Monday, 15 October 2012

Seven economists and a surreal debate

Over the last few days, there has been a great debate in the economics blogosphere over whether public debt is or is not a burden on future generations. The idea that high public debt is a burden on the as-yet-unborn is a popular theme with right-wing politicians and is used to justify deficit-cutting measures that may be counterproductive. So this was a really important debate and I have been watching it with great interest.

But oh, what a debacle. They couldn't agree what they meant by "fiscal cohort", except that it wasn't quite the same as "generation". And each of them seemed to have a different idea about how debt transferred down the generations actually would be paid off. Roughly, they divided themselves into two groups plus fence-sitters:

- those (Baker, Krugman) who argue that as the debt transferred down the generations is owned by members of those generations, paying that debt off through higher taxation simply moves money around among people already alive: future generations inherit both the debt and its repayment, so the net effect in aggregate is zero and there is no overall burden on future generations

- those (Rowe, Williamson) who argue that debt-funding consumption by previous generations effectively withdraws funds from future generations, reducing their ability to consume. This group generally did concede that debt-funded investment should benefit future generations leaving them with no burden, but they were adamant that debt-funding consumption (e.g. pensions for the elderly) would effectively leave future generations poorer.

I am not going to debate any of this myself.  I'm firmly on the fence with Delong, Smith and Wren-Lewis. For what it's worth, I think whether or not public debt proves to be a burden on future generations depends on the actions of politicians, not economists.

However, the purpose of this post is to share my amusement at the surreal nature of this debate with my readers.

Enter the Seven Dwarfs Economists, each with their own ideas about what to do with Snow White The Debt Burden.

Here they are, with their respective straplines (well, my interpretation of them, anyway).

1. Dean "Doc" Baker                         "This is my show!"

2. Nick "Sneezy" Rowe                      "If I go on about this for long enough,
                                                          eventually you'll agree with me"

3. Brad "Happy" Delong                     "We all agree, really"            

4. Paul "Grumpy" Krugman                 "Sigh. It's all distributional, you idiots"

5. Noah "Dopey" Smith                       "I don't know. But I can do math"
("Dopey" may be a bit unfair to Noah. Nick says he's smart. And he can do math. Which I struggle with.)

6. Simon "Bashful" Wren-Lewis           "It doesn't matter, at the moment" (balanced budget stimulus edition)

7. Stephen "Sleepy"Williamson             "It doesn't matter. Er, wait, yes it does" (Ricardian Equivalence edition)
(late entry)   

I feel we could submit this debate to the public vote, X-factor style. Vote for your favourite by number in the comments!



  1. Thank you, interesting reads.

    >It has distributional effects, but it does not
    >in any direct sense make the country poorer.
    Indeed surreal.

    It does make perfect sense to have the coconuts hanging from the palm and no one can grab except a few giants. Agreed, it does not matter who cannot if 'no one' can (anymore).

  2. Dear Frances,

    Wonderful post. Thank you for your clear insights, as usual. Your prior discussion about the productivity of labour vis a vis the somewhat less practical world of finance leads me to believe you may find the below book an enjoyable read. It is wonderfully written, and touches on some fantastic points of interest. I think you would like the chapter on Methodology in particular. In any case, I think the whole book is quite a worthy read.

    With some trepidation I post the below comment, based on Richard Rorty's lecture at the University of Chicago in 2006 (available through Google), insofar as I feel your unremitting rationalism might find it so fanciful that you don't bother to read the book I have commended to you. However, I trust in your unique impartiality. Best wishes

    The destruction of all categories reached its orgasmic climax by dissolving the relatively immaterial discursive distinction that previously was laid out through criteria’s of reference. Such criteria’s divided civilization amongst competing frames of the ‘subjective’ and the ‘objective’, and necessarily overlooked one simple fact: all the human thinking that is transmitted through complex codes of communication – even that which utilizes computers – stems from a subjective point of view. The supposed God of objectivity, detached as it was from human interpretation was but a temporary, and perhaps even necessary episode of theological extremism in the guise of modernity, thanks to the arrogant enthusiasm of an admittedly still wonderful and highly productive scientific community. The implications of this realization are quite meaningful, for it means that quite literally the only obstacle to anything is imagination, of which there is a great surplus in the 21st century thanks to the information revolution. Thinking poverty will end will end poverty, for example. So the question then arises, what next? What planet should we colonize? That, I submit, is the new scientific project.

    1. I shall read it. I am slightly puzzled how "thinking poverty will end" will end poverty. Surely, at some point thinking has to be translated into action? I am reminded of the Letter of James:

      "If a brother or sister is ill-clad and in lack of daily food, and one of you says to them, "Go in peace, be warmed and filled," without giving them the things needed for the body, what does it profit?" (James 2:15-16)

      Thinking about something doesn't by itself create it.

  3. 4 & 6

    Many of these models rely on the "representative agent" or identical agents.

    Increasing taxes to reduce debt may lead to some individuals expecting lowers taxes in the future due to the lower debt. But why should this expectation exist, if the tax is 'perceived' to be carried by one generation/nationality/class/group for the future benefit of a different generation/nationality/class/group. There is no reason for spending to be maintained at the same levels.

    Agents vary in their willingness, expectation and ability (bankruptcy/unemployment). The more disparate the groups, the more the fiscal multipliers of such models will be underestimated.

    1. The limitations of representative agent models is of course one of the arguments against things like Ricardian equivalence. Mind you, I'm considering devising my own version of Ricardian equivalence - the "financially constrained household" that is worried about future cuts in benefits that haven't been announced yet but are widely predicted, so reduces its spending now in order to save money as a buffer against reduction in its real income ....I'm sure this is every bit as "representative" as the Ricardian household that is so worried about future tax rises that haven't been announced yet, and are not predicted to occur any time in the foreseeable future, that it saves money as a buffer against them.

    2. Surely countered by the Job insecure household with savings they need to get rid off to pass means testing on their benefits...

    3. Yippee, another "representative agent"! This is getting more complicated by the minute....

    4. That would be an excellent idea. Would fits in perfectly with Robert Clower's cash contraint/credit rationing and his distinction between notional and effective demand eg (can't quickly find a better reference)

  4. Francis, Couldn't you put the seven dwarfs story to music? No one else in the country has your combined talents: economics and musical ability.

    1. I thought Disney already did? "Hi-ho, hi-ho" and all that?

      But I'm certainly not the only person who can do music and economics. Paul Mason (Newsnight economics editor) has a degree in music, Andrew Lilico lists "opera singer" among his talents, Chris Dillow plays the guitar.....

  5. Music is essential - for me at least. Don't think I would have got a feel for the complex mathematics in dynamic modeling (Times series, VARIMA, VAR, ARCH etc) w/out hearing the 'noise' it all made. ("Harmony and dissonance")