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!)
