Nick Rowe writes

There are 4 possible positions to take on the debt. One of them doesn’t make sense; the other 3 do. Which of those 3 is right is an empirical question.

Here are the 4 positions. I gave each one a name. I made up the quotes.

1. Abba Lerner.The national debt is not a first-order burden on future generations. We owe it to ourselves. The sum of the IOU’s must equal the sum of the UOMe’s. You can’t make real goods and services travel back in time, out of the mouths of our grandkids and into our mouths. The possible second-order exceptions are: if we owe it to foreigners; the disincentive effects of distortionary future taxes; the lower marginal product of future labour if the future capital stock is smaller.

2. James Buchanan/uneducated person on the street.The national debt is a burden on future generations of taxpayers. Foreigners are basically irrelevant. Any second order effects of distortionary taxes and lower capital stock are over and above that first order effects of the taxes themselves.

3. Robert Barro/Ricardian Equivalence.The national debt is not a burden on future taxpayers (except for the deadweight costs of distortionary taxation) but only because ordinary people take steps to fully offset the burden on future generations by increasing private saving to offset government dissaving and increasing bequests to their heirs to offset the debt burden.

4. Samuelson 1958.If the rate of interest on government bonds is forever less than the growth rate of the economy, the government can run a sustainable Ponzi finance of deficits, where it rolls over the debt plus interest forever and never needs to increase taxes, so there is no burden on future generations.

I personally was taught 1 as an undergraduate. And I believed in 1 until about 1980, when I spent some time reading Buchanan and Barro arguing with each other. And I worked 4 into my own beliefs soon after.

And now, I believe 1 is false. The truth is some sort of mixture of 2,3, and 4. What precise mixture of 2,3,4 is true is an empirical question. My prior is one third-one third-one third.

Okay, I really will resist the urge to make this about something deeper but I absolutely insist that you read Eliezer on “If a tree falls in the forest . . “ which is basically the same question Nick is pondering.

I think that 1, 2 and 4 are essentially correct and that 3 could be, it just happens not to be in the world we live in.


I think a lot about debt dynamics and so (4) is how I usually frame the world. It is indeed true on average in a country that conducts monetary policy like the United States. The economy will outgrow the risk free rate of interest. The intuition is actually the exact opposite of Nick’s. If it wasn’t true then it would be possible for a single saver through the magic of compound interest to acquire claims on the entire economy. If there are even two such savers in the entire economy they will prevent one another from doing so.


Lerner’s point in (1) is that government spending takes command of good and services in the current period. Thus the opportunity cost of using those services is borne in the current period. This is true irrespective of how the government spending is financed. Its true if there are taxes, bonds, confiscation, money printing, or simple trickery.

If you are concerned that the government – as neither a utility nor profit maximizer – will make poor use of goods and services then this is what your concern centers around. The potential economic inefficiency from government spending that takes place in the current period.

This is highly relevant for macro policy as many macro economists claim that the opportunity cost of goods and services is extraordinarily low during recessions and thus the government should take command of them.


Buchanan’s point is most accurately – in the sense of being true not necessarily what he meant: the utility costs of government action always come at the point of the forcible rearrangement of claims. When claims are rearranged via consent no one faces a reduction in utility. It is only at the point where claims are forcibly adjusted that people feel the pain of government action.

Its important to note that spending is neither here nor there. We could collect taxes and then throw the money into the river. We could simply order Jim to give $500 to John. We could order that Taxi fares will be $10 per mile. We could order that no one will eat chicken on Wednesdays.

It doesn’t matter. It’s the fact that government is forcibly rearranging claims that matters. This hurts and it hurts when the rearrangement occurs. By using bonds we can push the rearrangement into the future so that the pain of government spending is felt later.

This is basically correct except for the fact that if people see the hurt coming they will take defensive behavior and draw some of the hurt backwards in time. Which leads us to.


People recognize the distributional consequences and are aware that if someone receives a bond for $100 as an asset that someone else must face a liability of $100. To the extent the bond is an asset the future tax is a liability because they are fundamentally connected.

I think this winds up failing in practice for a number of reasons but primarily because the bond holder can know with probability one that he has an asset. But, the sum over all probable liabilities for all current citizens will not equal one because it is not only possible but likely that the tax will fall in part on residual claims that are not yet in existence.

Obviously, there are immigrants and children who are not completely accounted for by their parents. However, there is also importantly technology which is not yet in existence.

For example, the owners of Facebook will pay part of the debt for the military build-up in the 1980s. However, the return on Facebook extends not simply from physical and human capital that was deployed in the 80s or could have been foreseen to be deployed in the intervening period. It is also the return from the development of the internet, which creates a set of residual claimants who cannot be known in 1980 nor can anyone in 1980 take action based on the future creation of this claim.

Put simply, suppose Mark Zuckerberg was 100% owner of Facebook and faced all of Facebook’s burden. Suppose also that the Zuckerberg dynasty was completely aware that this was going to happen. What would they have done about it in 1980? Nothing. Because the claim falls on a tech that does not exist in 1980, nor do they have any direct influence in creating – that tech is the internet.

UPDATE: Nick Rowe drew me in so its his fault, not mine. The point of the Eliezer link is that “is debt really a burden on future generations” is a non-question. Just like “If a tree falls in the forest but no one is around to hear it does it make a sound”

The question is: what states of nature do we expect to actualize.

In the tree question we expect that any measurement of air vibrations will produce a positive result but we also expect that no human mind will process these vibrations as the experience of sound.

This is the beginning and the end of the question. There is no “does it really make a sound” because really making a sound is not a thing. It only feels like it’s a thing because of mistaken wiring in the human mind.

Similarly, really being a burden on our grandchildren is not a thing. There will be a different mix of products produced within the economy. That is a thing. Some people will be happier. Some people will be sadder. Those are things.

However, really a burden, that is non-thing. There is no really. There are only states of nature.