There is a lot of rhetoric these days about making our grandchildren pay for our spending today. Like any “deficits are always bad” argument, this one doesn’t even meet the plausible metaphor test. That is, grandparents routinely spend money (thereby reducing their grandchildren’s eventual inheritances) on things that will make their grandchildren’s lives better.
As Nancy Folbre puts it in Economix (the New York Times blog):
Think of the United States economy as a family farm in need of modernization. Energy prices are going up, but all the tractors are gas guzzlers. Some of our fields have accumulated toxic levels of pesticide, and we need to develop new and better technologies of sustainable production. Our grandchildren want to run the farm, but will need good health and a college education to do it well.
Spending money on increased energy efficiency, research and development, health, and education could increase the value of their assets, helping them repay debt.
That’s just her closing metaphor; I recommend the entire article (it’s pretty short). There is a legitimate debate about what government spending actually benefits our grandchildren and what doesn’t, but it doesn’t make sense to say that every incremental dollar of current spending is hurting our grandchildren.
I tried to make this point on Planet Money, but I like Folbre’s story more.
By James Kwak
The Baseline Scenario 
I agree the metaphor is overused — I use it too often myself — but it is usually in the context of, “Is this really what you want to spend your descendants’ money on?”
As a general criticism of spending, you are right that it is a little weak. (Although your analogy is imperfect… Grandparents can spend their grandchildrens’ inheritance, but they cannot literally spend their earnings except via government borrowing. There is a difference, IMO.)
But as a metric to evaluate proposed government expenditures, I think the metaphor is indisputably useful. “If we insist on spending our descendants’ wealth, perhaps we should at least try to spend it solving their problems,” e.g.
I agree with you. Mainly I would like to shift the debate away from “all deficit spending is bad” to “whether deficit spending is good or bad depends on what you are buying.” There are certainly things the government spends money on that will not help our grandchildren.
I think this discussion misses the mark slightly. I think the outrage people feel and express using this metaphor has more to do with the fact that members of this generation messed up so colossally that the costs for cleaning up our mess are going to be paid partly by the next generation. Sure, we ought to fix the problem now that we’ve created it, since our grandchildren will suffer either from a broken economy or from the debt burden that comes from fixing it. But the outrage has more to do with passing on the screwup to our grandchildren. I leave aside the issue of how this feeling is being spun in Washington to oppose spending any more money.
It’s pretty easy to recognize that current spending can yield future benefits and “Spending money on increased energy efficiency, research and development, health, and education could increase the value of their assets.” However, I’ve yet to find a very convincing argument that any of these investments are even mildly likely to pay off. Throwing a boatload of money at education, healthcare, etc. may be stimulative, but I doubt that it will result in any substantial benefits.
That NYTimes blog had some pretty silly stuff a while back – including inane readers’ comments – so I had given up on it some time ago, but I must admit the Folbre’s piece is interesting.
Not so much because of the debt question, which is a red herring periodically waved by the right, but because it raises the fundamental question of what wealth consists of. Common “wisdom” holds that taxes impoverish us, and it is useful to show that, over time, well-spent public funds can cause productivity to improve. The issue, of course, is whether mere productivity is an adequate measure of wealth.
Consider taxes used to provide universal free medical care. They may raise productivity marginally by reducing absenteeism and freeing people from having to care for sick relatives. By increasing longevity, however, free medical care causes society to be “burdened” by more older citizens, and by reducing mortality, it reduces or even eliminates the “culling” effect certain diseases. In other words, those taxes are not the most productivity inducing. Yet what could be more “enriching” than having universal access to health care? Americans tend to consider tax rates in Europe as confiscatory. For many of us who live here with a modicum of piece of mind, minimum medical expenses, good transportation and largely free higher education for our children, they’re well worth the price.
At least that is what I think now… I admit that I have changed my tune from when I was Obama’s age.
Any rule of thumb has its own limitations and idioms are supposed send a general message…in that spirit “Taking care of grandchilden” is a great rule of thumb…
If you want to refine it, then you keep going down to the finely refined mess which has not helped the countries that have them – revenue deficit, fiscal deficit, plan expenditure, non-plan expenditure – Indian govt. example
I agree with this interpretation. However, this is merely a question of moving public debate in a more sane direction. I think most people agree agree that deficit spending can be good within certain parameters and that public investment can also be good. The cited article seems to assume that the public investments of the stimulus plan are a good idea. I think a closer examination of where the money is going wouldn’t be so charitable.
“What could be more enriching than having universal access to health care?” Are you serious? Few things could be more impoverishing. The American health care system, despite lack of access, spends twice as much per capita as any other industrialized nation, yet produces mediocre life expectancies and other health outcomes. The American health care system has become a cancer on the American economy and American society. Much of the “health care” it provides is useless, and a significant proportion is deleterious.
The costs of paying for it are a huge drag on all of our industries, and a major cause of the imminent demise of GM and Chrysler as we know them.
In their final years of life, large numbers of helpless people are subjected to futile “treatments” that serve primarily to enrich the drug companies, hospitals, device industries, and doctors.
In Europe, where there is a level of sanity and restraint regarding delivery of health servies, access to health care is a good thing. In this country, where health care is as badly run and under-regulated as the financial services industry, universal access would probably finish off what remains of our economy. But America needs to radically transform, downsize, and regulate its health care system before we can even think about making access to it universal.
As long as the money is well spent, I’d like to know what’s so wrong about having the grandkids pay for it. Compared with us, they’ll be rich.
I paid for my grandmother’s Social Security, and I was glad to do it. She had to carry water from the river miles away, and scrape by on a dry farm in Idaho. She never made it past 8th grade. Whereas I have a flat screen TV, an iPod, a cell phone, a nice car, and have traveled the world. I think I can afford to pay for her retirement.
I’ll bet our grandchildren will be glad to pay for ours too. They’ll be flying around in jet cars and enjoying medical miracles that keep them active into their 90s, and they’ll pity our poor generation with its backward standard of living.
It reminds me of what the Bank of England Governor told a TV interviewer about the national debt back in the 1950s. He was asked if World War II had been paid for. Oh no, he answered. What about World War I? No, he said. What about the Battle of Waterloo? Not exactly, was the answer.
Some things are worth buying now and paying for later. A night on the town? No. Continued national prosperity and freedom. Yes.
What I want to avoid is running up deficits that will impose a huge tax burden on my grandchildren who have no say in how the borrowed money is being spent. The way things are looking now I may not want to be around when they ask “Why did you do that?” For example, they could ask why we kept giving so much money to failed financial institutions. When we spend money on our grandchildren today at least we try to take into account THEIR needs and wants. Others may disagree about how the deficit money is being spent, but it is important to keep this in mind unless you are so wealthy that tax burdens will not have a significant effect on the lives of your descendants. So I think maintaining this awareness through the use of rules of thumb serves a useful purpose.
James,
The “logical structure” of your argument is sound. But, of course, that is not what the debate is actually about, even if people tend to make poor logical arguments.
In theory, the government could borrow $25 trillion (or whatever) and if the true return on investment exceeds the borrowing costs and exceeds the alternative use of such capital in the private sector then we will have “helped our grandchildren”. Maybe one could even do away with crowding out theory (I wouldn’t but just say) and say we can help our grandchildren infinitely on the margin, in theory at least, by massive borrowing, as long as we have positive returns.
But that is the question. When one looks at the stimulus package, we know it cannot possibly have a positive return on investment. Why? Because this is never even considered as part of the decision making process. These are all on average (at best on average, if not universally) negative “return on investment” projects, as surely they are subject to either randomness, or more realistically, massive adverse selection.
Hence, to support the Obama stimulus, one must resort to so called Keynesian stimulus theories. This spending can only be justified if it creates multipliers and “jump starts” the economy. Christina Romer, of course, makes the best argument against stimulus theory, despite her obvious support. She has strongly implied, both in her 1994 tax study, and more recently in her statement to the media after the package was passed, that in principle it is virtually impossible to determine whether spending stimulus works or not. She does, on the other hand, believe in principle one can hold other variables constant to test for the usefulness of tax cuts. Her support for spending is “extrapolated” from her findings on tax cuts.
So, unless we believe either that 1) Government makes good investments; or 2) we can trust there will be positive multipliers, we will indeed be “reducing our grandchildren’s wealth”.
James,
Is borrowing money to buy guns, bombs, bullits and aircraft carriers, then borrowing more money to use it all to kill actual children in foreign country’s (children who did NOTHING to America)….is that a good way to deficit spend? Your point is that the argument against spending the next generation’s money is always bad. But…..what about when you borrow money to KILL the next generation in places like Iraq, Afghanistan, Vietnam, Korea, (it’s a long list, maybe i’ll stop there). Is that a good use of borrowed money James? You know….killing children?
Mike,
I believe it is completely inappropriate to use the words “government” and positive “return on investment together, in the same sentence. People will begin to think you have finally lost your marbles.
AA
I know! Lets give a bunch of Politicians who you already KNOW are deeply corrupt, the keys to the cash drawer! In fact, lets allow them to borrow literally unlimited amounts of money, whenever they like! Not only are they the Borrower, they are the Loan Officer also! Then, lets give them limitless power to spend (read: steal) as much of this borrowed money on anything they would like to spend it on. Lets allow them to overpay for literally everything they buy, so when they are no longer in office, that vendor/manufacturer will pay them millions to come to a luncheon and give a few speeches. Then, lets NEVER, literally, have any principle reduction of our debt load. In fact, lets grow the debt FASTER than GDP is growing, so ultimately our children are totally screwed. Then, when our creditors begin to question what we are doing (China), we’ll print trillons of dollars and completely destroy our creditor’s holdings…..since we don’t need those a-holes anymore who have the GALL to not lend us their citizens savings anymore! The NERVE of those Chinese! Next thing ya know, they’ll probably want to actually be repaid all the money they loaned you in good faith. Bastards….they have a LOT of nerve, don’t they? Actually expecting Americans to make good on their debts? What were THEY thinking?
I think it would be interesting to explore this issue further with respect to the generational parameter, in short, an analysis of the debt that got passed on to the baby boomer (BB) generation by their parents, in contrast to the debts the BBs passed on to their successors. It might be hard to normalize the data, but it might be worth a try.
I think what’s also important is a prevailing mentality for the past few decades that lower taxes implied an easier path to personal wealth. I suspect this very thinking may have allowed us to not distinguish debt worth taking from frivolous debt that would be better paid by taxes now, rather than 30 years later.
The farm analogy I think works for the good use of debt, but there is another one I would like to suggest for bad use of debt. It involves a parent who uses their credit card to buy stuff they need to live on, and to buy what they think will benefit their children. The parent only makes the min monthly payment, and when they die they pass on the full balance of the debt to their children.
(I don’t suppose anyone would like their parents to treat them to such a surprise ;)
Breathe, breathe. I think universal health care in the US implies radical overhaul.
Well, that could actually be the plan. Borrow and spend until we max out our credit. Then default on the debt by using the printing press. The Chinese, Japanese, and Saudis become the major bag holders instead of our grandchildren. Problem solved!
This is a good post – maybe a great post. I think it gets to a really deep question. What the heck is money?
Conventional economics considers it a “store of wealth”. Thus, if you have money, you have wealth… Except that (even if we are on a gold standard) if the world suffers a massive drought money remains unchanged by real wealth diminishes…
Money, really, represents an obligation. A claim that the owner of money can make on society. Money is only useful in a social environment. Money, therefore, is inherently distributional. Money is zero sum.
Wealth, however, is _not_ zero sum. Wealth can increase as we have better air, better medicine, more production due to higher employment, more food, better houses, etc.
At some level, economics needs to understand that money and wealth are not the same thing, though they are closely related, and a proper monetary system can contribute to an economy that encourages the creation of real wealth.
I still fear dumping debt on our children, however. One thing this crisis has reminded us is that distributional factors (and incentives) DO affect real wealth. If we create future distributional obligations for our children that cripple their lives (aka, “debt”), it will cripple the economy. And undoing those obligations is terrifically hard. Heck, we can’t even get GM’s bondholders to agree on a deal to save the company…
I really just want to know what Adios Amigos has to say! Sorry James and Simon… but you are both still awesome!
Spending money to improve the economy for the benefit of future generations justified deficit spending and inflation in my country Italy in 1960s-1980s. Italy had to be modernized, and the state had to lead the way.
The money was largely appropriated by relatively small elites with connections in politics and the economy, who could and can live above the rules, unpunished by the failing judicial branch, by voters, or by the market.
Today, Italy has 3 million of euro millionaires, 2 lost decades and a mountain of debt. The current generation, who was supposed to profit from increased opportunities, is sitting idle at home living off their parents’ money.
If I look at the US administration enthusiasm on spending, I can’t help but see the same pattern: the system is broken, but instead of being fixed it will be oiled with billions of taxpayers’ money. The money is going to go to a small elite which will use it to stay in power, live above rules and common sense. The next generation will be requested to foot the bill, but will not be able to, because today’s spending will have killed everything good and growing in the US.
I just hope I will be proven wrong.
Perhaps we worry too much about the children. If they inherit a five-million dollar property with a one-million dollar debt, they may not mind. Now it the debt is five million and the property is worth one-fifth of that, that’s another story. There’s nothing wrong with leverage if it is backed by assets and generates income.
Après nous le déluge !
The baby-boomers
The big problem is the word “could.” Federal spending on education and health care in particular has exploded over the past 50 years, and developed into huge and wasteful government monopolies that are unsustainable, at the same time that quality declined. I find it laughable to postulate that record amounts of deficit spending at this point could be considered an investment that will pay off in the future. It’s time to take the spending power away from the federal government, and give it back to states, municipalities, and individuals where it belongs.
That’s true. It’s the “if” that has me worried. Wisdom is not evident to me in retrospect and we have essentially the same crowd making the decisions now.
AA–agree!!–That was my point—I thought my discussion made that clear–sorry about that. My final paragraph was rhetorical in nature—that is, of course those 2 points cannot rationally be “believed”
Thanks for the comment.
CBS,
There is a benchmark for the US government providing health care for it’s citizens, it’s called the VA. How’s that going?
AA
Ah yes, the “American Plan”. I think the reality is, that others in the equation (IE: your creditors) have already figured out the end game…then what, America? I believe Alan Greenspan had it right when he said (and i’m paraphrasing) “you don’t have a problem with the U.S. debt, until our creditors stop loaning us money”. Interesting guy, that Greenspan. He had his finger on the pulse for 20-odd years. I believe he may actually know what he’s talking about. Perhaps that’s why Big Ben Bernanke is working those printing presses overtime. So…..what’s next America, now that your having your last gasps? I don’t think there’s anything left….after Banana Republic….is there?
Rex,
What color is the sky on your world? If you so love debt, I would like to transfer you some of mine, in fact you can have it all.
AA