The Guardian have an article today about an index that purports to measure intergenerational fairness:
“Young people face a steeper climb to achieve the lifestyle of today’s baby boomer generation, according to an index measuring intergenerational fairness which recorded a rise from last year.
The declining affordability of housing for the under-30s accounted for the increase alongside a rise in government debt, which future generations must pay.”
In response, economist Bill Mitchell has written a great blog questioning some of the indicators used to build the index, in particular the government debt measure, which Mitchell argues in no way places a burden on future generations. The blog is excellent but a little long, so I thought I’d just quote some choice sections here:
“…the inclusion of public debt and unfunded pension liabilities for government workers in the index are based on a misunderstanding of what actually will burden the future generation.
The fact is that the current government has as much ‘money’ now as it had yesterday and the same amount it will have tomorrow. That is, it has whatever it wants to spend. It always has that. It has no more or less capacity to spend today because there were surpluses in the past than it would have if there had have been deficits in the past.
The implication of the IF Index components is that fiscal surpluses provide more spending capacity in the future or lower tax rates. That is plain false.
Every generation chooses its own tax rates. That is, the mix of public and private sector involvement in the economy is a political choice. If the future generations want more private and less public they will choose lower tax rates etc.
Currency-issuing governments do not draw down on the savings provided by the previous government’s surpluses. It is a nonsensical notion thinking that a sovereign government would ‘save’ in its own currency.”
He goes on:
“The idea that borrowing ‘takes money from the pockets of future taxpayers’ is nonsensical. The funds to pay for the bonds originate in the government net spending in the first place.
Clearly, deficits now are in part helping the current generation with income transfers and the like. But they also facilitate public education, public health and other infrastructure which provide massive benefits into the future for the current generation and their children.
Once you understand that then the idea that there is a future burden will make you laugh.”
And on the idea that we’ll all have to be taxed more in the future to pay back today’s debts:
“There has never been an empirical relationship shown between tax level changes and debt level changes lagged however many years you like. The notion is ridiculous.
I have never been asked to pay back the public debt that was accumulated as non-government wealth by my parent’s generation. But I sure benefited from the public infrastructure that the continuous fiscal deficits allowed the government to provide.
If you want to provide for the future generation then the things that will matter are education, employment and public infrastructure. All three are investments in the future. On all three, the previous government failed dramatically.
The best thing this government can do to prevent entrenched disadvantaged among our youth is to ensure they have work now or are in education and training programs.”
So the next time you hear someone argue government debt is placing a burden on our children’s future, you’ll know they’re talking nonsense!