Sunday, July 09, 2006

The Deficit and Future Generations, part one

In an earlier post, I discussed the argument that the budget deficit is economically efficient because it allows people to “borrow” at a low interest rate by paying lower taxes today and higher taxes in the future. The obvious counterargument is that the people doing the borrowing are not the same people who are going to be repaying. Is it fair to expect our grandchildren to pay for today’s government services?

Philosophically, the question of what we owe future generations is a difficult and controversial one, but with or without the national debt, we are leaving them a lot: the houses and offices we’ve built, the books and software we’ve written, the music and movies we’ve recorded, the businesses we’ve created, the machines we’ve constructed, the skills we’ve taught them, the technologies we’ve developed. It’s not obviously wrong for the bequest to come with a mortgage. The real question is, once you count the value of the assets and subtract the liabilities, are we leaving them too little, too much, or just the right amount?

Being an economist and not a philosopher, the only approach I’m prepared to take to this question is the utilitarian approach. If we leave more to future generations, will the additional amount be worth more to them than it is to us? Will it be more useful for them than it is for us? Will it give them more happiness, or relieve more of their suffering, than it does for us?

Once we’ve asked these questions, most economists will have to admit that the most obvious answer is “no.” Because productivity is growing and will in all likelihood continue to grow, our grandchildren will almost certainly be richer than we are. Why should we give up the things we want and need so that our grandchildren can have even more than the more that they will almost certainly have anyhow? In economic terms, the marginal utility of consumption falls as consumption rises, and consumption rises over time, so the marginal utility of consumption falls over time; therefore present consumption (by us) is more valuable than future consumption (by our descendants).

One obvious counterargument is that, properly measured, our grandchildren’s wealth won’t really be greater than ours. For example, if we allow global warming to become an ecological disaster, they’ll need all the resources they can get just to deal with all the extra hurricanes, tsunamis, and such. But if that’s true, wouldn’t it be better to run larger (or at least equally large) deficits and spend the money on finding solutions to global warming? It may be stupid to ignore global warming, but it is still almost certainly the case that, if we do things in the smartest way possible, our grandchildren will be richer than we are. As it is, they can blame us for being stupid about how we spend the money, but not for borrowing it in the first place.

There’s another counterargument that I find quite intriguing, but I’m afraid it will take a whole post to discuss. Until tomorrow, the anti-deficit case is still looking pretty weak.

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16 Comments:

Anonymous Anonymous said...

But if that’s true, wouldn’t it be better to run larger (or at least equally large) deficits and spend the money on finding solutions to global warming?

I think very few people are actually against deficits per se. What they are actually against is deficit spending that doesn't align with their personal politics. That is why, for instance, you can see many Republicans accept massive defense spending while also championing fiscal restraint.

Complaints against deficit spending then become a tactic to transform specific spending disagreements into a moral one. Instead of arguing (and very possibly losing) about what levels of defense spending are appropriate you change the footing of the debate to one that very few people are equipped to disagree with.

It also means that any cuts become the responsibility of whatever party is in power. After all, you didn't say Medicare needed to be cut...you just said that deficit spending was bad and needed to end.

Mon Jul 10, 01:41:00 AM EDT  
Blogger Gabriel Mihalache said...

Ha ha! I love it how you play coy!
You say you'd not going to do philosophy and then you say you'll give the utilitarian answer, but utilitarianism is a moral-political philosophy, and not a very good one at that.

As an economist, I would have expected, that you'd say something about the impossibility of inter-personal utility/preferences comparisons, as any holder of the subjective theory of value would, tell us we have no revealed preference (or any other kind of preference) for the unborn and leave it at that (we don't know what is "worth" to them and how much, but we can analyze the provisions made by the current generation).

Also, it's not like we'll have to pay martians in the future. Taxpayers will have to pay bond holders. So, some in the future generation will do quite well because of the deficit, no?

Mon Jul 10, 05:55:00 AM EDT  
Blogger Gabriel Mihalache said...

P.S. To put things into perspective, maybe someone could find out how much debt your current generation was born into? (I mean for the US)

Mon Jul 10, 06:03:00 AM EDT  
Blogger knzn said...

Gabriel, Economists frequently make welfare comparisons in models with infinitely-lived agents. I’m just doing the same thing but being honest about the fact that there are multiple generations involved.

Anyhow, the subjective theory of value, as applied normatively, is only an attempt to make utilitarianism precise. In my opinion, it’s not a very successful attempt, because it ends up allowing only trivial welfare comparisons. (Economists are always talking about efficiency, but, as Bob Solow used to say, distribution is what really matters.)

I didn’t say I wasn’t going to do philosophy, only that I’m not a philosopher, meaning that I would approach philosophy the way an economist would, namely by using utilitarianism. Economists often talk about the equality-efficiency tradeoff, and the justification for being concerned about this tradeoff is usually a utilitarian one. And for all its problems, I would say that utilitarianism is the only moral philosophy that rests on a morally sensible premise. Others may be more internally consistent, but that doesn’t make them better.

Taxpayers will have to pay bond holders. So, some in the future generation will do quite well because of the deficit, no?

In principle, if there is a binding resource constraint, then the deficit is welfare-reducing for future generations in a Kaldor-Hicks sense (unless it is used to finance government investment that benefits them). Looking at the US in isolation, the bond holders are not necessarily from the US. Looking at the world as a whole, the deficit crowds out private investment and thus reduces future production possibilities. Granted, in today’s world, you might reasonably question whether there is a binding resource constraint, but I think of that as a separate issue.

Mon Jul 10, 08:25:00 AM EDT  
Blogger Gabriel Mihalache said...

Point taken. This is more of a separate discussion but... I disagree that utilitarianism is what economists would or should do. Many would, in the sense that they do what they saw their teachers do, for example, yet the my point is that moral issues are not constitutive of positive science, and this is the context in which I brought up the subjective theory of value (revealed preference is scientific, equal capacity for satisfaction isn't). I'll stop here. Maybe once you're done with the deficits you could take on methodology.

Mon Jul 10, 09:28:00 AM EDT  
Anonymous Matt said...

If the things we are leaving to future generations were assets whose value will increase, I'd agree that the deficit is 'good debt'. But in fact, (as I understand it) we're financing consumption, not asset-creation-- which would mean that the deficit is 'bad debt'... No?

Mon Jul 10, 02:04:00 PM EDT  
Blogger knzn said...

Matt, It’s bad for future generations but good for our generation. The question is who needs the consumption more. To make the point, I’ll take an extreme example: suppose you’re a retired person with no health insurance (in a country without Medicare) and you mortgage your house to get a lifesaving operation. That would still be “bad debt” in the sense that it doesn’t create any new assets, but in that case it’s easy to see that the consumption has more urgency for you than for your descendants.

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