How to indebt future generations. Borrowing alone does not do it!

Private investors were begging governments to borrow more money in 2015. Interest rates were extremely low:

Government debt cannot significantly be a significant burden when interest rates are that low. For example, when interest rates are zero, there is no penalty for borrowing at all and all expenditures might as well be debt financed although there must be cash-flow planning for repayment.

Simon Wren-Lewis wrote a confused article worrying about government debt burdening future generations when debt isn’t the problem at all because one person’s debt is another person’s asset. Always. Finance is purely symbolic, not real because all finance is literally created out of nothing and returns to nothing when financial accounts are destroyed. Finances only have an effect on the economy by changing the use of real resources. In Wren-Lewis’s story, he assumes that government debt will decrease the production of capital goods make the future less productive. That is the key issue, not debt. Wren-Lewis doesn’t give any reason to think that government borrowing must cause less production of capital goods. In fact, if government borrowing is used for infrastructure, education, and healthcare, it should increase future productivity and if it also creates a Keynesian multiplier (which was likely during the recession when he was writing), that should increase productivity too.

Any parable that doesn’t show how real resources change is not useful. Financial symbols can have a powerful impact on incentives that do change the use of real resources, but we should keep our focus on the real resources not the financial symbols.

In Wren-Lewis’s story, all government debt that is owed to Americans, which means that the government is committing to tax future generations to pay back future generations. The government cannot indebt future generations of Americans by borrowing from them. The government can only commit to redistribute money in the future. It can commit to impose a net tax on some future Americans to give a net payment to other future Americans. There is always zero net debt because for every debtor there is always a creditor. The future generation cannot be more indebted than the present because total credits must always equal total debts.

This could still be a future burden, but it isn’t a debt burden. It would be a redistribution burden. The future redistribution might cause a problem due to inequality, higher taxes, or lower government services. Borrowing also redistributes resources in the present if it raises interest rates crowding out private business borrowing and by funding present priorities. But none of these problems are an inherent problem of debt per se.  Noah Smith explains how Nick Rowe got this confused too. Some argue that borrowing could cause the government to spend funds unproductively, but if government isn’t spending its funds wisely, then there is going to be lower productivity regardless of whether the money is borrowed or not.

Anyhow, there is no reason to fetishize government borrowing when private borrowing is MUCH bigger according to the Fed’s flow of funds accounts:

Austerians like Peter Fisher believe that a Keynesian stimulus (borrowing) creates present demand by borrowing from future demand.  That is possible because Fisher correctly realizes that a nation can become indebted to foreigners.  But that is the only way and it is very simple.  The rest of Fisher’s rhetoric is gibberish.  It isn’t really a problem of “borrowing from the future” as he claims.  The issue is purely one of borrowing from foreigners.  He says that, “The inter-temporal trade-off of borrowing from the future might make us” worse off in the future because “we might borrow too much if, by increasing indebtedness, we bring too much demand from the future into the present…”

Panos Mourdoukoutas argues that “ultra-low interest rates help “steal” sales from the future” for example by getting people to buy cars earlier that “they would normally buy years later.”  However, when people pay back their borrowed money, someone else will have more money they can spend, so that doesn’t automatically reduce future sales.  It just redistributes the future sales away from today’s borrowers to their lenders who will have more to spend in the future as they get paid back.

The biggest way the present generation is leaving a debt for the future generation is by destroying natural resources.  We are depleting fossil fuels which directly makes the future poorer and using them to create global warming which will also make future generations poorer so that we can boost consumption today.  In the big scheme of things, a graph of history showing the consumption of depletable mineral resources like fossil fuels and helium will peak and get more scarce in the future. Furthermore, global temperature is rising.

Which will cause sea level to eat up land.

That is the kind of thing that will directly impoverish future generations. Other ways we are making future generations poorer are by increasing persistent toxins in the environment like mercury in the ocean which have made tuna and other fish less safe to eat. (Queue the iconic crying Indian commercial.) Future generations will be much more environmentalist than our generation because they will look back at history very differently than the present generation. We look back at history and see resource extraction as increasing our prosperity.  Future generations will look back at the history of resource extraction as indebting their generation to boost past consumption.

Posted in Macro, Public Finance
One comment on “How to indebt future generations. Borrowing alone does not do it!
  1. […] by creating money=debt=savings is a lot more complex than the analogy of matter/antimatter, but debt clearly does not hurt future generations (contrary to what most people think) because every debt for one person is always exactly equal to […]

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