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February 9, 2010

K-12 Tax & Spending Climate: Borrowing from Our Children

Kenneth Anderson:

I realized, talking in office hours with a couple of my law students, that they did not really understand what is meant by the phrase "borrowing from our children" -- as we often hear it raised or referenced these days in budget, deficit, and other policy debates. These are bright students who have often taken some economics, but haven't necessarily learned to think through common economic tropes in current arguments. So it hadn't really occurred to them to ask, what does it mean to "borrow from our children"? The children who mostly don't yet exist, and in any case don't have any money from which to borrow.

As soon as it's put that way, it is obvious that what we actually mean is, we will borrow today from people who do have money -- and who are willing to forego consumption today, presumably in China and the rest of Asia -- and our children will repay the principal and interest. We have internalized the consumption (er, investment? -ed.) currently and externalized the repayment. It might be more accurate to say that we have exercised an option with regards to the future -- we are the holders and they the involuntary writers of an option. But the fundamental public policy point is that in order to engage in this borrowing exercise today, even if we are going to "put" the repayment to our children, someone today has to be willing to give up consumption now and lend us those resources today.

To that end, David Sanger has a nice piece in the New York Times Week in Review, "The Debtor the World Still Bets On." While we're at it, Irwin Steltzer's Weekly Standard essay, "Government Intervention Will Leave a Nasty Hangover."

Posted by Jim Zellmer at February 9, 2010 1:17 AM
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