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Nick Rowe on the Debt Burden

Nick Rowe explains better than I did – either here or here – (and better than I am capable of explaining anywhere) just why Paul Krugman errs in his attempt to resurrect the argument that government A’s debt is no burden on future generations in country A insofar as that debt is owed by citizens of A to other citizens of A.

Like me, Nick mentions Jim Buchanan’s landmark work on the debt.  Even if Nick and Buchanan and I are wrong on this matter, anyone attempting to resurrect this “we-owe-it-to-ourselves” argument ought at least acknowledge the impact that Buchanan’s work has made on this question and address Buchanan’s arguments.  (Note that while Nick is correct that Buchanan does not specialize in macroeconomics, Buchanan does specialize in public finance; his contributions to that field were explicitly cited by the Nobel committee in announcing his award.  And the question of the burden of the debt is certainly one of public finance.)

See also, while we’re at it, this short essay by my colleague Dick Wagner, written on the occasion of Jim winning the Nobel Prize.  Here’s a relevant passage (original brackets; emphasis added):

The thesis that public debt allows the cost of public spending programs to be shifted forward in time has proven difficult for many economists to accept.  Consider a simple formulation of the public debt controversy: instead of taxing to finance a rail system, a government borrows.  Buchanan argues that borrowing shifts the cost of the rail system into the future, while others say that the cost remains in the present, noting the resources that went into the rail system are used up this year regardless of how it is financed.  Public debt, they say, cannot be a burden on future generations because “we owe it to ourselves, [now].”….

It is irrelevant that “we owe it to ourselves,” for we are not many heads attached to one body.  Some owe it to others, and it is irrelevant to note that the sum of the debts equals the sum of the credits.  One could similarly aggregate over mortgage lenders and mortgage borrowers and say we owe it to ourselves, but it would be no more enlightening.  Public debt allows present taxpayers to reduce their tax payments and obligates future taxpayers to amortize that debt, and it is here that the burden of the debt resides.  True, the resources required to construct the rail system this year are furnished by bondholders, but those bondholders do not bear the burden of the debt simply because they are compensated sufficiently to make them willing lenders.