After the weekend march against UK austerity, I
saw a government minister on the TV justifying their fiscal plans. One of the
arguments he used was that it was necessary for the sake of our children. In
these circumstances I can quite understand the urge to dismiss such arguments
as invalid. Part of this urge comes from knowing that, in many cases, the
argument about debt being a burden on future generations represents simple
hypocrisy.
How do I know this? Because often exactly the same people championing
austerity also argue
that we cannot take action to reduce future climate change because the current costs
will be too great. The UK government’s spin
was that it would be the greenest government ever, but its policy is quite the opposite. The
Republican Party in the US also resists any action to reduce climate change
because of the current costs of doing so (at least when they are not denying
climate change exists). The connection? Both issues involve trading off costs
to the current generation (austerity, measures to reduce climate change) with
costs to future generations (higher taxes, climate change itself). If you
really believe that we must reduce debt right now (rather than after the
economy has recovered) because of the impact debt will have on future
generations, then you should also be doing everything you can right now to
reduce carbon emissions.
But just because some of those who use the ‘we are doing it
for our children’ argument to justify today’s austerity are doing so
hypocritically does not mean the argument is wrong. I will not go over why it
is not wrong again,
except to stress a point I do not think I have made forcefully enough before. Arguments
which look at the distributional implications of permanently higher government debt
(debt incurred but never repaid), and then ponder whether real interest rates will
or will not be higher than the growth rate, are analytically convenient but
practically irrelevant. There are many strong reasons, which have nothing to do
with intergenerational equity, why it would be foolish to not try and reduce
the high levels of government debt we currently have when the economy recovers,
and so additional debt issued today will need to be repaid (and not just financed) at some point in the not too distant
future.
However, although concerns about intergenerational equity
are valid, they are unlikely to be critical to the austerity debate. Probably
most major economic issues involve some element of redistribution, and in
practice the device
of compensating the losers is not an option. Take monetary policy, for example.
We currently have low real interest rates, which benefits some but harms
others. Do we let the fact that savers are worse off as a result of this policy
hinder the central bank from keeping interest rates low? Of course not.
In the case of reducing debt today through austerity, there
are other factors which have distributional consequences going in the other
direction. To the extent that we have austerity through lower investment in
infrastructure or education, it is the young more than the old that will be
hurt by this policy. As important, high unemployment among the young today can
have lasting effects (pdf, HT TC) on their welfare, and their children's welfare, as this study (pdf) shows. More generally, if DeLong
and Summers are right that the hysteresis effects of austerity today are
significant, then an entire future generation may be worse off as a result.
So it is not that ‘burden of debt’ arguments are wrong, but
that they are just not that important in the context of the current austerity
debate. The welfare loss to future generations of delaying debt reduction by
ten years is small relative to the massive loss of resources and welfare caused
by austerity today. If we are worried about future generations, a far cheaper
way of helping them is to take action to mitigate the impact of climate change.
