I am not a student of economics. At times I struggle to understand all the implications of the Macro and Micro Economic situations of my household budget let alone Australia and the World. But last week I read an article on Peter Black’s Election Blackout Blog written by Tom Gole an Economics student from UQ now studying his PhD at Harvard University. This article put into perspective why we don’t need to be worried about Debt (at least at Australia’s current levels). Here are some of the pertinent points.
… it seems that a lot of the confusion about the level of federal government debt stems from the natural intuition of comparing a nation to a household. If it makes sense for me or my family to avoid taking on too much debt, surely a country shouldn’t either. …
The reasoning behind households not holding too much debt is based on a lifecycle pattern: people should borrow when they are young to finance purchases they don’t have enough savings for (houses etc), then as their wages grow as they get older they pay off those loans, and then accumulate an asset base to live off once they stop working.
There is no analogous lifecycle for a country: Australia, as a nation, will never collectively stop working, so we will never need an asset base to live off. And the point goes further: Australia’s earnings, our GDP, will continue to grow, with the occasional up and down, for the foreseeable future. …
It’s worth noting that the other reason people don’t want too much debt is so they have something to fall back on if they lose their job or get sick. In one sense, the household analogy is appropriate here – if you hit bad luck, you should use up some of your savings or go into debt until you get out of the bad times, and the government should do the same thing in a recession. …
And there’s a further catch: most people cut back their spending in bad times, because their income has fallen and they don’t know how long it will be until they get back on their feet. On the other hand, if the government cuts its spending in a recession, it usually makes the economy take even longer to recover. The instinctive urge to tighten the belt during bad times is appropriate for a household, but if a government does the same then things only get worse.
After reading this I wondered why I hadn’t heard such an easy concept like this before. I was then gobsmacked to hear Julia Gillard make the analogy to Laurie Oakes of the Weekend Today program:
JG: Look, I understand people worry about debt, I worry about debt too Laurie. I also understand that as we emerge from the global financial crisis, our debt position as a nation is like someone earning a hundred-thousand dollars a year, having a $6,000 loan.
When Tony Abbott is out spruiking his debt and deficit lies, why are we not hearing the fight back put in such simple terms. I think a lot of people would be scared by the debt and deficit scare campaign and by hearing Joe Hockey talk of our borrowing Billions of dollars.
But when the Government (and Opposition) claim they will be in surplus inside 3 years and thus be able to begin paying off our $6000 (equivalent) loan, I tend not to worry so much and I am thankful the Government didn't tighten their belts and see us enter recession!
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