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Open Letter to Paul Krugman
Posted By Don Boudreaux On December 30, 2011 @ 3:12 pm In Budget Issues,Debt and Deficits,Myths and Fallacies,Other People's Money,Seen and Unseen | Comments Disabled
Dear Prof. Krugman,
On your blog (here , here , and here ) you attempt to resurrect the notion that the burden of the public debt is not shifted onto future generations. Specifically, you argue (as did earlier Keynesian economists, most famously Abba Lerner ) that whatever funds future citizens as taxpayers must pay to service the debt are funds that future citizens as beneficiaries of government programs receive. In your words, “talking about leaving a burden to our children is especially nonsensical; what we are leaving behind is promises that some of our children will pay money to other children.” Receipts equal payments, so collectively it’s a wash.
I searched your posts in vain for a reference to James Buchanan’s 1958 book Public Principles of Public Debt  – the foundational source of Buchanan’s work on debt, work cited by the Nobel Committee in awarding Buchanan the 1986 Nobel Prize in Economic Science .
Were you to read Buchanan’s book you would discover why your reasoning is mistaken – or at least you would meet the argument that you must, but as yet do not, address in order to give your claim scientific legitimacy. Here’s how Buchanan, writing with Richard Wagner in their 1977 book Democracy in Deficit , summarized one of the many problems with the “we owe it to ourselves” view of public debt:
The Keynesian advocates failed to see that, if their theory of debt burden is correct, the benefits of public spending are always available without cost merely by resort to borrowing, and without regard to the phase of the economic cycle. If there is no transfer of cost onto taxpayers in future periods (whether these be the same or different from current taxpayers), and if bond purchasers voluntarily transfer funds to government in exchange for promises of future interest and amortization payments, there is no cost to anyone in society at the time public spending is carried out. Only the benefits of such spending remain. The economic analogue to the perpetual motion machine would have been found.
A central confusion in the whole Keynesian argument lay in its failure to bring policy alternatives down to the level of choices confronted by individual citizens….
Escaping misleading aggregationist thinking and bringing policy alternatives down to the level of individual choices reveals that the burden of the debt is borne neither by bond purchasers (they lend voluntarily, expecting a net gain) nor by today’s taxpayers (their taxes don’t rise even as they enjoy whatever gains that flow from government’s use of the borrowed funds).
The burden of the debt, therefore, necessarily falls on those taxpayers who are obliged to pay off the debt. The fact that fellow, bond-holding citizens receive these repayments is irrelevant.
If you disagree, consider the following example:
Suppose Uncle Sam were to supplement my annual income to the tune of $1 billion, to be funded exclusively out of present taxation. The result is that Americans as a group today pay $1 billion more in taxes and Americans as a group today (I’m an American) receive $1 billion more in the form of an income supplement. Receipts equal payments, so collectively it’s a wash.
But surely you agree that it’s mistaken to conclude that, because “we” pay this $1 billion to “ourselves,” government granting me this income supplement is no burden on current Americans. Therefore, you should also agree that it’s mistaken to conclude that, because “we” owe the public debt to “ourselves,” the responsibility for repaying that debt is no burden on future taxpayers. (If, however, you disagree with me about the burden of my hypothetical income supplement, I invite you to write a column petitioning Congress to grant me such largesse: it would, after all, bring me great joy while imposing no burden on Americans as a group.)
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA 22030
(HT Greg Mankiw )
Article printed from Cafe Hayek: http://cafehayek.com
URL to article: http://cafehayek.com/2011/12/open-letter-to-paul-krugman-3.html
URLs in this post:
 here: http://krugman.blogs.nytimes.com/2011/12/28/debt-is-mostly-money-we-owe-to-ourselves/
 here: http://krugman.blogs.nytimes.com/2011/12/28/more-on-the-burden-of-debt/
 here: http://krugman.blogs.nytimes.com/2011/12/29/the-burden-of-debt-again-again/
 Abba Lerner: http://www.econlib.org/library/Enc/bios/Lerner.html
 Public Principles of Public Debt: http://www.econlib.org/library/Buchanan/buchCv2c15.html
 Buchanan’s work on debt, work cited by the Nobel Committee in awarding Buchanan the 1986 Nobel Prize in Economic Science: http://www.nobelprize.org/nobel_prizes/economics/laureates/1986/press.html
 Buchanan, writing with Richard Wagner in their 1977 book Democracy in Deficit: http://oll.libertyfund.org/index.php?option=com_staticxt&staticfile=show.php%3Ftitle=1097&Itemid=27
 Greg Mankiw: http://gregmankiw.blogspot.com/2011/12/burden-of-debt.html
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