The economist Brad DeLong recently took on Professor Nick Rowe, of Carlton University, over the bizarrely confused issue of intergenerational debt; in a moment I’ll try to offer a new way of explaining why the conventional presentation is all wrong.
“In Nick Rowe’s world the next generation’s taxpayers are taxed to pay off the debt — and so they are losers,” Mr. DeLong wrote in a blog post on Oct. 12. “And in Nick Rowe’s world the next generation’s debt-holders are not gainers.”
First, let me suggest that phrasing in terms of “future generations” can easily become a trap. It’s quite possible that debt can raise the consumption of one generation and reduce the consumption of the next generation during the period when members of both generations are still alive. Suppose that after the 2016 election President Santorum tries to buy senior support by giving every American over 65 a gift of newly printed government bonds; then the over-65 generation will be made richer, and everyone under 65 will be made poorer (duh).
But that’s not what people mean when they speak about the burden of the debt on future generations; what they mean is that the United States as a whole will be poorer, just as a family that runs up debt is poorer thereafter. Does this make any sense?
Well, let’s do a thought experiment that doesn’t, at least initially, seem to have anything to do with debt. Suppose that instead of gifting seniors with bonds, President Santorum passes a constitutional amendment requiring that now on, each American whose name s with the letters A through K will receive $5,000 a year the federal government, with the money to be raised through extra taxes. Does this make America as a whole poorer?
The obvious answer is no, at least not in any direct sense. We’re just making a transfer one group (the L through Z’s) to another; total income isn’t changed. Now, you could argue that there are indirect costs because raising taxes distorts incentives. But that’s a very different story.
O.K., you can see what’s coming: a debt inherited the past is, in effect, simply a rule requiring that one group of people — the people who didn’t inherit bonds their parents — make a transfer to another group, the people who did. It has distributional effects, but it does not in any direct sense make the country poorer.
Really, this isn’t complicated — and the fact that everyone in public life gets it wrong doesn’t change the logic.
Foreigners and the Burden of Debt
Another thought experiment: suppose that for some reason the Chinese and a bunch of domestic investors do an asset swap. The Chinese sell off $500 billion of United States Treasuries and buy an equal amount of, say, corporate bonds, while the domestic investors do the reverse. Has the United States become any richer (or any poorer)? Obviously not — as a nation we still owe the same amount to the rest of the world. What this tells us is that when we’re trying to assess the burden or lack thereof of debt, foreign ownership of government debt doesn’t really matter. What does matter is our net international investment position: the value of the overseas assets owned by all domestic residents minus the value of all domestic assets owned by foreign investors. Now, this ties right in with what Mr. DeLong wrote about the burden of the debt: we’d all agree that deficits make us poorer if they crowd out investment spending — which they would if the economy were near full employment, but won’t if it’s deeply depressed. All we have to do is realize that net foreign investment — purchases minus sales of assets and to foreigners — is also a form of investment. Or to put it a bit more simply: sure, budget deficits can make us poorer as a nation if they lead to bigger trade deficits.
So far, nothing like this has happened. Look at the chart on this page showing the United States’ budget deficit (all levels of government) and the current account deficit, both as a percentage of gross domestic product. Borrowing abroad is way down, not up, in recent years.
Still, you could argue that a bigger budget deficit would, other things being equal, lead to a bigger trade deficit because it would expand the economy and lead to higher imports. In this very limited sense you could tell a burden of deficits story. But surely it’s not what debt alarmists have in mind.
The bottom line is that while foreign ownership of American assets — not just government debt — is a complication, the common claim that deficits mean that we’re selling our birthright to the Chinese makes no sense at all.
FIVE POINTS, FEW SPECIFICS
Throughout his campaign, Mitt Romney, the Republican presidential nominee, has repeatedly claimed that his “five-point plan” can serve as a blueprint for economic recovery in the United States, and would 12 million new jobs over the next four years.
While Mr. Romney has provided few specifics, the plan’s centerpiece is a proposal to cut marginal income tax rates (in which rates increase as more income is earned) by 20 percent across the board without adding to the federal budget deficit. Officials Mr. Romney’s campaign have claimed that loopholes and deductions in the tax code would be eliminated in order to offset the tax cuts, but they have not specified which ones. Many independent analysts have argued that there are not enough of them to make up for the lost revenue.
In response to comments that the math does not add up, Mr. Romney’s economic advisers recently posted an eight-page paper on his campaign’s Web site that lists more details about the planThough it also avoids specifics, the paper proposes decreasing the corporate tax rate, reducing federal spending, privatizing the Medicare insurance program for the elderly, reducing Medicaid spending by ceding control of the low-income insurance program to state governments, and repealing Mr. Obama’s health care and financial regulations, which Mr. Romney has promised to replace with unspecified alternatives. Taken together, the campaign claims, these proposals would 12 million jobs by the end of Mr. Romney’s first term.
However, fact-checkers have pointed out that the economy is already projected to add at least 12 million jobs by 2016 under current policy. “Moody’s Analytics, in an August forecast, predicts 12 million jobs will be d by 2016, no matter who is president,” wrote Glenn Kessler, a fact-checker for The Washington Post, in a blog post on Oct. 16. “And Macroeconomic Advisors in April also predicted a gain of 12.3 million jobs.”
A New Economic Stimulus: Mitt Romney’s Awesomeness
I’ve been delving a bit into what the Romney campaign and its economist fellow-travelers have been saying, and I think I have figured out the true economic doctrine that Mitt Romney and his inner circle have in mind. It is, needless to say, not what the campaign has claimed.
The official line has been that Mr. Romney’s five-point program will scads of jobs. There are a couple of problems with this. First, the program is vacuous — for the most part it’s a statement of desired outcomes, not policies. Second, as Glenn Kessler pointed out recently in The Washington Post’s “Fact Checker” column, the studies claimed as justification for the 12-million jobs number don’t at all say what the campaign asserts they do.
Actually, one point that should be made: Mr. Kessler isn’t quite right in his critique of a paper written by the economist John W. Diamond, in which Mr. Diamond describes big employment gains the Romney tax plan. The time horizon is not, in fact, a big deal. What is a big deal is that the paper is an analysis of an economy that is assumed to be continually at full employment. The “job gains” the paper estimates are supply-side, not Demand-side — they represent an increase in the number of people who want to work, not an increase in the number of jobs available.
If you like, Mr. Diamond is claiming (implausibly) that there would be a big jump in the labor-force participation rate.
And this, of course, has nothing to do with the problems of an economy where people who want to work can’t find jobs.
So the Romney campaign is lying about the rationale for its boasts about jobs. But what’s the real story? The answer is actually pretty clear: confidence.
Mr. Romney’s notion is that we’d be having a rip-roaring recovery right now, except that Job Creators feel that President Obama is looking at them funny. And so all Mr. Romney has to do is show up, and happy times will be here again.
Now, the obvious riposte here is that we know why we have a weak recovery, and it’s not because of Mr. Obama’s evil eye — it’s the normal hangover a severe financial crisis, which could only have been averted by much stronger fiscal and monetary stimulus. But that’s not a story the Romney people want to hear. Hence the determined effort by people like John Taylor, an economist at Stanford, to dismiss everything we’ve learned about the macroeconomic effects of financial crises.
So there you have it. The true plan is to provide an economic stimulus in the form of Mr. Romney’s awesome awesomeness; the cover story is his pretense of having an actual program. Are you feeling confident yet?
