...against fictions and other tall tales

Wednesday, 24 October 2012

Bill Vickrey and Alan Blinder on the burden of the national debt

A colleague asked me today if I thought the national debt was a burden imposed on future generations.  No doubt my colleague has been following the debate of late on that issue. Anyway, in my opinion, anyone who argues that the national debt is a burden on future generations has to take into consideration the views put forth by the late economist and Bank of Sweden Nobel laureate Bill Vickrey.  According to Prof. Vickrey, the notion that government debt is a burden imposed on future generations is a false worry.  In Prof. Vickrey's own words:
...[I]n generational terms, the debt is the means whereby the present working cohorts are enabled to earn more by fuller employment and invest in the increased supply of assets, of which the debt is a part, so as to provide for their own old age. In this way the children and grandchildren are relieved of the burden of providing for the retirement of the preceding generations, whether on a personal basis or through government programs.

This fallacy is another example of zero-sum thinking that ignores the possibility of increased employment and expanded output. While it is still true that the goods consumed by retirees will have to be produced by the contemporary working population, the increased government debt will enable more of these goods to be exchanged for assets rather than transferred through the tax-benefit mechanism.
Also, in regard to the notion that deficits represent "sinful profligate spending at the expense of future generations who will be left with a smaller endowment of invested capital", Prof. Vickrey considered such an idea a fallacy stemming from a false analogy to borrowing by individuals.  Again, according to Prof. Vickrey,
[c]urrent reality is almost the exact opposite. Deficits add to the net disposable income of individuals, to the extent that government disbursements that constitute income to recipients exceed that abstracted from disposable income in taxes, fees, and other charges. This added purchasing power, when spent, provides markets for private production, inducing producers to invest in additional plant capacity, which will form part of the real heritage left to the future. This is in addition to whatever public investment takes place in infrastructure, education, research, and the like. Larger deficits, sufficient to recycle savings out of a growing gross domestic product in excess of what can be recycled by profit-seeking private investment, are not an economic sin but an economic necessity. Deficits in excess of a gap growing as a result of the maximum feasible growth in real output might indeed cause problems, but we are nowhere near that level.
Finally, it's also important to mention that, as economist Alan Blinder has pointed out in the past, the majority of government bonds in the US have a maturity period of about a decade:
...in my view, most of the debate is beside the point because, in the real world, the bonds that will be issued to cover deficits will almost always mature in less than 10 years, a time frame within which most of today's taxpayers will still be around to pay the bills.  So intergenerational aspects of present-value budget constraints are mostly irrelevant. (2004:19) (emphasis added)

Blinder, Alan."The Case Against the Case Against Discretionary Fiscal Policy" CEPS Working Paper No. 100, June 2004.

Vickrey, William. "Fifteen fallacies of financial fundamentalism: A disquisition on demand-side economies", Proceedings of the National Academy of Sciences of the United States of America, Vol. 95, No. 3, February 1998, pp. 1340-1347.


  1. Well is it not a fact all this national debt is denominated in USD i.e. the obligation is not in any other currency or commodity?
    Secondly, is it not a fact that since 1971 we are no longer on a gold standard, i.e. there is nothing backing the USD?
    Which leads to the fact that the US can pay any and all of its debt anytime without the fear of solvency.
    In fact we have been doing that everyday. Look up Total Redemption Public Debt Transactions

    1. Yup. That's entirely correct. And Prof. Vickrey understood that as well. Here's another excerpt from the same paper:

      "... in the absence of a norm such as a gold clause, there can be no question of the ability of the government to make payments when due, albeit possibly in a currency devalued by inflation."

  2. Very interesting visions on controversial subjects. It's very promising to know that some out there (FRB) know the better minds to tap when grounding a position. Let's hope the discipline gets replicated...so much unncessary babble on the same topics. Most irritants have been laid to rest decades ago: must be the unintended poverty of the pampered mind that needs comforting.

    Vickrey and Blinder are transgenerational thinkers. Nicely done.

    1. Circuit!!

      I concur with GC. The latest in this thread of unnecessary irritating babble is the exchange or interchange or conversation on 'the multiplier'. Suffice to read Eichengreen/ O'Rourke to lay the matter to rest:


      Chair Bernanke has shown outstanding leadership in the absence of fiscal and congressional initiatives. Perhaps the next Sveriges Riksbank Nobel in Economics, (Messrs Shapley and Roth Nobel is well-deserved) should go to Messrs Volcker and Bernanke for keeping the ships of State afloat in the midst of maelstroms of 'assymetric information', 'lax regulations' and 'market imperfections'

      On a variant of Robert Solow, they did what they could "...(when)Congress falls well short of God."

      Nods to Laliberte and Circuit for reminding everyone to unshelf an OLD BOOK's wisdom that there's nothing new under the sun.

  3. bang bang! wild bill vickrey knocks'em down and blinder finishes'em off. I'm gonna forward this to brad, dean and paul. Nick too -- that horseman must see this!

  4. Joseph Laliberté26 October 2012 at 20:37

    Wow, I have to read Vickrey! Good stuff Circuit!

  5. @GC: I thought the same thing. It's as if a section of the discipline's foundations were surgically removed, erased. And then bloggers had to somewhat piece it back together from scratch. Have they ever heard of Bob Eisner? He wrote about the burden of the debt in the 80s and 90s.
    @MI: Great link to Eichengreen et al! As for Chairman Bernanke, he's definitely got me sitting on the edge of my seat! Not sure what is next. But the Woodford paper raises some interesting possibilities.
    @varga: thanks!

  6. Here's a link http://blogs.forbes.com/johntamny/ that will recall a great conversation a yr ago on your post Deficit Myths (Pt 1)-a stirring write-up!! http://fictionalbarking.blogspot.ca/2011/10/deficit-myths-part-1-effect-of-budget.html

    jhcraw will surely remind us of his comments. Maybe Mankiw will take lessons from an old book by a wiser thinker: Rob Solow!

    Would that Vickrey have witnessed Romney's campaign debacle.

  7. Thanks Swells for the recall! I remember the exchange on Mankiw quite well. In fact, since then I've adopted JH's view on the meaning of 'keynesian':

    "... i contend that a necessary condition for the attribute is to prioritize viable solutions to unemployment as main policy objectives. i leave it to the readership to evaluate if gm satisfies that test. of course, some may argue that the above test is not the sole criteria. i would agree it's not the sole, but it identifies the keynesian bloodline."

    This is great. In fact, the comment reminds me of one of my favorite Keynes quote (actually, I consider it a 'golden rule' for the budget-obsessed policymaker): "Look after the unemployment and the budget will look after itself" (1933). I assume Bill Vickrey would have approved.

    As for your link to John Tamny's column, this part grabbed my attention:

    "Personnel as they say, is policy, and in Glenn Hubbard, Greg Mankiw and Kevin Hassett, Romney had the wrong personnel that fed him bad policy ideas."

    Of course, personnel *is* policy'. But it's important to keep in mind that Tamny thinks that the 'bad policy ideas' includes support for QE. Now, I've come around to the view that, while QE is probably not all that helpful, going ahead with multiple QEs was probably better than doing nothing. So I think that Tamny is overdoing it here. On the other hand, Tamny's statement is correct if viewed as a commentary on the lack of support of Romney's advisers for additional fiscal stimulus. This in my opinion would have been the proper policy recommendation.

    And this is where I join you in highlighting the brilliant work of Prof. Solow (!!) and his prescience in reminding authorities (and his fellow economists) about the critical role of fiscal policy in helping to avert and mitigate the impact of major economic downturns!! So much in recent years has vindicated this view. From the complete disarray caused by austerity policy in Europe and the UK to the ineffectiveness of monetary policy to Bernanke's and Woodford's recent calls for greater coordination between fiscal and monetary policy, my opinion is that the case for the appropriateness of fiscal stimulus has been strengthened. As far as transgenerational thinkers, Prof. Solow also makes the list!

    Now, as a follow-up to the Tamny article, I suspect that Prof. Solow would probably object with the following statement from Tamny's comment:

    "In short, President Obama ignored the basics of economic growth, the economy during his first term limped along as a result, and when the electorate reached the polls unemployment was abnormally high while GDP was abnormally low."

    I would tend to disagree that the President ignored the basics of economic growth. It's true that the federal stimulus was insufficiently large, however, I think it is obvious that the stimulus helped to keep unemployment from skyrocketing higher than it otherwise would be without a stimulus (especially considering the cuts in state expenditures and record level corporate savings).

    Also, it's important to mention that the reason why unemployment has stayed so high is because the productive capacity of the US economy has continued to expand due to recent productivity growth. From a policymaking standpoint, this makes it doubly more difficult for the authorities to help fill the gap between the economy's productive capacity and what the economy actually produces. The unemployment rate will only go down in earnest once that gap narrows.

    Thanks Swells and MI for the comments and reminding us to go back to wiser thinkers! There are important problems out there and many of the solutions should be grounded in their work.