Thursday, November 8, 2012

Writing Landsburg

In one of the skirmishes in The Great Debt War Bob Murphy and I tussled over the proper understanding of Steve Landsburg's arguments. I suggested asking Steve to clarify, and Bob graciously agreed on sending a joint note. Here it is:
Steve

I am writing this jointly with Bob Murphy.

The discussion of debt-as-burden on FreeAdvice has become so complicated that we cannot even agree on what *your* position is. I am hoping you will be willing to clear this up. Here then is my ( Ken B) understanding:

Krugman’s argument is that borrowing rather than taxing imposes no extra burden on unborn Americans in toto, because both are transfers between living persons, and that any burdens are caused not by debt per se but by transfer and incentive effects. (Bob would describe Krugman's position a bit differently, but this is Ken's understanding of it.)  Krugman’s argument relies on the constraint that internally held debt represents a flow of assets is within a given pool, and so the pool is not directly diminished by the debt. The debtor and lender are part of the same closed system.

Steve endorses but extends this argument. Steve observes that Krugman is missing a point which strengthens and extends his claim: if the foreigner owns a bond because he paid for it we include the payment in the pool's assets the constraint is re-established. (One can also see the initially foreign held cash as a claim against future earnings already, so all we are seeing is an exchange, cash for cash flow, not a new burden.)

Steve’s argument relies on the same constraint as Krugman’s, that debt is just exchange amongst living people, not an extraction from the future. This is clear if you take a case where foreign interactions are *impossible*, so that SL's argument reduces to PK's.

Bob thinks there's nothing wrong with your own position, but he just thinks it is weird to say "Steve is strengthening Krugman's point" when, in Bob's mind, you are actually advancing a totally different argument. In contrast, I think you are amplifying Krugman's point, by showing that Krugman doesn't even need to focus on whether future Americans "owe it to themselves."

We'd appreciate any clarification, and also let us know whether you want your response to remain private.
Steve kindly replied and his answer is below, with permission:
Ken and Bob:

I was about to say that your statement of my position is accurate,
succinct, and beautifully expressed.

But I think I'd rather say that your statement of my *point* is accurate, succinct, and beautifully expressed, because a "position" is something controversial, whereas this point is, I think, not controversial at all.  (It's often disputed, but that's not the same thing as controversial ---- "disputed" means some people don't understand it, whereas "controversial" means that even people who understand it sometimes disagree.  I do not think this point is controversial.)

As to whether this is an *extension and strengthening* of Krugman's point or an *additional point*, that, I think might be controversial and could be argued either way.

I should add that when I say this point is not controversial, I must admit to not being up to date on Bob's blog, and perhaps he has already proven me wrong.  He clearly understands the point completely; if he disagrees with it, then I guess it's controversial after all.

I'd like to quote your email on my blog next week (maybe not till
late in the week cause I'm quite swamped for the next few days).
Is that okay?
 I hope to see Steve's followup.

Thanks to both Bob for his co-operation and Steve for his kind words.

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