This is from a very old post (2/2009):
As noted, most of these points are also made in Baumol and Blinder's textbook, but there are some qualifications to note. First, on the effect of lending to foreigners, see Paul Krugman. Second, on whether its possible to transfer resources across generations, see Simon Wren-Lewis (and the links he provides at the beginning of his comments).
I saw Senator McCain on CNN talking about how the stimulus package is, essentially, reaching into the pockets of future generations and transferring their wealth to the present generation. He kept talking about how much poorer future generations will be as a result of the debt from the stimulus package (never mind that he voted for tax cuts that would have made the deficit much worse, e.g. "It’s 'generational theft,' said Senator John McCain, just a few days after voting for tax cuts that would, over the next decade, have cost about four times as much.").
So let's look at this and see if the generational theft charge has any foundation or, as is more likely given recent history, it is mostly scare tactics being used in an attempt to manipulate public opinion.
To begin, think about how the government finances, say, $10,000 in deficit spending. To use debt finance (as opposed to raising taxes or printing money), the government will print up a piece of paper - we call it a government bond - and write "IOU $10,000 plus interest" on it. It then trades the "IOU $10,000 plus interest at some point in the future" for $10,000 in cash. Thus, the private sector gives the government $10,000 and gets an IOU (a bond) in return.
Let's suppose the government then takes this money and spends it on a project such as a road that has benefits for a wide segment of the population. The end result, then, is that the money was borrowed from an individual and distributed through government spending (or transfer payments) to a larger segment of the population.
So far, there hasn't been any transfer of resources from the future to the present, only a transfer a resources within the current generation. What about when the bond is paid off, does that transfer resources across generations? Let's suppose it is a 30 year bond, and that the holder passes away and bequeaths it to his or her children. Thus, thirty years from now the bond comes due, and the holder cashes it in and is paid in full. But where does the money come from? The government pays it out of its tax revenue. That is, the government collects the $10,000 plus interest from the future generation, then gives taxes it collects to the bond holder.
But this is a transfer of resources within a generation, not across generations. A whole bunch of people in the future will have to pay higher taxes, and the taxes they pay will go to a smaller number of individuals holding the debt. But across the population the assets and liabilities cancel exactly, there is no net aggregate burden. Liabilities have passed to future generations, but so have the corresponding assets.
Thus, the current generation cannot use government deficits to literally reach into the pockets of future generations and steal their resources. But that doesn't mean that deficits are always harmless. There are three ways that debt can make future generations worse off, the question is whether these are important considerations right now. So let's look at three ways debt can be problematic and see if we should be worried about them in the present environment.
First, financing the debt can cause interest rates to rise. If interest rates rise, investment is lower and that can lower future economic growth. Thus, if this effect is operative and strong, there is a sense in which higher output today is traded for lower growth in the future.
This effect, commonly called crowding out, is worrisome when the economy is running at or near full employment and competition for resources is intense, but right now with interest rates as low as they are and with so much slack in the economy, this is not much of a worry. Government borrowing will not put upward pressure on interest rates, and hence private sector investment - to the extent firms are willing to undertake it in such poor conditions - won't be much affected.
Second, the collection of taxes in the future can cause distortions, and those distortions can lower economic growth. This is simply the usual supply-side economics story. This will likely bring the supply-side fanatics and ideologues out of the woodwork, but I don't believe the evidence supports the claim that these effects are large (e.g. see "Final grade on the Bush tax cuts: Failure to produce jobs"). So there's nothing much to worry about here either.
Third, if we borrow from foreigners rather than ourselves, the debt can impose a net aggregate burden within the US. To see this, use the example above where the government borrows $10,000, but this time let's suppose the money is borrowed from the foreign sector. In this case, we borrow from the foreign sector, and then at some point in the future the debt is paid off and this involves a flow of resources out of the U.S. Because resources flow out of the U.S. instead of simply being redistributed within the U.S., this imposes a net burden.
But there are two important qualifications. If we use the money to build something that provides benefits to current and future generations that exceed the value of the resources flowing out of the country, there is still a net benefit from the transaction. It depends upon what is done with the money. If it is used, for example, to build things like infrastructure and schools, then future generations get a benefit along with a bill, and it is the net effect that matters.
The second qualification is that while we borrow from foreigners, we also hold foreign assets and if you look at the net resource flow, the flow of funds outward from foreigners owning our debt, and the flow inward from our owning foreign assets, the net flow is positive. So overall these transactions do not detract from the living standards of future generations. [Update: I should have also added that these considerations are independent of countercyclical fiscal policy. The value from using countercyclical fiscal policy to enhance economic stability - something that does not necessarily require capital expenditures by the government (e.g. investment in infrastructure) - also needs to be taken into account.]
When you put all of this together, it seems very clear that the Republican opposition is misplaced and, though it's par for the courses they play on, unduly alarmist. But you may not believe me, so let me add two other sources for the same message. ...[adds supporting quotes from Baumol and Blinder's textbook, Dean Baker]...