It is a “myth,” writes Kelton, “that deficits will burden the next generation.” This claim is also wrong. Suppose Congress passes a Boomers Boomtime Act to provide for a humongous 75th birthday payout to each surviving member of the first Boomer cohort born in 1946. They will reach 75 in 2021. These payments are to be financed by a zero‐coupon bond with a 40‐year maturity. Since none of the beneficiaries will be around to pay taxes when the bond is due to be repaid, they get a free handout.
Who bears the burden of paying for it? When the Boomer bond comes due in 2061, the government faces the following choices: (a) pay it off by raising taxes, (b) pay it off by issuing money, (c) default, (d) pay it off by rolling over, that is, by issuing a new bond.
If (a), then the burden is borne by taxpayers in 2016.
If (b), the subsequent price level is higher, so the burden takes the form of a tax on money holdings and other instruments of fixed nominal value.
If (c), default, the burden is borne by those who suffer the adverse consequences of default.
If (d), then the rollover will mean that there will more debt after 2061 than there would otherwise have been and we have the same choices again when the new payments come due. If the decision is to roll over each time, then the debt/GDP ratio will hit a level at which the government defaults sooner than otherwise.2 Thus, however the government responds when the Boomer bond matures, some group born after 1946 bears a burden from it.
More generally, any arrangement that involves one group issuing a debt that another group is expected to pay for necessarily burdens the second group. The injustice is all the worse because the second group has no say in the matter.
There are also the government’s entitlement programs, Social Security, Medicaid, etc. This takes us to Kelton’s “myth” that “entitlements are propelling us toward a long‐term fiscal crisis.… There is absolutely no good reason for Social Security benefits, for example, to ever face cuts. Our government will always be able to meet future obligations because it can never run out of money.”
These programs however are just another form of debt insofar as they create obligations on the government’s part to make future payments. Consequently, my earlier argument, that programs that create future obligations burden future generations, applies here also.
Entitlements are large, so the corresponding burdens would be large as well. To illustrate, there are perhaps $210 trillion in entitlements, and possibly more.3 If these entitlements are to be paid for by future taxation, then that is a lot of future taxation. If they are to be paid for by rolling over, then we would anticipate the ratio of debt (including entitlements) to GDP rising considerably, possibly to default levels.
Then there is the option of meeting those obligations by printing money. Given that the current stock of base money is just over $5 trillion, that response implies a possible 42‐fold‐plus expansion of the monetary base. That, in turn, implies a considerable increase in prices. Making entitlement payments is one thing, but the purchasing power of those payments is another.
We have here another instance of the margin vs. scale issue. The government can increase entitlements a little with next to no impact on their real value. But if the government creates huge entitlements to be financed by printing money, then those entitlements are going to be greatly devalued in purchasing power terms. And what the government must absolutely not do is create huge entitlements that are inflation‐linked and then rely on printing money to finance them. If it does that, it will produce both hyperinflation and default. The “myth,” that the national debt is a problem, is not a myth.