say, to buy a house, or have a lot of fun, is there a burden? What are the costs and benefits to the family? Guest: Of course there's a burden. There's a cost. Jim Buchanan--we shouldn't get into it here because it gets way too esoteric--himself distinguished between the subjective cost and the objective cost. But speaking just in plain language, when you undertake a project that you have to pay for, whether you pay for it with current income or whether you pay for it out of future income, you have to pay for it. You have to give up something to pay for it at some point. You have to pay for whatever you consume today. Let's recognize at the very start that just because something has a cost doesn't mean it's not worth buying. Almost everything has a cost. So, to say something is costly doesn't mean it's not worthwhile to do. Let's also make the related point that because something is financed with debt doesn't necessarily mean that that decision to finance it with debt is irresponsible. There are many good reasons for financing things with debt instead of out of current income. Buying a home is typically regarded as one of the more responsible things to finance with debt. There's no moral opprobrium that attaches generally to debt. Public or private. Russ: So, let's talk about that family. So, if I go into debt and I borrow $250,000 to buy a house; and I'm going to presume that I expect to have the wherewithal to pay that back. Guest: And the mortgage lender expects it, too. Russ: That's the point. So, a private individual, until this recent dysfunctional era of U.S. mortgage markets, that is sort of coming to an end--it may not, we don't know what is going to happen--but historically, if you wanted to borrow a lot of money, your ability to borrow was limited by the expectation of your ability to pay it back. Things could happen that were unexpected. Inflation is one. Losing your job is another. There are all kinds of reasons that you might have trouble paying that back. But the mortgage lender knows that, and takes that into account. That's part of the reason it has to be compensated with interest. Which is clearly one of the costs at the personal level of borrowing money. You have to pay back more than you started with. And at different times that burden is going to be different, because of different interest rates. And inflation will change what actually happens. You have an expected payment in terms of what you will have to give up in consumption. It may turn out to be different if inflation is different than is expected, which it often is. But if I am going to go and borrow that $250,000, the lender expects me to be able to pay it back. What does that allow me to do? Guest: It allows you to transfer future income into the present, in effect. You and the lender, both, make an estimate. Obviously it has some amount of risk associated with it. But you and the lender make an estimate that your future earnings will be sufficiently large that your lack of liquidity today--your lack of cash today--should not be a barrier to you buying this asset or buying this consumption item--however you classify it today. So, you are in effect telling the lender: Look, I'm going to make this future income; I'd like you to advance me the future income today, and I will return it to you with interest in the future. And the lender makes a similar assessment: I believe that you will have that future income; I believe it well enough that I will advance you that future income on your promise to repay me. So, going into debt allows us to transfer income from our future into the present. Now, let's take an example that's different from a house. The house, by the way, is the collateral. It's the insurance policy that the lender has that things might go awry; and of course the value of that collateral is uncertain. Which we are seeing right now. Sometimes it turns out to be less than what was borrowed, ex post. But ex ante it's not going to be, generally, if things are working as they should.|
|7:09||Russ: But let's say I go out and instead of borrowing $250,000 to buy the house, instead I borrow $250,000. I own a house; I own it free and clear. I go to the bank and I say, I'd like to borrow $250,000, called a line-of-credit or an equity loan, because I have equity in the house. And I am going to take that money and I am going to throw a party for a bunch of my friends. A heck of a party. Maybe a lot of friends. And I'm going to spend $250,000. It's pretty clear what I've done in that case, which is? Guest: You've spent a lot of future income to have a really big party today. As subjectivists, we can't say for sure absolutely that that was wrong. I can't get into your mind if you do that. But most people, a fairly noncontroversial statement, is that you are behaving irresponsibly. $250,000, assuming your income is what it is--if you are Bill Gates and you are spending $250,000 that's one thing, but you wouldn't have to borrow the money, in that case. Russ: Well, I'm going to disagree with you. I don't think there's anything irresponsible about it. I've decided--and again, maybe this is the Buchanan distinction--but I've decided I would rather have a lot of fun now, and a lot less fun later. Guest: Okay. Let me concede. At the individual level, there's no way we can say, no way an outside observer can say it was good or bad. Some people do behave irresponsibly; may wake up in the morning. Russ: I might regret it. Guest: Ten years of time you may think: Boy, I wish I wouldn't have spent $250,000 of my future income in order to have a one-night party. But you are right. There is no way, at least at the private level--one adult can assess that decision. Russ: And the reason I gave that example is that it's pretty clear there's a burden. I pay a price for that. It may be worth it; it may not be worth it. You are suggesting it may be unlikely it's worth it. I agree with you in the sense that most people don't do that, at our income levels. Guest: Yeah. If your child did that-- Russ: I'd stop him. Maybe. Depends on how old they were. But the point is that you would never want to say: Well, it's only a loan, so it's free to me. A child actually--one of the fun things about child-raising is that when you go to the grocery and you give this little piece of plastic and they give you all these bags of groceries, that looks like magic. And you explain to them: Well, it's not so magic. They go and take stuff. Giving them the card gives them the right to take a lot of stuff out of my bank account. "Oh. It's not free." It looks free. It looks like you just pass the card through this magic device, the scanner; my card gets kind of warm after a while because I've been running it through too many times. So, when you go out and you borrow $250,000 to throw a great party, the costs are in the future. The benefits are today; the costs are in the future. All you've done is transfer future benefits into current benefits. Which means you have lower benefits down the road. Because not only do you have to pay back the $250,000, but you have to pay it back with interest. Because you've had access to the money. You might die. You might not keep your job or keep your promise along the way. The lender is going to require, typically, both collateral and a premium for letting you use their money. Guest: Right. And in a world of inflation, a premium for the lender to bear the risk of potentially higher-than-expected inflation. Russ: Meaning, when you pay back the money, it might not be worth as much as before. Guest: Yeah; so the lender doesn't want to be paid back--if the lender thinks he is going to be paid back in dollars that are worth less than what he loaned, he is going to attach an inflation premium to the interest.|
|10:58||Guest: In this example, and I don't want to get ahead of you, it's important to point out here that the person who pays for your party--in common sense--no one would say it's the bank. No one would say it's the bank's depositors. It's you. And you don't escape that payment just because the money advanced to you today to buy your party paraphernalia and party food and drinks comes from a third party. You know you have to repay it, and so the burden is on you to repay it. The fact that that burden doesn't become manifest on you until some time in the future does not mean it is in any way a lower cost to you than if you pay for it out of $250,000 that you had sitting in your bank account. In both cases, you pay for it. Russ: Yeah, and I want to add another twist, which I think will come in handy in what generalizes and what doesn't in the national case. The fact that I can push the cost to the future rather than today is tempting. Now, part of that temptation is rational--I might not be here when it's time to pay it back. Of course, the bank knows that. That's why there's collateral, right? Guest: And an interest premium above the pure time preference aspect. Russ: Absolutely. But it's always tempting to push off costs to the future for future benefits today. And as adults, we try to learn that. Our children struggle to learn that. Our children in general want benefits today and costs tomorrow, and have trouble putting aside money for the future. As adults we have had some experience with that, and we realize that that can be irresponsible, immature--whatever you want to call it. But inside of us, benefits today and costs tomorrow has a tremendous appeal. For obvious psychological reasons. Guest: Evolutionary as well. Russ: Right. And so you've got that urge to borrow money. And the marketplace tempers that urge. It forces you to pay a premium, as we've been talking about; and if you mess up and you buy something like an extravagant party, which as fun as it is turns out not to be as much fun as going 20 years of living badly to pay off the loan, you then learn that it was a bad year. Ex ante it seemed like a good deal, but that was before the fact. After the fact, it turned out not so well; and as you grow up, you learn to try to anticipate those feelings for consequences. And I would argue that's what growing up is. That's a key part, to a large extent, of being an adult. Do you want to say anything more? Guest: Everyone knows that in spite of our protestations about the sanctity of subjectivism, which I agree with-- Russ: The sanctity of what? Guest: Subjectivism. We can't second guess other people's preferences and behaviors. Everyone knows. The world is full--at least the industrial world is full of a lot of people who have credit card debt that they wish they didn't have. That they now regret having. Russ: That the toys they accumulated, the TVs--Guest: Not just in the sense that they wish they could have gotten these things for free. We all wish we could get what we consume for free. But in the sense that: Boy, I wish I had had more self-discipline yesterday or last year, and would not have borrowed the money for whatever it is I bought so I wouldn't have this credit card debt hanging over me today. We all understand the temptation to consume now and delay the costs until the future. And modern credit institutions allow us to do that; although, as you point out, the interest rates do temper that proclivity. Russ: And the flip side--you started to say it, actually, because it is such a useful phrase--the flip side is delayed gratification. Instead of saying: I want the fun now and I'll pay for it later; what savings is all about, as opposed to borrowing, is saying there's stuff I want. I can't have it right now. I could, but I'm worried about the consequences of that, so I'm going to delay my gratification and have it when I'm ready to pay for it and the costs are not as high. Guest: We are both parents, and I'm sure the case is true not only for you but for any parent. No parent has any trouble teaching his child to enjoy things now. We don't have to say: No, no, Junior, you want to consume; you want to have more fun now. Part of what parents teach children is to delay gratification. Or the importance on many occasions of delaying gratification. It would be a very odd little human being indeed who didn't have to be taught that by parents or some guardian. Russ: There aren't many frugal children. Guest: No, it's just not natural. Russ: Just a footnote: I think one of the great lessons of time management is understanding the difference between important and urgent. There's a lot of urgent things that are not important; and if we only do the urgent things we don't end up having a lot of time for the important things.|
|16:41||Russ: Now, let's turn to the national level, and let's ask: Do these lessons and implications we've been drawing for debt apply when a country goes into debt--we should be careful. I want to use the word government, not a nation. When a government borrows money, spends more than it takes in in revenue, and--there's different things government can finance with debt. And we could debate the appropriateness of some expenditures versus others. So, we could talk about, in a war that threatens the very essence of a country's survival, whether that's a good thing to borrow money against; whether it's to have a party at the national level, whether that's a good thing; transfers to special interest groups; infrastructure which in general would have a future benefit that would stretch over time. Guest: Assuming it's not a bridge to nowhere. Russ: Right, as long as they are bridges to somewhere, bridges that the private sector wouldn't build very well. So we could talk about a range of government activity. And I think the extremes would be payments to friends, special interest groups such as farm subsidy payments, or, to my mind worse--building things that are not productive, the use of real resources, which often involves payments to friends, so the people who build the bridges to nowhere benefit but you are not just giving them a check. You are actually getting them to pour concrete and use up real resources. And at the other end an attack on a country whose very survival is at stake and goes into debt to finance the war expenditures. Let's talk to start with about differences if any between the case we just talked about at the family level versus the national level. Guest: I think there are a lot of similarities. A lot of things are identical. That everything is identical--when you make a private decision to borrow, you are not imposing a cost on anyone. You are imposing on maybe your immediate family-- Russ: Unless you lie about your income or ability to pay it back. You could impose costs on other people. Guest: Right, but even there, your credit rating suffers if you are found out of falsifying a document. So there are a great deal of similarities, the analogies between private and public debt hold in a lot of ways. But there are differences. Russ: So, you just gave one that's important. Guest: It's a vitally important difference. Russ: Because it confuses a lot of the discussions, as we'll see. So, the first difference is that, in the case of private--let's call it personal debt--in the case of personal debt, I make the decision and I bear the cost. And in the case of the public debt, there's a whole bunch of different people who are going to be involved in that decision. Not just one decision-making unit. And the costs and benefits are going to fall on different people. We'll get into that. What other differences do you think are important? Guest: I think that's the main difference. You have the decision-making process to go into debt and the decision-making process that determines who will repay the debt and how it will be repaid is very different in both circumstances. And we lose sight of that when we talk about "the nation" going into debt, when we speak as if we have one big collective mind choosing our debt today and being responsible for repaying that debt in the future. Actually, a related difference then--well, I'll just leave it at that for now.|
|21:08||Russ: There's one other difference I think is important, and this certainly is going to be an argument that the justifiers of borrowing are going to invoke. Like many issues in economics, unfortunately this one has ideological and methodological baggage alongside it. So, historically--by which I mean the last 80 years or so, people who want government to be bigger typically are going to be people who are associated with the Keynesian theory of macroeconomics, and a view that borrowing is overly feared; that we should be less fearful of borrowing. Those of us like myself, yourself, who like to see a smaller, more limited government tend not to be Keynesians and tend to be fearful or perceive the costs differently than the other side. I want to get that on the table to start with. It's easy to talk about this as if it's a pure economics conversation, but there's political and ideological baggage alongside it that we should be honest about; and I want to try to bring it out on both sides. But to give due to those on the other side of our view, the people who say that when government borrows it's not as bad, or it's cheaper, or it's more justifiable than at the personal level; public debt is very different from private debt--one of the arguments they make that I think is correct is that I as an individual cannot borrow perpetually. I cannot live beyond my means, in general. There may be moments when I borrow, for example, to buy a house; but then I'm going to pay it back. And it would only be an unexpected outcome that would allow my net borrowing to be other than 0. Meaning I lose my job, or whatever. So, I can rearrange my consumption. Guest: But over time you can't consume more than you produce. Russ: Other than through good fortune or bad luck, one side or the other. And the reason is that the lender--when I'm 80 years old and retired it's a lot harder to borrow money than if I have a nice, full-time job. Guest: No one's going to give you a 30-year mortgage when you are 80. Russ: Correct. Well, if it's short and small enough and you have other assets. But in general it's a lot harder. Two reasons. One is that you die. And the second is because you die, your lifetime earnings pattern typically has an inverted U-shape. That when you are younger, your earnings climb, and when you get older they fall. Part of what borrowing allows you to do is smooth the consumption over that rather than living poorly and then living well and then living poorly; most people, for human psychology reasons, just the nature of our satisfaction and life, want it to be a smoother stream and not as jerky. But that's different at the national level. Guest: I'll concede that, but I'm not sure how relevant that is, actually, for the thrust of the arguments that are made to excuse gargantuan public borrowing. Russ: I like that term, gargantuan. It has a nice--a neutral term, Don. But I think it's relevant in the following sense. In a minute we'll give some examples and we'll see how relevant it is or irrelevant. But certainly if a nation is productive--meaning if it has good institutions and good laws and its people are innovative, as the United States typically is; and our productivity is growing over time, our product is growing--we have productivity--and as a result, it's possible--it may not be desirable but it's possible at the national level, as it is not at the individual level, that the United States could perpetually, the U.S. government certainly, could spend more than it consumes. Somewhat it can, and I hate to bring this up, but it's useful--I hate to bring it up because it's just another level of difficulty in the conversation--but certainly a country can run a trade deficit over a long period of time, meaning it can consume more than it produces--a capital account surplus, if nations want to invest in the United States by having a stake in our assets. If those assets are productive and growing we can at any point in time consume more than we produce as a country. It's not debt, as you have written many, many times; and I've written a few times; we certainly agree on this. It doesn't have to be debt at the trade deficit level. Guest: It's not debt by identity. Russ: Right. But that's one way in which a nation can consume more than it produces, year in and year out. And I think Great Britain did it for decades over its history, a century. Guest: Well, the United States has done it with relatively few exceptions for 400 years. What is today the United States. Russ: And certainly then--to move away from the trade issue and talk about spending--the U.S. government--doesn't mean it's desirable--but the U.S. government can year in, year out spend more than it takes in in revenue as long as the world finds that investment in the U.S. government debt to be attractive and there's confidence that the U.S. government is going to be able to pay back those promises and keeps those promises. That when the nation reaches either a size of debt or a problem with its inner economy and tax revenue that it can't do that, that's when you have a default risk. But in theory, unlike an individual, certainly a nation can borrow perpetually, if it does not over-borrow and stays within its ability to repay. Agree or disagree? Guest: Yes, of course; but the same can be said of a corporation. Russ: Yes, that's true. Guest: There's nothing special about government. Now, the government does have a special ability that private corporations don't have and that is that today's government have sovereign monopoly power over the money supply. That gives them an added attractiveness to borrowers--excuse me, to lenders. If I know that you have, that Uncle Sam has just given you, Russ Roberts, to print as much or as little dollars as you want, I am more likely to lend to you because your risk of default is a lot lower. If your income doesn't rise, then you can always revert to the printing press to pay people. Russ: I disagree with that. I think that's a negative for the lender. Guest: Oh, no, not at all. The government can abuse the power, of course; it can cause inflation to be so high that lenders not longer wish to be repaid in those. Russ: Yeah. Guest: But-- Russ: It reduces the risk of absolute default but it creates the risk of implicit default. It seems to me that the-- Guest: But from the perspective of the individual lender. Russ: China? You think China is comforted by the fact that the United States can print money when it lends it money? I think it goes the other way. I think China is anxious and they've explicitly said so, that there's a temptation on the part of the U.S. government to inflate the debt away. And I think it's a very real risk. Guest: Well, they are still lending money to us. Russ: That's true. Guest: They are still buying American bonds. I haven't thought through this, but perhaps there's a difference between very, very large lenders acting as a single entity, such as a major foreign government. But at the individual lender level, the individual-- Russ: When I go out and buy a Treasury bond. Guest: I think the fact that the government has access to a printing press at the margin makes it more attractive to lend. Russ: What I thought you were going to say is that it's ability to tax. Guest: Well, it has that, too. Russ: I think that's the real comfort. Guest: It has that as well, of course; and that adds to it too. But even that can be abused. If the tax power, much like the inflation power, if it's over-extended, then the government can be thrown out of power, or it can collapse. Russ: Absolutely. Guest: None of these things is guaranteed. But yes, the power to tax, the power to issue money created de novo at the margin at least for relatively small lenders makes lending to the government more attractive than otherwise.|
|30:56||Russ: Let's now turn to James Buchanan's insights into this. Buchanan, in 1958, wrote a book called? Guest: Public Principles of Public Debt. Russ: I had not read the book until recently. Don and I talked about this podcast and he got me to read some of the book. And Don has written about it at CafeHayek, our blog together. What I think is creative--in a way it's so straightforward you could argue in a way it's not creative, but sometimes it's hard to see things that are out in the open--what Buchanan has done in that book. It's a very short book; it's a very dense book. He thinks slowly and carefully. Guest: It's only 160 pages in print, but it's about 800 pages in thinking. Russ: It's complicated. You've got to read it a few times. I read it very slowly. But what I think is useful about his approach, and quite important and striking, is he very explicitly rejects the notion that the national government borrows money and repays that money as if it were a single individual. Because we know we are a nation of different individuals. And the people who lend the money, the people who get the government spending, the people who pay back the money, and the people who receive that payback are all different people. Different groups of people. So, Buchanan's simple point in a way is that you have to take that into account. You can't just say we owe it to ourselves. Because there's no "ourselves." Guest: You can't be misled by Keynesian aggregates, is what he's saying. Russ: Right; there's no ourselves there; there are different groups in our country that borrow the money, pay it back, and receive it. Although there is very little in the first part of the book that is explicitly about Keynesianism, there is a Keynesian aspect to this, which is that, to some extent in the Keynesian view, aggregates are what matter. And things wash out because of that. Whereas in the Buchanan view, and I would say my view and yours, they don't wash out all the time. Let's go through this. Let's start with Buchanan's argument--again, we don't have to think about what kind of government spending it is--let's walk through who pays for it and who gets the benefits. Guest: Let's assume that the government spending is regarded by everyone as being justified; no matter what that might be, it's justified. Buchanan, in 1958, was reacting against what was then a fairly new theory of public finance. He called it the New Orthodoxy. And it emerged in the 1930s right along with Keynesian economics. And it served--although it's probably not necessary for Keynesian economics--it certainly served the Keynesian agenda and people who accepted it were Keynesians. They bought into it. Because, if you bought into it--and I'll explain in just a moment what the "it" is--you didn't worry about debts that you encouraged the government to undertake. The "it", this New Orthodoxy, the new theory of public finance that emerged in the 1930s, was that because the debt doesn't come due until some time in the future, to the extent that that debt is payable to people within the same political community that undertook that debt, then the debt is not a burden. Russ: That is Americans, in this case. As long as the borrowers are Americans and the lenders are Americans, the people who buy the Treasury notes are Americans. Russ: Because it's so important in Keynesian economics for the government to be able to borrow--functional finance--and because prior to Keynes there was, for better or worse, certainly in the economics profession, a bias against government indebtedness in peacetime, the Keynesians had to, at least psychologically to get rid of that. Because we have to be able to go into debt in peacetime on many occasions. And the Keynesians then were able to say because the debt is owed to people in the future, and because those people are citizens of the same country we belong to, it's no problem. "We owe it to ourselves"--that was the famous phrase that justified the debt--so it's not a burden. Buchanan said: Nonsense. Let's look at the individuals involved here. We have citizens/taxpayers, who somehow participate in the political process. We have politicians, who obviously participate in the political process. We have lenders--these would be people who buy government bonds, lend money to the government. And then we have future taxpayers, people whose tax bills will rise when the debts come due. And the bondholders--they can be either the same people who lent the money today or they can be the heirs of the bondholders. Russ: Or the people they sold the bonds to. But that's confusing, I think. There's one other group--those who benefit from the spending. Which could be the nation as a whole, for fighting off an invader. Or it could be the friends of someone.|
|37:42||Guest: So, let's take the war example, which is the example most people regard as the most justifiable use of debt when we all believe the threat is real and imminent. So, government borrows a trillion dollars to fight off an invading enemy, because it doesn't have the liquidity today. Private lenders--and let's assume they are all American-- Russ: We are going to play within the Keynesian rules as much as we can here. So there are no foreign holders of U.S. debt in the story. Guest: So, Americans lend, voluntarily, a trillion dollars to Uncle Sam. Uncle Sam spends that money effectively in winning the war; America survives. The debt comes due 30 years from now. All the holders of the bonds are Americans; Uncle Sam honors its debt commitment. It raises taxes. Or reduces spending. Let's assume it raises taxes. The story is not fundamentally different. It raises taxes 30 years from now to pay off the debt; so some Americans have to pay, or Americans in one capacity have to pay higher taxes; Americans in another capacity receive the principle and interest on the debt that Uncle Sam took out 30 years earlier. Buchanan says: Even though we might agree--we do agree in this case--that the debt was justified, it is still a burden; and this is the crucial part. The people who bear the burden of that debt are the future taxpayers, the taxpayers 30 years hence, whose taxes rise in order to pay off the debt. The fact that, 1. The debt holders 30 years from now are citizens of the same country of the people who paid the debt, that doesn't mean there's no burden to the debt. The fact that the resources to fight the war were of course contributed and literally consumed 30 years ago does not mean that the people who contributed those resources voluntarily bear the burden of the debt. Those are the bondholders. They chose to lend the money to Uncle Sam in return for--additions to their financial portfolios that made them better off. They are not the ones bearing the burden of the war. The burden has to fall somewhere, and it falls on the people who pay off the debt, and those people are the future taxpayers. The nationalities of the bondholders when the debt is redeemed is utterly irrelevant. The burden is shifted to the future, and its real. It's not reduced just because, number one, it doesn't exist today, when the debt is taken out, and number two, contrary to what the Keynesians say, contrary to what Paul Krugman says, it's not reduced or disappears just to the extent that the bondholders are citizens of the same country as the taxpayers whose taxes rise to pay the debt. Russ: So, I think in the Buchanan story, the way to see it is that the bondholders, the people who lent the money to the United States--and obviously some of them died, have heirs; that just confuses things; it's not relevant--so let's make an unrealistic assumption for the sake of understanding the economics: let's assume they are all still alive when the debt comes due. Might be a 5-year bond. Guest: Some of them will be. Russ: Some of them will be. So, they are better off, slightly, by the attractiveness of this opportunity to lend the money relative to other opportunities to lend money. The people today who received the benefits of the government spending--they are not killed in a war as a result; or it could be that they have better bridges and roads-- Guest: And we could even say that people in the future-- Russ: I'm going to get to that. And it could be these benefits extend over time. Guest: And I would assume they did. Russ: Yeah. They are not enslaved by a foreign power, or they get to enjoy the bridges that were built. The special interest payoff is a slightly different story; we could talk about that later as an exercise. So, whatever those benefits were--which we think are huge; we are not disputing the value of the benefits--it's clear who pays for them. In one dimension. It's a little unclear. But in one dimension, it's clear who pays for them: the people who have to finance the taxes to pay back the bonds plus interest. Guest: Oh, I think it's completely clear who pays for it. It's those people. Russ: Well, the reason I want to say it's not so clear--here's why I want to say it's not so clear; and this is a confusion that may be unproductive. We'll see how it goes. And this is why this is such a difficult topic. When the government in the present convinces would-be savers to give their money to the government in the form of bonds, other things don't take place. And if the government were to say, we are not going to fight this war, those other things would take place; and some of those investments would be productive. And so those resources today-- Guest: That's true. But that's true for any economic decision-taking, whether it be political or private. Russ: So, I think the right comparison is to talk about a war financed by taxation today versus debt. Which, as Milton Friedman would point out--that's just taxation tomorrow. You can call it debt. When government finances activities, it can either tax today or tax tomorrow, and Friedman used to always say, and I think it's in agreement with Buchanan. Guest: It sounds on the surface like it contradicts him, but it doesn't. Russ: I think it's the same point. What Friedman used to say is, if you are debating government activity, don't be fooled by whether it's financed by debt or by taxes. Just look at if it's worthwhile. If it's finance a war that's going to save us from destruction, it's worthwhile whether you finance it out of taxes today or taxes tomorrow. It might make sense to do it out of taxes tomorrow, but certainly it's a good idea. If you are doing it to dig ditches to nowhere and fill them back in, you it doesn't matter whether you finance them by taxes today or taxes tomorrow. It's still a bad idea. Guest: What Friedman is saying is the full cost, the cost of government activity today, is the amount of money government spends today, not the amount of explicit tax revenue it takes in today. It's measured by spending, not taxing. Russ: And borrowing doesn't somehow allow you to have a free lunch.|
|45:04||Russ: So, let's walk through that a little slower to make sure that's right, or at least that we're comfortable with it. Because the alternative facing this terrible war, is instead of to borrow the money, we could have said: Folks this is really bad. I mean, we could think of two ways to finance a war. We could think of three ways, excuse me. The way we just talked about, which is we are going to borrow the money, take the borrowed money and buy stuff with it to fight the war; which is "voluntary," on the surface, because it's taken from people who choose to buy the bonds. The involuntary part comes on the people who have to pay it back. Guest: Which is an important point. Russ: No, it's huge. We're going to come back to the politics, because that's part of the political incentives that are in play here. But it looks voluntary. It's the same involuntary thing; you just push the involuntary part to the future. Guest: That's exactly right. Russ: Alternatively, you could said: Folks, bad news. We're going to be attacked. We are going to have to tax-- Guest: Raise the taxes by a trillion dollars this year-- Russ: And that's going to be painful. It means less private consumption. And the only difference between those two is which Americans end up paying the price. It could be a slightly different group. Which is one of the reasons the political incentives-- Guest: But no, in both cases, the people paying the cost of the war are the taxpayers. Russ: It's just different points in time. Guest: The fact that the taxpayers who pay it in the borrowing case are in the future and the taxpayers who pay it in the taxation case are in the present, does nothing to change the fact that the burden falls on the taxpayers. Russ: Okay. So now the third way--and there's a fourth way, too, I'll get to. Guest: We can stop money creation. Russ: No, I'm getting away from that. That's not my third or fourth; that's the fifth way. That's, again, a different kind of tax. It's an implicit tax. Guest: Fundamental tax, to distort. Russ: But here's a third way. The government could expropriate private resources. It could say: One of the things-- Guest: Well, that's a form of taxation. Russ: I know, but there it's very clear where the burdens are. The government could say: We need transportation in this war; we need to move troops around; we need to fly airplanes. So, U.S. Airways, Southwest, we are coming to you. We are taking all your planes. Guest: To hell with the Third Amendment to the Constitution; we are going to quarter soldiers in your house. Russ: Right. And we are going to steal all your buses and your cars are going to become government. Now, everybody would understand in that case. You wouldn't say: There's no burden, because we all understand that we still have the cars. We still own our cars. We understand that whatever those cars and buses and trains produced for us in benefits--as you said before, it might be worthwhile to use them to fight this terrible external enemy--but we never wanted to say: Well, it's free. Because we still own our cars. Guest: The people getting the benefit from the seizing of Southwest Airlines and the seizing of private homes and hotels to quarter soldiers, or Americans--that doesn't make it free. We seized it from ourselves. No one would say that makes the burden go away. Russ: It's clear what the real cost is. The real costs are those private benefits and pleasures we would have had from travel and comfort in our homes. And by the way, the same thing with food. We have to pay for the food for the soldiers. So, we are coming to your farms, and we are taking your crops. All that does is change who pays for it. It doesn't change the fact that there's a burden of it, or that there are prices to pay. Now most people would argue we have to spread the burden because we are all getting the benefits of this security. Guest: And that would be true. That would be correct. Russ: And so therefore it's not right to just punish people who already own cars, happen to own airplanes. Let's spread the burden. Guest: And that's why there's a Just Compensation requirement in the 5th Amendment Takings Clause [to the Constitution]. Russ: Yeah. So I think we've made some progress. Guest: Did you list all the ways to pay for it? Russ: We could ask people for donations. We could ask people voluntarily to give. Guest: In which case they would be the payers. Russ: And I think in the background of our conversation, which I think both Keynesian and classical economists, and I would put both you and me and Buchanan in the classical camp-- Guest: In this case yes-- Russ: A pre-1930s view of debt. What everybody agrees on is that there are some distortionary effects from these different methods. The form of taxation matters. Whether the tax system is well-designed. There are extra costs from that. But we also all agree that that's relatively small compared to what we are talking about.|
|49:49||Russ: Okay. You want to say anything else before we gone on? Guest: No. Russ: So, now this is where we are 49 minutes into this; and now we get to preps [?preparations?] the hardest part. Which is that I am going to take a quote from Paul Krugman and see if we can apply what those claims are so far, and if we can disagree with him in a useful way. So, Krugman explicitly, in a column that was written January 1, 2012-- Guest: January 2, 2012 edition of the New York Times. Russ: Right. It was online on January 1st, but it came out in print on January 2nd. Guest: I know the column well. Russ: Don's written on it. And I've been chewing on it since he got me to think about it. Here's what he [Krugman] wrote; and I'm going to try to sketch out the rest of our conversation. I want to try to address the Krugman point. And then I want to go to the really large question of sovereign debt generally and whether we are in a crisis or not in some dimension. Greece is still embroiled, as we record this, in some serious problems; Spain and Italy seem to have some problems. And a lot of people say: That doesn't apply to the United States. Other people say: Oh, my gosh, we are going down the same path. Guest: John Taylor, for example, is worried that we are not there yet but close to it. Russ: I'm a little worried about it, myself. So, here's the Krugman quote; and it applies perfectly to what we've been talking about. He just has a different view. And by the way, those of you who have written me, I appreciate it and you have encouraged me to have Paul Krugman as a guest--I am eager to have Paul Krugman as a guest. I prefer to have Paul Krugman defend himself than have to read him. I've invited him; he has not responded. It could be he is not interested. It could be he has not gotten my emails. If anyone knows him out there and wants to encourage him to come on, we'd be happy to have him. It surely would be interesting and lively and we'd both learn a lot; at least I would. But here are Paul Krugman's words:|
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.Before we talk about it, I want to let people chew on that quote. You might want to rewind and hear it again. It's a long quote. I want to both be fair to him and to--it just so perfectly captures the alternative view to what Don and I have been talking about. But I want to just re-emphasize his points. He makes two points. The first is that government doesn't have to pay back it's debt. It can roll it over. And the second is, it's not harmful; there is no burden, and we owe it to ourselves. To the extent that taxpayers are the holders of the debt rather than foreigners. And again, I want to give him the benefit of the doubt, and assume that that's not literally true, but it is to a large extent. Guest: The argument he's making is that--he admits that his argument and that part of it applies when the debt is internally held. Russ: Yeah. So, what's wrong with him? What's wrong with that argument? Is he wrong? Guest: Yes. Russ: Why? Guest: Well, first of all, you didn't point this out, but it is true of course that the debt incurred to fight WWII did not prevent America from growing economically. Well, again, just because a debt has a burden does not mean that it is not worthwhile. Just because an expenditure has a cost does not mean that expenditure was not worthwhile. Russ: Yeah. Well, that argument, that part of it-- Guest: And that also, this is a sort of post hoc fallacy, in a way. Russ: Correlation isn't causation. Guest: You could have someone here who makes a strong--. Let's assume these expenditures were completely wasteful, and yet America grew. Therefore these wasteful expenditures weren't that wasteful. But maybe America wouldn't have grown even more. Russ: Right. Guest: But we can forgive him that. It's a column for a newspaper. We all write sloppy things. Russ: We simplify things. Guest: We simplify things. I write sloppy things sometimes. The heart of that claim is that because we owe it to ourselves, it's not a real burden. That is a mistaken--this is the claim that Buchanan so carefully examines and exposes as fallacious in his writings, most noticeably in the book that you'll put online, that Buchanan wrote in 1958. By the way--and I've searched his blog and I've looked at his columns. I see no evidence that Krugman even acknowledges Buchanan's contributions. In 2012, unlike say, in 1957, you cannot make the claim that Krugman makes as if it is an established, indisputable truth that only untrained economists disagree with. You have to deal with Buchanan's argument. You have to show why Buchanan mistaken. And that is what I think Krugman has not even attempted to do. Maybe he's done it elsewhere. Russ: But he doesn't need to. Because it's obviously-- Guest: Well, the way he dismisses it, he dismisses it, in his newspaper column, his blog, he dismisses Buchanan's view as-- Russ: Irrelevant-- Guest: As if it's a flat-earth kind of claim. Russ: Right. It's irrelevant. Guest: So, yes. If American A has her taxes raised so that American B has his bond redeemed with those taxes, the money stays in America, but that doesn't mean there is no burden to that debt. The taxes are still raised. Krugman will admit, as the Keynesians admitted--there is a slight burden, the distortionary effects of having to raise marginal tax rates. Russ: Right. Guest: No one denies that. But the absolute amount of money paid from A to B does not disappear as a burden just because B is a citizen of the same country as A. And that is what Krugman is suggesting.
This is, however, a really bad analogy in at least two ways.
First, families have to pay back their debt. Governments don't -- all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.
Second -- and this is the point almost nobody seems to get -- an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.
This was clearly true of the debt incurred to win World War II. Taxpayers were on the hook for a debt that was significantly bigger, as a percentage of G.D.P., than debt today; but that debt was also owned by taxpayers, such as all the people who bought savings bonds. So the debt didn't make postwar America poorer. In particular, the debt didn't prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation's history.
|57:41||Guest: So, here's why, here's where the politics comes in. Let's now, let's get away from the war thing, because we all agree that war is necessary to fund. Russ: If you are under the threat of imminent invasion. Guest: Oh, yeah, right. Much of Uncle Sam's belligerence. Russ: To pick a better example, I'll take the example of the example of-- Guest: Stimulus spending-- Russ: No, no, I want to take an example of, there's an asteroid about to hit the United States and if it hits, everybody understands on its current path it's going to devastate 330,000,000 people and destroy all their stuff, so we've got to build a complex set of activities to shoot it down out of the sky. Guest: Let's back up for a moment. His claim can't be dismissed this easily. Resources had to be spent to fight the war. Resources had to be spent to destroy the asteroid. Resources have to be spent for corn subsidies. Resources have to be spent and are being spent today with borrowed money. That money has to be repaid. The need to repay is a burden. It's not reduced as a burden just because it's funded with money borrowed today and taxes put off into the future. Would Krugman say--I suspect he would not--but would he say, let's suppose the war were funded out of current taxes, going back to your previous example. You wouldn't say: Oh, you are paying those taxes to ourselves, therefore these people who worry about the cost of the war, they are absurd because most of that money is being paid to us. It's still a cost. Again, it may be worthwhile. We can agree it's worthwhile. That doesn't mean it's not costly. It doesn't mean it's not a burden--on the people who pay the tax. And this is the problem. Because current taxpayers, participants in the political process, by being able to borrow through government are able to consume more today than they otherwise would could. Oh! I get to have whatever goodies the government is going to give me today! Without my taxes! Or anyone else's taxes rising today! Then, that creates an incentive, because we all like to spend other people's money, an incentive to spend the more today. So, at some level, the fact that the burden can be pushed off to other people, particularly people who aren't voting now--they are voting only in the future if they vote at all. They can't even identify themselves. That creates a not-logically necessary but it creates a politically-likely scenario in which the government does spend more money than otherwise. It does use up more resources today on projects today that it would not otherwise engage in, if those projects had to be funded out of current taxes. Because they don't have to be funded out of current taxes, then government spending rises higher than it would otherwise rise. You cannot say that the cost of those programs, whether they are necessary or not, disappears just because taxpayers in the future will be the ones who see their tax bills rising to pay off the debts when the bonds come to be redeemed. And that's what Krugman wants to say: Oh, you people are so dumb; you don't realize, that you see we are paying it to ourselves so it is not a real cost. Again, that's easy to see when you recognize it. You wouldn't say that if the programs were being funded out of current taxes. You wouldn't say: There's no real cost to this program because you see, we are taxing some Americans and giving the proceeds to other Americans. So, it's not costly! Of course it's costly. The cost is being paid by the people who have to pay higher taxes. It makes no difference at all whether those taxpayers are existing and paying taxes in the current fiscal period or if they exist and pay the taxes in the future fiscal periods. They are the ones who pay. And the burden is no lower; in fact it is probably higher because the incentives for government to spend more money today are raised due to the fact that the cost can be pushed off into the future.|
|1:02:11||Russ: So, the way I see it--I think that's beautiful but here's the way I would suggest to challenge Krugman's view. And I really hope Mr. Krugman responds even if he doesn't want to be a guest on the program. Or some of his friends will, I'm sure. So, I invite people who think he's right to comment on this podcast in the comment section. But the way I think about it is: It's a slippery slope of intellectual reasoning to think that we owe it to ourselves. Because on the surface, it would seem to justify any size of government spending, because there is no burden. For example, let's say it would cost a trillion dollars to fight off the invaders or destroy the asteroid, or whatever it is. A trillion. But let's suppose the government decides, out of political reasons, to spend $4 trillion. Make a much bigger effort. Turns out to be a mistake. Turns out it isn't necessary. Turns out we could have just spend $1 trillion. But, while we are borrowing, let's borrow $4 trillion. Guest: And this is why. If people believe the Krugman view, then they are more likely to accept that. "Oh, well, we owe it to ourselves." Then why would they care how much government spends? If it's not a real cost, if we owe it to ourselves, then by all means reduce that risk even further by spending not just $1 trillion but $4 trillion. Why not $40 trillion, because we all owe it to ourselves; it's not really costly? Russ: And, if the government borrowed enough money, as each individual borrower decides whether it's worthwhile or not--and one of the complications we've left out here, which I suspect would be part of Krugman's defense or someone else's defense--is that interest rates would perhaps be different if you went to borrow $4 trillion versus $1 trillion. You'd have to pull resources out of the buyers of the bonds to induce them to offer $4 trillion; you'd have to offer them a higher interest rate than if you were only doing $1 trillion. I worry that that complicates things. Put that to the side. If the government goes and borrows $4 trillion, that means there's less stuff that's created today. If they requisition not just the airplanes for the war, but the cars, too, just in case, you wouldn't say: Well, because we're going to pay back, say, the car owners--suppose we borrow the money to buy the cars from the private sector rather than confiscate them. So, again: three methods. We can borrow the money today to buy the cars from people so we have them to use for the war. Turns out not necessary, totally unproductive. We could tax people today to get the money to buy the cars. Or we could just confiscate the cars. In all three cases, we don't get the benefits of using the cars. We hope that it's there's a benefit from defending ourselves, but if it's a mistake, if it turns out that we shouldn't have taken the cars out of circulation and all they did was sit around in government parking lots, you wouldn't want to say: Well, if we used borrowing to finance them, then it didn't cost anything. It obviously cost us the fact that we didn't have our cars. People who paid for it, it would be different. In the confiscation case, it's the people who own the cars. In the current taxation case, it would be the people paying current taxes. And in the debt case, it's people paying taxes tomorrow. Those are the people who finance the use of cars in the war. You wouldn't want to say there's no burden. Guest: Take a simpler case. Suppose government changes transportation policy: it just requisitions cars from people in the top 50% and gives those cars to people in the bottom 50%. So, we are just giving it to ourselves. Now, you can think it is a good policy. And I will concede for argument's sake here--let's assume it is a good policy. God dictates it's a good policy. So, we all agree it's a good policy. That does not mean that that policy does not cost Americans anything. It costs the people whose resources are confiscated. It costs the car owners whose titles to those cars and ability to use those cars are stripped from them. And the fact that the cars are given to other Americans does nothing to reduce the burden of those people who have to pay for the policy. Russ: I don't know if that's a good example or not. I don't know if I agree with that. I agree with your point, but I would argue that's probably different than what we've been talking about in that that's a reallocation. At least you can argue, correctly, that the total number of cars hasn't changed in the United States. Guest: Well, but if government had this power to do this kind of requisitioning, what would happen to the amount of requisitioning that it does. That's a marginal tax point. Russ: Right. Guest: But the point of my example here--I agree, it's a little bit different than the debt thing--is simply to point out that just because the person who is taxed--in my example, a car is taken from him or her--is a citizen of the same country who gets the proceeds of that tax--the other American who gets the keys and the title to the car--that does not mean that there's no burden. That Americans in fact pay no price, that there's no cost to this program. There is a cost; it's borne by the people who lose their cars. Russ: I think Krugman would agree with you there. Guest: I don't think he will. I think he would be consistent. He wouldn't. He's saying that there is no burden except for the marginal tax rate point: there's no burden when in the future, future taxpayers are taxed in order to pay future bond holders. What's the difference? Okay, they are in the future. So? Russ: I think he'd say-- Guest: I think he clearly does not want the two--and we're picking on Krugman here; this is the view held by a lot of people prior to when Buchanan wrote-- Russ: Correct-- Guest: Krugman's just resurrected it. Krugman does not want the two to be the same. But I think they are the same in important respects. Not in all respects. But in the essential respect that just because the people who have resources confiscated or are citizens of the same country to whom those resources are transferred, does nothing to reduce the burden of the program.|
|1:09:24||Russ: Well, I'm not sure. But the point I want to make a slightly different point that I think gives Krugman his due. And I think Krugman is consistent in a way you've suggested is inconsistent. I think fundamentally what the defenders of debt spending are saying today--the sovereign debt issue we're not going to talk about--obviously everybody agrees, people who want bigger U.S. government debt now, and those of us who are opposed to it, that if you make it too big, you could eventually risk default. The debate right now is: Is it too big now? There's arguments on both sides. You could argue that we're in perilous waters; you could argue there's nothing to worry about. I wish we had time to talk about; but we don't. I want to make a different point. I think the fundamental reason that Krugman makes the argument that he does, and people like him, who are arguing for bigger debt, is that when they say there is no burden, I think fundamentally they are talking about aggregate demand. Guest: Yes, yes, yes. Russ: I think they are saying--the reason there is no "burden"--I am going to call them Keynesians. I am going to get away from poor Mr. Krugman. He's certainly a Keynesian. Let's talk about Keynesians generally. Keynesians are worried about aggregate demand. And they are worried about spending. Those of us who are classical argue that that's misplaced emphasis, and maybe often wrong. But certainly a misplaced emphasis, in that while it is certainly true that in the future, when bondholders are repaid by taxpayers, there's no net change in aggregate demand then, that doesn't mean it's free. And of course, where I think, what is strange about that view of the Keynesians is that it's also true today. That when we issue bonds today, we are taking money from one group of Americans and giving it to the others, the people who are hired by the government or who benefit from government spending. In that sense, it's a wash on the surface, in terms of aggregate demand. They have to argue that: Well, the people who lent the money were going to keep it under their mattress or some other unproductive thing--and that's an interesting argument. We've had conversations with people about that before. But I think just fundamentally, intuitively why they ultimately look to the future and say this is not a burden is because they are saying: Well, aggregate demand is going to be preserved, so the economy is healthy, and we are going to get back on track. Guest: Yes, I agree with that. And even if we concede both the centrality of aggregate demand in a Keynesian way, we concede when American A pays American B, that does not--and I agree. That's what motivates a lot of this. By looking at aggregate demand, they so: Oh, because we owe it to ourselves, there is no threat to the economy. That may be true. That's a separate issue in macroeconomics. But it's very dangerous. Particularly for someone who has a public voice, of the kind that Krugman has. Very dangerous because it's wrong to say-- Russ: Maybe-- Guest: wrong to say that debt owed to ourselves is not a real burden. It makes it appear as if, at least to the careless listener, as if someone like Krugman is saying: Well, you know, it's not costless at all. As long as we borrow money from Americans and then tax Americans to pay that, then that somehow gives us an ability to get something for free. We get it for free. We don't have to pay for it. Well, if people believe you can get something for free and don't have to pay for it: Why not? Why would you pay? Russ: There's no budget constraint.|
|1:13:32||Russ: So, let's come full circle. Let's try to take it back to the family level. Which Keynesians-- Guest: Krugman-- Russ: do not accept. My punchline, and the reason I don't like your car example, is that I think that's a reallocation of happiness and wellbeing among Americans. And you can debate whether that's good or just or whatever. Guest: And all I'm saying is it's costly. It has a cost. Russ: I understand. But I think the Keynesians would accept that. I think part of the confusion in this issue is definition of cost and definition of burden. And we've given our implicit definition. Guest: It is an intricate issue. Russ: But I'm going to cut through all that. And again, I'm going to talk about an expansion of government spending, not a reallocation of private consumption. A family who goes into debt on a get-rich scheme that is flawed. So, I go out and I borrow a huge amount of money to buy up an inventory of a product I think is going to be a world-changer. And it's a loser, it turns out. No one wants to buy it. Guest: You buy a warehouse full of chocolate pickles. Russ: Yeah, exactly. That's a mistake. And whether I fund that out of debt, with debt--that is, future consumption--or I say to my family: We are going to move into a really small house and we are not going to be able to go out to eat, and nobody can buy clothes and if you get holes in your socks and your shoes, too bad, because we are making an investment. We are going to be fabulously rich, because these chocolate pickles are going to be a huge success. It doesn't matter whether I borrow the money or whether I give up my consumption today. There's a cost to me, and all that really matters is whether chocolate-covered pickles are a hit. If they are a hit, it's only a question of when I pay for that investment. Guest: Yep. Russ: And I would argue--the part where I think both you and I agree and where we disagree with the Keynesians, is that if government goes out and does something gloriously productive like save us from an asteroid that is going to destroy us, it doesn't matter whether it's financed by taxes today or taxes tomorrow. If it's a good use of money, the only difference is who bears the burden of the debt. If it goes and buys chocolate covered pickles because it thinks those protect us from an asteroid--that's a bad example--because they think it's going to improve the health of the nation, it doesn't matter whether it's taxed or borrowed. It's a bad use of real resources today. Guest: Right. So, to put a codicil on that, the reason we should have a preference for funding government expenditures out of current taxation rather than the future debt, is because current taxpayers are a bit more likely--not perfectly so--a bit more likely than are future taxpayers to monitor-- Russ: the quality of what the government spends the money on. Guest: The amount and the quality. And so, to the extent that government pushes those burdens into the future, it's released from fiscal constraints--healthy fiscal constraints--than would otherwise exist today, if anything had to be made out of current tax dollars. And then, so the people could--Keynesians just say that, 'Well, if it's pushed off into the future it's not really a burden. If we owe it to ourselves it's not really a burden.' That makes the issue even worse. Because then people today would say, 'Oh. Well, in that case, we don't have to worry. We are getting something for free. We are getting something that doesn't cost us as a group anything. So, go for it. Chocolate covered pickles. Let's go settle Pluto. It's all free.'|
|1:17:21||Russ: Before we close, I just want to raise one semantic issue. And then an issue about expectations, something we haven't talked about. And the semantic issue: the reason I think that Keynesians would agree with you about your car example is they'd say, 'Well, sure it's a burden on the people who financed those transfers. But it's just a transfer. The total number of cars stays the same. I agree with that. And that's why I think it's important to make a distinction between real resources that get used by government spending, regardless of how they are financed and whether they are productive is what matters--of course, as transfers. Now, a transfer of, say, pure money--forget the cars--a pure money transfer, say, from rich to poor, or politically unpowerful to politically powerful, that has disincentive effects because the taxes ultimately have to be raised to pay for it. Everybody agrees with that. I think we may disagree about how large those disincentive effects are, of higher tax rates. But I think it's important to distinguish between transfers versus real spending--spending on real resources. Of course, the government transfers relentlessly, large amounts from one group to another. The group that's losing their money is going to respond by not trying to accumulate as much. That's the disincentive effect that I think everybody respects. But I think the key in this whole area, when you talk about the burden: I think the Keynesians would agree there's a burden on the people who lose the transfers, who are paying the taxes. But they'd say the net burden, the total effect, is zero. And I think they'd be roughly right. But not with real resources. Not when we're building a bridge or tanks or other things that mean we have less today. Guest: Look, I don't want to go to the mat defending that particular example. But here we have a connection between some of Buchanan's most famous work and Gordon Tullock's most famous work. Gordon Tullock's most famous work, his 1967 piece on, using his term, on rent seeking. Obviously, when you are transferring monetary claims, at some point, they are going to result in resource use. The problem with the 'it's not a burden if we owe it to ourselves' discussion in language is that it conjures up the image of people the wrong impression that if government borrows, and if the holders of the debt are citizens of the same country of the government that issued the debt, then it's a free lunch. Then we can get for all these things without anyone having to pay for it. It's not a burden. And the fact that, the fact that politicians are spending other people's money--and in this case are spending the money of people many of whom are not even voting yet--that means they are going to overspend. That means that they will spend less prudently; and they will spend more than they would if the people who were enjoying the actual resource transfers had actually to pay for them. Directly.|
|1:20:39||Russ: And that brings us to the last point I want to talk about. Which is expectations. We have not talked about the fact that people look ahead. They anticipate consequences in the future that might be set in motion today. The classic issue that's raised in this area is debated as Ricardian Equivalence. Guest: Named after David Ricardo. Guest: David Ricardo. And what people are often talking about there is whether current taxpayers, anticipating higher future taxes, offset the alleged stimulative effects of government spending by saving more to pay off their future taxes. And a lot of people are skeptical about that. But what I think no one is skeptical about, and I just want to bring this in as a footnote to the political economy point you are making, I think a lot of future taxpayers are alive today and know who they are. I may have agreed with you a little too quickly on. Obviously, the big debate that's going on right now in America is that people look at large increases in government spending financed by debt and realize--I'm not going to end the discussion right now with how they respond today. But they are certainly aware of it. and part of the reason they are opposed to it is they do realize they are going to have to pay for it. Guest: Right. And with their--in a sense what they are opposed to is, to the extent that that's true, then it proves Buchanan. They want to keep the level of spending and debt down because they know it's not a free lunch. Russ: Yeah, correct. Guest: And look, on your Ricardian equivalence point, I think it's become more of a historical--I think it's more of a sort of intellectual curiosity than a substantive point. I mean, it may be real in some sense; it may exist in some sense. It does exist. But it detracts from Buchanan's main point. The point is, whoever pays the taxes in the future--there will be taxes that are raised in the future to pay off the current debt. It's possible for people today, and caring about their children and grandchildren, to in fact then set aside more money today than they otherwise would and pass it along. In which case, in those particular instances, that burden is borne by people alive today. And the people who write the checks just happen--the people in the future just happen to be the ones who write the checks. And they just passing along wealth lent to them, given to them, bequeathed to them by their prescient forebears. But the reason that's not empirically important, I think, the very reason politicians so readily borrow and spend today is because people today don't want--they want the goodies today and they don't want to pay for them. Russ: Yeah. Whether it's going to end up being them or their children, it's further down the road. An impulse to push that down there. Guest: Yes. Russ: My guest today has been Don Boudreaux. Don, thanks for being part of EconTalk. Guest: Always a pleasure. I'm indebted.|