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.

Private Wealth, Public Debt, and Taxes

Well, well. Over at VoxEU somebody just connected a couple of the dots:

http://www.voxeu.org/article/eurozone-crisis-time-tax-rich

“Increased levels of public debt are accompanied by mounting private wealth, which is increasingly concentrated on the wealthy elite.”

Could there be a connection?  Could the public debt increasingly be held by a wealthy elite?  Could that wealthy elite be charging their sovereigns rent for the use of the sovereigns own money, money only owed that elite in the first place because that elite have used their power over their governments to lower their own taxes?  And the governments have had to borrow to maintain their services, and now they owe that elite too much to ever repay? 

But note the key step:  The elites used their power over governments to reduce their own taxes, and forced those governments to borrow from them instead.  And now those governments owe too much, threatening the very stability of the system which supports their own wealth.  Greed, greed, greed. 

At Vox they propose a one-off tax of 10%  on the assets of the top 8% of wealth.  (The top 10%, in Germany, for instance, own 2/3 of the wealth.)  They figure it will raise 9% GDP. 

Good, but not good enough.  The entire increase in the concentration of wealth since the 1970’s has been engineered by the elites.  They should give it all back.  The top 1% share of the pie more than doubled, for instance, so they should be taxed, on average, 50% of their assets.

It’s quite remarkable.  They demand disproportionate compensation, because they are so important, and they run things.  But when you ask, who’s responsible for the increased inequality, they deny responsibility, and point the finger somewhere else:  Education, for instance.  Globalization.  

They manage the system, and the system is tottering.   They take too much out of the system for a modern economy to support.  But is it due to their mis-management and short-sighted greed? Or can we, they blame circumstances beyond their control?  Well, if they do not run things, perhaps they are paid too much.   

But we know very well who’s responsible for the financial predicament.  Our elites, and their greed.  So taxing their ill gotten gains is good for us.  And good for them.  Stave off collapse of the system, on which they, and the rest of us, depend.  Will they? Or will our elites, who purport to run things, be shortsighted to the end?  If the US elections are any indication…

Links to Mansoor Khan

Here are active links to the articles Mansoor Khan refers to in his comment to Debt, Total Debt and by Sector. I encourage the reader to check them out. First:

http://seekingalpha.com/article/209386-modern-monetary-system-there-is-another-way

In Modern Monetary Theory, (as far as I understand it.) the government creates money by printing it, politically easy, once established, preventing inflation, and destroys it through taxation, countering inflation, politically hard. A government of reasonable virtue and principle would be required. A certain amount of inflation is more likely. Indeed, since debtors tend to be numerous, and creditors relatively few, a certain amount of inflation, which favors debtors, might counter natural tendencies toward the concentration of wealth. Compare this to what we see: Creditors have seized control of the government, and seeking to retain what are essentially ill gotten gains, are directing the government toward our common ruin.

(For a nice exposition of the problems with the current system, see:

Money as Debt:

http://www.youtube.com/watch?v=Dc3sKwwAaCU&feature=related

Or:

http://video.google.com/videoplay?docid=-2550156453790090544

And:

Money as Debt II:

http://www.youtube.com/watch?v=rCu3fpg83TY )

Next from Mansoor Khan:

http://aquinums-razor.blogspot.com/2011/08/what-is-relationship-of-money-to.html

And:
http://aquinums-razor.blogspot.com/2010/07/why-is-deflation-and-depression.html

http://seekingalpha.com/article/210346-should-newly-created-money-be-a-private-or-a-public-asset

Good. Helicopter money to every citizen. Give citizenship a tangible benefit, rather than the burden implied by the national debt. Negative taxation, which is precisely what the government should do when demand is depressed. And/Or it could guarantee employment, which would work as an automatic stabilizer.

http://seekingalpha.com/article/192375-cause-of-today-s-economic-crises-too-much-thrift

http://seekingalpha.com/article/160269-a-radical-solution-for-america-s-insolvent-financial-system

An orderly bankruptcy of the financial system, with the government as receiver.

http://seekingalpha.com/article/-great-banking-confusion-is-there-a-better-way

Mansoor's proposal for 100% non-lendable equity accounts seems doable. They would carry essentially negative nominal interest. The magnitude of this interest would be minimized by interbank competition for deposits.

That Bloated Financial Sector

Suppose the auto industry was twice the size it was now. That means it would have to sell twice as many cars, AT THE SAME PRICE, to stay in business. Naturally, it couldn’t do this by itself. It would either be forced to contract, or it would require government support to stay in business. It would have to do sneaky and unethical things, like sell fraudulent products. Its companies would have to collude, to hold prices high. It would have to hold its customers hostage, one way or another, to stay in business. And the fact is, we should expect this. It would merely be doing what it had to do to survive, in the bloated and destructive form, it had become.

Consider now the financial sector. Historically, even during times of prosperity, it had ‘produced’ under 3% of GDP. But as of 2006, it has ‘produced’ 8% GDP. I put ‘produced’ in quotes, because the financial sector produces nothing. It is merely there to allocate resources. It does not make things. It is overhead to the economy. It rearranges money. And instead of arranging money to encourage productive industries, it seems to be allocating much of these resources to itself: Its profits, in recent years, have been over 40% of the total profits of all US businesses, despite the fact that it ‘produces’ only 8% of the GDP.

How does it do this? How does it ‘sell’ almost 3 times as much ‘services’ as in the past, and make more money than ever doing it? After all, we would expect that if it had more services to sell, their price, and their profits,would go down.

Well, it has government support. It has its bailouts, and the government has gone through agonizing contortions to see that the banks' mortgage income and value are maintained. The Fed also supports the industry with low interest loans. And the government throws business its way by selling bonds at a higher interest rate.

It does sneaky and unethical things: It sells fraudulent products, CDO’s and CDS’s and dubious mortgages with teaser rates that balloon into unpayable amounts after a few years. The whole real estate bubble was an effort by the banks to generate profit, in fees and interest, sufficient to keep themselves in business. Now the bubble is gone, and the only way the banks can support themselves is to eat into the real economy, It withholds credit from the real economy until its bloated balance sheets will be 'repaired,' inflicting deflation on the economy. And where is the next bubble going to be? Perhaps we are looking at it: the debt bubble.

It colludes, with the combination of algorithmic trading and ‘front running,’ to effectively defraud legitimate traders of their just profits. In these it is explicitly self-serving, and not to the benefit of the rest of the economy.

It holds its customers hostage. With too big to fail banks that the government thinks it is obligated to maintain and foster. With fees and usurious interest rates on credit cards and payday loans.

Meanwhile, the financial sector uses its power to deflect the efforts of government to effectively regulate it. In fact, should the regulation the government is considering prove effective, it would cut into the financial sector’s profits, would tend to its ruin, and force the government, as it now conceives its duty, into even greater efforts to rescue and maintain it.

It siphons off from legitimate industry, and corrupts, some of the best minds of society with its disproportionate remuneration, and contributes to the country’s increasingly inequitable distribution of wealth and income.

And we should expect this. We should expect it to act, not to be benefit of society, but to its harm. It is merely doing what it has to do to survive, in its bloated and destructive form.

That this should lead to the destruction of the economy which supports it, it does not care. The people involved are either indifferent or oblivious to the damage they inflict.

I have painted all banks with the same brush. I'm mainly aiming at Wall Street, though many other banks were a party to the real estate bubble. To those that don’t deserve such a paint job, I apologize. I’m sure there are good banks out there. I hope mine, that is the bank I use, is one. But these banks are at a competitive disadvantage to the bad banks. And the absence of effective regulation reinforces this.

Yet I don’t hear the officers of good banks decrying the malfeasances of the officers of the bad banks. Is it because I just don’t hear, of is it because they do not. Perhaps they feel more a sense of community with those who work at the destruction of their society, than those of the communities they ostensibly serve.

The Interests of the Wealthy

When the wealthy seize control of government, the wealthy cannot help but destroy the society which supports them.

In the short term, it is in the separate interests of the wealthy to corrupt the system to their benefit. That is, they will seek their own benefits ahead of the people's, first by becoming the instruments of government policy, then by bending government policy to their interests. They will cooperate with each other to do this, and secure advantage over the people. Securing advantage, they will plunder the wealth of the people. This is what (most of) the national debt is. It is what the people 'owe' the rich. Instead of paying taxes, wealthy 'loan' the money to the government, which it then has to pay back. The wealthy have used their power to cause this.

In securing their separate interests, they will cooperate in gaining favors. They will trade for votes. This is not 'zero sum' as regular trade is, but each party gains, and both their influence on, and burden on, government and the people, will expand. That is, through the instrument of government, they each acquire disproportionate wealth. And since all resources are competed for, others, the people, are at a disadvantage. The system becomes rigged.

But then they will compete, they must compete, to secure advantage over each other, and further advantage over the people. The government becomes an instrument of their competition, as they compete for its favors. Those who do not compete will be at a competitive disadvantage.

So all the wealthy are forced to compete against each other. They will compete to cause the government to pursue purposes to their own separate ends,which is the very definition of corruption. These interests, the benefit of the wealthy, harm the system, and the people, necessarily, by the law of externality: Those costs which can be externalized, will be. Thus the costs of the benefits to the wealthy will be laid upon the people, until the wealth f the people is exhausted. We are seeing this happening in the present 'recession.'

But the welfare of the people is essential to the welfare of the wealthy, and where it is destroyed, so is their own welfare. If the destroy the income flow of the people, they destroy their own income flow as well.

A poor society has few rich people. Neither has it much power to project, or even protect its interests.

In the long term, an uncorrupted government serves the interests of the wealthy better. A government can only remain uncorrupted to such degree as the influence of the wealthy is limited.

The people have been losing the competition for their government. They have persistently elected the servants of the rich to office. Now the system is rigged in the favor of the wealthy. Not good.

Cross posted as comment to angrybearblog.com: Maule and Pappas on progressive taxation and the decreasing burden on the rich