A question of legacy

There’s been quite a lot of discussion of the intergenerational implications of debt recently. Paul Krugman tries to explain (here, here and here) that borrowing today does not, on the whole, leave a net burden of debt to our children tomorrow, since they will largely owe that debt to themselves. The distributional questions of debt are largely intra-generational, not inter-generational. Krugman was actually picking up on Dean Baker, who made the point that, while the notion of a burden on future generations from debt is nonsensical, the real burden comes from not addressing climate change:

“If the deficit has little to with the wellbeing of our children and grandchildren, global warming has everything to do with it. We run the risk of handing them a planet without many of the fascinating features that we had the opportunity to enjoy (for example, coral reefs that are dying, plant and animal species that are becoming extinct, landscapes that are being transformed). Far more seriously, we face the likelihood of handing them a planet in which hundreds of millions of people risk death by starvation due to drought in central Africa, or through flooding in Bangladesh and other densely populated low-lying areas in Asia, as a result of human caused global warming.”

The point is that, in Baker’s words, “the main factor that will determine the economic wellbeing of our children and grandchildren will be the strength of the economy that we pass down to them”. A crucial part of this strength will be the state of the natural environment, which will in turn depend on the kinds of investments we make now.

Put these arguments together – (i) borrowing does not create a net burden, (ii) future welfare depends on the state of the economy, which is strongly influenced by investments today and (iii) the need to make investments that do not erode natural resources (what Partha Dasgupta calls genuine investment) – and you have the idea that Duncan Foley has put forward, that we can borrow now to cover the additional costs of low carbon investments. Future generations will be better off, even with the higher levels of debt, and we will not have to reduce consumption today. Overall, Foley’s position is that “global warming presents no novel issues of the distribution of economic welfare between generations that are not already inherent in other investment choices”. The key issue in how far to pursue this approach is the value future generations place on a lower stock of GHGs in the atmosphere relative to conventional (high carbon) capital stock.

Foley’s approach may offend the moral principles of some – isn’t it wrong that future generations should have to pay for cleaning up the mess that we have made? However, the point is that future generations would still be better off than if we did nothing, and if borrowing makes it politically possible to act, then that has to be better than expecting additional costs to come out of the pockets of today’s consumers and hitting a political brick wall.