More on the Debt and Future Generations

Last week, I wrote a post on Robert Murphy (who I regard highly) and his discussions on the national debt.  I may have a rare disagreement with Murphy on this topic and I wanted to add a few points to this.

Murphy gave an example of consuming apples.  He was trying to show that future generations pay for the excesses of current generations.  But the last person on the chart was really just paying at the expense of the person right before.

The interesting thing about the example is that you could not save any apples for the future.  If you could, that may have actually given a better argument for Murphy to use.  If there is only a given amount of wealth at one particular time and it doesn't even have the potential to increase over time, how can one generation benefit at the expense of another generation unless it is two generations that live during the same time?

If you can't carry any wealth into the future, then how can someone living in the year 1900 consume something at the expense of someone living in the year 2000?

Murphy's example is like a Ponzi scheme.  You will only enter into it if you think you can sucker the next group of people behind you into it.  If someone (in this case a whole generation) says "no", then the scheme is over and the last people to buy into it are the losers.

What would happen if the U.S. government just defaulted on the whole national debt right now?  Would we still say that future generations would have to pay for the debt?  If there is a default, then no future person has to pay anything.  It is the people currently holding the bonds who have to pay.  They were the last suckers to pay up who couldn't get another buyer behind them.  It is like people who bought real estate in 2006 in a hot market.  It came to a point where they could not find one more person after them to buy the house at a still higher price.

As I said in the last post, Murphy's original instincts were correct.  The national debt does place a burden on future generations, but not because they necessarily have to pay for anything.  The burden is placed on them because there is less development in technology and capital investment than if there had been no national debt.

The real problem with the huge national debt is the massive government spending.  If the government could not borrow all of this money (or create it out of thin air with the Fed), then it would be forced to cut back spending.  Government spending automatically misallocates resources.  This misallocation leads to less growth and less advancement, and that is where future generations "pay".

The national debt  hurts us right here and right now.  The massive government spending is one of the reasons for the high unemployment and weak economy.  It misallocates resources and it is preventing a proper correction of the previously misallocated resources.  It is taking capital away from the free market economy.

We should worry about the national debt and government spending.  We should not just worry about it because of our future grandchildren, we should worry about it because of everyone living right now.