does the public debt "burden" future generations?

The following presumption is commonly offered in favor of austerity in times of high unemployment, as if unemployment were akin to a fallow field recovering its fertility in resting from crop production.

“. . . national debt is a means of boosting today’s consumption at the cost of future generations.”

The thing is, money is a fiction. If you think strictly in terms of goods produced and consumed, it is not so clear how a money debt incurred by the state accomplishes this shift of consumption from the future. There are no time machines that can export future production back to us in the present — or ship bales of cash forward in time to “pay” for these exports from the future.

We only have the present moment in which to live and act. We may choose to live in anticipation of the future, better or worse, but we can only act in this present moment. Whatever we are doing with money, we cannot make decisions for our posterity, only for ourselves. This is the great tragedy of involuntary unemployment, brought about by public austerity in a time of private retrenchment: it is a waste of time and life. We can never get back the time when we could have been productive. We cannot save up our productive powers for a future time.

That’s not to say we cannot invest productively. We could use our time and resources now — time and resources that cannot be recovered if squandered in the idleness of pointless austerity — to build for a better future. We have enough foresight for that, I think.

The one sure way we can ensure that our posterity is poorer is to run down the infrastructure, dumb down the young, lay waste to the environment, all in the name of containing money deficits. Money deficits which are simply fictions, symbolic constructions.

I am not saying money isn’t useful. It is a very clever institutional invention that let’s us keep score and coordinate our behavior in the system of production and distribution that is the economy. We use money to calculate our chances, hedge our bets and figure the odds as well as weigh the costs and benefits. Money is an all-purpose incentive and means of motivating people and property.

But, let’s think for a moment about what it means, this claim that we can “burden” later generations by using money and debt to marshal resources in the present. If we fail to use resources in the present productively, if we fail to put people to work doing worthwhile things in the present, we lose them, we lose the time and the opportunity . . . forever.

If the state borrows money, it typically issues marketable bonds that embody a promise to pay principal and interest on some fixed schedule. The state will levy money taxes in the future in order to keep those promises. If you are familiar with the concept of present value, you will understand that the bond is exactly worth at issue the present value of the anticipated future taxes to repay principal and interest. The stream of payments to the bondholder is exactly equal in value to the stream of payments from taxpayers that fund the bond.

Now here’s the tricky part: if the bondholder and the taxpayer are the same person, then the bondholder has in hand, in the form of the bond, the funds he needs to pay the taxes necessary to fund the bond. Of course, realistically, there may not be a precise correspondence between the bondholder and the taxpayer. The point of the thought experiment is simply to establish that the future is not “burdened”. Taken together, collectively, to the extent that bondholders and taxpayers form a common community, there is no burden, because the taxes are paid in money funds from money funds circulated by paying off the bond.

Creating the debt, in and of itself, has no consequence for future consumption, places no constraint on future public or private choices.

Of course, public policy can have consequences for the future. What public goods we choose to invest in, the bridges we build, the knowledge we develop, the communities we nurture — these things matter to the future.

I won’t say public debt is inconsequential. We need it as a vehicle for savings and for hedging the payments systems. We need an efficient fiscal system for collecting taxes, particularly taxes on economic rents. But, that’s another comment for a future time.

Note: originally published as a comment at Naked Capitalism, where I am now banned from commenting, apparently because I think Yves Smith is a bit addled, especially where MMT is concerned.

Atrios explains

Mainstream economists love to pose as academic masters of esoteric theory, devotees to rigor, but the main "results" or doctrines of economics -- those that provide convictions for the ideological foundations of the neoliberal faith are nothing more than hand-waving, leaps across the gaps in economic theory left by the failure to think it thru critically.

Duncan Black, a recovering economist writing the venerable political blog, Eschaton, identifies two of these gassy theses that fill the interstitials of textbook economics:

Economists have been obsessed for years with the unemployment/inflation tradeoff. Also the inequality/growth tradeoff. The former was basically as sophisticated as saying "um, I think if unemployment gets below....umm... 6%? maybe that would bad." The latter was as sophisticated as posing the question and then never answering it but still believing it. That maybe higher inequality could be *bad* for growth, just thinking out loud here, was never really seriously considered. Both of these things have been excuses for really horrible policies which have caused so much suffering.

These doctrines, it should be noted, are not pushed solely by the right-wing reactionary economists of "fresh-water" infamy.   Or even especially by them in recent years.  No, these are doctrines regularly validated by the left-neoliberals, the centrists with liberal consciences and mush where their brains should be.

What is wrong with economics is that the mainstream of the profession will not tolerate questioning of this hand-waving.  Nor will the self-appointed "left" of the profession engage in critical thinking about theory or the institutional nature of the political economy.  Sure, they will rail against the stubbornness of the profession's right, while celebrating their own informal reasonableness.  That refusal to think critically accounts for the degenerate state of mainstream economics.

Economics as Neoliberalism: The Beat Goes On

Boston Review: Economics after Neoliberalism

  by Suresh Naidu, Dani Rodrik, Gabriel Zucman

This essay really is a demonstration of how impervious economists and economics as a discipline are to fundamental criticism.

The criticisms are acknowledged but their response is to tout the need for "a broad and deep public discussion of new policy ideas".  Apparently, they think "a policy framework" -- essentially a new coat of paint in a brighter color -- is all that is needed; economics as it is, is sound, but misunderstood.  They think the problem with economics -- that economics is wielded as a dogma to support neoliberal policymaking -- is a matter of deceptive appearances.

They acknowledge that it looks bad for economics, as neoliberalism's unwavering policy sponsor and rationalizer.

In the eyes of many, the turn towards neoliberalism is closely associated with economic ideas. Leading economists such as Friedrich Hayek and Milton Friedman were among the founders of the Mont Pelerin Society, the influential group of intellectuals whose advocacy of markets and hostility to government intervention proved highly effective in reshaping the policy landscape after 1980. Deregulation, financialization, dismantling of the welfare state, de-institutionalization of labor markets, reduction in corporate and progressive taxation, and the pursuit of hyper-globalization—the culprits behind rising inequalities—all seem to be rooted in conventional economic doctrines. The discipline’s focus on markets and incentives, methodological individualism, and mathematical formalism all seem to stand in the way of meaningful, larger-scale economic and social reform. In short, neoliberalism appears to be just another name for economics.

It has all been just a terrible misunderstanding, you see.

Many of the dominant policy ideas of the last few decades are supported neither by sound economics nor by good evidence. Neoliberalism—or market fundamentalism, market fetishism, etc.—is not the consistent application of modern economics, but its primitive, simplistic perversion.  

No True Scotsman?

Economics is in a state of creative ferment that is often invisible to outsiders. 

Yes, invisible.  For decades.

Weirdly, though they claim that market fundamentalism "is not the consistent application of modern economics", they go on at length praising markets and economic analysis of markets as central to economics as a discipline and doctrine.

Economists study markets (among other things), and we naturally feel a certain pride in explaining the way markets operate to those who lack our specialized knowledge. When markets work well, they do a good job of aggregating information and allocating scarce resources. . . . The typical course in microeconomics spends more time on market failures and how to fix them than on the magic of competitive markets. . . . the “competitive equilibrium model” in which free markets are maximally efficient—even if they are not good for fair distribution—is the dominant framework only in introductory economics courses. Thoughtful economists (of which there are many) quickly move away from it. . . . Economists still have a strong bias towards market-based policy solutions, and the policy prescriptions endorsed by economists tend to be narrowly focused on addressing precise market failures. . . . Economics does have its universals, of course, such as market-based incentives, clear property rights, contract enforcement, macroeconomic stability, and prudential regulation. These higher-order principles are associated with efficiency and are generally presumed to be conducive to superior economic performance. 

Their core argument is that economics is more flexible than fundamentalist.  Even a fairly stupid economist can produce an argument in favor of her own prejudices.  And, this is treated as a feature, not a bug.  No really, they make that argument!  I quote:

.  .  . the science of economics has never produced pre-determined policy conclusions. In fact, all predictions and conclusions in economics are contingent: if x and y conditions hold, then z outcomes follow. The answer to almost any question in economics is “it depends,” followed by an exegesis on what it depends on and why. Back in 1975, in a collected volume entitled International Trade and Finance: Frontiers for Research, an economist named Carlos F. Diaz-Alejandro wrote: “by now any bright graduate student, by choosing his assumptions . . . carefully, can produce a consistent model yielding just about any policy recommendation he favored at the start.” Economics has become even richer in the intervening four decades. We might say, only slightly facetiously, that today the graduate student need not even be that bright!

Oh, my, god.  Just look at this reasoning -- in one paragraph, they go from "the science of economics has never produced pre-determined policy conclusions" to "any bright graduate student . . . can produce a consistent model yielding just about any policy recommendation he favored at the start" without noticing the contradiction!

Well, I was once a mediocre graduate student and I could tell them where they went wrong: it was at the beginning.  Neoclassical economics, the economics of the market economy, is in the nature of a Big Lie, in Goebbels sense, that is, a colossal lie consistently adhered to.  If you accept the premise of the lie, if you follow the White Rabbit, you will soon find yourself down the rabbit hole in Wonderland with no way out.

The White Rabbit, in this case, is the presumption that the political economy can be usefully understood to be organized by and as a system of markets.  There are few actual markets in the actual, institutional economy, and pretending otherwise will rot your brain.  Certainly, the institutional realism and turn to empiricism that the authors hold up as the great hope for the future will remain out of reach as long as they adhere, as they assiduously do in this essay, to the Big Lie that the political economy is a system of markets.

There may well be a great deal of value to salvage from economics as bits and pieces, once the architecture of the market is abandoned as the organizing principle and the intellectual structure collapses.  But, these fools are not going to do anything but get in the way of that project.

Michael Hudson: How Financialization Makes You Poorer

This is a blog about what is wrong with economics, not what is wrong with the economy, but the reason what is wrong with economics matters is because what is wrong with the economy can be traced, in many ways, to what is wrong with economics. Economics and economists ought to help us to understand how the economy -- our decentralized decentralized system of production and trade and investment -- works, and macroeconomics ought to help us understand what choices we are making collectively. In that sense, it ought to inform government, especially democratic government. But, mostly, it doesn't. It confuses, and talks up a lot of rot. But, there are a few people out there, who are zeroing in on the essence of the choices we are making. Michael Hudson is one. Michael Hudson: Productivity, The Miracle of Compound Interest, and Poverty « naked capitalism:

"After World War II many women stayed home and raised families. But since the 1950s they have been forced increasingly into the labour force for what are called two-job families – and now, three-job families (with only two family members). If you project labor participation rates, by the year 2020 every woman will have to work 18 hours a day or economic trends will falter. What was applauded as a post-industrial economy has turned into a financialized economy. The reason you have to work so much harder than before, even when wages rise, is to carry your debt overhead. You’re unable to buy the goods you produce because you need to pay your bankers. And the only way that you can barely maintain your living standards is to borrow even more. This means having to pay back even more in years to come. That is the Eurozone plan in a nutshell for its economic future. It is a financial plan that is replacing industrial capitalism – with finance capitalism. Industrial capitalism was based on increasing production and expanding markets. Industrialists were supposed to use their profits to build more factories, buy more machinery and hire more labor. But this is not what happens under finance capitalism. Banks lend out their receipt of interest, fees and penalties (which now yield credit card companies as much as interest) in new loans. The problem is that income used to pay debts cannot simultaneously be used to buy the goods and services that labor produces. So when wages and living standards do not rise, how are producers to sell – unless they find new markets abroad? The gains have been siphoned off by finance. And the financial dynamic ends up in austerity. And to make matters worse, it is not the fat that is cut. The fat is the financial sector. What is cut is the bone: the industrial sector. So when writers refer to a post-industrial economy led by the banks, they imply deindustrialization. And for you it means unemployment and lower wages."

This is so important to understand. In 2008, the finance sector, after failing spectacularly, demanded that government take emergency measures to preserve the financial sector, alleging that any other course would destroy the global economy. Those emergency measures have destroyed the global economy. And, yet, we -- the general, voting public and the politicians, who represent us and the centrist busybodies, who decide what is wise and "serious" policy -- are apparently paralyzed, like deer in the headlights, unable to understand and move forward on a sensible rational policy And, why? Well, one critically important reason is that economics -- particularly macroeconomics -- has never bothered to figure out what money and finance is all about. What is the function of money? What is the function of finance? These are basic questions. The answers are not exactly rocket science. And, yet the essentially predatory nature of financialization is ignored, except by a few, articulate scholars, like Michael Hudson, who are marginalized for their trouble.

Eschaton: Fine, Galtian Overlords, Make Us Poor, But...

Eschaton: Fine, Galtian Overlords, Make Us Poor, But...:

...do you have to make people suffer so? It's one thing to take an income hit, it's another thing to spend an entire life with high degrees of income insecurity. It isn't just stagnant or declining incomes that's the problem, it's that most people face a daily nontrivial probability that they're going to be completely fucked.

At the risk of pointing out the obvious -- or what should be obvious, at least -- one thing is a means to the other.

The only uses for financial wealth are "ownership" and "insurance" (I am using quotes to indicate that I am using the term in a broad, economic sense to mean something more than auto insurance or life insurance), and the only way to obtain high returns to financial wealth, is lots of volatility, which has the effect of separating poorer people from their wealth, or ownership claims, making them desperate enough to buy "insurance" at usurious rates and at risky terms, which will result in many of them, say, experiencing medical bankruptcy or the foreclosure on a home.

Atrios -- Duncan Black -- it will be noted was a Ph.D. economist in another life.

The Madness Behind the Method, Part 1

There's an old saying in the military to the effect that amateurs focus on strategy, while the professionals do logistics. It highlights the prosaic reality that a commanding general's job consists largely of making sure his army is fed, clothed, supplied and moved; strategy and tactics are almost an afterthought, and success in logistics may well overshadow what is called strategy or tactics, in determining the outcome of conflict and battle. There's a useful analogy in this wry observation to the situation in the intellectual battlefield of economics: the amateurs focus on theoretical modeling, while the pros do methodology. For the past month of so, there's been a quickening of exchanges in the econblogs over the merit of "microfoundations" in macroeconomics: the pre-occupation of the field with connecting analysis of the behavior of economic aggregates with the expectations and inter-temporal optimizations of (representative) individual actors, largely in models of a type known as Dynamic, Stochastic General Equilibrium (DSGE) models. Although conducted largely in good humor, the exchanges have been fairly stark in terms of outlining alternative views of the value of the DSGE/"microfoundations". On one side, some bloggers have been somewhat dismissive; on the other, some have tried to explain the approach and its value. I say, "tried" without prejudice, since the topic is somewhat technical and esoteric. It is an unusual discussion for the econblogs, because it goes directly to the usefulness of economics, as a body of knowledge and doctrine, and is not a subspecies of ideological partisan sniping over ephemeral policy issues. The usual pattern resembles a kind of ritualized tribal warfare, in which the same tropes are rehearsed. Allies close ranks around their champion, or join together to harass some hapless victim or to engage with a talented provocateur. Some allegedly left-of-center econbloggers would scarcely have an opinion, if they were not constantly provoked by Tyler Cowen (Marginal Revolution). But, here, we get to see some genuine transparency of thought, as bloggers on the same "side" expose their differences and doubts and deepest assumptions. And, this is real core stuff. "Microfoundations" trace back to the Lucas Critique, an event that has helped shape macroeconomics as a field for a couple of generations. Robert Waldmann, in his comment, contrasts the Lucas Critique with Friedman's outline of Positive Economics, as the two methodological touchstones for macroeconomics. As Simon Wren-Lewis observes practically every paper published in what are considered top journals includes several pages laying out the "microfoundations" for the model presented in the paper. And, it is precisely the value of doing so in every case, that is being called into question in this blogospheric back-and-forth. A nearly universal practice, closely associated with professional prestige, is being called into question, with regard to its practical value. And, the back-and-forth is occurring among people of good will and a more-or-less common ideological world-view. It's a remarkable development, a breach of some kind of barrier, I think. Economics is subject to a great deal of scornful criticism from the amateur laity (such as my own lovely self), as well as from gadfly and apostate economists. I don't think the mainstream of the profession likes to engage with this criticism much. There's a tendency to close ranks, and to defend the professional reputation of prominent members of Tribe Econ; if an economist is attacked by other economists, it will be for the partisan claims made in an op-ed written for popular consumption, and not for professional accomplishments. It's OK, somehow, for a Krugman or a Barro to take potshots at each other's popular opinion-writing about, say, Obama's stimulus; disagreements about the useful of technical and professional approaches and accomplishments are another thing.

Arrogance

When I created this blog, I was having one of those super-caffeinated manic moments, when I could see an extensive outline for a critique of economics. Once I recovered, I immediately saw how far my vision had soared past not only my ability, but my ambition, and even my arrogance. I've since thought about using these pages to review some of the other critiques, floating out there -- particularly the ones written for a popular audience -- Steve Keen, Yves Smith, John Quiggin, etc., as well as some of the short bits spun out daily by various econ bloggers. Ability limits me; ambition fails me, too. Arrogance? I really do not care. But, as I stumble on, I find myself very angry, about the failure of economics to say anything coherent or useful. The more I understand of what economics has become, as an academic discipline and a college of science and a tool of popular discourse, the more angry I become. So, maybe, I will try to channel a bit of that anger, and see if it can supply the deficit of ability and ambition. At least, it may produce some useful or interesting rants. And, that's what blogging is for, no?