Do future generations pay for deficits?.

Assume that government spends some money today on consumption.  That money could have been spent on a durable bridge, but it wasn’t.  Some current people benefit from the consumption and future generations get nothing.

Above and beyond that effect, do future generations bear the burden of deficit spending?  That it, are they worse off if we finance the consumption with government bonds rather than higher taxes?

Under one scenario, future generations bear no additional burden.  Assume the government bonds are paid off fifty years from now.  Future generations pay the taxes.  But they also inherit the bonds.  Might that be a wash? 

Wealth effects complicate the story.  The old people, who are holding bonds, may spend more in the meantime (spend more relative to a tax increase, that is) and this may pull away some resources from future generations.  If old people just sit on their bonds and make no other expenditure changes, the burden on the future is nil.

If old people spend more today, and John is born thirty years later, how much worse off is John from this extra spending?  And would having saved that same money necessarily have directed resources toward John, as opposed to directing resources toward the later consumption of the elderly?  What if the extra spending doesn’t occasion much in the way of a supply response?  Then it is just a sloshing around of some paper.  To ask an Austrian question, what is the net injection effect here from the bonds?

I don’t know.

Often deficit critics focus on the moral issues.  On average future generations are better off than their parents, at least in a growing economy.  They are less well off if their parents spend more rather than less.  Is this immoral on the part of the parents?

Alternatively, let’s say we pay off the debt in fifteen years’ time.  Furthermore assume that the future elderly (who are now middle-aged) have stopped paying taxes, but they are not yet dead.  They are still holding the government bonds.  Then we must tax the young, who currently are described by the phrase "future generation."  Then, through a different mechanism, future generations will bear a chunk of the tax burden. 

Even then the burden will not be full.  By letting the elderly off the hook, we increase the sizes of their eventual bequests (what is their marginal propensity to bequeath?).  Furthermore a VAT tax, or means-testing of benefits, will keep the elderly paying taxes and diminish the potential burden on future people.

Offsetting bequests, a’ la Robert Barro, makes deficits less relevant rather than more.  If people know their children will pay higher taxes, maybe bequests will go up a bit to make up for that burden.

There is also tax smoothing.  Nominal tax rates can only be so high in each period before a taxation system breaks down.  By postponing tax boosts, we make it harder for future generations to engineer other tax increases for other reasons.  This could make them either worse off or better off, depending on your point of view.

You can put these scenarios together in different combinations and achieve many differing results.

The bottom line: We are running large deficits.  The case for boosting taxes today rather than tomorrow lies in the fear that financial markets will get spooked, rather than in intergenerational considerations.  Some time ago I put this spooking at p = 0.2; I have revised that estimate upwards only slightly.


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