Understanding The Debt Burden Debate

Looking at my previous article, I realise that it is mayhap unclear what the "debt burden" debate is about. I provided links, but my feeling is that the linked articles are in all likelihood to a greater extent than complex than necessary. In this article, I render a quick primer on the debate, without attempting to reply which side is right.

In club to avoid debates near the nature of authorities debt, I volition supercede "debt" amongst "government liabilities", which includes coin together with authorities debt (which I similar to refer to every bit "forward money").

The side that argues that "debt is non a burden" debate that nosotros cannot transfer resources across time. Future generations produce no send goods to the electrical flow generation via fourth dimension machines inward club to encounter "obligations". Conversely, the side that argues that "debt is a burden" typically debate past times constructing examples, where in that place is an number that mimics such "time travel".

In club to empathise the debate, nosotros request to empathise those examples. They to a greater extent than oftentimes than non await similar this.

• At some initial time, the authorities spends money, together with increases its liabilities. Typically, this is a transfer to an "older generation" (think of authorities pensions), which spends the coin together with and then promptly dies.
• The authorities liabilities are rolled forwards for a number of "generations".
• The authorities raises taxes on the futurity "young generation" to eliminate those increased liabilities. ("Paying off the debt.")

Therefore, it looks similar the futurity "young generation" is penalised amongst higher taxes every bit a outcome of the increased authorities liabilities that was used to transfer resources to the acquaint twenty-four hours "old generation". Government liabilities appear to deed every bit an intermediary inward a transfer betwixt those generations.

The flaw amongst these examples is that in that place is no justification every bit to why the authorities liabilities accept to go reduced inward the future. This is simply an arbitrary authorities activeness that is imposed past times the somebody giving the example. In the existent world, authorities coin together with debt grow along amongst nominal GDP, hence 1 could easily accept an alternate story inward which the taxation hike never occurs. (My previous article gave such an example.) That said, it appears condom to tell that is impossible to grow liabilities faster than gross domestic product "forever", together with hence actions may eventually go needed to confine liability growth.

The fact that the "burden" is genuinely the outcome of what appears to go an arbitrary authorities policy was observed earlier. The Austrian economist Robert P. Murphy gives a proficient summary of the debate inward this article, which discusses this point. He also lists the positions of the diverse economists involved.

The Real Question

The query that the debate is genuinely near is: does increasing authorities liabilities at in 1 lawsuit (above some "normal level") imply an obligation to cut down them dorsum to some "normal level" (with some shape of austerity policy) inward the future?

From the perspective of mainstream economists, this query does non appear to go answerable. They entirely recognise 2 modelling approaches every bit beingness valid, together with neither gives a useful reply to this question.

1. The "representative household" models, which are the measure mainstream models used past times fundamental banks, are characterised past times households that alive forever, together with hence they cannot tell us anything useful near inter-generational equity.
2. The overlapping generations models which are beingness used are besides far removed from reality to tell us anything useful. The fourth dimension increments are "one generation long", whereas financial dynamics motion much quicker. Debt ratios tin motion a lot inside a decade, never hear a "generation". 

Since they lack a model framework that tin reply this question, mainstream economists volition go debating this query for a long time.

(Update.)

• Roger Farmer provides a "reading list" of publications to empathise the mainstream side of the debate. I accept non read all of the list, I believe that they revolve around the purpose of OLG models, which I pass upward every bit offering policy relevant guidance. He responded to my points inward this article. I volition accept to await it over, together with offering a longer version of my comments.
• Cameron Murray gives a to a greater extent than detailed explanation of some of the problems amongst OLG models.

(c) Brian Romanchuk 2015