Response from Prescott re: 5 Macro Myths

Greg Mankiw has engaged Dr. Prescott on the issue of the "correct" level of government debt equalling twice the level of GDP.

His reply is a bit technical, but I think I've isolated the crux of his argument:

"The important point of our analysis is that it is welfare improving to have government debt rather than taxing the labor income of the workers and making transfers to the retirees where both policies are such that the real interest rate is 4%."

While it may be 'welfare enhancing' in a given model (depending, of course, on what assumptions are made) to borrow from future generations to pay for the consumption of the present one, there is no covering up the fact that Dr. Prescott is advocating borrowing from future generations. That hardly seems a convincing 'bust' of the 'myth' that government debt is a burden to our grandchildren.

Regardless of what the model says, a related issue is that borrowing against supposed future growth in income, taxes, or whatever is inherently risky.

We're currently paying hundreds of billions of dollars toward interest on the government debt. This certainly reduces the possibility of government spending on education, investment in green energy, and so on. It's hard to see the opportunities we're missing. Borrowing more money from our grandkids doesn't seem like the answer.