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Don’t fret the debt
June 3, 2009 | 12 Comments | Andrew Leigh
Joshua Gans and myself are among 21 authors (signatories?) of a Nicholas Gruen-instigated opinion piece in today’s AFR, arguing that modest levels of government debt are a perfectly appropriate response to a major downturn. Full text over the fold.
Debt for Development Makes Sense say 21 Prominent Australian Economists
Australian Financial Review, 3 June 2009
In Paul Krugman’s words, right now, “knowledge is our only defence against catastrophe”. A natural reaction would be to retreat into timidity. But that would repeat mistakes that exacerbated the Great Depression by giving in to our fears and phobias. IMF Chief Economist Olivier Blanchard has a similarly blunt message. “Above all, adopt clear policies and act decisively. Do too much rather than too little.”
Of course other things being equal it’s better for governments to be debt free. But as any homebuyer knows, debt can help us build assets now that we couldn’t otherwise afford, and repay the costs when the assets bear fruit. Australia entered this crisis relatively well placed to weather the storm. In addition to the recent mineral boom, for twenty five years Australian governments have consistently stressed fiscal responsibility and taken large political risks doing what they thought right for Australia, for instance with tax reform and fiscal austerity during the mid 1980s and again in the mid to late 1990s.
Many developed countries were already running cash deficits and had substantial public debt before the financial crisis. However all of them have accepted one lesson of the Great Depression – that during a downturn we should let the ‘automatic stabilisers’ work by loosening budgets temporarily as revenue falls and outlays on welfare relief increase.
Given Australia’s relatively stronger balance sheet, it’s been in a better position to engineer additional discretionary fiscal stimulus than most comparable countries. Cash handouts of nearly two percent of GDP are being paid to middle and lower income Australians. There is no more effective way to stimulate the economy quickly. The success of this measure can be seen in the relative strength of Australian retail sales compared with almost any of our peers. In addition the Government plans to spend many billions more on infrastructure.
All this has converted a sizable expected cash surplus next financial year into a deficit of nearly 5 percent of GDP. This compares with the average of our peers of nearly 9 percent. On current Treasury projections, which seem as plausible as any (though like all such forecasts, they are only ‘best guesses’), net debt will stay below 14 percent of GDP compared with an average of over five times this in comparable countries which nevertheless retain their creditworthiness in capital markets. Ultimately if other countries run weaker balance sheets than us, that’s no reason to relax our own standards. But the comparison does provide some context. It illustrates that even after the stimulus, we remain within a very healthy margin of safety in our Government’s reputation for economic prudence.
None of this is to suggest that Australia should rest on its laurels. There’s a fair chance (but no more than that) that our economy will recover strongly within two years. But just as we don’t know today how far or fast interest rates should be increased then, we don’t know today precisely how fast we should be returning towards budget surplus then. So these debates need to go on and there will come a time when we need to change direction, from supporting economic growth to restraining it, perhaps with great vigour. But that time is certainly not now.
Further, as Australia’s population and infrastructure needs grow, Australians must decide whether they prefer a balance sheet more suited to genteel decline or one that supports investment, dynamism and growth. In addition to building genuinely valuable assets in R&D and carbon abatement, our education, health and transport systems and housing stock, the stimulus will, in Treasury’s words keep up to 210,000 Australians in work who would otherwise be out of jobs. Major infrastructure projects should also pass independent and transparent benefit/cost assessment.
Deploying our strong balance sheet to use otherwise idle resources – or to put it more compellingly, deserted factories and unemployed workers – to build assets that improve our lives and our economy in the future, seems much more appealing; much more commonsensical than retreating into phobias.
Fred Argy, Former Head of EPAC.
Paul Binsted, Company Director and Economist
Tony Cole, Former Secretary to the Treasury
Max Corden, Emeritus Professor, Johns Hopkins University
Owen Covick, Associate Professor, Flinders University
Steve Dowrick, Professor of Economics, ANU
Saul Eslake, Chief Economist, ANZ Bank
John Foster, Professor of Economics, University of Queensland
Bernie Fraser, Former Governor of the Reserve Bank of Australia and Secretary to the Treasury
John Freebairn, Professor of Economics, University of Melbourne
Joshua Gans, Professor of Economics, Melbourne University
Paul J. Gollan, Associate Professor, Macquarie University
Roy Green, Professor, Dean, Faculty of Business, University of Technology, Sydney
Stephen Grenville, Former Deputy Governor, Reserve Bank of Australia
Nicholas Gruen, CEO, Lateral Economics
Tony Harris, Former Auditor General of NSW
Stephen Koukoulas, Global Strategist, TD Securities
Andrew Leigh, Professor of Economics, ANU
John Quiggin, Professor and ARC Federation Fellow, University of Qld
Mike Waller, Former Chief Economist, BHP Billiton
Glenn Withers, Adjunct Professor, Australian National University
Comments
12 Responses to “Don’t fret the debt”
Andrew, shall we name your new collective the conga line of government suckholes? What is actually new about what your saying? In fact where is the criticism of the Government in relation to its complete failure to perform a “transparent” cost/benefit analysis on the broadband network?
The issue is how much debt not whether debt should be incurred.
In endorsing the government’s position – that’s what you are doing – how many of this illustrious group have done any inspecting of the case for what has been delivered.
‘Australians must decide whether they prefer a balance sheet more suited to genteel decline or one that supports investment, dynamism and growth’.
What is being said here?
“…Many developed countries were already running cash deficits and had substantial public debt before the financial crisis…”
and where are those countries now ??
- in recession – which is where we will be at the next global twich now that we are so exposed by our debt
Helena make a great point;
furthermore .. your piece lacks substance and direction. As already asked above … what are you saying ?. . . you seem to brush over each item as a news headline . . .
“None of this is to suggest that Australia should rest on its laurels. There’s a fair chance (but no more than that) that our economy will recover strongly within two years”
… based on what ??? oh right it says so in the media . . . and what does the Australian media base their views on …. what Ben Bernanke tells congress? or the UK Chancellor?? Yes these massively underfunded societies are rooting for a rapid return to growth – its their only hope . . . so of course we should blindly follow them and their theories.
It seems clear from yesterdays GDP report (the guts – not the headline waved around so arrogantly) that the governments’ stimulus efforts have done nothing to improve business investment or any other catalyst for true long term growth. Whats happens when the stimulus effect wears off . . . and the first home-buyers grant? I guess we can just borrow some more right . .
What if China’s trend suddenly turns the other way . . . or they simply plateau out at a low level of growth for several years …. Australia is undertaking a huge gamble with its future prosperity (and sadly), its potential future place in the global economy and the AsiaPac region, on the chance that forecasts of “green shoots” by the mainstream finacial community are correct?
I guess these guys have been right on the money since 2005 in their forecasts – they all saw subprime coming, then the credit crunch – all called for mild recession.
These were all the prevailing throries at the time, just as “green shoots” or “China stimulus rescues the world” or
…. 200 million chinese ex and soon again to be, peasants return to the country from their recently lost factory jobs to spend their great new wealth on consumer items and large ticket items hence instantly turning China into a US-style consumer nation that rescues the global economy from disaster.
All so convenient no?
The societies to really prosper coming out of this severe recession will be those with the ability to apply policy that fits alongside their own specific cultures, economies and societies, rather than those that blindly apply policies that relate specifically to others and wittle away their hard-earned wealth in the process.
The only contribution of those other countries’ debt to their recessions has been that it meant they couldn’t afford the sort of stimulus that we’ve been able to deploy.
If we chose not to pay for the stimulus – or worse, severely cut back existing spending – in order to avoid debt, we’d be abrogating the only advantage the lack of debt gave us in the first place!
“It seems clear from yesterdays GDP report (the guts – not the headline waved around so arrogantly) that the governments’ stimulus efforts have done nothing to improve business investment”
Some people really do have no idea.
A fundemental cause and symptom of a recession is a collapse in business investment. Yesterday’s numbers demonstrated that the “cash splash” worked precisiely where it was meant to – i.e. by boosting household consmption.
While economists should no doubt provide non-partisan commentary it does not mean that they shouldn’t call a spade a spade. The coalitions attack on debt is completely hollow and should be called as such.
“the “cash splash” worked precisiely where it was meant to – i.e. by boosting household consmption”
The drop in imports within GDP supports this theory doesnt it!
And so where do the funds to continue this household consumtion come from next quarter. Its an unfortunate fact that this money is going directly to the most unproductive parts of the economy. The money would have been better spent elsewhere; infrastructure projects will have a good effect when they get going but the “cash-splash” is nothing but political window-dressing.
The need to get money out the door quickly and be seen to be acting has meant that a good chunk of the surplus that we had has been wasted where it may have been better spent on the more productive parts of our economy to enable them to create (or keep) jobs.
Putting you cash bonus in the bank, spending at the pub or on a TV, or even paying down personal debt does not relate to an increase in jobs in Australia.
kme – “those countries” CAN afford the stimulus we have been able to deploy even with the debt they already had . . . . and will continue to spend money until bond markets call time on their borrowing. Of course they will be in a horrible state in the end but they have the benefit of being in the G7 and having globally significant currencies (GBP debatable) that remain in demand.
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I think the point is relatively clear “Above all, adopt clear policies and act decisively. Do too much rather than too little.” – in that context, yes, it is about the debt level – and the recommendation is clear, no?
From the comments it must just be me. But it seems like somehow the ‘stimulus’ is wrong/immoral now…but there wasnt the same level of hysteria when we were frittering away our safety net through middle class welfare build up. I kinda feel like if we hadn’t given countless handouts to the middle and upper class for the last ten years we might have a shot at being _more_ balanced over the cycle. _Now_ all I hear about is ‘fiscal responsibility’…amazes me. Its like people have just been born at this part of the cycle..
oh my , apologies for whatever happened with the ‘meta information’ in the post above… maybe the admin might like to ‘delete me’?
The increasing use of scientific jargon has permitted the
State’s intellectuals (a category that includes, perhaps unwittingly, some of the authors on this blog) to weave obscurantist apologia for State rule that would have only met with derision by the populace of a simpler age. A robber who justified his theft by saying that he really helped his victims, by his spending giving a boost to retail trade, would find few converts; but when this
theory is clothed in Keynesian equations and impressive references to the “multiplier effect,” it unfortunately carries more conviction. And so the assault on common sense proceeds, each age performing the task in its own ways.
I found this video on YouTube which really opened my eyes to the importance of getting out of debt: http://www.youtube.com/watch?v=50bWUrKAbwU
I am sure you will be as amazed as I was.
[...] that says that we don’t want government deficits persisting in the long-run. By the way, the statement that I put my name to says just that: “Of course other things being equal it’s better for governments to be debt [...]