Inter-Generational Borrowing

Nick Rowe addresses the problem of inter-generational borrowing at:

http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/12/debt-is-too-a-burden-on-our-children-unless-you-believe-in-ricardian-equivalence.html

The issue is brought up again by Dean Baker: http://www.cepr.net/index.php/blogs/beat-the-press/children-and-grandchilden-do-not-pay-for-budget-deficits-they-get-interest-on-the-bonds

If I read Nick Rowe right, he assumes (using a toy economy based on apples,) that A: Apples don’t last.  And concludes:  B:  Each generation, in borrowing apples from their children,  consumes an increasing share of the apples produced by their children.  That is, each generation consumes more than they themselves produced, taking from the production of their children. (The second generation gives to the first, but borrows even more from the third, etc.) I think this is correct, and is Nick’s point: Inter-generational borrowing is not neutral. Succeeding generations end up short. And Dean Baker, who claims that there is no transfer of wealth with inter-generational borrowing, is wrong.

If I read this right, then the only moral position is to grow the economy at a rate greater than the increase in (real) inter-generational borrowing. ( Of course, this eventually comes up against physical limitations.) That is, plant apple trees at an increasing rate, greater than the increase in inter-generational borrowing. But this requires (it seems to me) that the present generation consumes less than they would if they hadn’t borrowed in the first place.  That is, the present generation must invest more than they borrow.   

But in terms of the present, real value, this just means the present generation should consume less than they produce, and invest the rest. The borrowing of money is irrelevant, except where it affects this. 

In fact, the borrowing of money is rather inverted, because the younger generation is forced to borrow money from the older, established, wealthier generation, pay that older generation back with interest, and thus end up with a diminished share of the  real pie. 

So this is what the government is doing.  It is the younger generation borrowing from the older, who refuse to pay their taxes, and instead consume more than they produce.   Social Security and Medicare notwithstanding,  (Who, after all, will be cheated, if Social Security and Medicare are not adequately funded in the future?) the government, in principle, represents the interests of the young. Its proper purpose is to invest in the future, which is more the younger generation's than the older.

But the government has been co-opted by the older generation, who, instead of holding it in trust, exploit it to their own profit. 

The Republicans’ stated goal, then, and that of Austerians in general, the shrinking of government, (especially those parts of government that pertain to investment,) is to cheat the young out of their interests.   This is what we are seeing in youth unemployment across the globe, so much being taken away that the younger generation is even being decapitalized.  Here in the US, it is seen as higher costs of college, and lower investment in primary education, the neglect of infrastructure, etc.  (Infrastructure is of greater benefit to  the young, since they can expect to use it longer.)

So not only is it the 1% vs the 99%, but it is the old vs the young.  

The problem for the old, of course, is that by decapitalizing the young, they are decapitalizing themselves.  Because it is on the backs of the young the old hope to take their ease.  

 Running a trade deficit is also borrowing from future generations, and is thus also immoral, unless it is done for investment.

Who Really Pays Taxes

Steven Landsburg, at "thebigquestions.com" considers the issue of Mr. Robert Kendrick, who, though wealthy, does nothing but drive and park his four cars. Can Mr. Kendrick be taxed? Steven Landsburg says no. Many others say yes.
____________

Mr. Landsburg is drawing a distinction between the nominal and the real. They are too often confused. Nominally, Mr. Kendrick can be taxed, and nominally everyone else is better off. However, Mr. Kendrick cannot be taxed of real resources, because he basically doesn't produce any, so nobody is really any better off. Good.

More generally, (really) only production can be taxed: All taxation is a transfer of production, goods and services, to the government. Consumption cannot (really) be taxed, since it is still a transfer of what is produced away from the consumer and to the government, which then consumes. Consumption can only nominally be taxed. For example, were we to tax Mr. Kendrick to such degree as to change his behavior, on the whole, there would still be no net improvement in the economy. Any real improvement in the rest of the world would be less than Mr. Kendrick's loss.

Further, (really) only consumption, demand, can be subsidized: All subsidy is a transfer of demand, that is, consumption of goods and services, from one producer to another, through the instrumentality of the government. Due to handling expenses, the subsidy is always less than corresponding tax, that is, on the whole, an economy is always, in the present, worse off for a subsidy. This is not to say a nominal subsidy need be useless. For example, when the subsidy goes to develop infrastructure, that is future production, an economy may be better off in the future.

Above xposted to:
http://www.thebigquestions.com/2011/04/18/the-man-who-cant-be-taxed/#more-5896

To continue: An economy is a transfer of production to consumption, of producer to consumer. However, producers are also consumers, and must get back a certain percentage of their real production in order to survive and expand. The various mechanisms of an economy may prevent producers retaining this percentage, in which case, a nominal subsidy may be necessary to compensate. This combination of processes is, however, less efficient than just letting producers retain sufficient resources on their own account. For instance, labor, particularly low wage labor, is increasingly coming under subsidy, as eg earned income tax credit, and in the future, ‘universal health care.’ It is more efficient simply to arrange that they are paid more. However, this seems to be politically infeasible.

From the above, it should be clear that the real, or essential, tax base is much smaller than the nominal, or apparent, tax base. This is because most labor, and most industry are involved in activities which are essentially non-productive, in the most basic sense. The financial services sector, for instance, cannot really be taxed, because it produces nothing real. Government employees, for instance, cannot really be taxed. Neither can Calvin Klein or Brad Pitt. Or your neighborhood plumber. Unless the government directly uses their services, their production, and is not buying these services, the government is merely transferring other, more basic production, away from them and to itself. They are not part of its real tax base, however much a part of its nominal tax base they may be. The government, for instance, cannot really tax the military industrial complex. It can, and must, tax those industries whose production goes into sustaining that complex. The production of steel and coal and electricity can be taxed, but the production of a jet fighter engine cannot be. The engine is instead really paid for by the steel and coal and electricity and labor, and whatever else goes into it, that the government had collected as real tax. This is clear because what ever nominal taxes are charged to the jet engine will merely be added to the (nominal) bill the government pays for it.

So, are you really taxed, that is do you directly contribute to your government, or are you just nominally taxed, and your welfare reduced somewhat by the transfer of demand, and thus resources, away from you? Probably (mostly, if not all) the latter.

Thus your complaint is not that the government takes too much from you, since it takes nothing. It is merely that it does not allow you to keep for yourself as much of what others have produced as you would like.

--- Further consideration has led me to the conclusion that real assets can be taxed, since all real assets have previously been 'produced.' Thus, taxes on Mr. Kendrick's nominal wealth, which represents a demand on real wealth, would represent a real transfer of wealth from Mr. Kendrick to the government. However, Mr. Landsburg's point that the government spending this would leave everyone else a little worse off is still correct. But so too if Mr. Kendrick had just taken the money and spent it himself.

A point of MMT, however, if I have it correct, is that the purpose of taxes is not to raise revenue. The government can spend its currency as it wishes. (Nominal) taxes are to maintain a demand for that currency, and to destroy excess demand in that currency, that is, to maintain the value of that currency, ie fight inflation. According to MMT, then, the real cause of inflation is a lack of political will. ---

A Brief Keynesian Digression

This will help with the next posting. Its not necessary, but if you don’t understand it you will have to take some things on faith.

Over the long run, Consumption and Income (or production) are equal, for economies of all sizes. Everything that is consumed must first be produced. Everything that is produced is pretty quickly consumed. Yes, there are inventories, but they are seldom for more than a few months, and they usually stay more or less stay the same. (Every economy, especially modern ones, is at most, only a few months from disaster) Let’s draw a picture, Diagram 1, with Consumption on the vertical axis and Income on the horizontal axis. Then the line where they are equal, for economies of all sizes, is the 45 degree diagonal. If we draw a point above this 45 degree diagonal, the economy it represents will have Consumption greater than Income. Below this line, Income is greater than Consumption. So any economy we talk about, is in the long run, going to be a point on this 45 degree diagonal. If we talk about a 100 billion economy a, it will lie on this line, where its Income and its Consumption are equal. The same for a 200 billion economy b, or a 500 billion economy c.

Now think about Consumption. If our economy is really little, we are going to want to consume more than we produce. If our economy is bigger, we are going to produce more than we want to consume. (Then we are also going to want to save, or more properly accumulate.) We represent what we want to consume by a line C. Diagram 2. This line is called a curve, by economists, lest they forget, as they sometimes do, that it really doesn’t have to be straight. The distance between this line, and the bottom of the graph, is how much we want to consume, at each level of income y. It slopes upward because the greater people’s income (y), the more they want to

Consume. Now this line C, this curve, crosses our 45 degree diagonal, at point e. Below, to the left of this at point e’’ for instance, our economy is little, and people are going to want to consume more than they produce. (In this simple model they can’t, of course. They have to starve) So the Consumption line is above the 45 degree diagonal, more desire to consume than income. To the right of e, at e’ say, our economy is larger, and people are going to have leftovers from what they want to consume, which they will want to save. As our economy grows bigger, and moves further to the right of e, people will want to save more and more. This is shown by the vertical distance between the 45 degree line, and the Consumption line C. Note they are also consuming more and more.

Now this Consumption line is sort of a matter of attitude. (And other things. In fact, this whole argument, is a matter of attitude. As is the diagram, except for the fact that the economy is on the 45 degree diagonal. Notice we’re also ignoring little things like taxes and government and exports and imports.) If people feel like consuming a greater proportion of their income, for a given size of their income, the Consumption line would be higher. This is shown by curve C’ in Diagram 3. At the size of income marked by y, though people are neither saving or dissaving at C, at C’ they want to consume so much they would be dissaving.

Back to the C curve, and Diagram 4. At income y, C is below the 45 degree diagonal, and the difference is how much the people in the economy want to save. (Want to consume + want to save = what is produced.) Now, where can this savings go? It has to go somewhere, because in the long run, economies cannot accumulate stuff. Economies do not save. (This is particularly true of market economies. A company that ‘saves’ too much of its product ends up going under. Well, maybe except for banks. But saving money is not saving stuff.) Nobody is going to make 50 million dishwashers, or 50 million cars, so that 5 or 10 years down the road, they will have them to sell. (Inventories that are accumulated are for at most a few months, and we’re talking about longer than that. Also, note that services cannot be saved.) No. They’re going to want to build a factory to make these things. They’re going to want to invest in a factory. That’s where all the savings goes, investment, and so savings is equal to Investment. (Remember, we’re talking about real savings. Right now, people are money savings like crazy, or trying to. But it is not being invested. So really, they are not saving anything. THey are redistributing demand, both in the present, and the future.)

Now Investment uses resources and is therefore like Consumption. Desired Investment also depends on the Income of the economy, so it can also be represented by a curve, and if we take this curve for desired Investment and add it to the (desired) Consumption curve, we end up with a total, the sum of Consumption and Investment, which economists call Aggregate Expenditures, or AE curve. Actually, what we have here is Aggregate desired Expenditures. Now where wishes, that is the AE curve, meet with reality, that is with income, or production,(y) on the 45 degree line, at e, we have the size of the real economy. This is also where desired savings is equal to desired investment. (We cheated and used a different argument, that real investment and real savings really have to be the same. The Keynesian argument with desired savings and desired investment is more complicated: Suppose the economy produced more than at e, at e’ say. Then the economy would be really producing more than people wanted to expend (at the AE curve.) So with all this extra production, inventories will expand, producers will want to cut back, they will invest less, and the economy will fall back to e. Suppose instead, the economy produced less than at e, at e’’, say. Then the economy will really be producing less than what people want to expend. Inventories will shrink, producers will see this and want to produce more, so they will invest more, and the economy will grow, back to e.)

Now this diagram doesn’t explain very well how economies grow, and move up the 45 degree line as both income, that is production, and consumption grow. Apparently, the AE curve has to keep shifting upward, which means either desire to Consume, or desire to Investment, or both must also keep shifting upward.

In the diagram, though, the economy is kind of stuck at e, because we can’t save more than we invest, and we can’t invest more than we save.

From this diagram, we can draw a simpler diagram of just the relationship between desired Savings and desired Investment. We do this by simply subtracting the Consumption curve in the diagram. If we subtract the C curve, that is shift the C curve down to the horizontal axis (down the orange arrow) and keep the other lines in the same relationship to each other, we have a diagram of the relation between desired savings and desired investment. Diagram 5.

As in Diagram 4, the economy we are talking about is really where the lines cross, at e, where desired Savings equals desired Investment. This is the diagram we will be discussing in the next posting.