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Brad DeLong's Grasping Reality 2019-10-13 23:43:56

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This, from the smart Nick Rowe, is just misleading from any sensible point of view. The burden of a debt on a generation in any sensible social welfare function is proportional to the proportional reduction in that generation's consumption needed to finance the debt, and all generations are on an equal footing. When r < g, you can boost the relative well-being of a current generation at a very low cost in terms of the reduced well-being of a far-future generation. So even though debt is not a free lunch when r < g, it is a very, very cheap lunch indeed: Nick Rowe: Hilbert's Hotel and the National Debt when r < g https://worthwhile.typepad.com/worthwhile_canadian_initi/2019/10/hilberts-hotel-and-the-national-debt-when-rg.html: "Hilbert's Hotel has infinitely many rooms. Even if every

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This, from the smart Nick Rowe, is just misleading from any sensible point of view. The burden of a debt on a generation in any sensible social welfare function is proportional to the proportional reduction in that generation's consumption needed to finance the debt, and all generations are on an equal footing. When r < g, you can boost the relative well-being of a current generation at a very low cost in terms of the reduced well-being of a far-future generation. So even though debt is not a free lunch when r < g, it is a very, very cheap lunch indeed:

Nick Rowe: Hilbert's Hotel and the National Debt when r < g https://worthwhile.typepad.com/worthwhile_canadian_initi/2019/10/hilberts-hotel-and-the-national-debt-when-rg.html: "Hilbert's Hotel has infinitely many rooms. Even if every room is full, you can still make room for one more guest in room 1, by moving the guest currently in room 1 to room 2, moving the guest currently in room 2 to room 3, and so on forever. When the rate of interest r is less than the growth rate of GDP g ("r < g"), the national debt in an infinitely-lived economy is a bit like Hilbert's Hotel. The government prints some bonds, which it gives (as a freebie) to generation 1 (this is like giving generation 1 a deficit-financed transfer payment, or tax cut). When they get old, generation 1 sells those bonds to the young in generation 2, in exchange for apples. So generation 1 eats more apples when old, and generation 2 eats fewer apples when young.... If r < g, the government never needs to raise taxes to service the debt.... A national debt makes all generations better off.... But it won't work if the economy has a finite life.... The last generation is stuck with bonds it can't sell, and no compensation for consuming fewer apples when old. So they wouldn't buy the bonds... unless the government raises taxes to retire the debt before the economy ends, but then those taxes would make the generations that pay them worse off...

Bradford DeLong
J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.

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