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Public Debt as a Burden Without Transfers

October 24, 2012

I was wrong in my previous posts on public debt when I said that you need transfers for public debt to be a burden on future generations. Here is a situation where public debt is a burden without them.

Example 1:
Time period 1:
The government borrows $200 to pay for public consumption. They borrow $100 from the old generation, who spend less on retirement homes, but get more Medicare. The government borrows $100 from the young generation who spend less on beer pong, but get more subsidized student loans. Consumption is shifted from C to G.

Time period 2:
The old die and leave their bonds evenly distributed to the new generation and the previously young. Now the new young have 25% of the debt and the new old have 75% of the debt. Everyone is taxed $100 to pay off the debt, but the old get 2/3rds of the debt payments, meaning they benefit from the debt being paid off while the new young only get $0.50 for each dollar of taxes paid.

To determine if debt is a burden, you need to figure out how it moves through generations. If the dying generation gives the debt to the new generation, debt won’t be a burden.

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