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