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The Real Burden on Future Generations will not be the Deficit

Bill Mitchell tirelessly explains yet again why the deficit is not a burden on the young but that resource waste, joblessness and cuts in services are.  He explains that resource constraints in the future are more likely to be real i.e. shortage of material, energy ecosystem services and social capital than virtual i.e negative units in the digital accounting  that is our money system.  It is a long article responding to a Guardian piece – as are all Billy’s blogs.  Here is just a snippet..

..The UK Guardian article claims that settling health care availability and pension promises through the market “price system” is the only way to avoid the “burden for the public purse”.

First, there is no debt burden borne by the future generations. That is a total myth.

Please read my blog – Will we really pay higher taxes? and Will we really pay higher interest rates? – for an introduction to this issue.

The only reasonable conclusion when you understand how the monetary system functions is that burdens can only be considered in terms of real resources. In that context, the level of public debt that is carried through time has no bearing on what each generation is able to consume (or produce). The next generation will be able to consume the outputs of their labour in the same way that the current generation is potentially able.

Clearly, governments bent on fiscal austerity deliberately deny successive generations the ability to consume and produce but that is not an intrinsic function of the level of public debt outstanding. It is rather a wrongful policy direction driven by an irrational fear (and ignorance) of what the public debt means.

The mainstream belief is based on the erroneous conflation of a household and government budget. So when a household/firm borrows now to increase current consumption (or build productive capacity) there is a clear understanding that future income will have to be sacrificed to repay the loan with interest. This result follows because spending by the non-government body (household and/or firm) is financially constrained.

A household must finance its spending either by earning income, running down saving, borrowing and/or selling previously accumulated assets. There is no other way. Borrowing has to be repaid via access to the other sources of spending capacity but by implication such repayments reduce the future capacity to spend.

This is translated (erroneously) into the public sphere with the claim that governments have to pay the debt back in the future by increasing taxes. The consumption benefits of the higher spending now are enjoyed by us and our children pay for our joy by facing higher tax burdens. That is the nub of the mainstream argument.

But do our children forego real consumption in this way? Answer: no!

If our children produce $x billion in real GDP in 2020 all of that flow of real goods and services (and income) will be available for consumption should they choose to do that. They probably will save some of it (especially if the government runs a deficit of sufficient magnitude to fill the spending gap left by the desire to save by the non-government sector).

But the important point is that real GDP is not a reverse-time traveller. There is no government agency collecting real output to “pay back past debts”.

Moreover, running fiscal deficits which support aggregate demand at levels where everybody who wants a job can get one maximises employment and output each year and provides each demographic with the best opportunities to expand their real consumption possibilities.

Fiscal austerity – in the misguided hope that the public debt ratio will fall – undermines growth over time and the resulting unemployment erodes the capacity of our children to consume in the future. Potential output (expanded by investment) and productivity growth are cyclical in the sense that if an economy is in recession or stagnating investment falters and future growth potential is reduced. Similarly, productivity growth lags when aggregate levels of activity falter.

So the best way to increase the opportunity set for our children is to keep (environmentally-sustainable) economic growth strong and fiscal austerity will typically work against that reality.

The public debt ratio has no bearing on any of this. The only possible burden on our children relates to my term “environmentally-sustainable” which includes consuming through time within the limits of real resource availability.

If the current generation cruels the world’s environment and exhausts finite resources then unless technology changes dramatically (for example, to use different energy sources for transport, etc) then our children will not enjoy the same lifestyle that we enjoy (using enjoy liberally!). But that conclusion relates to competing uses of real resources…(link to article)

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