Saturday, 18 October 2014
More on time travel.
My article yesterday on the above topic was not well thought out. But I still don’t think that funding public investment via government borrowing rather than via tax has any significant implications for inter-generational fairness. Let’s run through the arguments.
The obvious and superficial attraction of funding via borrowing is that future generations (who benefit from public investments) have to pay interest on the debt and/or have to repay that debt.
One answer the latter point is the “time travel” argument set out in my article yesterday.
And an answer to the latter time travel argument, set out by Nick Rowe is that time travel is in fact possible in the following sense (assuming I’ve got Nick right). Assume a public investment is made during the working life of a particular generation (let’s call it generation 1). Assume also that government funds the investment via borrowing. Generation 1 undoubtedly suffers a standard of living hit as a result. However, that hit can be nullified if during the retirement years of generation 1, generation 2 has to buy government bonds off generation 1. That obviously helps fund the retirement of generation 1.
Likewise, generation 3 can be made to buy the bonds off generation 2 in the retirement years of generation 2. And clearly that works: that is, it transfers the burden of making a public investment to future generations.
However the big problem with the latter “generation” argument is that it is highly artificial. That is, when governments make public investments funded by borrowing, they don’t in practice set up the above nice clean and simple “succeeding generation” system.
That is, the real world is in practice far more messy. For example, government debt tends to be held by the rich who far from SELLING government bonds to their descendants, simply GIVE it to those descendants. Second, government debt is in practice bought by and held by a variety of actors apart from pension funds, e.g. foreigners, banks and so on. And the latter have a variety of reasons for buying or selling government debt that have nothing to do with inter-generational fairness. Third, the assumption in the above “generation” scenario that government makes public investments in a particular year and none at all for the next ten or twenty years is unrealistic.
The reality is that governments spend very roughly the same amount on public investments every year. And that point alone means that it doesn’t make much difference as far as inter-generational fairness goes, whether public sector investments are funded via borrowing or tax.
And a fourth and final complicating factor is that the population ALREADY HAS approximately the pension set up it wants. That is, in as far as pensions are investment based rather than pay as you go, the above generation 1, 2, 3 etc won’t be very interested in a new facility that enables younger generations to buy bonds or other assets off preceding generations. Put that another way, if the above “clean and simple” system WERE SET UP, it would to a large extent just displace EXISTING SYSTEMS for “making the next generation pay”.