Friday, June 05, 2009

The letter that leaves Turnbull naked

Read the full letter

Prime Minister Kevin Rudd has seized on an open letter from 21 leading economists including former Reserve Bank Governor Bernie Fraser and ANZ economic chief Saul Eslake to claim that the Coalition's campaign against government debt lacks mainstream support.

Brandishing the letter in Parliament and noting it was also signed by academic economists John Freebairn, John Quiggin, Joshua Gans, Andrew Leigh and Nicholas Gruen as well as a former Treasury Secretary Tony Cole and a former Reserve Bank Deputy Governor Stephen Grenville.

Mr Rudd quoted them saying that even the extra debt forecast in the Budget Australia would retain "a very healthy margin of safety in its reputation for economic prudence".

The letter says Australia's 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."

While Opposition leader Malcolm Turnbull spoke Wednesday of an "larger and larger and less sustainable burden of debt, both on our shoulders and those of our children", the economists say "fears and phobias" about debt exacerbated the Great Depression...

"Of course other things being equal it is better for governments to be debt free," the letter says.

"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."

Explicitly backing the government's multi-billion dollar series of cash handouts the letter says there was "no more effective way to stimulate the economy quickly".

"The success of these measures can be seen in the relative strength of Australian retail sales compared with almost any of our peers," the authors say.

"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," it concludes.

Overseas signatories include Stephen Koukoulas, the London-based global strategist for TD Securities and Max Cordon, emeritus professor at Johns Hopkins University. Other Australian signatories include Mike Waller, a former chief economist at BHP Billiton, and Glenn Withers and Fred Argy, both former heads of the government's Economic Planning and Advisory Council.

The economists go further than defending a build up in government debt for the purpose of dealing with the current downturn arguing that as Australia's population and infrastructure needs grow, Australians will have to "decide whether they prefer a balance sheet more suited to genteel decline or one that supports investment, dynamism and growth".

The current Reserve Bank Governor Glenn Stevens also endorsed running up debt to fund stimuls programs in an address to university students in Townsville saying the resulting stimuls would be "substantial."

While expressing concern about other countries that had run up government debt in excess of 100 per cent of GDP, he said he had no such concern about this government's plans.

New figures released yesterday highlighted the depth of Australia's economic challenges, showing that exports fell 11 per cent in April, he worst monthly decline for 12 years.


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 Reserve Bank and Secretary to 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, 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


Pete (not Peter Martin) said...

Saul Eslake, Bernie Fraser? Hahaha, what a list of names!

1) Who cares what 'they' think? Name one person of those who benefited from the stock market slide in November, and perhaps then they might have some credibility. None of them saw that coming, and none of them will understand anything else of our future economy. As it stands, these are just a bunch of people talking nonsense and hoping to get into the Gov's good books.

2) The whole idea of 'the consensus must be right' is half the reason we are in these messes. So, the majority make a choice. Does that mean it was a clever choice, a well thought-out choice, or even an informed choice, merely due to the fact that it was made by a majority? No way. The majority can easily be incorrect. All this list does is tell us the Gov. has some fans - or maybe that the Opposition has some enemies.

What a pathetic excuse for news.

carbonsink said...

My view is the govt went too early with the cash handouts and we blew it at the mall. Monetary policy and the crash in the AUD would have got us through the initial stages of the downturn. Now the real trade crunch is coming as the AUD rises and new contract prices kick in. The crash in business investment has dire implications for unemployment down the track as well.

Unless the ‘green shoots’ / China-will-save-us recovery is real, we’re really going to need a fiscal boost in Q3-Q4 but there will be nothing left in the tank.

Those 'automatic stabilisers' are gonna start hurting as unemployment rises, and tax receipts from the big miners crash.

BTW, Rio will hold a $19B rights issue ... investors piling in, Rio up 11%. Insane.

Anonymous said...

"we’re really going to need a fiscal boost in Q3-Q4 but there will be nothing left in the tank."

There will be substantial infrastructure stimulus in the second half of the year. Interest Rates will still be very low and could still go lower, providing substantial stimulus.

Without the cash handouts we would have had GDP go backwards in ther December 2008 quarter by 1% and the March quarter go backwards by 0.2% according to treasury estimates. Confidence would have been lower, spending lower and unemployment higher.

In summary, I think that the fiscal stimulus was well-timed and generally well-targeted.


carbonsink said...

Without the cash handouts we would have had GDP go backwards in ther December 2008 quarter by 1% and the March quarter go backwards by 0.2% according to treasury estimates.
In other words, a really mild recession compared to the rest of the world. Now we've bet the house on a China-led recovery in the second half of 09. If we don't get it, there's a trade blowout looming, which will subtract heavily from GDP.

Westpac says:

Total exports fell sharply as we expected, down 11.3% after a 0.4% fall previously. The RBA commodity price index plunged 12.2%mth in USD terms and with the AUD/USD rising 7.3%mth, it fell 18.1%mth in AUD terms. This suggests higher export volumes. This resilience in export volumes in April after their 2.7%qtr rise in Q1 does not concur with the weak global demand backdrop, and should fade over 2009.

Does not concur with weak global demand backdrop. Well, that's one way of putting it.

Anonymous said...

So Peter why haven't you reported the conflicts of interest that this embodies? Nick Gruen, brother of David Gruen of Treasury, has received over $250,000 in consultancy income from the Rudd government.

Peter Martin said...

Dear A,

If you added up all the income this lot had received for advising politicians - from a sides - it come to quite a bit, and go back a long way.

Argy even advised Menzies!

The point is that they are public figures, in the advice game.

And as for the argument about someone who has a brother who works in Treasury...

Anonymous said...

Argy was a public servant - as was many of them. So they did their jobs. Gruen is a consultant to government - currently, or at least recently, on the payroll. Why no disclosure.

Please amplify your argument about his brother. I don't understand the meaning of '...'.

Peter Martin said...

Someone who has a brother who works in Treasury...


Half of Canberra has brothers who work in public service departments.

Anonymous said...

So half of Canberra write letters to the newspaper defending policies their brothers have devised and when they themselves are on the government payroll as a consultant? That might explain why you don't think there is anything wrong with what Gruen did, but the rest of the country might.

Peter Martin said...

No A, I don't think there's anything wrong.

But if you are worried about these things, it's worse than you think:

The Financial Review actually pays Nick Gruen to write about economics - each fortnight.

They don't disclose that he has a brother and they don't disclose where that brother works.

When Nick was Assistant Director of the Business Council of Australia, it too seemed unconcerned that he had a brother who had a job.

Get real.

Tim Costello used to write letters to the paper all the time, and his brother was the Treasurer.

Nick a public figure in his own right.

Or haven't you noticed?

There is something offensive about your line of argument.

If you were making it about a woman and her husband, it would be called sexist.

Anonymous said...

"There is something offensive about your line of argument."

no, mate. There is a lot offensive about your covering up of potential corruption.

Peter Martin said...


Of who?

Anonymous said...

The corruption of public debate. The public are entitled to know whether or not any person making a claim is being influenced. I suspect that Gruen's brother has little influence on his view regarding public debt. The consultancy income too, yet it should be disclosed. If you, Peter, were to write an article about a share that you owned you would be expected to declare your interest, so too Gruen should have declared his consultancy income from the Rudd government.

Peter Martin said...

I don't think Nick has corrupted public debate.

I think he has advanced it.

Neither I nor you know whether he is currently in receipt of government income.

We know that he has been in the past.

I guess I should mention that I have been too.

I have worked for the ABC, the SBS and the Commonwealth Treasury.

If it really matters to you, take it up with him or with the organisations that publish him.

But perhaps it doesn't matter that much. He was only one of the 21 economists who signed the letter.

Anonymous said...

No, he organised the letter. We do know he has received income from the current federal government as a consultant.

Why should I take it up with him? That's your job as a journalist. You should have taken it up with him before you wrote the article.

Peter Martin said...

Apparently he was the guy who organised it, but he was only one among 21 signatories.

What do you think? Was his name one of the more or one of the least important names on the list?

Anonymous said...

Andrew Leigh and John Quiggin both claim that Nick Gruen organised the letter. Whether he is more or less important is a value-judgement I cannot make. But the organiser needs to declare his interests, let the public decide the importance or otherwise.

John Humphreys said...

The debate about the effectiveness and appropriateness of an activist fiscal policy is long-standing within the economics profession. It is not true to say that "economists" support activist fiscal policy. Only "Keynesian economists" believe that. And despite what some people say, we are not "all Keynesians now".

Of course there are at least 21 Keynesians left in Australia. Besides Freebairn, it was mostly a list of the usual suspects.

There is a strange disjoint when it comes to Keynesian economics. The Keynesians have lost pretty much every academic debate, being shown to be wrong time and time again... but they remain politically popular. Probably because they're telling politicians exactly what they want to hear (ie "you can spend, spend, spend").

Anonymous said...

Why besides Freebairn? He too is a usual suspect.

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