US finance expert giving UC lecture next week on government debt

November 27, 2012

Governments are not that special. They have to pay debts like the rest of us, a United States economics expert, who next week will be giving a public lecture at the University of Canterbury (UC), said today.

If government did not pay their debts they defaulted or inflated, which is really the same thing, University of Chicago Professor John Cochrane said.

``Historically, governments that have successfully paid off large debts did so by growing. Tax revenue equals tax rate times income and long term growth produces the tax revenues needed to pay down debt. Governments that have tried huge tax rate increases have killed off growth, and not successfully paid off debts.

``European countries like Greece had been struggling. Alas, the euro, as common currency, got mixed up with all sorts of other projects, and in particular the zany idea that no country may ever default.

``Companies in New Zealand that can’t pay their bills default, and don’t have to be bailed out to save the New Zealand dollar, nor do they have to leave the NZ dollar zone. Countries in the euro are supposed to be the same way. That’s how it was written and set up.

``Countries like Greece grow and pay off debts, they default on the debts, or they get someone else to pay the bills. Leaving the euro is the same as default. Really, this is just accounting. Here are your choices, pick one. The surprise is how reluctant they are to take the ‘grow’ option seriously. Opening up these economies apparently steps on a lot of powerful toes.’’

Professor Cochrane said the US had a yawning gap between what their government spends and what they take in taxes. The US was borrowing roughly a third of the government budget every year. The real nightmare was the ‘entitlements’, the US promises of social security and health care.

The current deficits were bad enough, but he said the real problem was what would happen in 10 or 20 years? Bond markets look forward to that, so the US could be in real trouble soon. The US had benefitted enormously from foreigners willing to buy enormous quantities of their bonds and finance it. How long they will be willing to do so is a troublesome thought, he said.

``The problems we are facing are simple, straightforward long-run questions. If you take 75 cents of every additional dollar someone earns, you get low growth. If you spend like a drunken sailor and don’t have a stable, low-marginal-rate tax base to pay for it, you get a debt crisis.

``If you hyper-regulate an economy – by which I do not mean rules, but so many rules and so much chaos that regulators can tell people to do as they wish – the economy stalls. If you pass laws that nobody can get fired, nobody gets hired. If you pass laws that people can’t get foreclosed, nobody lends to them in the first place.

``If you set things up so financial institutions always get bailed out, they take a lot of risk. It’s not that hard. Fixing it is said to be politically difficult. I’m glad to be an economist, not a politician.’’

Professor Cochrane will give the annual UC Condliffe memorial public Lecture on campus next Wednesday. More details about the lecture can be found at: www.canterbury.ac.nz/wiw.
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