 This is a new talk. I've never given this one at Mises you before when you're talking beforehand about Making suggestions for what to cover. I brought this up because this is going to be this was a controversy that raged in the blogosphere Where no man emerges unscathed And this was a few years ago where a bunch of Economists were arguing about stuff and the reason this Stands out for me in particular is I started out on one side And I'll tell the stories we go through this presentation and then I had an epiphany and I it was like a like whoa I have been totally wrong and it was it was so cool that I didn't mind that I had been wrong All right, and so that's very rare. It's not having like three times I've been wrong more than three times, but usually I resent the fact I'm saying this time it was so like I was like, oh wow like now now I see that the issue clearly so if that's ever happened to you where you were really sure you were right about something You can list five reasons that you were right and then when you saw the other side and realized oh each of those five things No, there was a little flaw there that falls apart. So anyway, I'll try to convey that to you I've never tried to do this in terms of like a classroom lecture setting So we'll see how it goes, but that's what I'm hoping to convey and also just you'll you'll come away I'm sure with a much better understanding of how government debt works because this is a very confusing issue sometimes and there's a lot of Misleading things that are said to the public Okay, so first let me just go through a little Primer on how does government debt work? So I'm gonna be going over a part of a table that's that's in this book Lessons for the Young Economist So there's the copies out there the free PDF is online at mises.org if you want to look at it Let me just mention in case you was if you knew about it But you knew also knew that oh, yeah, this is written for like junior high So why would I need it I do certain things in here that you probably have never seen before so if you are an advanced student And you just assume this is basic kiddie stuff you might want to look at so for example Carmen told me that when she was doing the comparative advantage stuff That one of the examples she got was based on the treatment in here that apparently I did something in here That she had never seen before and I was surprised, but I just rolled with it. I was like oh, yeah, okay No problem, you know You're welcome, but so anyway, that's there's certain ways I guess of that I try to put stuff to explain it to a junior high audience and apparently some older people like oh wow I never thought of it like that. Alright, so anyway, let's mention that So here what we're just gonna walk through is two hypothetical years for a government And it's just look walk through its finances because I want you to see exactly the sense in which running a deficit Makes it harder in the future for the government to buy things Alright, so it's it's the same thing as it is for a household But let me just do it in the context of a government just so you can make sense of some of the vocabulary that we use in the in this context Okay, so I'm gonna go through it quickly because it's pretty standard stuff But in case you'd never heard someone say it like this. I just want to make sure we lay this foundation So the idea is tax revenue one trillion dollars expenditures one point one trillion, right? So this government in this year 2017 is spending a hundred billion dollars more than it's taking in a tax revenue So that's why the deficit is a hundred billion. Okay, so a deficit is Something that pertains it's a flow concept if you know the distinction between like a flow and a stock variable So the deficit refers to something over a certain period of time So it's saying it during the course of this year 2017 This government spent a hundred billion dollars more than it took in a tax revenue I just assumed so that this doesn't come from the numbers here. I'm just telling you this suppose at the start of 2017 the debt of this government was zero dollars So it started out debt-free that means at the end of the year its debt would now be a hundred billion Okay, so that's the relationship between the government debt and the deficit the debt is a stock variable That's just a number that's true at a snapshot in time Whereas the deficit is that the disparity over is a flow over a certain unit of time. Okay, so It's not a coincidence that it ends up being a hundred billion, but again, that's because it started at zero Okay, now I'm making up some more numbers here Let's say that where did this how did this one point one trillion? What did it consist of I said all they spent three hundred billion dollars on their military in 800 billion on what they would call social stuff here. We would call anti-social, but they're right Okay, so notice that adds up to one point one trillion That's not a coincidence. These numbers are gonna have to add up to that number Okay, and then the interest for this year on the government debt is zero Because we assume they started out without any debt. All right, so now so that's how those numbers fit together and now How does the finance minister or the Treasury Secretary in the US context? How do they actually do this, you know, mechanically what legally contractually what happens? Well, they don't have any outstanding bonds from previous years because they start out with the zero dollars in debt But what they do this year and I realize this might be hard to see because there's a table in the way But what it says is they sell 10,500,000 bonds that have a $10,000 face value at $9,524 each and that raises them a hundred billion dollars Okay, so when the government runs a deficit they issue bonds a bond is just a piece of paper That's a legal claim that says the owner of this piece of paper is entitled to a payment from the Treasury Okay, so just like a corporate bond in that sense the government bond is similar so These bonds I'm just assuming just you understand how this stuff works is what would be called a zero coupon bond All right, so the the face value these particular bonds say the owner of this thing in One year time in the year 2018 is going to get a payment of $10,000 from this government's Treasury and so what? Investors in the year 2017 are willing to pay to this Treasury To get that piece of paper is not the full 10,000 that would be stupid, right? You wouldn't pay the government 10,000 dollars. Well, they do now in Europe. They actually pay more but Normally they you would not pay $10,000 now for a piece of paper that says in the year 2018 The government owes you $10,000 right you would pay less so that you earn a positive interest rate Okay, so that's the way for these what are called zero coupon bonds where you just buy the thing up front hold it Till maturity then turn it and get paid the way you earn interest on that is You pay the government less than what the face value is and that's the way you earn interest on your mind So these numbers work out that if you paid 95-24 for it waited one year got paid 10,000 if you do the difference and then divide by 95-24 it's about 5% okay, so that's a 5% rate of return That's where that stuff comes from Okay, and then we'll just look through next year What happens again? I know you might not be able to see this But I'll just say it out loud. You'll get the big picture Tax revenues again are a trillion dollars this time expenditures. We I've assumed are only a trillion So they ran a balanced budget this year. So that's why the deficit for 2018 is zero The debt at the start of the year is a hundred billion where that number come from. That's the debt at the end of 2017 okay, so that the debt at the end of 2017 is the debt at the start of 2018 The debt at the end of 18 is also a hundred billion because they ran a balanced budget that year So since the deficit was zero that year This the quantity of the debt the value of the debt stayed the same because there's that distinction between deficit and debt If you run a zero deficit, the debt doesn't go down. It just stays the same. All right expenditures this time around I had 280 billion for the military 715 billion on social spending and Five billion for interest. So those three numbers add up to one trillion But so notice right away part of the the drag if you will of the the fact that they're carrying this $100 billion debt is now Five billion of their expenditures is just due to interest on the debt Okay, so that even though they're taxing the same amount now. They only have 995 billion left over to play with that the five billion is kind of spoken for Because they're carrying that hundred billion in debt because a hundred billion times five percent All right, so that's the big picture. That's pretty easy to follow if you want to get in the weeds What's happening in terms of the bonds and so forth and again? You can get the book if you want to think about it more carefully over a cup of coffee or something the The government redeems those outstanding ten million five hundred thousand bonds that we talked about for ten thousand dollars each Okay, and so ten thousand dollars paid out to ten million five hundred thousand adds up to a hundred and five billion and Then if they reissue the same bonds in the same terms, they only take in a hundred billion Okay, so that's when you think about the government just rolling over the bonds as they mature To sort of tread water with their total outstanding debt because remember the deficit zero this year There's a mismatch and that's where the interest payment comes in because again when they Sell someone a piece of paper that says one year from now We're gonna give you ten thousand dollars you hang on to this thing the investors only given them 95 24 And so they the government has to issue more of those things to raise a hundred billion now So when those pieces of paper mature in one year the total amount the government has to pay those people is actually a hundred and five Billion so that mismatch is where the interest comes in and that's why just rolling over the debt There's there's a drag there and that's why The government even if it take even it runs a balanced budget some of its spending now is absorbed by the interest So when you see projections of the United States Government's debt and what the interest cost is gonna be when interest rates start rising This is the kind of thing they're talking about that The amount of debt the US government issued in the last several years is enormous There were it was at least three it might have even been four I forgot the the number but at least three years where under the Obama administration the deficit each year Was more than a trillion dollars Okay, so each of those years the government spent a trillion dollars more than it took in okay So just astronomical but the reason that doesn't feel like a crushing burden on American taxpayers Is because interest rates during that same period fell to basically zero Okay, so the interest cost of carrying that debt for that period was pretty low But the you know the worry is if and when interest rates start rising that huge debt is still sitting there And that's really gonna start weighing down heavily. Okay, so that's just the basics I wanted to make sure you had heard these concepts and how they relate to each other so now the the focus of this talk today is gonna be four different views on Who bears the burden of government debt? So I'm just gonna go through and summarize four different perspectives on this question of You know, what's the big deal? Is there a big deal about government that some people are really freaked out about it? other people as we'll see think now that's a red herring, you know only a The layperson worries about it, but the sophisticated people know it's not a big deal. We're gonna just walk through the different views of that Okay, so the view number one that we're gonna cover I'll call the man on the street So this is an idiom I realized when I was typing this up that if you're foreign you might think that's a weird expression So in American English that means like the view from the non-expert like the standard per the common person And I think you might say oh is that sexist cuz the man's right I think they know that women wouldn't be so stupid as be standing in the middle of the road talking about government policy so Think it's actually complimentary Okay, so the view of the quote man on the street as far as Government debt and you'll you'll see this a lot like with letters to the editor or Just talking to regular get a town hall meetings or something when it comes to this issue of government debt So I'll just read I'm so what I'm gonna do for these views is like put words in the person's mouth So these aren't actual quotes from some other pram You know I'm paraphrasing, but I think this is very fair to the spirit of this of each of these perspectives So the man the street often will say something like if the citizens want the government to spend money They should be willing to pay the full taxes for it Don't want the government debts and make our grandkids pay for our spending Okay, so the perspective there is to say that if the government's gonna be running a deficit in a sense It's like we're not really paying for it because the citizens would know not to They wouldn't want to pay for it So that's what that the perspective is and then so the idea is that in a sense We're living beyond our means today if we because it would be owners No one wants to pay taxes everyone wants the goodies that the government pays for that's the idea And so ah we can have our cake and eat it too if we have the government spend the stuff now So we get all the goodies, but then we're actually we're in a sense. We're not paying for it We're just gonna have we're gonna borrow the money run up the debt and then our children down the road Remember those numbers we were showing you how the interest payment gets higher and higher And so that there's a sense in which geez our children are being taxed 50 years from now just to service the debt not to pay for their goodies, right? That's the the intuition there and it also It feels like with a regular household like you kind of get this intuitive sense Yeah, you can go buy cars and go to fancy restaurants and so on just running up a credit card bill that you're using debt you're Consuming higher than your income and that's why you would run up a debt, but that's gonna have consequences down the road There's a sense in which that is kind of irresponsible So that's the intuition of the man on the street when it comes to this and so again You'll often see them say things like you know, it's immoral for us to run up a debt at the expense of our grandkids Let's just go if we want to pay for these probably want to pay for Medicare We want to do all this let's run a balanced budget and just do it ourselves pay the full burden of the tax Package all right, so that's the man on the street view the next view is So now we're on rational expectations So it's not government borrowing but government spending that really makes us poor That's really where Resources are getting diverted away from the private sector and into channels that government officials dictate And so from this perspective, they're gonna say look in the long run to a first approximation In any given period whether the government spending is paid for through taxation or by borrowing That doesn't really do much in terms of making the citizens poor or richer Because the idea is if the government borrows, you know So right now the government's gonna spend ten billion dollars on something if they tax us Then okay clearly the taxpayers are down ten billion and then you get whatever benefits there might be from the expenditure But even if they just borrow it Then still it's true that future tax payments in net present value terms have to be ten billion dollars higher right and so because either the tax taxes have to go up to cover this the service cost or Other government spending has to be that much lower in future periods if you're still just taking the same amount of tax revenue Because now there's that interest cost. So they're saying either way It's you know taxpayers are still in the long run paying the same amount in present value terms Okay, and so what this is associated with you may be familiar with what's called Ricardian equivalence So if you've heard that term that's related to this idea So again the big picture for this view number two is they're saying yeah, the man the street is is kind of confused Or not to confuse but the way a household finances work That really has nothing to do with government finances and you're just gonna get misled that you know Economists understand that people aren't completely stupid and that if the government's running huge deficits What will end up happening with what's called Ricardian equivalence is the taxpayers will know Wait a minute. They're running up debts. That means down the road They're gonna have to tax us more to pay at least the interest on this huge debt burden So we're gonna save more. So the idea is once you think of it like that It's just kind of a shell game or it's a wash that what if the government spends the money now Then the taxpayers are paying for it now if the government borrows it now Then the taxpayers are rationally looking ahead They have to save more now to get ready to pay those future taxes down the road And so it's like the government just barring from them now instead of taxing them now But either way, it's kind of a wash. All right, so that's that's basically their view and they know That's not literally exactly true down to the penny, but they're saying to a first approximation That's true. And so it's they think it's clearly wrong to act like the government running a big deficit today Makes our grandkids that much poor that they say that's that's kind of silly Okay, view number three that's associated with Abel Lerner You might know that name I Joe Salero might have talked about him in the socialist calculations that okay I see some people nod their heads. So yeah, it's the same guy with the market socialist person. So he says Again, this is not an exact quote from him, but I'm I'm paraphrasing fairly as long as we quote owe it to ourselves Government debt can't possibly make the nation as a whole poor So after all our grandkids will inherit not only the debt But also the treasury bonds so in the year 2050 The government will tax our grandkids in order to make the interest principal payments to our grandkids So this clearly doesn't make our grandkids poor. All right, so let me just paraphrase that well Let me give you the other economist one person who's also in modern times espousing. This is Paul Krugman So you can see I'm really stacking the deck against this view I'm saying a market socialist in the past and Paul Krugman today. Let me throw you a curve ball You know who else fairly recently held this opinion Was this guy? All right Now I used a picture where I didn't have the beard to show this was the young Bob Murphy. All right Okay, so but let me just explain where the because at first glance this this seems correct So obviously I just want to clarify clearly It's not like I was cool with government debt or anything and I say there's no problem But what what I thought was right Several years ago before I had this insight and that's again one of the things in this talk I'm gonna try to convey to you to see what the fallacy was here is I was thinking yeah It's not it is the government spending or certainly if if the government debt crowds out private saving You might have heard that that expression that if the government's borrowing a bunch of money that pushes up interest rates And that crowds out private saving and makes it hard to invest and I thought okay Yeah, those are all valid mechanisms Those are all reasons that government debt make society poor But I was I clung to this very narrow point this modest point to say Strictly speaking though the existence of a bunch of treasury bonds per se Doesn't make our grandkids poor. It's not like we today Can be richer like we can consume a bunch of stuff and then make our grandkids poor because it's not like we have a time machine Right in this and partly what put this idea in my head was I was I read something from Mises And I think that in Matt McCaffrey's lecture on war finance or the economics of war He mentioned this so to be clear Mises didn't say anything wrong. I'm just saying I Read a correct statement from him and I extrapolated it incorrectly. All right, but But what what happened is so Mises was making the point saying Sometimes people in the in a war say oh if we if we pay for the with the for the war using deficit finance Then that that's gonna lower the burden on our generation and have our grandkids help pay for this present conflict That's gonna help them anyway, you know, if we fight off the Nazis or whatever But Mises was saying well, there's something a little wrong there that the war is always fought with present resources Okay, so there he was trying to just make sure people understood if you're making tanks and bullets and Uniforms for soldiers today It's coming out of present resources right consumption in other areas or output in other areas has to go down today to pay for that You can't use a time machine and take cars from 50 years in the future to right now Okay, that that was the point the correct point. He was making but I'm saying in conjunction with this stuff about government debt. I Ironically thought okay. Yeah, the fact that like in other words, does it make it does it do our grandkids in the year? 2050 Would they rather grow up in a world where the US government debt was one trillion dollars or ten trillion? And so what from this view they would say as long as it's Americans who hold those treasuries It doesn't really matter for the for the jet, you know for the generation as a whole because yeah If it's ten trillion dollars that means the interest payments are higher So the Treasury has to tax people tax Americans to raise money to then hand over to the people who hold the treasuries But if it's Americans who hold those treasuries, you're just moving money around among our grandkids Okay, so I hope you you get the how that seems to be correct So it's saying yeah, you're not making our grandkids poor because there's this big debt You're just rearranging resources among our grandkids That it's not that we're somehow today siphoning off resources from them to us because how could you they don't exist yet? That anything we do today any money the government spends today if they give health care to older people if they fund They spend for a war Those resources are coming out of potential present goods that could have been produced today It's not that we're making fewer pizzas for them in 2050 All right, so that's the logic of this position and as I'm gonna try to get you to see that's actually wrong There's a there's a problem with that But I wanted you I wanted to spend some time on that just so you could see where they were coming from And so incidentally this phrase we owe it to ourselves. That's fairly popular In the history of economic thought for a while that within this I think it came from Abel Lerner or at least he popularized it and so the idea there what that means is The philosophy behind it is saying our government's debt Can't possibly burden our own people as long as it's our people who have financed it Right, so in other words if our government borrows from our own capitalists and investors to run the deficit Well, then that just means down the road our taxpayers will be reimbursing our own people So we're just moving money around internally. It's not making our country poorer or richer just by transfer payments That's that's the the so-called logic or the intuition behind it whereas if the US government borrowed money from Chinese lenders today and This was what Krugman's point was when Krugman was arguing about this a few years ago He was one of his main points as he just looked empirically at who holds government Who holds treasuries and he was saying look at as long as it's mostly Americans who hold these things then to that extent It doesn't make our grandkids poor. He said yeah, sure if Asian investors hold a bunch of treasuries Then there is a sense in which the US today is living beyond its means because it's borrowing resources from Asian savers And then two or three generations down the road if we wanted to pay those off That means our grandkids would then have to live below their means to get taxed heavily and the government at that time would pay Off the treasuries that had been passed down to the grandkids of today's Asian savers So that's how Krugman was looking at like a big household and saying okay Yeah, that's kind of like a household running up the credit card bill But he's saying to the extent that it's all internally financed then it's a wash Okay, he's saying the household analogy doesn't work So that's what their position was and like I said I thought that was correct in so far as it went and that if you Wanted to object to government deficits. You need to use other Arguments, but as we'll see that's actually not correct. There's a problem there even on its own terms Okay, so this last view that I think had you know more more insights that showed the problem of Abba Lerner and that that school of thought I know James Buchanan had a lot to do with this so he People were writing articles complaining about debt mongers meaning people worried about debt and Buchanan wrote a funny article With a title saying something like Confessions of a debt monger. Okay, so he was in other words He was saying yeah, I am a debt monger and he was taking on these arguments He's by this was you know his spare time when he wasn't trying to subvert American democracy so So here let me again. This isn't an exact quote from him But it's the spirit of what he was saying and I'll try to elaborate on it So he's saying look it's clearly politically expedient To pay for government spending via deficits and not taxes All right So he's saying it's not if the rational expectations school were correct Nobody would care one way or the other and he said but yet that's clearly not true The public doesn't like paying taxes if they pay for stuff with deficits That that doesn't feel as bad nobody's bothered by that right they might be you they might worry about the principle of it Like I we shouldn't be running but you don't feel the pain of it the way people don't want to pay taxes So he's saying there's there's something missing in these arguments. They're trying to say not it's all a wash It doesn't matter. He says there's a real sense in which government Deficits allow present generations to live beyond their means future generous and here's Part of the problem of what that Abel Lerner view and the Paul Krugman view missed Future generations might pay for government bonds. They don't simply inherit them and so Let me just give you the economists who are brought this to my attention So in these recent battles over the last few years It was Dom Boudreau who was quoting Buchanan against Krugman when they started arguing about this and it was a Canadian economist Nick Rowe Also, who was jumping in and citing him and so they kept they kept saying how no Krugman's wrong Buchanan showed that that this is wrong and that they were going through and doing a little experiments or thought experiments and so on Also, I'm happy to report Mises is correct. So he's given a thumbs up saying don't listen to the market socialist So in I mean that literally in human action for example Mises literally quotes Lerner and others saying they'll say as long as we owe it to ourselves It doesn't matter and he just walks through and says why that's wrong. So To be clear again Mises was correct on this issue But the little subtlety that I'm gonna try to get you to see here. I don't I didn't see that in Mises He might have been aware of it But I'm just saying the where it jumped out at me was just in this recent debate and what happened was I actually thought Boudreau and Nick Rowe were wrong and it was gonna be ironic that I was gonna take Krugman's side on something And so what happened is I took when a Nick Rowe's blog post where he was responding and saying Krugman's wrong on this That the government debt does burden future generation or at least it could and the Krugman's arguments don't work And I was actually gonna come in on Krugman's side But as I sat there and thought through and I was like wait a minute And it just it was like a little course of a few days where I realized wait a minute I'm thinking about this wrong this guy's right and then it was that was when I had the epiphany and then all of a sudden I was like the bulldog for the for this side and you can imagine it was a relief to be able to say no actually Krugman's wrong Okay, so This is a subtle Point so let me I'll try to hit it from a few different angles Here, but I realized it's a tricky point because even on my blog when we spent a ridiculous amount of time We called it the great debt debate of 2015 or whenever the year what we we knew enough to call it the Year when it happened. I just right now. I'm forgetting when it was but So so the problem here. Let me just try a few different ways for you to see what the fallacy was so again, what there's two things going on one is The people who are saying government debt as long as it's held internally Doesn't make American. I'm gonna just keep using Americans just for you if you live in Germany think of it as Germans Doesn't make our grandkids poorer Collectively right all it could possibly mean is that some of our grandkids get paid on that from other of our grandkids who pay out On that but look at remember if yeah, if the that's gonna be 50 trillion dollars in the year 2050 That by itself doesn't make Americans in 2050 collectively poorer as long as it's Americans who hold those bonds because again The the fit the the bonds themselves go to get bequeathed so it's not just you growing up in 2050 is a US citizen And who owe taxes on outstanding bonds, but also if it's Americans who own the bonds there you go So there it seems like they're getting both ends of the stick So it shouldn't matter and so there's a one one problem with that view is There's something fishy when you say they'll inherit the bonds or that to the generation today might bequeath The bonds to their grandkids That makes you think they're just handing it over for free But you realize no they might sell them to the future generations All right And so once you realize that there's that element involved the logic or the the argument that tries to say it doesn't matter It's all a wash starts to break down. All right, so that's that's one component of it I'm gonna keep coming at it from different angles in case you don't fully see it But it's again, it's a subtle point another problem with that typical view that that Abel learner and Krugman were espousing is they were thinking of it in terms of this generation's alive right now Then we die off and then there's the next generation that's alive And then they die off and then it's the grandkids who are alive and they day off and that's the great grandkids And if you're thinking of it like that then yeah anytime the government taxes and and pays interest It's just clearly rearranging stuff within the same generation So it can't possibly make that generation poorer or richer But you realize it in reality, of course, that's not how the world works. Okay, you guys know where babies come from just okay Talk to talk to David Gordon so In reality, of course this generate, you know the old people are alive and there's some middle-aged people and Then young people and then it's sort of you know, it flows over time And so just what we're gonna see is just a little tweak if all you do is assume at any given time There's two generations who overlap so that there's like the older cohort and the younger cohort and then next period the people who used to be young are now old and then there's a new cohort of young people and if each Generation just lasts two periods like that with a little model that just has that little slight move towards realism That Abel learner argument falls apart. Okay, so it's That's another reason I like this because it shows The tremendous impact of what seemed to be a fairly innocuous assumption and you see this though a lot So I'll resuppstate it here and then give you another example. So again, what happened here is The economists like Lerner and Krugman when they were trying to get their readers to see come on This is this is silly stuff the man of street clear doesn't always talking about They were implicitly using a model where each generation lives and dies moves on and then it's the next one It moves on and that there was no overlap There was no time at which some old people and some young people were both alive at the same time It could have transactions with each other and and clearly that's not realistic And so again if you you can still do it with a little cute little model It's not like you have to just use a verbal analysis You can show why this is wrong even using a mainstream mathematical model But the point is the model has to have overlapping generations and once you allow for that Their logic falls apart. So it just shows what they probably thought was a a simple assumption just to keep the analysis tractable drove the result So this also happened just incidentally with it with the stuff I did with my dissertation when I worked on capital and interest theory That you I think if you went to Jeff Herbner's lecture You might have heard some of this stuff that it has to do with Bumbaverks critique of that What's called the naive productivity theory of interest if you go to grad school and you study capital theory and you know these models The real rate of interest in those things it will be set to What they call the marginal product of capital right they'll have like r equals mpk Just like the real wage rate equals the marginal product of labor in Austrian economics teaches you that that's wrong That's a fallacy and yet they're doing it with their mathematical models like well, what did calculus break? I would you know And it took me a while to figure out what the heck is going on because the math was right You know these so the mainstream economists were so I know what you Austrians are talking about but hey the numbers don't lie You know that kind of stuff and or the Greek letters don't lie and then but clearly Bumbaverks verbal arguments were right You know Mises talking about the clearly interest was not the marginal product of capital like the dimensions weren't even right That's what and what it was is that in the models where they show that Where they were it pops out that oh, yes in equilibrium the real interest rate equals the marginal product of capital right like the Derivative of the production function with respect to capital There's only one good in the whole world And so with that one and that's driving the whole result and once you allow for there to be two goods Then that that result falls away Okay, so again It's a good example where they were making what they thought was a simple assumption just to keep the analysis easy And something we could solve with math, you know using calculus very simply and that was driving What is a pretty important economic outcome alright, so that's just another example of what was going on here Okay Let me let's see how much time we got here. I got about 10 minutes. I will go through this now This was something I wrote up so again, we were arguing about this on my blog and other people's blogs and For people at home so as we were consulting by RPM and I had this blog post called the economist zone so it was a takeoff on the twilight zone and I was I Had a lot of free time or something. I don't know what happened, but I Just I was trying to summarize all the stuff that was going because we were it's really getting in there We're like eight of us like some economists and some of the commenters in my book who are really into this Trying to get to the bottom of it and trying different ways of showing people What was happening in these debates and I ended up just writing like a little skit where? One of the David Brooks who's a writer who was getting this stuff He ended up I don't want to spoil it but something happens to him and it was like a twilight zone episode But it was called the economist zone right because he was going crazy Listening to Krugman and guys like that so anyway the the economist magazine actually linked to this right and hey if they liked it It must be awesome So if you I'm mentioning this because if you if you want to see more obviously here I'm just giving you a taste of this stuff But if you really want to see who wrote what when and what did Krugman say and then how did this guy respond? And that's we're back and forth. It's all linked in this if you this is the central hub of that So one thing I did here and again, I know if you're way in the back This is gonna be hard for you to see but for the people at least the front you'll understand it I want to say this just I might get hit by a bus tomorrow And so I want to be on tape me explaining how this works. This was My contribution so there's the zombie I did that for Tom Woods and then this table Those are my two contributions of the social sciences. All right But I mean I'm trying to be funny, but seriously that me coming up and Trying to figure out a way to get people to see like James Buchanan's point and how that worked with those two assumptions I said you about the overlapping generations In this model it really works. So let me just quickly here spend a couple minutes Deciphering this thing, but again, it's contained in that blog post if you want to read it later But the idea is that the top Here shows what happens just without the government doing anything in the bottom shows what happens when the government starts running deficits And so what happens is each period there's no production here There's no it's just what's called an endowment economy. So there's no saving. There's no investment each period There's two apple trees that shoot out a hundred apples. Okay, so each period real GDP is 200 apples And so what I'm trying to do is just isolate and show that no even you know Krugman's argument doesn't work because there's all sorts of other things going on You know, there could be crowding out people don't save as much Investments lower in the private sector because they're worried about future taxes So there's all sorts of reasons in reality that government deficits make our grandkids poorer But again just to isolate and say no even as one little corner in which Krugman thought he was right No, he's wrong there, too. And that's what that's what I'm trying to isolate here not just to get Krugman even though that's justification enough but also Because it's it's pretty neat when you when you see this okay, cuz I wouldn't have thought this was possible Until you know, we Nick Rose argument made me realize it and then I think my exposition with this Excel chart Made it crystal clear if you take the time to figure out how to read this thing, okay? So each each period there's only two people alive So it starts out with Al then Bob then Christy then a guy whose name starts with D and then Eddie Okay, and then Frank and George and so you so there you see the pattern. Okay, and so So there's ten periods and each person lives for two periods, right? So you're young and then you're old the next period and then you're gone and so what ends up happening Everyone in here is gonna die you guys know that right All right Judge Napolitano will tell you when All right, so And so if you look at these numbers across the rows, it's always 200 apples all the government can do is Tax, you know take away some people's apples and hand it over to the other person. So again each period There's only two people alive Left to their own devices each person has a tree that shoots out a hundred apples So that's why up front if you and again, I know if you can't see it's hard But up here each each person I know I've colored in each person's lifetime, right? So here's Christy young Christy gets a hundred apples old Christy gets a hundred apples young Eddie gets a hundred likes to see That so again, this is like the the free market outcome and then down here Again each row it adds up to 200 that all the government can do is take apples from somebody and give it to somebody else And yet so you would think with this framework if I say if we're up here in the first few periods And we said is there any way that running in the government deficit right now? Could make the people in periods eight or nine worse off and you would think no that's impossible We don't have a time machine each year real GDP is 200 apples So all the government can do is move that you can't yeah So the people in period eight who you know our great great great grandkids You can make half of them richer and half of them poorer You could take 15 apples from one and give it to the other But that's just a wash for all the people alive in period eight, right? It's real real consumption still 200 apples and that's a true statement What I just said and yet it does not follow that therefore there's not a sense in which you can legitimately have the earlier generations living at the expense of the later ones through government borrowing and so specifically what ends up happening is For example, let me just walk you through the bottom one So again, the outcome here is all the people in blue Benefit all the people in the reddish and orange colors lose in the sense that their utility is lower In the government version than in the free market version So what happens is old ale gets 103 apples young Bob only gets 97, right? Okay, so that still adds up to 200 apples So what happened is the government borrowed three apples from Bob to get young Bob to give to old ale So there clearly old ale is better off He got a hundred and three apples instead of a hundred and he dies You know having had three apples because the government ahead of you know gave him Medicare or something or a special program for retired people So you might say well clearly young Bob's down three apples But no they didn't tax it from him and this is the crucial thing The way the government got the three apples from young Bob was voluntarily in the sense that they said We want to borrow three apples from you in this example. They offered a hundred percent interest rate So next period in period two The government borrows six apples from young Christie and pays that to who's now old Bob And so old Bob gets a hundred and six apples in period two and just with the preferences we assumed It's not unreasonable to assume that Bob in the perspective of period one would say yeah I'd be willing to have three fewer apples now if the government's gonna give me six apples next period Okay, so that and that's why it's voluntary and this was a point that Buchanan stressed in his you know The writings of this stuff. He wasn't necessarily going through Excel charts. I don't think Excel existed back then But you see the point so his he was stressing the fundamental difference between taxing people to pay for something in Versus borrowing it is the investors so long as you actually don't renege on the bonds They're voluntarily lending their money to the government. So that's not where the coercion is coming in So if you're thinking about it in the grand scheme if the government's paying for stuff today Not by taxing people so you're taking money against their will but instead by borrowing it Then they're if they're voluntarily letting that they think they're better off and that's that's the one of another way Of seeing the insight and so clearly you know something's got to be screwy with the Abel learner view That if people for several generations and again, I spell it out here if you want to get the PowerPoint This is a particular numerical example, but the spirit of it is because we're running out of time Let me just give you the spirit and words Right now the government could be running a big deficit spending stuff the capitalist today who might be in their 30s Voluntarily lend that money to the government and they get bonds So the capitalists assuming they get paid off they like that transaction. They were willing to consume less today Because then in 30 years when they're retired They turn in the bonds and get paid. So where does that come from? Well, maybe at that time the government borrows money from the next generation And so the government could do that for several generations while the stock of the debt expands and then if they want to start paying it off That's when they start taxing people and so you see those first few generations They all could be better off in their lifetime utility sense because what's happening is They they consume less when they're younger because they lent the money the government but then they get more than compensated for that when they're older and You could keep rolling that over in a sense with more and more generations as long as they keep doing that He couldn't do it forever necessarily But at some point if they start then paying the debt off That's where the pain kicks in and so you can imagine a scenario where the first few generations keep doing that trick Where everybody is it's voluntary in a sense and then the coercion doesn't kick it until down the road when they start Really having to pay down the debt because it's getting too big to manage Okay So that's the intuition and you see that that can only happen if there's overlapping generations and so the The last thing I'll do here is we're out of time the last point I'll make is just think of it this way if it still hasn't clicked with you We throw a big party today that cost a trillion dollars We finance it through a deficit and then we keep handing that bond down over time and it keeps growing at 5% and Then a hundred years from now. These are some gigantic Tax bill that's due and the person growing up in that environment has to pay You know the previous generation for that bond and then gets taxed a hundred trillion dollars To get paid off the hundred trillion Okay, and so there the person, you know He's getting taxed to then retire the bond that he's holding so clear the government's taking money from a gunpoint And then so here we'll pay off that bond you're holding. Okay, so that person that's not a wash Right because he didn't get that bond for free He had to pay whatever 99.999 trillion to obtain it from his predecessor and then he's being taxed the full amount Okay, so that's that's the trick there and you realize the flaw in the the learner Krugman Young Murphy argument on that. All right. Okay, that's the time we have so thanks everybody