Krugman weighs in on public debt misunderstanding

Coincidental to my recent concerns about the gross misunderstanding or even out-right dishonesty concerning the issue of public debt from senior Liberal politicians in Australia, Nobel prize winning economist, Paul Krugman, has stepped in with an Op Ed piece in The New York Times headed “Nobody Understands Debt”.

It is at this link:

http://www.nytimes.com/2012/01/02/opinion/krugman-nobody-understands-debt.html?_r=1&smid=tw-NytimesKrugman&seid=auto

In Australia, Shadow Treasurer Mr Hockey, the Leader of the Opposition Mr Abbott, Shadow Finance spokesperson Mr Robb and it seems anyone in the Coalition bold enough to talk about government debt have embarrassed themselves with their comments on debt, the size of government and related matters.

As an aside - I don’t know anything about cyclone or flood warnings so I don’t pass comment on them for fear of embarrassing myself or worse, distorting the debate so that there is a general misunderstanding on the issue. That would be reckless and potentially harmful. I wont pretend to be an expert and will leave it to the experts to judge whether there is a risk of a severe weather event.

Perhaps this should be the approach of Coalition members in 2012 or at least until they get a better understanding on how government finances work.

Krugman’s article covers the debt debate and discussion in the US, but his points apply to many aspects of the debate in Australia, including for some misinformed media commentators who should know better.

In particular, Krugman notes:

• “…through most of 2011, as in 2010, almost all the conversation in Washington was about something else: the allegedly urgent issue of reducing the budget deficit.”

He went on:

• “it … revealed [that] when people in D.C. talk about deficits and debt, by and large they have no idea what they’re talking about — and the people who talk the most understand the least.”

As I have written before, the same issue concerns me when I see members of the Opposition discuss the budget and fiscal policy here in Australia. Suggestions that government spending is out of control or that the debt explosion is adding upward pressure to interest rates is wrong and smacks of scaremongering - talking down the economy and those sorts of things.

Back to Krugman and his discussion of the US.

• “Perhaps most obviously, the economic “experts” on whom much of Congress relies have been repeatedly, utterly wrong about the short-run effects of budget deficits. People who get their economic analysis from the likes of the Heritage Foundation have been waiting ever since President Obama took office for budget deficits to send interest rates soaring. Any day now!”

For Australia substitute Menzies House for “Heritage Foundation” and “the Labor Party” for “President Obama" and you get the core part of the Opposition discussion here in Australia.

On Budget night 2011, less than eight months ago, Shadow Treasurer Hockey said the following:

• “The Australian debt has now, net debt, has now blown out from $94 billion to $107 billion”.

He went on:

• “this is the first budget in eight years without income tax cuts, we're facing higher electricity prices, higher food prices, higher interest rates. This is going to make interest rates higher, not lower.” (my emphasis – and note official interest rates are 50bps lower than budget time and government bond yields are at all time lows.)

A few days later at the National Press Club, Mr Hockey said:

• “There are two very significant legacies of the Government’s failed Budget. Firstly the debt is getting worse and secondly this Budget does nothing to reduce the upward pressure on interest rates.”
• “Let me be very clear. This government owns every interest rate slug to Australian families.”

A sharper wit than me might say in response:

• “Let me be very clear Mr Hockey, this government owns every interest rate cut that is saving billions of dollars in interest costs to Australian families” based on the fact that mortgage rates are 50bps lower now than at Budget time.

Economic management is about much more than debt. To be sure, like a wonderful Moss Wood cabernet or Timmy’s Kitchen shantung chicken, too much debt can be damaging, but too little leave opportunities lost, lower living standards and potential economic turmoil. Knowing when to have it, when to cut back, when to abstain and when to go in hard is the stuff of good decision making. The Krugman article is a must read for those interested in government debt.