[JonBurns28]

I apologize for being off topic but this is an economics question. Can one of you gentleman explain how debt is passed off to future generations? I guess it is just taxes? I have been studying the Austrian theory ardently lately as well as this course. I just want a good explanation as this is one of the few things I have not heard in detail.

[mpelkowski]

This article by Gary North really puts the debt issue into context. I must warn it is more libertarian/politically charged than economically, but it certainly makes the economic case. http://lewrockwell.com/north/north1081.html

A quick answer would be that the presently accumulated debt will be payed off with future taxes or by the FED creating new money to pay off the debt which will devalue your money and is thus another form of taxation.

[tylerboyd49]

The way I usually explain it to friends is that there are 3 ways the government pays for stuff.

1.) Taxes – paid by today’s workers [Has political limits]
2.) Borrowed debt – paid for by tomorrow’s workers (aka: next generation pays taxes to pay for today’s spending) [has credit limits]
3.) Inflation – paid by the ones who get the created money last (by paying the prices that have reacted to the influx of currency) [The hidden tax – currency viability limit]

[jmherbener]

When the state borrows today to pay for its expenditures, resources are transferred from private hands to the state today. The burden of the loss of resources from taking them away from their efficient use in the hands of entrepreneurs and putting them into the hands of politicians and bureaucrats occurs now. When the debt is paid in the future by taxes, there is a transfer of wealth between private parties, from taxpayers to bondholders. Resources stay in private hands. Future generations do not pay for state borrowing, the present generation does.

[akashdan]

A lot of economists (including libertarian ones) do not agree with Jeff Herbener on this. In short, with borrowing today, people buy bonds willingly (of course, there may be deadweight loss, but that’s an additional burden). In the future, someone is being taxed, which obviously is not voluntary, so that’s where the burden is.

[ray.holloway]

Dr. Herbener, I think it may help to clear up who exactly is burdened by “the loss of resources” when the state borrows. Do you mean only those who bought the bonds? Or, perhaps, do you mean the burden is on the marketplace as a whole (i.e. consumer demands are not being met)? In other words, the voluntary choice that bondholders have made (buying government debt) has actually burdened current consumers (i.e. taxpayers), because the funds used to buy bonds would have better served those consumers, if those funds had been spent in the free market.

Also, is it not fair to say that the voluntary choice that bondholders have made to spend their money on government debt is only voluntary in one direction? There is no voluntary agreement by future taxpayers in this transaction, unless one views past officials/bond elections of their particular geographic region as legitimate representation. The private party to private party analysis is true as far as it goes, but someone breaking into my car and stealing my radio is a private party to private party transaction, too. I certainly don’t consent to it, nor am I happy about having to buy a new radio which I consider to be a burden. Future taxpayers (certainly, the unborn and those unable to vote yet) have not consented to the present sale of bonds, but they are obligated to pay the interest on those bonds.

So, this appears to be a burden on both present and future generations. Today, we suffer from an inefficient use of resources, and, tomorrow, our children are obligated to pay those who enabled the inefficiency.

[jmherbener]

There are two different issues that we should not conflate. The first is the transfer of control over resources from private hands to the state. The happens whenever the state spends funds, from whatever source it acquires them: taxes, borrowing, and monetary inflation. This transfer of control takes resources out of the realm of efficient decision making by entrepreneurs using economic calculation and puts them into the realm of inefficient decision making by politicians and bureaucrats. The burden of the loss of efficiency is born in the present by society at large.

The second issue is the transfer of wealth between taxpayers and bondholders in the future as the state pays the bondholders. This does not transfer resources from private hands to the state. It transfers wealth between two private parties, taxpayers lose and bondholders gain. Of course, this has inefficiencies too since it’s coerced, but it does not transfer resources to the decision making control of the state.

This distinct is helpful in disabusing one of the fallacy that if the state borrows today the burden falls entirely on future generations. Actually, the burden falls on the present generation as resources in the present are wasted by the state. Then, in the future, the state adds the additional inefficiency of coercively transferring wealth from one private group, taxpayers, to another private group, bondholders.

[akashdan]

I agree with you, but I don’t think it’s correct to say “Future generations do not pay for state borrowing.” Someone in those future generations is bearing the burden, it’s just that part of it is a (coerced) transfer within the private sector. By aggregating the private sector, you’re giving the Krugman argument of “we owe it to ourselves”

[jmherbener]

What if the state borrowed today and then in the future it defaulted on the debt and no taxes were extracted and no bondholders were paid. Wouldn’t the burden of the debt be the same today as in the case where the state taxes some people in the future to pay other people? And isn’t this present burden the main answer to the claim that the debt doesn’t matter because “we owe it to ourselves”?

[akashdan]

I agree there is a burden (inefficiency/deadweight loss) because of government spending made possible by borrowing, ignored by Krugman. But that is in addition to what people mainly mean by the burden, which is the actual amount of the debt. In the case of default, then the bondholder would bear the burden.

Actually, I was thinking perhaps it is correct to say the burden is limited to that inefficiency and is borne by present generations, but only because the government can continually roll over the debt. The government is always taxing, of course, but for the foreseeable future it is also able to borrow to pay current bondholders. So you have more people voluntarily purchasing bonds (creating that additional inefficiency due to government using resources). Until there is some kind of end game with the debt, is that burden postponed? Is that consistent with what you’re saying?

[jmherbener]

But the bondholder has born the burden in the present, not the future. The bondholder has given up buying consumer goods or making investments in the present when he lent to the state. So future generations do not bear the burden of the debt. If the state coerces taxpayers to pay bondholders in the future that is an additional burden on the taxpayers that is independent of the primary burden of the debt, which is born in the present. This secondary burden on future taxpayers is exactly offset by the secondary benefit to future bondholders. So future generations do not bear the burden of the debt.

[miljacic]

Mr. Herbener, such seems to be the case if we look at the “total future generations of the whole planet Earth”. But I’m a bit lost… what if we look at different countries? If USA bondholders are Chinese people, and taxpayers Americans, then in the future the tax money will be raised from within USA and given to somewhere outside (China). Can it not be said then that: the present burden of debt is upon “present Chinese generations”, while future burden is upon “future American generations”? Wouldn’t then, in both the present and the future, some generations bear the burden? Thank you.

[jmherbener]

There are two burdens from debt financing of the state. The primary burden is born by the present generation. Bondholders give up command over resources by lending to the state and society in general suffers lower standards of living than it could have enjoyed when the state directs the use of resources instead of entrepreneurs. The latter is the burden born by society at large.

The secondary burden from debt financing is independent of the primary burden. It occurs only if the state taxes some people in the future to pay bondholders. If so, taxpayers bear a burden and bondholders receive a benefit. Control of resources are not transferred to state and so, there is no burden on society at large.

In your case, then, the primary burden is suffered by the Chinese holders of U.S. bonds and by people around the world whose standard of living is lowered by having resources used inefficiently by the U.S. state instead of efficiently by U.S. entrepreneurs. The secondary burden occurs if and when the U.S. state taxes Americans and uses the tax revenue to pay Chinese bondholders. But this is not a burden on society at large.

It doesn’t matter whether or not the taxpayers and bondholders are in the same political boundary. The secondary burden will be suffered by taxpayers and offset by the benefit to the bondholders. So it’s misleading to say that future generations bear either the primary or secondary burdens. The secondary burden is born by the taxpayers (not Americans in general), wherever they reside, and offset by the benefit to the bondholders (not the Chinese in general), wherever they reside.

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