Does Government Debt Impose a Burden on Future Generations?

A relevant question given the high current government debt levels to which most people will answer with a clear “yes”: we are spending today and passing the bill to the next generation. But this answer is incorrect (or to be more precise it might be incorrect).  The link between debt and burden on future generations is much more complex than what many think.

Recently, a debate has populated the economics blogosphere as some argue that that debt only imposes a burden when it is held externally, others coming up with counterexamples where this is not true (borrowing from Noah Smith a list of links to the debate: here, here, here, here, here or here.)

The debate becomes even more complex as the issue of desirability of another round of fiscal stimulus is mixed with the notion of intergeneration transfers associated to increasing government debt.

Unfortunately, economists tend to go in circles and debate the same subjects over and over again without reaching consensus, so when I went back a few months (January this year) I found a very similar debate with practically identical arguments being put forward by both sides.

The lack of consensus in this particular debate is much more about semantics that about disagreements on how the economy works. My reading of the debate is summarized well by Noah Smith long list of updates to his blog entry. In particular the following question: is government debt an indicator of the (fiscal) burden we are imposing on the next generations? And the answer is a clear no. Debt does not matter. What matters is taxes and spending, debt is just a vehicle to deal with imbalances between the two. Debt is not a burden per se but it can be the outcome of tax and spending decisions that lead to redistribution of resources.

We can construct examples where a government with high debt levels is not imposing any costs on future generations. We can also construct examples where a government with very little of no debt imposes large burden on a given generation (tax everyone under 50 and give the revenues as a transfer to everyone over 50).

And while seeing these debates come back without a resolution is frustrating, the advantage is that I can cut and paste below a longer and more detailed post that I wrote last time the debate happened. Just for those who still want to read more about it.

• Become A Funded Futures Trader