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.