Friday, April 08, 2011

Stealing from our children

Alonzo Fyfe trots out the persistent delusion that government deficits constitute stealing from our children:
First, we are dealing with an issue morally comparable to theft on a massive scale. Our legislators are engaged in a continuing practice of buying votes by taking money from those who have no voice in our elections (thus no voice in who gets to become a Senator or Representative, and completely unrepresented in Congress) and giving that money to those who are eligible to vote.

Specifically, they vote to take money from children and those not yet born and give their future earnings to current voters through a process of deficit spending.
This is one of the most egregiously insane and delusional economic opinions. Unless you have a time machine, it is physically impossible for us to steal anything at all from our children. Let me say this again, because it's important.

It is physically impossible for us to steal anything at all from our children.

Anyone who says that we are stealing anything from our children is a complete idiot who does not understand the laws of physics. It is physically impossible to steal that which does not yet exist, and the products of our children's labor (assuming we're not putting them to work already) do not yet exist.

More importantly, money is an abstraction. It is not possible to really steal money from anyone, just as it is not possible to inches or pounds. When someone steals a $10 bill from my pocket, I am not concerned about the loss of the money itself, which is just a piece of paper with some green ink on it; I am concerned about the loss of what that money could buy. Money itself is just a symbol.

It is really impossible for a government, which is the privileged manager of the macroeconomy, to ever steal money. The government represents everybody; everybody as a whole cannot steal from anyone: who would they steal from?

In macroeconomics, money is irrelevant in the long run. This is why long run aggregate supply is vertical, i.e. completely invariant with respect to the price level (the aggregate money prices of goods and services).

Seriously, anyone who has taken Principles of Macroeconomics as a freshman in college should understand this point. All we can do with monetary and fiscal policy is change short run aggregate supply, either by shifting the short run aggregate supply curve or by shifting the aggregate demand curve causing movement along the short run aggregate supply curve. Anything that happens with our children happens in the long run, which is immune to money issues. All we can ever do with government monetary and fiscal policy is shift the allocation of present demand for presently produced goods and services.

All goods and services flow in a circle, and money flows in the opposite direction. Creating new money and new demand as government "debt" just recognizes that sooner or later the new money will flow back to the government in the form of taxes. It does not in any way reduce the amount of goods and services our children will be entitled to consume.

I believe the macroeconomy is dynamically unstable. Government monetary and fiscal policy (treating the Federal Reserve as a somewhat independent part of of the de facto government) works to actively stabilize the macroeconomy. When there is a shortage of aggregate demand — there is insufficient "social permission" to presently consume what is presently being produced — the government creates debt to increase aggregate demand, causing movement along the short run aggregate supply curve to meet at the vertical long run aggregate supply curve. When there is excess demand — "social permission" to consume more than is being produced — the government raises taxes on the general public to prevent excess inflation. Since we are presently in a recessionary gap, where the equilibrium between short run aggregate supply and aggregate demand is less that the equilibrium between long run aggregate supply and aggregate demand, we need government deficits.

The alternative is to let wages and price levels fall. This alternative, however, creates enormous problems for people who hold debts denominated in nominal dollars: debts don't fall when the price levels for goods and services fall. Letting price levels fall rather than creating new money in the form of debt (and the corresponding moderate inflation) is far preferable.

Another alternative is to let long run aggregate supply fall, by letting productive capital rust away. Perhaps Fyfe has Andrew Mellon's solution in mind : "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. [Panic] will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people." Of course we'll have to liquidate ten million long-term unemployed, but hey, Soylent Green is tasty.

Dealing with people like Alonzo Fyfe, I have new understanding of how biologists must feel about creationists.

1 comment:

  1. So if the government enacted a Free Candy For Everybody policy, and over ten years built up a trillion dollars in debt buying candy from overseas and distributing it to everybody of voting age... When people come of age where they can pay taxes that go to the debt that was used to buy the candy but never got any of the candy themselves, it's exactly the same to them as if the debt had never been run up?

    Thank goodness, I thought they'd either have to pay higher taxes or have fewer government services to make up the difference, at least on the debt's interest if they didn't care about paying down the principal.


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