 Let me start off by just making sure everyone knows what this is and what to expect. So what we're talking about here is who bears the burden of government debt. And this relates to something, I did this talk the first time last Mises You because I and several other economists had gotten into this very long dispute. And what ended up happening is I realized like the way I used to think about this issue was wrong. So what I'm gonna do, part of what I'm gonna do in this talk in the beginning, I'm gonna just make sure you understand the mechanics of what's actually involved when the government finances a budget deficit. Like what's the difference between a deficit and the debt? Sometimes people use those terms interchangeably. So we'll start with some simple stuff. And then I wanna really make sure you get the way even I used to think about this stuff and that Paul Krugman still does, there's a little teaser and then show you why there's actually a subtle fallacy involved. Okay, so it's the kind of thing, if you pay attention and you follow it by the end of it, you're gonna go, whoa, okay, but it's gonna take sustained attention. I also should say the only way I can really get you to see it is I'm gonna have a few numerical examples that I have to like really walk through methodically so you get it. So for people in the back, I mean, I'm not telling you what to do. We're all ANCAPs here, or at least we should be by the end of the week, but you may have, you know, if you're far and you can't see the numbers, it might be hard for you to follow. So I'm just mentioning that. The last thing I'll say is the last talk was a very fun one. This talk is not gonna be anarchy. That's not what this talk is. So if that's what you thought it was gonna be, I just, you know, Mark Thornton's given a talk on the opioid crisis. Some of you halfway through this might say, I could use some opioids right about now. All right, so if you wanna switch, you're not gonna offend me. All right, Bob, I just wanna make sure you do understand that this is the most technical that I do this week. You don't need to have any background now. I'm not trying to scare people away, but I'm just saying that this is stuff that I really want you to see what the flawed way was that even I subscribed to, let's say 10 years ago, because there's a sort of intuitiveness to it when you see that actually it's wrong. So the upshot is government debt is probably actually more burdensome even to future generations than you might have originally supposed. Or the reasons that there's a sense in which the government deficits today can make your grandkids poorer, you're gonna see there's actually something else involved that I bet a lot of people in this room haven't thought of before. So it's not that the old ways you might have thought are incorrect, but there's another thing going on that a lot of economists have missed. Okay, so first of all, how does government debt work? And here I'm drawing on the numerical examples that's in lessons for the young economist. So if you're, again, if you're in the back or something, or if I go through this too quickly and you wanna see it, this is where I'm drawing these numbers from. So here's a hypothetical budget year. And again, for some of you, this is gonna be really elementary, but I think for a lot of you, you've never seen someone actually spell this out. And so it might just help clarify and get your footing firm here for this sort of analysis. So just walking through these numbers up here, the tax revenues, one trillion, expenditures are 1.1 trillion. So the deficit is a hundred billion. So that's all you would need to know to conclude that. The deficit in a given time period, usually you'd say a year, but it could be just any specified time period. The government's budget deficit is saying how much do tax receipts fall below what the expenditures were for that period? All right, the debt I've assumed starts at zero. So you wouldn't know that just from the spending and taxing figures. I'm just stipulating that for the sake of argument. I'm telling you the government debt starts at zero. So now given that fact, we conclude the debt at the end of this period is a hundred billion. So the deficit is a flow figure, whereas the debt is a point static figure, if you're a stock figure, if you're familiar with that terminology. So the deficit's just saying for a given time period, what was the shortfall, or if there's a surplus, what was the excess of receipts vis-a-vis expenditures, whereas the debt is in a sense like the history of all previous deficits and surpluses up to the present, if you wanna think of it that way. Okay, so expenditures here, I just broke it up into three categories of military, social, and interest. So the military, and obviously, noticing this talk, this is more conventional, right? So I'm not really admitting that when the government spends money on things, oh, that's social programs, you know, that's socially useful. I'm just saying that's the way we talk about that stuff. So military 300 billion, I said social 800 and interest zero. So it's not a coincidence. Every period, the total expenditures are gonna add up to these total figures. That's not a coincidence that that happens to be true. So in this case, it's split 300 and 800 on military and social. So now, and notice the interest, I've got a zero. Why? Because the debt at the start of this period was zero. So there's no finance charges, there's no interest charges on the government's debt this year in 2018, because they started the period again, just by stipulation with zero debt. So that's why there's no interest charges in the current period. Okay, so now this is, again, pretty straightforward and many of you who have even thought just even very quickly about this stuff, I'm sure this is no surprise, where you might not have thought it through fully is mechanically, what are the actual operations? Because you know the government issuing treasuries, bonds or bills or what have you, T-notes, things like that. You know that's somewhat involved with this, but you might not have thought through the logistics. So here, I'm assuming they finance everything with one year bonds, okay? And so specifically, there's no outstanding bonds from previous years, right? Since the government debt was zero in the beginning, there's nobody in the world right now who's holding bonds issued by this government, let's just say it's the US government for convenience. So no one owns any treasuries, there's no treasuries outstanding at the start. How do they raise the 100 billion, right? Because look, the tax revenues are only one trillion, they're spending a total of 1.1 trillion. So that $100 billion deficit, how is the government actually getting its hands on that money to spend that much more? What they do is they sell or issue bonds of 10,500,000, and it's a $10,000 face value, okay? So what I'm saying is the thing you're buying, if you're somebody in the private sector and you want to lend money to the government here, technically what you're doing is the treasuries auctioning off one year bonds and the face value is 10,000, all right? And so it's just saying the way these ones work, there's no coupons, I'm not, if you know what that means, if you don't, don't worry about it. The way this example works is what the US Treasury is selling you is saying this piece of paper is a promissory note, the bearer of this thing one year from now turns this into the Treasury and we give that person $10,000 at that time. So if somebody, why would somebody right now buy such a thing, it's because they can buy it for less than $10,000 and that's how the person earns an interest return or a yield. And so here I've assumed that the implicit yield is 5%. And so that's why right now at auction, investors who want to invest in US treasuries, that's a component of the saving they want to engage in or the form they want to hold their wealth, they'll pay 9,524, right? So I had that specific number because if you divide, so a year later when they get paid 10,000 and they want to calculate what's the rate of return, they would say 10,000 divided by 9,524 and it works out to like 1.04999, something like that, right? So it's 5%. So that's how that works, okay. Next year, what happens? I'm assuming the tax revenues again are a trillion, now the expenditures have fallen, they've cut spending by 100 billion, they have a balanced budget. Okay, so the deficit that year is zero. So a balanced budget means the deficit for that period is zero. The debt at the start of this period is 100 billion, right? And so that has gotta be what this was. The debt at the end of last period gets carried over to be the debt at the start of the new period. The debt at the end now is also 100 billion because the deficit in this example was zero, okay? So again, I'm just making sure you understand the distinction, sometimes people carelessly conflate those terms. If you have a balanced budget, the deficit is zero, but it doesn't mean there's no government debt, it just means the debt didn't increase that period. Okay, I made up some numbers for expenditures. Again, these three numbers added together equals one trillion. That's always gonna be true, the expenditures here, this is just breaking out what this figure was, so these add up to 100 or a trillion if you add them up. And notice though that of that spending, five billion was interest, okay? And so where's that coming from? Well, because the debt that it carried over from previous to the previous period was 100 billion, and we know that they had to pay investors 5% on that, so that's five billion dollars in interest expenses. So just from that knowledge, that's how you would know this has to be, you would know that five billion has to be there. So what that means, so already we can see this is the sense in which government debt constrains current government operations, that whatever the amount they're gonna spend, that they have to devote some of it to interest financing unless they default, in which case investors would be less likely than to lend them money in the future. Okay, so the idea is even though they've got a balanced budget now, so they tighten their belt, they cut spending by 100 billion, that was politically painful, but now because they ran up that deficit last year and they had that 100 billion dollar debt, they, five billion has to be devoted to interest expenses. So that's the sense in which their earlier decision is constraining them now. They actually only have 995 billion to play with among military and social spending, right? And 995 billion dollars is hardly enough money to run the world empire, okay? So you see the issue there. So again, we're not even talking about the morality or the ethics of this, we're just saying in terms of the logistics or the financing, governments, even though yes, central banks are involved doing things behind the scenes, but in terms of just the accounting and the treasury, governments running deficits and having debt, impinges on their future abilities just like a private company or a private household, where if you borrow money in the past that constrains what you can do in the present, it sops up some of your available income, has to be devoted to finance charges. Okay, so now the last thing we'll do on this one then we'll move on, the financing of this. So if you understand this last little subtlety, you'll get the sense in which just rolling over bonds involves an interest expense. So what's happening here? How do they do that? How are the people who are actually in charge of the government finance and the auctioneers and whatnot, what actually happens here? Well, remember a year ago, they issued 10,500,000 bonds that said the bearer of this thing will get $10,000 from the treasury one year from now. Well, now it is one year from now or from then. And so there's 10,500,000, or sorry, there's 10,500,000 people showing up with these pieces of paper that say you owe us $10,000. So you run the numbers, they have to pay out 105 billion total to retire those maturing bonds. Now you're gonna say, wait a minute, but I thought you just said they're gonna borrow five, or sorry, that the interest expense was five billion. We don't have somewhere here of them paying 105 billion to the previous bond holder. So where's the missing 100 billion coming from? It's because what they do is they reissue newly 10,500,000 bonds at the same face value and then at the same auction price. Okay, so what I'm assuming here is that interest rates on one year government debt are still 5%. If interest rates had changed, the amount that they charged would also change that might affect how many bonds they would have to issue. Okay, so the idea is if you multiply 9524 by 10,500,000, the answer is 100 billion. So the point is they're rolling over those bonds that matured in order to re-raise 100 billion and that's why the debt at the end is still 100 billion. Okay, so I'm just showing you all these different numbers all fit together. That's what's actually happening. And so if you wanna step back and think about it, like why is it just, so notice just carrying that debt, if they run a balanced budget forever, from this point on, as long as interest rates on one year government debt stayed 5%, every year they have to devote five billion just to debt service. And so if you wanna understand what's the slippage in the budget, like how is it that we're losing money on net or what's going on, it's this fact right here that when they sell these 10,500,000 bonds, the investors are only giving them 9524, right now for it, one year later they get paid 10,000. So that's the distinction, that's the discrepancy, that's why the government when it's just rolling it over, the new crop of people buying those bonds is giving them only 100 billion, whereas they owe 105 billion to the people who held the bonds from a year ago. And so that gap of five billion is what's showing up here, where of the incoming tax revenue, right off the top, five billion has to go for that mismatch, okay? So that's the way these things work. So now let's move on. So that's the mechanics of the logistics. So now that's just the financing, now I want to talk about different ways economists and just the man on the street can evaluate what happens when the government runs a debt, right? So in other words, the government wants to spend money on something or the people want the government to spend money, the politicians are going to do it, and there's different ways of financing it. You could raise taxes to spend, to pay for it that way, or you could borrow money to pay for it that way, and how should we feel about those different options? Okay, so there's, I'm going to present here four distinct ways of evaluating that. Okay, so the first one I'll just call it the man on the street. So by the way, I have quotation marks here. This is just to show you, I'm saying this is what a hypothetical person in this school of thought or line of thought would say these aren't actual quotes from real people, okay? So would say if the citizens want the government to spend money, they should be willing to pay the full taxes for it. Don't run up government debts and make our grandkids pay for our spending, okay? And you hear this a lot, especially when the Tea Party was big in the US, the political system, that there's a natural aversion people have. They sense something suspicious where, oh yeah, the politicians are promising us these goodies, they're going to give us healthcare when we're older, they're going to have big road projects, they're going to do all this, raise military spending, all these great things, pay for our healthcare, and they're not raising taxes, or even they're going to give us a tax cut on top of it to make everyone feel richer. But come on, we know that deep down that can't be right. The government's just running up huge debts here and something's got to give, and they think they sense that it's our grandkids or future generations who aren't even born yet and can't even vote, that are the ones that ultimately are going to be around when the price tag for our current proficiency comes due, and so they sense there's something immoral there, okay? So again, this is a very typical view or even a lot of conservative, fiscally conservative political officials might say things along these lines. Try to say, look, I'm not saying we shouldn't spend this money, I'm just saying we should pay for it. We shouldn't make somebody else pay for it, namely our grandkids. Okay, so that's the mentality, and the idea is it's all about the children, right? They don't want to levy this debt on our great grandkids and so forth. Okay, there's another view now of what you call rational expectations. So a lot of economists are gonna think that that first line of argument is silly. Let me stop for a second just so you don't get lost. Where I'm going with this lecture is I'm gonna present view number two and view number three are professional economists who think that that number one view is just silly man on the street kind of thinking, they're not thinking like trained economists, they're not as sharp as we are and having devoted full attention to these issues, and so views two and three reject the first view. They think that's silly stuff that in particular they think that the view number one is looking at government finances like it's a household and they think that there's a fallacy involved there. And then what I'm gonna show you by the time I get to view four is that there's a sense in which the spirit of view number one is correct. So yeah, the person on the street does not have in mind all the nuances I'm gonna have to show you in a few minutes, but the person's instincts are basically sound whereas allegedly are ostensibly sophisticated economists who are knocking down that person and saying, ah, they haven't studied economics like we have, they're actually relying on models that make some particular assumptions. And in general, if those assumptions aren't true their conclusion is wrong, okay? So again, what I'm really doing here is showing, it's another example where the so-called sophisticated economists who are making fun of conservative hicks who haven't studied these issues, they're actually making a mistake. And so their smugness is misplaced. Okay, but right now, let's just make sure you get the different views. So the rational expectations camp, they'll say it's not government borrowing but government spending that makes citizens poorer, government deficits don't increase the long run burden of debt, they just shift the timing, okay? And this view is associated with David Ricardo. So this is what's called Ricardian equivalence. If some of you may be familiar with that term. That's a bit of a misnomer because if you go and look at it, my understanding is that it wasn't so much that David Ricardo himself was endorsing this view, he was just like adopting it for a train of thought. So it's possible that it's not really so much that David Ricardo actually believed this but he just entertained this idea for the purposes of a particular analysis. But whatever the historical fidelity to these views that he might have had, this is what economists nowadays call Ricardian equivalence by which they're saying, for example, if the government gives a $100 billion tax cut right now but it doesn't cut spending, people who subscribe to this way of thinking and often it would be like Chicago school type economists, they would say that's not gonna stimulate anything, right? That the Keynesians are wrong, that's not gonna stimulate spending or investment, consumption or investment spending because rational taxpayers realize, oh yeah, we have $100 billion more right now because our tax bill is lower in present terms. But if the government hasn't changed its spending one penny, that means the government deficit this year is exactly $100 billion higher. And so that means if they aren't gonna reduce spending in the future either, then that means government debt service payments are gonna be a little bit higher next year and forever. And if you calculate the present value of that future stream of extra taxes, we're gonna have to pay to finance that $100 billion higher in debt, it works out to exactly $100 billion right now. Okay, and so the point being that we get the tax cut and then what do we do with it? We have to save it in order to have the money in the future to pay the slightly higher tax bills forever because the government debt is higher. And so it's all a big wash if you assume that the interest rates private sector people pay is the same as what the government gets on its bonds. And so it's just a big shell game. The government gives you a big tax cut and then people save and relearn that money to the government because it now has a $100 billion higher deficit and that in the long run, it's a wash. Okay, so that's the rational expectations camp. In fairness, a lot of economists might use this as a benchmark and say, yeah, in practice it's not perfect, but they would just say to a first approximation, the government giving a big deficit finance tax cut doesn't do anything to GDP or job growth or anything like that or investment spending because everybody realizes, oh, we got to just save this tax cut to be able to pay the future taxes rather than going out into the mall and buying more clothes or something. Okay, view number three, which is attributed to Avalerner is the famous we owe it to ourselves line of attack. All right, so let me, I'll read this quote and then I'll elaborate on it. So it says, again, this isn't literally a quote from Avalerner, this is just the line of thought. As long as we owe it to ourselves, government debt can't possibly make the nation as a whole poorer. After all, our grandkids will inherit not just the debt, but also the treasury bonds. So like in the year 2050, for example, the government will tax our grandkids in order to make interest or principal payments to our grandkids. And so this clearly doesn't make our grandkids poorer collectively. Okay, and you can see, and so one person who subscribes this now is Paul Krugman. And so when there were, it was, I can't remember, it might have been, who was it? It might have been Paul Ryan, but I can't remember for sure if it was, no, it was David Brooks, that's who it was. It was David Brooks wrote something, you know, when an op-ed piece, this was like in 2010, I think, or maybe it was 2009, talking to, because remember the Obama administration was running up huge deficits at the time and said something along the lines of, yes, we might need this to stimulate recovery, but it's too bad that now our grandkids are gonna have to pay more for our mistakes or something like that. And Krugman and Dean Baker went nuts saying this is the crudest fallacy around, folks, this is really simple stuff, let's think this through. So I want you to see where they're coming from because it's wrong, but to see why it's wrong is very interesting, okay? So at least Krugman makes interesting mistakes. So somebody should do a podcast about this guy. All right. Well, that's the topic we'll talk about later. So here's where he's coming from, truly, I want you to see what he's saying because there is a superficial plausibility to it. He's saying, look it, it makes sense to say like a household, okay, that the parents have a certain amount of wealth and they're gonna go take a vacation and they romp their credit card and now they die and so what they're bequeathing to their heirs has this outside lean against. There's outside creditors like Visa or somebody's gonna say to the kids who inherit the family fortune or to say, hey, your parents ramped this bill, you owe us $8,000. So there's a sense in which the parents' vacation was financed by the kids having to pay the bill down the road, right? So you see the logic there. Incidentally, the rational expectations people, they would look at that same situation and say, no, I mean, the parents, whether they paid for it with the credit card or not, okay, so if they don't use the credit card to go on vacation, they spend it out of their checking account, now they give their assets to their kids and the kids don't owe Visa any money, but now the checking account balance they inherit is 8,000 lower, so it's a wash. Okay, so that's how the view number two people would handle that. So notice, with a lot of this stuff, it depends on what things are you holding constant and what are you tweaking to see where the person's coming from. So again, the view number two people just think, it doesn't matter, it's spending. So they would say it's the parent's decision to go on vacation that's making the kids $8,000 poorer, it's not that they financed it with the credit card versus out of their other assets. So where Kruman's coming from, though, is he's gonna say thinking about it like it's a household is wrong because what's happening there, the household is borrowing money from some outside entity. So they have more resources available in the present if Visa gives them an $8,000 loan, they can afford to do all their current expenditures, go to the store, pay the rent on their apartment or the mortgage payment, what other stuff, all the gas, food, whatever they do right now, plus they can enjoy an $8,000 vacation that they're not cutting back anywhere in the present that they're getting because some outsider infuse those resources into their control, but now that outside entity is gonna have to get paid 8,000 plus interest down the road. And so that's the sense in which, yeah, for a household it makes sense to worry about profligacy, living beyond your means and so on because chickens are gonna come home to roost later. He's saying, but for the nation as a whole, so long as we're not talking about Asians lending Americans money now and buying treasuries, to the extent that the US government, when it runs a deficit today, is borrowing money from other Americans and they're the ones lending money to the government. And so we owe it to ourselves, meaning Americans owe American debt to other Americans or the US government owes its debt to American investors. He's saying it's all internal. Okay, and so in particular, the thing that's tripping people up is they're saying, what are you talking about? If the government runs huge deficits today, then like in the year 2050, the government debt instead of being whatever, 30 trillion might be 40 trillion. How can you tell me that that's not gonna make the people in that day and age poorer, clearly the government then is gonna have to have higher taxes on them to raise money to pay interest because the debt's 40 trillion instead of 30 trillion or whatever the numbers are. And so Krugman's subtle point there is to say, think about what you're saying, they're not paying it to some outside entity to the extent that those treasury bonds representing that extra 10 trillion in debt, right, 40 trillion instead of 30, to the extent that it's those grandkids, the Americans alive in 2050 who have inherited those things, what the government in 2050 does is it taxes some Americans to raise interest to then hand over to other Americans to pay the interest on that extra debt. He's saying, you can quibble about the distributional consequences, but you can't say it makes Americans in 2050 poorer to take money from some Americans in 2050 and give it to other Americans in 2050. Okay, you see where he's coming from. Now he also talks about, okay, you might say that there's supply side effects that like a higher tax rate might discourage after, but he's saying the pure taking money and then paying interest, he's saying that per se doesn't make them poorer in the same way if you're thinking of it like a household, to say our kids in 20 years have to pay Visa, $8,000 plus interest that's been rolling over this long, that clearly makes the household poorer or whoever's running the household at that point, but he's saying the country as a whole so long as our borrowing and financing is internal, right, doesn't matter. Okay, so that's where he's coming from and I am ashamed to say there's another person that subscribed to that view. It was this guy. Now I've shown a young picture where I'm clean shaven and innocent just to say that this was previous person. All right, so I used to think this, now to be clear, I wasn't saying government deficits were innocuous. What I would have said if you asked me 10 years ago is I would say, oh yeah, government deficits make future generations poorer but the mechanism is like this, if the government spends more today that takes away real resources from the private sector or if the government runs a deficit and it borrows money, lenders give their savings to the treasury rather than giving it to other potential private sector borrowers, interest rates in general are higher than they otherwise would be and so that crowds out private investment, right? It might raise private saving but since the government's sopping up more of it there's less left in the dust settles for private investment. So I'd say our grandkids in 2050 have grown up in a world with fewer tractors and fewer factories and satellites and so forth because the government would have used that savings in an inferior application than what would have happened in the private sector. Okay, so that would have been the mechanism and I would have said, I would have agreed with this. I would have said don't, it's not the taxing per se because look at the grandkids inherit the treasury bonds too so I would say don't, that's not what it is. And then the thing I just talked to you about about the private investment. So I still think that's true. It's just what I'm gonna now spend the next 15 minutes showing you is I was wrong to even concede this, that even this is mistaken. So it's not just the mechanism of government debt crowding out private investment which I'm still, don't be confused. I'm still saying that's legitimate. So it's still true that people in 2050 if the government runs big deficits today I think there'll be less private capital accumulation so our kids will be poor because they won't have as much tools and equipment. That's all still true but I'm saying there's also a more direct mechanism. So the way I'm gonna show you is we're gonna walk through an example where there is no saving and physical capital accumulation even if it really is just transfer payments year by year there's still a legitimate sense in which profligacy early on can be in a sense paid for by future generations. And it's worth walking through just because it's a subtle thing that just broadens your understanding of how the market economy works but also it shows you the insidiousness of government deficit finance. Okay, so view number four now, this is the one that I'm gonna say is more refined than the numbers two and three and somewhat vindicates the man on the streets you sort of knee jerk, intuitive rejection that something's fishy with government deficit finance. I'm not saying he was the only person to say it but James Buchanan was really big in bringing this out and he had arguments with other people they accused him of being a debt monger, right? You know, like someone who is worried about debt and raising the public spheres about debt in an irresponsible way. And so he had an article, something like confessions of a debt monger. You know, he's being sort of ironic saying, yeah, I am a debt monger and here's why he was going through. Okay, so again, this is not a literal Buchanan quote but this is where he's coming from. He's gonna say, look, it's clearly expedient politically to pay for government spending via deficits and not taxation. Okay, so if you think about that, just that point alone if view number two or view number three were right and it really didn't matter one way or the other why does it seem like politicians would prefer to, you know, why are government debts so big? Under views number two and three you would think government debt could be zero or it could be a hundred quadrillion dollars and it doesn't matter one way or the other. And yet it seems like governments, you know, finance debts or they finance spending with deficits and debts as much as possible up to a certain point and then they back off of it. And so Buchanan's saying, why is that? That the standard, you know, the views of my opponents who are telling me that government deficit is awash it doesn't matter one way or the other they can't explain that. Why does it seem like it's politically expedient to pay for things with deficits? So he says, there's a real sense in which the government debt allows the present generation to live beyond its means. And here's the crucial insight. I'll say it here in words and then I'm gonna give you a numerical example to try to really drive the point home. So this is the mistake that Krugman and the young clean shaven Murphy were making. So future generations might pay for government bonds. They don't simply inherit them, okay? And so that was the mistake. Remember, we're talking about before, let me go back here just to see it. We're talking about before, look at it in the year 2050 the government might tax our grandkids to make payments to our grandkids. We'll give her to this guy. Make our grandkids poorer. Okay, and so the logic was it seemed airtight. How can it be that we today can do something to make the people in 2050 collectively poorer as a cohort if the government's gonna tax some of them and just hand the money right over to somebody else? The way to really see it is, suppose everybody equally inherits the treasury bonds. Right, so suppose every American year 2050 owns an equal number of treasury bonds in which case what the IRS does is it says to a given American, hey, your portion of the outstanding interest payment due this year is $832 and they stick a gun, give me that $832 and so they give it to them. And then they say, oh, and now since you own per capita the exact average amount of treasury bonds you're owed $832, there you go. And so Krugman is saying, you don't make Americans poorer by taking money away and giving it right back to them. Right, and that seems airtight. The problem though, as Buchanan points out is that is assuming that the way they got that treasury bond was someone gave it to them. But in reality, well certainly it's theoretically possible and also in practice it's true, most people who own treasury bonds right now if you ask them, how did you get that? They wouldn't say, well because I was walking by the tree that issues treasury bonds. They paid for them. And so the point is even though it's a wash, even in that I made the case as strong as possible for Krugman here by saying suppose everyone owns a, they're equal per capita amount of treasury bonds, even there he didn't prove enough. He has to further assume everyone literally inherited them and paid zero for them. If you earlier in your life paid money to get that thing and now because you own it the government's taking a certain amount of money and giving you that money right back, you're not better off. You're still poorer in terms of your lifetime consideration. So that is the insight. Now let me, so people who carried the torch on this were Don Boudreau who's a George Mason. So when Krugman and Dean Baker were going nuts because David Brooks had committed this silly fallacy that we were just getting so sick and tired of knocking this thing down. Every generation that comes up again and we got to sit here and teach these people basic stuff. It's really hard work being right all the time. So what's his name, did Boudreau came along and was like, no, Krugman and Dean Baker are wrong. James Buchanan has written several things on this and he's going through and making these points. Another guy was Nick Rowe, a Canadian economist who also was walking through this. And Rowe tells the story that he was totally turned around in the early 80s that he was reading Buchanan's arguments with people on this stuff. And Rowe said he had to like in his living room like take pieces of paper and rip them up and like had it spread on the carpet and was moving stuff around to be time periods. And that was like he had to see it that way. All right, I'm not suggesting you need to do it that way but my point is just it's a conceptual shift. Like if you're thinking of it a certain way it's hard to go through it. And in fact, I was getting ready to write something like it was going to be ironic. I was going to write in defense of Paul Krugman defending him from Boudreau and Nick Rowe on this narrow point, partly because I thought it would be funny but also because you might well do something once in your life, try everything once. And so I was going to do that. And then as I was working, so it was Nick Rowe's numerical example, right? So Boudreau, everything he said was right verbally. It was bouncing off me because I was so wedded to that earlier view. I thought, I'm sorry, Don, there's no way. How does the government taking $100 from someone and giving it right back to him, make him poorer? Come on, that doesn't make sense. And then it was Nick Rowe's numerical example where I was getting ready to smack him. And then I was like, oh my gosh, he's right. Normally you don't like being wrong, but here I was so wrong, it was like, whoa, that's pretty cool, all right, so. Okay, and also, thank goodness Mises was right on this stuff. So if you go and look at it, Mises and Human Act, if you get the PDF of Human Action, just search for learner and you'll see Mises quotes, learn saying we owe it to ourselves and Mises dismisses that as silly. Now in fairness, if you read Mises, it's not clear whether he had in mind the full subtlety of what Buchanan was doing, but for what it's worth, again, Mises didn't fall for the failed thing. He knew that what learner was saying was wrong and Mises' objection to it was perfectly valid, so I just wanna mention that. Okay, so here I'm gonna have time to walk you through the thing, but if you wanna see the full blown exchange starting from David Brooks and going through Dean Baker and Krugman and then Steve Landsberg was getting, so Steve Landsberg was taking the rational expectations view and other people were chiming in. I wrote this thing called The Economist Zone and if you just search for my name and you can see the screenshot, it was in January of 2012 where I wrote, what I did is when we had like 15 or so contributions from various economists on this, I then wrote a short story that was like a parable involving everybody and it was quite a masterpiece, I should say. And you should go look at, The Economist Magazine actually linked to it, like one of the op-ed right, because they thought it was, they liked it so much, so there you go. What else do you need besides to say they cost? But anyway, this really does show you, my point in telling you this is not to read the fictional account of what I did there, it was sort of like a parable where I had Krugman doing stuff and it was like a play, but besides that, the links I give where I linked to the original actual pieces if you wanna go see it. Okay, so without further ado, let me take the remaining time and again, if you're sitting in the back, this might be tricky for you to follow. I came up with this on my blog. So again, I'm arguing with all these guys several times. Let me mention one thing, this is an area where people often ask, hey Bob, do you think Krugman knows about your show? Does he listen as he reads your blog? Clearly Krugman has to know about the podcast because I think 8,000 of you emailed it to him when it first dropped. But on this one, I'm being dead serious. I knew at this point that Krugman does not read my blog at least because if he read this, I know Krugman enough to know, he would stop writing, he wouldn't have admitted he was wrong ever, but he would have flipped and defended it in a different way. It's because Dean Baker to his credit, I'm not saying Dean Baker read my thing, but he was reading Nick Rowe and Don Boudreau and possibly me too. Dean Baker eventually switched and said something like, okay yeah, earlier on I was being a little bit too sweeping in my statement. I'm just saying empirically, this kind of stuff is not a big factor what we're saying. So he did kind of move off his original sweeping condemnation and realize okay yeah, there is a sense in which we can impoverish future generations, but empirically that's not a big deal. Okay so he implicitly, he did admit he had been too strong whereas Krugman never backed down and again even when he kept doubling down on it, was saying stuff that was just demonstrably false. And so that's when I knew that Krugman say what you will about him but he wouldn't have left himself open to such an unforced error if he had been aware of this. Okay so let me now just show you how to read this thing. So this, if you go to that economist zone thing I showed you, I linked to this. So here what I'm gonna do is take the last five or so minutes I have and walk you through how this chart works. It's a little bit of work on the front end but I promise you if you understand how to read this thing and it's not that hard once I show you how it works you will really see what I've been talking about. Okay it'll click for you. So right now just focus on this top part. So the story here is there's nine periods. Each period there's only two people who are alive and each person only lives for two periods. So at any given time and they overlap. So at any given time there's an old person in a newly born young person. Then that old person dies and then the young person turns into the old person next period and there's a new young person born. Then the time passes that old person dies and then the new young person turns into the old person and so on. Okay so at any given time there's only two people alive. There's no saving or investment in this world. The only, there's no labor. The only consumption is each person owns an apple tree that shoots out 100 apples each period. Okay so real GDP every period is 200 apples period. There's nothing else you can't save more. You can't, apples will spoil. You can't carry them in the future. And that's it. There's nothing you can't plant more seeds. I don't know, I don't make up the rules. I did make up the rules but I, and so you say what's the point of this? The point is Nick and I wanted to isolate the point Nick was making okay. So in other words, I wanted to put aside all the stuff about government deficits crowding out private investment by looking at a world where there is no private investment. There's no investment period okay. And so that's, and I also want to crowd out the government wasting the money. All the government does here is take apples from some people and give them to somebody else. Okay so in this kind of a world, you would think there's no way it's physically impossible. How could it be that somebody in period one, whatever the government does, how could that possibly affect the people like in period eight or nine? If I'm telling you, no matter what the government does in period one, they're not gonna like poison the ground or something. Cause in practice, yeah the government would probably poison the apple trees. But I'm saying no matter what, every year 200 apples get produced and consumed by somebody alive. That's gonna happen. So you might think how could it possibly be that the government could do anything in period one that would in any way make both people in period nine worse off? They could clearly make one person in period nine worse off but only by benefiting the other person. If every year 200 apples get eaten, that's it, end of story, it would seem like there's no way the people up front could make the people down there poor. And so let me, so this top one, just to make sure you know how to read this stuff, everybody just consumes his or her apples each period. So the government's doing nothing these first nine years. Then we're gonna go down here and look at nine years where the government does intervene. So the way to read this chart, it's old ale gets 100 apples and young Bob gets 100. Next period old ale's dead, young Christie gets born, consumes 100 her apples. Now Bob, notice, turned into old Bob. And so you see the colors, each person I just carry forward. So each thing is two units and height wise, vertical because each person lives two periods. And the colors just keep track of who the people are. And it goes ale, Bob, Christie, Dave, Eddie, the people have been conveniently born in order of increasing in the alphabet. So that's how that works. And so notice here, it's very simple. The first one just so you get the sense of how the chart works and it's laid out. Notice every period, if you sum it up, it's 200 apples total. It happens to be 100 and 100 for each person, okay? Great. Now, here is the sense, again, you would think it is physically, mathematically, teleologically, epistemologically, any other adverb you want, impossible. How could the government by running deficits and taxing people in any sense make the future, present generation live at the expense of the future? And here's an example just to show you how it could work and the kind of point Buchanan was making. First period, the government borrows three apples at 100% interest from Bob and subsidizes ale three apples, okay? So young Bob only has 97 apples to consume this period, right, because the government borrowed three apples, but said that young Bob next period will pay you six apples back, right? The three apples plus 100% interest. Old ale gets the three apples from the government. So ale ale is clearly better off. Instead of getting 100 apples, he gets 103 apples. So he clearly prefers this outcome to the top chart. If this were the end of the time, young Bob would be worse off. He would only have 97 instead of 100. But young Bob lives two periods. Next period, what happens? The government borrows six apples from Christie to pay off Bob's six. So Bob now, old Bob gets 106 apples. He's got his 100 from his tree, plus he gets six that the government pays him because of the bond he carried over. Young Christie only gets 94 because her tree shoots out 100, but she lends six to the government. Okay, I'm gonna have to, I'm just gonna do a couple more lines here because I'm running out of time, but I wish when you see how this works, notice 94 plus 106 is 200. Every year here, it's 200. Real GDP is still 200 apples per year. You see this pattern, it's now in period five where the government, instead of letting the debt grow, starts instituting taxes. So it borrows 48 from Frank in period six that starts using taxes. So what happens, for example, it borrows 10 and 100% from George and taxes Frank 86 to pay off Frank 96. Okay, and so I'll just walk you through that one. Young Frank in the previous period had 52. He lent money to the government. Old Frank now gets 110. Okay, and so if you just look at the numbers, they all work out properly, but look at what's happened. And then the final period, the government retires the debt. It taxes Iris nine and taxes John one to pay off Iris 10. Okay, so I realize afterwards, you might wanna come up here and take a picture of this to look at it, but you'll see what happens. The first five periods, the government lets a debt grow, then it starts taxing people to pay it off. And what happens is, even though real GDP is 200 apples per period, the people that are blue are all better off. They prefer this bottom scenario to the top one. The people that are in the red and the orange are all worse off. They prefer the top to the bottom. And what ends up happening, that the thing that people didn't realize is, it's this mechanism of the young person can give up some of their stuff to give the old person extra apples today, knowing that next period, the government is gonna take apples from somebody else, a newly born person to pay them back. And so that trick can work for a few generations until the point at which, so it's growing. So every generation, you're willing to go along with it because yeah, you're giving up some as a young person, you're getting more when you turn older. But at some point, they can't continue forever because eventually the government debt would absorb the entire output. So at some point, the government has to initiate taxes and you're still willing to lend money to the government to get more next period, even though you yourself are having to pay the taxes to finance it. Just like right now, people know they gotta pay taxes and they might be willing to have treasuries in their portfolio. Okay, so that's the insight and just you run the numbers, you see the people down here are getting screwed. Like young Frank, it's 52 and 110, you can see why he might not prefer that to just getting 100 and 100, whereas you can see why young Bob might like 96106 as a flow over time rather than 100 and 100. Okay, so that's just a specific example of Buchanan's broader point. So a lot of time, thanks everyone for your attention. Thank you.