Do We Just Owe it to Ourselves?
By David Henderson
Ask the proverbial “man on the street” whether current government debt imposes a burden on future generations, and he will likely answer “yes.” But ask the same question of sophisticated economists, especially Keynesian ones, and they will likely answer “no.” Many will say “we owe it to ourselves.”
I used to believe that myself. But this June Feature Article by economist Robert P. Murphy, “Government Debt and Future Generations,” argues that the man on the street is right: current government debt does impose a burden on future generations.
Interestingly, this dispute is not clearly ideological. Murphy points out that he himself, as a younger economist, believed that “we owe it to ourselves” and so did the late Austrian free-market economist Ludwig von Mises. So Murphy takes on both Mises and the most prominent contemporary proponent of that viewpoint, Paul Krugman.
A key paragraph:
Finally, note the crucial ambiguity in saying that future generations “inherit” the government debt. Yes, if an older generation literally bequeaths Treasury securities to their heirs, then the analysis of Krugman et al. sounds more reasonable. But that’s not what happened, for example, in War Scenario B. There, the grandchildren had to pay their elders $4350 billion for the outstanding Treasury bonds. It was rational for each individual Youngest Capitalist to do so because the government was going to start taxing and making interest payments to the holders of those Treasuries. This is exactly what happens in the real world: we have all grown up in an environment with a large government debt, and the government taxes us so that it can make interest payments. Then–if we so desire–we can enter the market and buy Treasuries. Yet none of us is free of the existing debt and the taxes levied to service it.
The author of the article, Robert P. Murphy, has asked me to issue the following clarification:
It’s 100% true that Mises (and the younger me) thought that a deficit today couldn’t shift the cost of a government expenditure onto our grandkids, because present spending is paid for out of present resources.
However, both Mises and I explicitly criticized the Abba Lerner-type argument that government debt is benign to the extent that “we owe it to ourselves.” For example in Human Action, Mises explicitly rejects this view (I quote him here. And back in 2006–well before the debate flared up among Krugman, Don Boudreaux, Nick Rowe, etc.–I explicitly tackled that claim too (4th section).
So what’s going on is that I never (and apparently neither did Mises) saw the really subtle point about overlapping generations and how government deficits allowed the present generation to effectively live at the expense of future generations through that one mechanism. But it’s possibly misleading to say that Mises (or I) ever endorsed the “we owe it to ourselves” argument in defense of the benignity of deficit spending.