Debt and Fiscal Policy

Larry, a.k.a. the Barefoot Bum has taken issue with my claim that much of our current national debt constitutes theft from future generations.

You are as ignorant of economics as you are of philosophy. All money is debt; all demand is debt. Government debt by itself is not stealing from anyone,

He provides a few claims in defense of this position. Some of them provide me with a way to address what I think are interesting points. I will address them overall number of posts, rather than in one overly long post.

The first of those objections is:

[Government debt] is the creation of new money, the creation of new demand. Since we are in conditions of depressed aggregate demand, the creation of government debt is about the only way we have to create new demand in an orderly and systematic way.

I recall writing in my post that debt can be justified when, "the benefits for a project are to be harvested by future generations." I mentioned infrastructure projects and the fighting of certain wars as examples.

In my list of two examples, I did not include the act of avoiding an economic meltdown through government stimulus. Larry, apparently, sought to interpret my list as an exhaustive list of all possible forms of legitimate debt. Consequently, when he saw that it did not include this item, he sought to berate me for my economic ignorance.

I hold that avoiding an economic meltdown qualifies under providing benefits to those who will be charged with paying off the debt. The whole point of fiscal policy is to smooth the business curve, creating, as Larry describes, more stable and sustained economic growth. This certainly provides benefits to future generations. As such, it would qualify as legitimate in the system that I described.

However, for some reason, Larry did not want to interpret my post as saying that these practices would be branded legitimate according to the principles described. He seemed to be looking for an excuse to hurl insults. As a result, he sought out the interpretation that would “justify” those insults, at least in his own mind.

There is also an issue in that Larry implies universal agreement among economists as to the merits if this type of fiscal policy, and that anybody who disagrees with him is "a pathetic excuse for an intellectual." He classifies the denial of this fiscal policy with the argument for creationism in place of evolution in biology.

In fact, there is a dispute among professional economists on this matter, with monetarists holding that it is the money supply – not government fiscal policy – that has the greatest effect on the business cycle. Larry may well assert that economic monetarists are comparable to biological creationists. However, as a matter of fact, monetarists are not demanding that schools “teach the controversy” so that they could get their substantially discredited ideas mentioned in economic classrooms. Instead, the last I checked, a number of peer-reviewed economic papers are still published defending monetarist theories.

I will leave it to professional economists to solve this dispute among themselves.

Because I am not passing judgment on this debate, I am also not passing judgment on Obama's economic stimulus package. There is a body of thought that holds that it will provide benefits in the future. I further praise him for focusing that stimulus on infrastructure improvements and other programs that have additional positive externalities,

However, it is difficult to collect evidence showing whether the fiscal stimulus was effective because (1) we do not have a control group (a place where the same economic conditions existed and the economic stimulus was not applied, and (2) the government used monetary policy at the same time towards the same end, making it difficult to determine which cause produced which effects.

In my next posting, I will consider Larry’s claim that, without a time machine, it is impossible to commit theft against future generations. This will be interesting because it will provide me with a new way to present the desirist conception of theft and discuss when taxation and the redistribution of wealth is legitimate.

Until next time . . .