The Great Internet Government Debt War Ceasefire was breached by Nick Rowe last week and I thought I would jump in. (I’m a red shirt, I don’t expect to survive.) Daniel Kuehn yesterday expressed confusion as to how Gene Callahan was imposing a burden on future generations without any debt. I will try to explain.
We’ll use the Standard Internet Government Debt War Model: Each generation is composed of 100 people who each own an apple tree which produces exactly 1 apple per period. Apples are eaten at the end of every period. Planting new trees is impossible. The government only imposes lump-sum taxes. There is no time-discounting. (because it makes the math much simpler) There is no time travel. With this highly realistic set of assumptions in mind, let us crank through the numbers.
Period 0, Young Als eat their 100 apples.
Period 1, the government taxes Young Bobs 50 apples and gives them to Old Als.
Period 2, the government taxes Young Carolines 60 apples and gives them to Old Bobs.
Period 3, the government taxes Young Daniels 70 apples and gives them to Old Carolines.
Period 4, Young Daniels eat their 100 apples.
Als ate 100 apples at P0 and 150 apples at P1 for a total of 250 apples.
Bobs ate 50 apples at P1 and 160 apples at P2 for a total of 210 apples.
Carolines ate 40 apples at P2 and 170 apples at P3 for a total of 210 apples.
Daniels ate 30 apples at P3 and 100 apples at P4 for a total of 130 apples.
Als, Bobs and Carolines ate a total of 70 apples more relative to the baseline and Daniels ate a total of 70 apples less. It sure does look like apples traveled back in time and without any debt just like Gene Callahan said. (I can’t remember where Gene Callahan posted this.)
But really, it’s not that the debt is impoverishing future generations. It is simply every old generation impoverishing the young generation. Als take from Bobs and Bobs are now poorer. But Bobs themselves make up for that by taking from Carolines and making Carolines poorer. But Carolines themselves make up for that by taking from Daniels and making Daniels poorer. The reason why Daniels are poorer is not because Als got a transfer. It’s because Carolines decided to take apples from Daniels.
Now, the big difference with debt is the following: those who buy the debt (loan the money) choose to do so and so presumably they get a good deal. So Bobs are not impoverished by Als and Carolines are not impoverished by Bobs. But in the end, retiring the debt requires that somebody who would rather have kept their money send it in and get nothing in return. So again, it’s not the debt that impoverishes. It’s the tax.