Monday, July 10, 2006

The Deficit and Future Generations, part two

As I asked in the previous post, if our descendants are going to be richer than we are, then why should we leave more for them than we’re already leaving? Here’s one possible answer.

In economic terms, even if consumption is increasing, the marginal utility of consumption may be increasing too, because innovation may produce new types of goods that are expensive to produce and severely nonsatiating (or it may produce many, many nonsubstitutable new types of goods that are expensive and only moderately satiating, which I think would be equivalent). To put it another way, except for the necessities that we obviously won’t give up, the goods we have available today are all basically a bunch of crap compared to what our grandchildren will have available. Wouldn’t it make sense for us to give up some of our crap so that they can have more of the really good stuff once it gets invented?

That’s the kind of argument that seems interesting at first but starts to seem silly once you put numbers or pictures to it. Would it have been reasonable for our grandparents – who mostly had to make do with bulky AM radios – to make additional sacrifices so that we could have more iPods? I don’t think so.

But there is one area where the argument might make some sense: medical technology. You might think of “lifespan” as an expensive (on the margin) and severely nonsatiating good. Another month of life is considered very valuable even if you’ve already had hundreds and hundreds of them. The technology to prolong life can get quite expensive, and new types of expensive lifesaving technology are constantly being invented. Moreover, “health,” though in one sense highly satiating (once you’re cured of a specific disease, you don’t need any more of the cure), is in another sense quite nonsatiating: even if a health plan already covers hundreds of diseases and procedures, you’ll be willing to pay more for it if it covers one more disease that you might get (even if it’s not life-threatening) or one more procedure that you might need (even if it’s not life-saving). It was reasonable for our grandparents to make sacrifices so that we could have laser surgery and MRI scanners.

Of course, in addition to laser surgery and MRI scanners, we do also have iPods. So apparently our grandparents made more sacrifices than they really had to. But if you look at what’s happening today, the idea of sacrificing for the sake of future medical technology may not seem so unreasonable. For several years now, people in some income ranges have typically experienced declining real wages but rising real compensation. The major difference is health insurance. In other words, they’re getting richer, but they’re spending all of the new income – and then some – on health care. To the extent that these people consume a constant fraction of their income, their overall consumption is going up, but their consumption of most goods is going down, even though the new goods they consume (more health care) are not substitutes for the old ones (iPods? restaurant meals? gasoline?). If this trend continues, then we have a clear example of growth that raises the marginal utility of consumption.

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17 Comments:

Anonymous Anonymous said...

Sorry, but the premise behind this post is flawed in my mind. i do not believe that we will leave *more* wealth to the next generation. The boomer generation appears to be the first grasshopper generation that will destroy wealth through it's final years. Services are created and spent in real time and there can be no intertemporal savings without a reliable store of wealth. So the boomers will have a pretty good autumn leading to a dismal winter of life. The budget deficit that we have is self correcting through a dollar *event* that will destroy any thought of anybody saving in a currency that does not have stability. Got toilet paper? I firmly believe that we shall suffer a tremendous loss of *wealth* that was largely paper, and thus illusory.

allenm

Mon Jul 10, 03:13:00 PM EDT  
Blogger knzn said...

allenm, You probably should have commented on the previous post, in which I discussed the premise to which you object. I think what you’re missing is that wealth can be stored in intangible form – in particular, in the form of knowledge. Our generation has not been accumulating net physical assets quickly (though it’s still accumulating some), but productivity is continuing to grow rapidly, and it will almost certainly continue to grow in the future.

Mon Jul 10, 08:50:00 PM EDT  
Anonymous Anonymous said...

Our descendants will not just care about their absolute standard of living, but also that relative to people in other countries, for reasons of envy and geopolitics. So we need to keep up with the Joneses, which implies a more responsible fiscal policy.

erehweb

Tue Jul 11, 02:47:00 PM EDT  
Blogger knzn said...

Maybe, but being an object of envy also creates problems geopolitically. I do think relative wealth is important compared to people in ones own environment, but I’m not so sure it matters compared to people in another hemisphere. If there were a question about our ability to maintain an arms race, that would be a problem, but I don’t think that’s the case.

Tue Jul 11, 09:40:00 PM EDT  
Anonymous Anonymous said...

A couple of points:

There are problems in being at the top, but it's a lot worse at the bottom.

A new arms race seems unlikely now, but who knows what the next 100 years will bring? Maybe Star Wars will become feasible. Maybe we'll be racing to colonize Mars.

erehweb

Wed Jul 12, 11:25:00 AM EDT  
Blogger knzn said...

erehweb, The question is whether being in the middle is that much worse than being at the top.

This also gets into the issue that comes up with immigration: is it our responsibility to care for fellow Americans (and in this case, their descendants) more than for foreigners? In principle, I can take care of my own descendants by saving more than I otherwise would to compensate for the deficit. But I won’t assume that other Americans are rational enough to do the same. So should I advocate reducing the deficit in order to help the descendants of other Americans at the expense of the descendants of foreigners?

Wed Jul 12, 07:18:00 PM EDT  
Anonymous Anonymous said...

One reason we might want Americans and America to do better is that this shows that a democratic system is feasible, and won't lead to (relative) impoverishment. Perhaps a less big deal now than when Communism and Fascism seemed like the wave of the future, but still worth considering.

erehweb

Thu Jul 13, 02:07:00 PM EDT  
Blogger true dough said...

Knzn, I'm enjoying your blog as always! Especially this exercise you're inflicting on yourself over the budget defecit. Why oh why must uncertainty be so under-rated. I pressume because it packs low utility.
Anyhoo, to the point as quick as I can....how can we predict the ease in which future generations can pay back the defecit if we cannot predict productivity growth? Let me play for the death-to-the-defecit team.
You say: "...innovation may produce new types of goods that are expensive to produce and severely nonsatiating..."
I have a difficult time coming up with examples of goods that are expensive, severely nonsatiating, AND able to trigger the scale effect over the substitution effect. But I suppose there are variations of your med example that perfectly suit the timely baby boomer situation. If their pensions don't fail them first, boomers could trigger a temporary high demand for such products and services.
But what if, say, several general purpose technology's (GPT's) are developed, each of which could provide users with similar utility (although perhaps this assumption could even be dropped). Assume also that the overwhelming abundance of GPT's produced limit the ability and desire of potential users to gain information about each one. Further, agents can't foresee the future of each GPT beyond a margin of time, and so continues their vision for subsequent future periods as time progresses. Joe Baby Boomer asks himself, 'will this GPT have multiple applications? Do I want to bother with it? Will it be replaced, will it evolve? To hell with it. My expectations of holding money exceed my expectations of the unknown.' Voila, today we wrongly assumed a constant rate of growth and tomorrow the defecit continues to roll.
Doesn't this seem like a stronger case then the one of boomer's closing the defecit by purchasing med equipment? (Let's skip the iPod example...cuz how much has it cost the record industry...and isn't it an upgraded substitute for the discman?) If seniors live to be a frightening age, perhaps their strain on society will offset the purchases they make.

Please note that the gloom above is laced with forward-thinking concepts on GPT better expressed by Richard G. Lipsey (Simon Fraser Uni) and Kenneth I. Carlaw (Uni of Canterbury), in a paper I finished reading moments ago: GPT-Driven, Endogenous Growth.

Fri Jul 14, 07:48:00 PM EDT  
Anonymous Anonymous said...

Speaking as a borderline member of the next generation, I can assure you we won't be paying off that debt. (Indeed, we will never be able to)

Either by outright repudiation or by a quick round of hyperinflation, I don't think it will be a problem.

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