As the Western world grapples with Covid-19 by trying to find the right balance between limiting human contacts while keeping our economies open to at least some degree, we are embarking on perhaps the biggest wealth transfer in human history. We are in the process of transferring a very large portion of the future consumption of our children to the present in the form of increased safety. Between creditor bailouts and new spending, it will be our children who will have to pay the bill in the form of higher taxes.
In a usual situation we use debt to finance an asset that will generate an expected return. For example, a business like a restaurant might borrow to finance renovations or start-up costs and debt is paid back through business profits. Occasionally the restaurateur will fail and the loan might not get paid back in full, but that is why business loans don’t offer riskless interest rates. The higher interest rate is compensation for the possibility of failure. Government deficits operate in a similar fashion. The increased government debt is supposed to generate societal returns while recognizing the debt must be paid back through taxation. As Ricardian equivalence points out, there is no free lunch – society internalizes the government’s budget constraint. First order, the level of people’s consumption decisions do not depend on how government finances its spending, just on the spending itself. With increasing public debts, people anticipate the higher future taxes and change their consumption accordingly.
In the current situation debts public and private are not increasing asset performance, they are just keeping the lights on. There is no extra business profits or extra economic growth that we can expect from all this new debt to pay back the burden. This situation is the definition of a financial hole. Someone will have to cover that hole and that someone is our children.
The total cost of Covid-19 mitigation is not just the current direct costs, but also the lost future economic growth as our children pay taxes to cover the hole instead of using their wealth to make investments and generate innovation. And these costs are really beginning to pile up. I wonder what the total cost per life-year saved will turn out to be, because in the end, that is what our children are buying with all the debt we are creating. How much future consumption of our children and our children’s children is worth for the extra safety, almost exclusively for senior citizens, today? I don’t know, but I do know that our children and our children’s children don’t get a say.
Honestly, I find this all a little strange. We are waiting for a vaccine, but society went about its business long before Salk, and long before antibiotics. We built railways across the country and skyscrapers in our cities under what today would be considered prohibitively dangerous working conditions. You and I continue to benefit from that inheritance, but what will we bequeath to our children? Life was more hazardous in the past. I’m not suggesting that we return to 19th or early 20th century standards, but Covid-19 has made life only a little bit more dangerous again. Instead of living with and accepting some extra degree of danger, as previous generations did, apparently we are willing to risk destroying the opportunities of the generations coming up so that we can keep our safety as absolutely as high as possible. That trade-off is not a public health issue, it’s a moral one.
It’s a good thing that our ancestors didn’t shy away from risk; after we are done with Covid-19, maybe our children won’t either.