Public Debt and Intergenerational Justice

In order to guarantee intergenerational justice to prevail, we as a society should “keep” a certain amount of accumulated debt and pass it on to future generations.

This sounds rather counter-intuitive, doesn’t it? In public debate debt of whatever kind, but public debt especially, is mostly seen as something bad and running counter the ideal of intergenerational justice. In a recent discussion I took part in, however, this counter-intuitive argument has been made by one of my colleagues (whom I esteem for his ethical and scientific intuitions). I initially had rejected it, but after thinking about it for a while, I came to the conclusion that he might be right. Let me explain why.

Intergenerational justice, though often set equal with the idea of intergenerational contract, is mostly perceived very unidirectionally: we should leave to our descendants a world at least as good in shape as what we had got from our antecessors. While this is an important aspect, this is not yet intergenerational justice. Justice, at least in Western cultures, is identified with some kind of (at least hypothetic) reciprocity. But if we leave to our descendants a world in good shape, what can they do for us? Let me make this more concrete: to fulfil our part of the intergenerational contract, we have to make investments in what you may broadly call infrastructure (ranging from physical infrastructure such as roads, to more intangible things such as knowledge, to intact ecosystems). These investments are costly. While it may be argued that many of them benefit ourselves, this does not change the fact that they benefit our grand-children, too, and in some cases we make sacrifices, as seen from a narrow self-interested perspective, to make the world better for them. Indeed, this has been one of the major drivers of human development for centuries–the wish to make some sacrifices which will benefit our descendants. As you might have noticed, however, this is still a unidirectional story: we are making sacrifices for our descendants. But what about reciprocity? What may they do for us? The idea of intergenerational contract has been most influential in debates on social security systems–traditionally, children took care of their elderly parents, “repaying” the debt of education (whether it be school education or just more informal aspects of what children learn from their parents). Today, in many countries social security systems are constructed in such a way that the retirees’ pensions are effectively paid by the generation of their children and grand-children. But what about the future generations that do not overlap with ours? We make investments for their benefit, too, for example when protecting nature or tackling climate change. How should they “pay us back”? One way might be that they pay back the debt we incured to invest in the infrastructure they benefit from. This would mean that a carried-along public debt burden is not necessarily something (entirely) bad.

Of course, this argumentation is only valid under some idealized conditions: that we really know which investments will benefit our descendants; that we as society carry along only as much debt as the value of the infrastructure is for our descendants minus the benefits we ourselves have enjoyed; that we make efficient investments and do not waste resources. In the end, the claim here is not that it is OK to live “on tick” as society and that we do not have the moral obligation to decrease debt burdens. Rather, the argument as presented here is that intergenerational justice does not mean that we are prohibited from incuring debt–indeed, the conclusion is the opposite, that intergenerational justice makes it necessary to accumulate (some) public debt.

I am looking forward to any dissenting voices, since I find the argument very counter-intuitive and despite my disability to find meaningful counter-arguments I don’t think that there are none.

[UPDATE] It has been pointed out to me that what we should count against the “intergenerationally just” debt burden, too, are the “disinvestments” we make by, e.g., degrading the quality of natural capital. This is, of course, an important point to be added.

Thanks to B.K. for inspiration.

Advertisements

8 thoughts on “Public Debt and Intergenerational Justice

  1. Very interesting, but I should be wary of necessarily equating clever allocation of labour and resources to improve infrastructure with the accrual of ‘debt’. The two are obviously related in our system of accruing public debt to pay for labour and resources, but that does not mean they are the same thing. Likewise I find it sub-optimal that some of the grandchildren and great-grandchildren will inherit entitlement – in effect – to tax the proceeds of the labour of their peers, which will not only annoy their peers, but may also isolate and render uncreative and unfulfilled those ‘lucky’ inheritors.

    • First, I see here a misunderstanding: the idea is not that investments are always financed with debt. Rather, my colleague’s argument was that passed-on debt might be viewed as, let’s say, a “bill” to future generations. They have to repay it because they benefit from the investments we made.

      Second, we do not have to specify how the debt should be repayed. If you don’t like taxing labour–well, let’s think about taxing bad things, such as environmental pollution etc.

  2. I’m fairly certain I understand the meme itself, i.e. that ‘passed on debt might be viewed as a bill to future generations’ ; I just don’t like it. Neither do I like to imagine people using it as an argument to justify inimical policies for their own gain or conscience.

    I don’t disagree that some public debt can be manageable or even desirable in the systems we have, for instance to compensate for a downturn, or to invest in infrastructure and education facilities where they are not already present, especially in a less developed or developing country. But it is not easy to discuss debt without reference to the huge amounts incurred in, for example the US and UK, and the potential agency conflict of interest between politicians and the public with regard to short-term public perception and voting, departmental waste, and budget-bureaucracy creep.

    While some beliefs can make us happy, it does not mean they are necessarily true or helpful.

    Regarding taxation, it is unreasonable to assume you can tax ‘bad’ things corporation or public side to a greater degree than any other country, or indeed in any way that does not impede or limit the economic growth of the nation or nations with whatever harsh system is put in place. It will simply slow down business creativity and efficiency versus competing nations, organisations, or simply whatever world growth could have been possible in it absence.

    Just consider what you would want yourself. Would you want your country to spend more money on foreign debt interest than it does on health or education? Should repaying debt interest be the number one expenditure in a country’s budget?

    • My colleague’s argument, as I presented it above, was meant to be a gedankenexperiment only, a hypothetical exercise in thinking about intergenerational justice. There is no sense or use in bringing current excessive debt problems into it.

      With regard to taxing “bads”: first, if we lower the tax burden on “good” things (such as income), I see no reason why this should create a comparative disadvantage per se. Second, taxes are not the only thing that counts when it comes to success in globalised markets–just look at Germany, the Benelux or Scandinavian countries. Third, at least in the world of my wishes comparative (dis-)advantage does not play such decisive a role. I don’t think the current economic model that makes economies heavily dependent on the world markets is really a good model–more on this here.

      I do not really see any obvious links between the questions you asked in the last paragraph of your comment and my argument. I can only remind you: it is a gedankenexperiment. I don’t pledge for excessive debt. I certainly prefer financing public goods through taxes, for economic reasons. But the gedankenexperiment is more about ethics.

  3. Ah, I must have misunderstood before…it is an ethical thought experiment based in a fictional world which precludes the raising of difficult yet obviously related, ethical questions. :)

    While I believe the comparative disadvantage from tax is obvious all else being equal, I truly sympathise with your non global world notion. I enjoyed reading your link, thank you. I also would prefer a less global, predominantly regional bloc approach for various reasons including the enjoyment of autonomy and diversity of labour, not to mention the hard-to-reach heights of protecting aspects of democracy and liberty. Nevertheless, there will always be the risk of some other buggers who decide to work harder and will build smarter guns, missiles and weaponry with the proceeds of their less ‘moral’ approach to global trade. Whether it is in their interests of not, I think I take a realist, historical view with regards to the likelihood of unnecessary wars or abuse in the context of economic and military imbalance, such as may or may not be caused by sustained, pertinent comparative disadvantage.

    With regards to my questions, the link -I thought- is self-evident. If people say debt is okay or good as in your thought experiment, then in the absence of contrary rules as per Switzerland, there will grow to be too much of it, and it will not stop growing without significant cost or effective default by devaluation or regime change. Compound interest sucks when you’re fighting against it, and I don’t think stable democracies – with their short political terms in which must the people feel content to vote your way – are cut out to deal with intergenerational debt burdens.

    In short, debt is subjectively bad. Investment is subjectively good. It is a tension, and you should not try to resolve it by saying ‘debt is [or should be] subjectively good’ or ‘investment is subjectively bad’. The association is simply unhelpful in my opinion; it is like saying war sometimes begets peace, therefore let us – in a thought experiment only – advocate war, that we may be seen to love peace. Not so black and white of course, but simply because debt principal can be spent on good things does not make debt essential or desirable. Such is an experiment too far if the subjects are human, since in the current real world the excess funds seem to be squandered on non-infrastructure, and not repaid.

    • it is an ethical thought experiment based in a fictional world which precludes the raising of difficult yet obviously related, ethical questions.

      OK, I admit that you have a point. But still, I do think that your presentation of the debt problem is to black-or-white: debt does not have to mean excessive debt. If you let me stay in my gedankenexperiment: under “update” I pointed out that given that we create ecological debt, it might be that financial debt is not “needed” from an intergenerational justice point of view (supposed the ethical argument in favour of it, based on the idea of intergenerational reciprocity, is actually valid–it’s been just a proposition). Further, we should maybe distinguish between new debt accrual every year (the thing you seem to be concerned with, because it is excess here that leads to excessive overall debt burdens)–a flow–and the stock of “base debt” my colleague argued should be carried along. To limit excess you might want to install some “debt breaks” such as that recently built into the German constitution. Then, you have the possibility to carry along some base amount of debt without it becoming excessive. Which should answer your question about whether I prefer debt service or public investments.

      With regard to missiles, guns etc.–call me naive but I don’t believe in “balance of terror”. Wars and conflicts should be prevented via multilateral agreements. So this comparative-advantage-like argument does not really convince me.

  4. Thanks. I agree with much of your sentiment also. It is however difficult to enforce debt brakes in a democracy. For example several areas in Germany have voted for debt increase during a federal strategy of debt reduction. http://www.economist.com/node/21541459 (paragraph 7)

    In addition debt brakes can be abolished by a future government. There is no guarantee of anything, nor can we say more debt is always positive or negative. It surely depends on the situation. Once in power, a strong government can do anything it wants with previous laws, and the people will generally not care if it something they do not understand very well.

    While sovereign debt is more flexible than consumer debt, the underlying promise is that the nation will pay back the debt without unreasonable inflation or cancelling. Reneging on this promise may or may not have severe consequences, depending on who is in effect deceived and robbed, and their relationships and intent. Assuming you wish to play it safe and act in good faith, this means that any debt is sub-optimal because the money you spend on repayments could have been spent on something more productive.

    Some small degree of prudence is arguably the best case scenario, and this depends on the realisation of the dangers of debt, and risks to national security and future generations.

    With regards to naivety and comparative advantage, one could say that most of us are naive (most have cognitive bias) until we are afflicted by some cruel atrocity or terrible suffering. The irony is of course that then it is too late. The notion that we can cope with whatever we face is self-fulfilling prophecy, because those who suffer and are abused generally do not have a voice the world listens to, or else they are just dead and silent! Multi-lateral agreements are thus worthless unless they can be enforced, tit for tat. It does not matter that in game theory the best solution is to always cooperate; someone eventually defects, if only to see what will happen, or for boredom’s sake. The best you can hope for is intelligence, mutual respect and prudence; and those are hardly commodities in natural abundance; you have to create them.

    You do not need to look too far across space and time to see injustice and suffering, therefore why choose to be naive or selective in your conceptual thought experiments?

  5. You write: “You do not need to look too far across space and time to see injustice and suffering, therefore why choose to be naive or selective in your conceptual thought experiments?”

    Because to be able to consistently make judgements about real-world cases, we need some kind of a normative model. And models are ex definitione simplified versions of reality, based on counterfactuals. But, of course, such conceptual exercises should not prevent us from acting against injustice and suffering in the real world.

    You could counter virtually every argument with pointing out that there is no guarantee that people will behave so or that a future governments may overturn the decisions of their precursors. That’s an inherent characteristic of democracy (and, indeed, every human system, I guess) and we have to live with it. Of course, it might be a good thing to design the political/societal system in such a way that counterproductive deviations be impeded. But this is exactly what debt brakes aim at. I do not see meaningful alternatives out there… (irrespective of my scepticism with regard to debt brakes, but this scepticism is a result of the instrument’s deficiencies in other contexts, viz. the impeded flexibility of public policy).

    “Multi-lateral agreements are thus worthless unless they can be enforced, tit for tat.”

    That’s why they are multilateral, not bilateral–the burden of enforcement does not have to rest on the shoulders of one country/government only.

Comment

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s