In order to avoid debates about the nature of government debt, I will replace "debt" with "government liabilities", which includes money and government debt (which I like to refer to as "forward money").
The side that argues that "debt is not a burden" argue that we cannot transfer resources across time. Future generations do no ship goods to the current generation via time machines in order to meet "obligations". Conversely, the side that argues that "debt is a burden" typically argue by constructing examples, where there is an effect that mimics such "time travel".
In order to understand the debate, we need to understand those examples. They generally look like this.
- At some initial time, the government spends money, and increases its liabilities. Typically, this is a transfer to an "older generation" (think of government pensions), which spends the money and then promptly dies.
- The government liabilities are rolled forward for a number of "generations".
- The government raises taxes on the future "young generation" to eliminate those increased liabilities. ("Paying off the debt.")
The flaw with these examples is that there is no justification as to why the government liabilities have to be reduced in the future. This is just an arbitrary government action that is imposed by the person giving the example. In the real world, government money and debt grow along with nominal GDP, so one could easily have an alternate story in which the tax hike never occurs. (My previous article gave such an example.) That said, it appears safe to say that is impossible to grow liabilities faster than GDP "forever", and so actions may eventually be needed to limit liability growth.
The fact that the "burden" is actually the result of what appears to be an arbitrary government policy was observed earlier. The Austrian economist Robert P. Murphy gives a good summary of the debate in this article, which discusses this point. He also lists the positions of the various economists involved.
The Real Question
The question that the debate is really about is: does increasing government liabilities now (above some "normal level") imply an obligation to reduce them back to some "normal level" (with some form of austerity policy) in the future?
From the perspective of mainstream economists, this question does not appear to be answerable. They only recognise two modelling approaches as being valid, and neither gives a useful answer to this question.
- The "representative household" models, which are the standard mainstream models used by central banks, are characterised by households that live forever, and so they cannot tell us anything useful about inter-generational equity.
- The overlapping generations models which are being used are too far removed from reality to tell us anything useful. The time increments are "one generation long", whereas fiscal dynamics move much quicker. Debt ratios can move a lot within a decade, never mind a "generation".
Since they lack a model framework that can answer this question, mainstream economists will be debating this question for a long time.
- Roger Farmer provides a "reading list" of publications to understand the mainstream side of the debate. I have not read all of the list, I believe that they revolve around the use of OLG models, which I reject as offering policy relevant guidance. He responded to my points in this article. I will have to look it over, and offer a longer version of my comments.
- Cameron Murray gives a more detailed explanation of some of the problems with OLG models.
(c) Brian Romanchuk 2015