There was an interesting exchange in the Senate last week.
BARNABY JOYCE: Is it a fair statement that if we keep borrowing money and our debt keeps getting larger, that we will be putting upward pressure on interest rates?
KEN HENRY: Ah, well no disrespect Senator but that is a gross oversimplification of economic understanding of these matters and to illustrate you will recall that, um, during the early years of this decade as debt was being repaid, interest rates were steadily climbing.
So I think we should be um, we should be careful not to rush into simplistic relationships between levels of debt and interest rates.
Well yes. There are always ceteris paribus assumptions at work when economists debate issues. But I think Ken Henry’s answer was inappropriate. The correct answer to this question is, ‘Everything else being equal, yes’. Then speculate of why we don’t have to worry just yet – not that I’m suggesting that there might not be a debt problem.
Does Henry support this statement or is it too simplistic?
A high stock of government debt imposes costs on a country and its government. It leads to crowding out of private investment via higher real interest rates, imposes a continuing servicing burden on the government, and reduces its fiscal flexibility in dealing with unexpected adverse shocks. If government debt gets high enough, it can call into question the government’s ability or willingness to service the debt. However, a strategy of reducing debt as quickly as possible without regard to the broader economic environment is likely to do more harm than good. With fragile recoveries in their own economies and high debt levels, the governments of the advanced countries are currently confronting a difficult trade-off. On the one hand, government debt as a share of GDP cannot be permitted to continue to rise indefinitely; on the other hand, too rapid fiscal consolidation could endanger the recovery.
David Gruen said these words on December 8 last year. Now he made it clear that he wasn’t referring to Australia – fair enough, he doesn’t think debt levels are too high – but that is exactly the relationship Joyce was asking about.
Henry performed very poorly in the Senate committee. It is one thing to think that Australian government debt isn’t a problem, but he should at least be able to say what the numbers are. In addition to federal debt, the state governments also have a lot of debt, including large unfunded superannuation liabilities. That debt has been under the radar for a long time. This the man who has just done an analysis of the whole taxation system. Are we to believe that he has looked at state revenue powers without thinking about state liabilities and spending?
JULIAN MCGAUREN: We’re talking about the debt of the country here. If you’re not prepared for debt questions, why bother turning up?
Why indeed?
Copied from the open forum…I posed .. Good find SInc. Henry is calling debt/interest rate simplistic now. LOl.
Watching Insiders this morn they showed a clip of Joyce asking Ma Henry’s son, Ken if high levels of government spending would cause upward pressure on interest rates.
Henry replied “with due respect this was a simplistic way of looking at such matters”.
I almost fell out of bed.
Henry, the man who told the world that the person responsible for the bank guarantee was his mother is actually telling a senator his question about the connection of interest rates to high levels of government spending was simplistic. The irony.
Joyce’s question was not simplistic incidentally and actually quite relevant.
Perhaps Ken ought to call Ma Henry to get an update.
If I was the liberal leader, Henry would be publicly fired just after Rudd’s concession speech.
JC
14 Feb 10 at 12:12 pm
Not only is Henry an ALP stooge, but these days he doesn’t even go through the motions of caring that he looks partisan. He really doesn’t seem to give a shit.
JC
14 Feb 10 at 12:26 pm
Henry has either allowed himself or has chosen to position himself too closely to the government. He has lost all credibility as providing any sembelance of independent advice. It is a sad day for the Commonwealth Treasury and a sad day for economic policy. Can’t wait to see the back of both of them. Julia for PM.
johno
14 Feb 10 at 3:21 pm
“If I was the liberal leader,..”
But you arent and never will be so that puts an end to that particular delusion
rog
14 Feb 10 at 3:42 pm
Rog, are you trying to be as stupid as possible, or is this just your true character showing through?
Michael Fisk
14 Feb 10 at 3:50 pm
Henry Ergas for Treasury Secretary!
ACTOldFart
14 Feb 10 at 4:25 pm
If Dr. Henry had any real insight into macroeconomists, he would have replied, “f***ed if I know, senator”?
Peter Patton
14 Feb 10 at 5:44 pm
Henry doesn’t care. Retirement and a huge Super payout loom. He’s got the top job for his skill stream in the APS and a guarantee of endless invites to former ALP PM’s barbecues and dinners.
Abu Chowdah
14 Feb 10 at 5:44 pm
Joyce should have said “back in your box, boy, and just answer the bloody question.”
Peter Patton
14 Feb 10 at 5:51 pm
ABU:
Then legislate to take all his benefits away. One needs to be totally ruthless with the bastard. He can then go work for the ALP and stop the pretense.
If he thinks he can offer those sorts of answers to the politicians he’s not doing his job and acting as a partisan hack. Treat him the way he deserves to be treated and then some.
Asking a question about the relationship of debt to interest structure is not simplistic.
Telling people his ma was the inspiration for the bank guarantee is simplistic.
Joyce should have had the come back at the ready and thrown a bucket of water over the insolent tax-eating prick.
The Libs should have just walked out after the comment or after Senator McGuaren and then complained about his political partisanship to the media.
In any event he really doesn’t want to answer these sorts of questions as he claims he was the architect of the huge spendathon.
Next time around the Libs need to ask him to dissect the benefits he claims from the spenathon vs the benefits from the RBA’s actions to cut interest rates around 450 basis points.
For the life of me I don’t understand why the libs don’t bring up the RBB’s action as monetary policy is really what did the work. They can argue that the RBA did all the heavy lifting and all the spending has done is push interest rates higher than they necessarily should go though crowding out and distorting the nation’s capital structure.
They should ask the wombat whisperer to prove his claims of the benefits we derived vs the RBA. If he can’t then attack for lying.
JC
14 Feb 10 at 7:49 pm
wow Sinkers either didn’t read the world today story or deliberately failed to acknowledge that Nigel Ray was to be quizzed by the Committee and they had already been informed he would be talking about debt.
This is a quite occurrence for the committee , as opposed to the RBA, not only does Henry testify but also other senior Officials and ALL committee members are informed of what areas they will be covering.
not only does Joyce think that Asutralia might default on bond payments ( Is Forrest advising this idiot?) he doesn’t even read the information sheet for senators on the committee.
sounds like right out of Catallaxy.
A high level of debt really does not apply to Australia.
Just remember debt would be far larger if we had listened to crackpots like Sinkers, Ergas or Makin.
We would still be swimming in negative growth.
It would be nice if an alleged Professor of Economics had just an inkling of how a senate committee operates and not pass up ignorant musings appealing to even more ignorant crackpots.
Butterfield, Bloomfield & Bishop
15 Feb 10 at 8:31 am
[...] posts on Joyce and debt are here and [...]
Barnaby on debt at Catallaxy Files
25 Feb 10 at 8:04 am