Laudato Si
The debt of the U.S. government rings in at over $15 trillion these days, not including Social Security or Medicare. Unfunded debt obligations (things we have to pay for someday that we promised to people) are around $110-160 trillion, or the equivalent of two world economies (which will need to be paid out within around 80 years). Many statist economists have claimed that debt is no big deal, because government income is certain, since the government can always tax. A response from anecdote would encourage such Big Thinkers to look at Greece, who spent their youth into tax slavery. Yes, it is possible to finance today’s activities with tomorrow’s money. But in doing so, you force the next generation to pay for the past goods, and at some point it will be so bad that the subsequent generation will be paying for bills that are not theirs and receiving nothing in turn. If taxes are to exist, the only just reason is for the benefit of those who pay. We are nearing a point, as Greece has already, where taxation is completely unjust, since the benefit to society is far less than the taxes input.
In a free market, financing certain ventures with debt would not be unjust, as the following example shows. This is because the transaction is voluntary, and the benefit is certain to the people who undertake the debt. A new way of thinking about debt, by Bob Murphy:
OK but now on to a new way to think about this. Forget government debt for the moment. Think of the beautiful, pristine, laissez-faire economy. I’m going to talk about one of its virtues that I have never seen discussed by pop writers.
Suppose there is a scientist who realizes that a certain, small asteroid has (say) $10 trillion worth of very easily extractable metals, even adjusting for the drop in the price of the metals with the increased supply. Only this scientist knows the exact trajectory of the asteroid. Given the technology of private spacefaring at the time of his discovery, it would cost (say) $10 million to send a nuclear bomb out into space to detonate at just the right spot to make the asteroid land on Paul Krugman’s house. (Thus we achieve both private and social benefits.)
Seems like a no brainer, right? We further assume that there’s no problem with property rights and that kind of stuff. The scientist gives the engineers the precise coordinates, and BOOM it’s a simple operation to bring that baby in, and shower $10 trillion in wealth into his estate. Since it only costs $10 million to execute the plan, duh, of course he’ll do it, as if led by an Invisible Hand. He just needs to explain the situation to some venture capitalists, they will understand all the details (perfect capital markets), and boom, there ya go.
Oh shoot–there’s a hitch. The asteroid is really far away, and it won’t actually smash into the area currently occupied by Krugman’s house, until the year 2112. Will the scientist and venture capitalists still go ahead with the scheme?
Well, if they care about their kids and grandkids, sure they will. What better inheritance to bequeath, than the property rights to the $10 trillion in metals that will land on Earth in 2112?
Oh shoot–these guys are all eunuchs. Even worse, they are misanthropic eunuchs. They don’t care about future Earthlings.
Well that’s that, I suppose. Another market failure to add to the next edition of Krugman & Wells….
Wait a tic! What if the scientist and the venture capitalists auction off their property rights to some other investors? For example, at a 5% discount rate, the looming $10 trillion jackpot in 2112, is worth about $76 billion today. (I think I did that right. It’s 2am my time, if not.) So the venture capitalists put up the $10 million to fund the launch of the nuclear bomb, then they auction off the property rights in the asteroid (when it crashes in 2112), for $76 billion. They split up the sizable surplus with the scientist in a mutually agreeable way.
But wait a second, who would be so stupid as to buy that property claim? People who are neither eunuchs nor misanthropes?
Well maybe; that would solve the problem right there. But even investors who were also eunuchs and misanthropes would be willing to do it. Let’s say they are 40 years old right now. (You’d have to be at least 40, to have accumulated $76 billion to put up for such a project.) They put in their $76 billion today, then sell the property right for about $257.5 billion when they’re 65 and want to retire. It was a sure-fire way to earn 5% per year on their money, so that’s why they did it.
At that time–the year 2012+25 = 2037–a new batch of 40-year-old investors grabs the torch. They carry it for another 25 years (i.e. till 2062), then sell it for about $872 billion to another group of investors. They in turn sell it (in the year 2087) for about $2.95 trillion to another group. These guys in turn hold it for the remaining 25 years, and when the asteroid crashes into Krugman’s great-grandkids’ house, they sell the metals for $10 trillion, thus earning 5% per year on their retirement fund.
When you step back and think about what happened, it’s quite beautiful. Even though the planet didn’t have physical access to the cornucopia on the asteroid until 2112, in a very real sense the earlier generations “consumed” that wealth. In particular, the scientist and venture capitalists who made it all possible got the lion’s share of the benefits. They got to consume $76 billion of goods and services in their retirement years, and nobody was hurt by it. Where did this massive bout of consumption come from? Well, from the asteroid. But you have to think through the overlapping generations to see exactly how it was “passed backward” through time, metaphorically.
OK now that we’ve got that one under our belt, consider a new one: A politician in the year 2012 says to a bunch of venture capitalists: “Hey! I have just discovered a way to give $10 trillion to the holder of a particular property right in the year 2112! There is this technology called ‘guns, prisons, and a docile population who will report on tax cheats.’ What do you guys say? If you lend me $76 billion, I’ll sell you this piece of paper entitling the bearer to get the $10 trillion our government will tax in the year 2112.”
So the logic is the same as in the asteroid case. People in the year 2012 enjoy $76 billion worth of consumption (assuming that’s how they use the raised funds–it’s possible they spend it on finding a cure for cancer). Where does it come from? Why, out of the hides of the indentured servants who work for the taxman in the year 2112. The bond markets and overlapping generations allow that slave wealth* to be passed backward through time, metaphorically.