Deficit spending that pays for current consumption is just a wealth transfer from future taxpayers to current consumers. Economist Larry Kitlikoff et al say accumulating debt to pay for current expenses is like a Ponzi scheme

Two years ago, a respected ex-IMF economist said, "Put bluntly, public debt may have no fiscal cost." It is a seductive view that has been grabbed by politicians of all stipes to justify virtually unlimited spending based on raising vast amounts of debt, some of it created by their central banks.

But there are problems with deficit spending, the main one is that the benefits all go in one direction, from the young who have to pay it back in the future, to the old who are the primary beneficiaries of current spending.

There are other structural issues too. Deficit spending tends to use savings from other countries so it supresses capital formation in the deficit country, leaving them weaker for longer.

Now another respected economist is calling this "no cost" view out. Not that his argument is new, just newly stated. He says accumulating debt to pay for current expenses is like a Ponzi scheme in that money from new players (the young) is used to pay off people who started playing the game earlier (the old). The Ponzi scheme collapses when the economy’s growth rate falls below the interest rate. “For awhile it all looks great, then somebody gets nailed,” Laurence Kotlikoff says.

Kitlikoff has been joined by three other economists renewing the attack on long-term deficit spending where new debt funds current consumption needing to be paid off decades later. Financial repression becomes the favoured salve, but that does not solve the generational transfer issue; rather it exacerbates it.

To be clear, Kitlikoff and friends are not against deficit finance used to fund infrastructure or correct externalities, like global warming, or to fight a recession by spurring demand in the short term.

But they argue against the notion that public debt has no fiscal cost.

Here are the Abstracts from the two papers they offered in June, 2021, with links to the full papers.

Deficit Follies

Johannes Brumm, Xiangyu Feng, Laurence J. Kotlikoff, and Felix Kubler
NBER Working Paper No. 28952 June 2021

Deficit finance is free when the growth rate routinely exceeds the government's borrowing rate. Or so many people say.

This note presents three counterexamples. Each features a simple OLG economy with a zero growth rate and a negative government borrowing rate. None provides a basis for taking from the young and giving to the old.

One example features idiosyncratic risk, one features policy uncertainty, and one features a safe borrowing rate that exceeds the safe lending rate.

Progressive taxation cures the first problem. Policy resolution cures the second. And improved intermediation, perhaps organised by the government, cures the third.

The three models are parables. Each conveys an inconvenient truth.

Seemingly free deficits may, on careful inspection, be far more costly than they appear. Indeed, government intergenerational redistribution can lower the government borrowing rate, encouraging yet more inefficient deficit finance.

When Interest Rates Go Low, Should Public Debt Go High?

Johannes Brumm, Xiangyu Feng, Laurence J. Kotlikoff, and Felix Kubler
NBER Working Paper No. 28951 June 2021

Is deficit finance, explicit or implicit, free when borrowing rates are routinely lower than growth rates? Specifically, can the government make all generations better off by perpetually taking from the young and giving to the old?

We study this question in simple closed and open economies and show that achieving Pareto gains requires implausible calibrations. Even then, the gains reflect, depending on the economy's openness, improved intergenerational risk-sharing, improved international risk-sharing, and beggaring thy neighbor – not intergenerational redistribution per se.

Low government borrowing rates, including borrowing rates running far below growth rates, justify improved risk-sharing between generations and countries. They provide no convincing basis for using deficit finance to redistribute from young and future generations or other countries.

Here is a 2012 interview with Kotlikoff where introduces his ideas about an intergenerational 'ponzi scheme'.