Dear Professor Diamond
Thank you for sending your paper ‘National Debt in a Neoclassical Growth Model’ to the American Economic Review. The paper has now been read by two referees, and I’m afraid the news is not good.
Referee A raises a fundamental objection. Your model has a two period structure, where agents work in the first period but do not work in the second. This assumption is simply stated in one paragraph on your page 2, but is not justified in any way. In that sense it appears entirely ad hoc. Furthermore, as referee A stresses, it appears to contradict (is internally inconsistent with) another fundamental part of you model, which is that agents attempt to smooth consumption over time. The referee is quite happy with that assumption, as it clearly comes from standard postulates about the utility of the consumption of goods. Yet why should these postulates not also apply to the consumption of leisure? As the referee points out, if agents tried to smooth leisure in the same way as they smoothed consumption, there would not be any ‘retirement’. As this concern strikes at the heart of your model, it is troubling.
Referee B raised rather different issues. They pointed out that the model implies a constant interest rate that is only a function of the population growth rate. The model therefore makes a clear prediction, but as the referee points out interest rates have fallen in this country over the last two decades, without any matching declines in the population growth rate. So the model has been clearly falsified by events, and therefore cannot be the basis of any meaningful discussion of the impact of national debt. The referee is also concerned that you failed to locate your analysis within an ontological discussion of the open rather than closed nature of the social realm, which makes your deductivist and formalist reasoning about socially constructed variables problematic, to say the least.
I am therefore very sorry to inform you that we will be unable to publish your paper. Referee A did make a number of helpful suggestions about how ‘retirement’ could be microfounded, and I am sure you will find the extensive reading list referee B provided on economic methodology helpful in any future work.
My apologies to Nick Rowe, whose post gave me the idea. I actually think asking the question why we have retirement is revealing, but writing the above was easier than attempting an answer. (And I also think economic methodology is important!)