On “generational theft”

Has Senator McCain Taken Leave of His Senses?

That might have been the better headline for an article that referrs to Senator McCain’s description of the borrowing needed to finance the budget deficit “generational theft.” While Senator McCain has repeatedly said that he doesn’t know much economics, this one is really over the top.

The basic story is that the borrowing is making future generations richer, not poorer. The stimulus will increase GDP and therefore increase investment, since companies will invest more in plant and equipment, if they see an increase in demand. This private investment will increase the economy’s productivity, thereby making our children and grandchildren richer. In addition, much of the spending in the stimulus will directly increase productivity, such as money for retrofitting buildings to make them more energy efficient, putting medical records on-line, or increased funding for college education.

The debt that will be used to pay for this will be an asset for at least some of our children, since at some point we will all be dead and our heirs will have possession of the bonds we hold today. (The fact that China and other foreign countries own some of the debt doesn’t change the story. China’s buy U.S. assets to keep up the value of the dollar to preserve their export market. If they didn’t buy government debt, they would buy other assets, like stocks and bonds of private companies, which would result in a comparable flow of future income going to China. The problem here is the over-valued dollar, it has nothing to do with the budget deficit.)

It is especially remarkable that Senator McCain would make such a bizarre comment about “theft” from future generations given that they just have been handed an immense gift from the collapse of housing and stock prices. The decline in house prices means that they will be able to buy the nation’s housing stock for about $6 trillion less than they would have paid two and a half years ago. The decline in the stock market means that they can buy the country’s stock of productivity capital for about $10 trillion less than they would have paid two years ago.

The fact that Senator McCain could make such an incoherent complaint about younger generations being mistreated, after they have just seen a transfer of close to $16 trillion in wealth from older generations, warrants attention from the media. It is far more newsworthy than President Obama’s comment’s about “bitter” working class voters that received so much attention during the primaries.

—Dean Baker