Borrowing from Our Children? And Hegemony

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.”

And  finally Joshua Kurlantzick, in the Boston Globe, “Dazzled by Asia,” arguing that if you’re assuming an emerging Chinese hegemony, you might be disappointed.   (To which I’d add my own oft-repeated observation that if the corollary is longing for American decline and the rise of a new, post-American-hegemony, world of cooperative great powers in peace and harmony, think again – the human right universalism of the last fifteen years has been an epiphenomenon of American hegemony, and if it fades, the human rights universalists fade with it.  A multipolar world is competitive and more aggressively Westphalian, not less.)

Kurlantzick on President Obama’s Asia trip:  “Major media outlets covered the president as if he was some kind of Dickensian vagrant, appealing to his increasingly powerful creditors in China for leniency.”  And, to judge by spiraling Chinese hubris in its demands concerning the Dalai Lama, Taiwan weapons, and other things – well, the appetite grows with the eating, and the President has fed the beast.  (Responding to someone in the comments asking on what basis I thought China had raised the stakes, see among many articles in the last few weeks, this Jan 31, 2010 Washington Post front page new analysis, “China’s Strident Tone Raises Concerns Among Western Governments, Analysts.”)

(Update:) An Instalanche (thanks, Glenn) – and Megan McArdle’s quote of the day!  Wow!

One last thought about thinking about various things as options.  Some of the comments have expressed surprise, and a certain amount of derision, at the idea that the option running in favor of the present at the expense of the future is non-trivial.  Speaking as a teacher, I consistently find that when students who are not in econ, business, or finance discover for the first time that what looks to be a “loan” actually (because of the limits of downside created by many legal rules, such as bankruptcy, or non-recourse rules, etc.) turns out to be an option is an “ah-ha” moment.

And even more so when, as in this case, one realizes that it is a loan from Party C(hina) to Party A(merica), but also a put of the loan from Party A(present) to Party A(future).  That’s not a trivial observation, whether speaking pedagogically or intellectually.  Commonly-made these days – of course – but not trivial, which is why unpacking “borrowing from our children” has to be unpacked if you’ve never unpacked it before.

And note that one of the comments notes with some condescension that this is merely pretentious – but then gives as an analogy something that doesn’t actually fit.  Kids “write” their parents “involuntary” options all the time and, yes, that’s pretentious and trivial. However, they less frequently (at least in the past) write them in the form of loans in the present from third parties located in China, with consumption by the present borrower and repayment by a future obligor.  That’s neither trivial nor pretentious.

And touching the intersection of debt and security, I cannot recommend highly enough the monumental history of the intertwining of public debt and democracy, A Free Nation Deep in Debt: The Financial Roots of Democracy, by James Macdonald.