Your Kids Will Not pay $94 Billion of NBN Debt

The Coalition has announced their broadband plan for the 2013 election and have a nice little infographic to go with it.
Infographic

Unfortunately for them I don’t think it is selling the message they wish it to do. I am sure many would dispute the price tag as well. Nonetheless that message is what we shall discuss.

Some critics of fiscal policy claim that by running large budget deficits, governments risk creating unsustainable levels of public debt and a burden on future generations. In reality, budget deficits create no such debt burden for societies whose governments are monopoly issuers of flexible exchange-rate fiat currencies. The debt of these governments will never become unsustainable unless for some inexplicable reason they decide to borrow foreign currency rather than their own fiat money.

In fact, as was discussed in the previous post, there is no financial need for these governments to borrow at all in order to fund their deficit spending. The reason, in practice, that they do issue debt to match their deficit spending is to meet voluntarily imposed legislative requirements that are in place for operational or political reasons – none of which are indispensable – but not financial reasons.

This clearly shows the impracticality of leaving any debt to your children or your grandchildren. I am not saying the Coalition is economically illiterate, they are not, just misguided.

Not all governments are so fortunate. The Spanish and Greek governments, for instance, don’t have the same policy freedom because they have committed themselves to operating under a common currency, relinquishing the right to issue their own currencies as they see fit. National governments who maintain a fixed or pegged exchange rate similarly give up some policy freedom. Lower levels of government, such as local or state governments, also lack such freedom because they are mere users of the currency, as opposed to issuers of it. However, for the governments of the U.S., U.K., Japan and many other countries, there is plenty of scope to pursue as much deficit spending as is necessary to facilitate economic recovery.

None of this is to suggest that debt is without consequences. But the debt that is problematic is private debt, not public debt. Unlike the government, private households and firms really do need to fund their spending. A household can’t simply credit its bank account on whim; nor can a private firm. When private debt can’t be paid, economic crises can occur, as recent events have made clear.

This is an adaptation from Heteconomist on Budget Deficits and Savings

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5 responses to “Your Kids Will Not pay $94 Billion of NBN Debt

  1. Ahhhhh…. I don’t think that your quite right there.

    The graphic you have used as the premise of you entire argument is actually a bastardised version of Labor’s own infographic, which was initially posted on JG’s Facebook page.

    See – http://www.facebook.com/photo.php?fbid=10151585831167328&set=a.10150173759707328.302398.161674172327&type=1&relevant_count=1

    Aside from the obvious misnomers in Labor’s original infographic (such as the NBN being FREE!), your observation that the Liberals are economically “misguided” is somewhat misguided in itself given that you have come to that conclusion based on what is, to my understanding, an amateur internet meme, not an official Liberal graphic.

    I could be mistaken, so perhaps if you could provide a link to the Liberals website where you found this image it would be great. I am happy to stand corrected.

    While I like your other post about not needing to borrow funds from overseas to fuel deficits, I am not sure that is the case here with either the Liberals or Labor.

    But the facts are that we are now more than $300 billion in the red and Labor are lining up to borrow money more money to pay for socialist policies.

    IMHO if we cant pay for it, then we dont really need it. If we do need it, then we need to prioritise it against other priorities. What is it to be?

    NBN, open borders, Gonski, or NDIS?

    We can’t have everything all at once. Pick one.

    • Nevertheless it is an infographic used by a Liberal candidate and I do believe that the point is it is a bastardised graphic. One that does not do its job very well. It can be seen here: http://www.facebook.com/photo.php?fbid=197601673697422&set=a.154420214682235.4499.145262132264710&type=1 I would have made the fonts on the left small and the fonts on the right large to make it more effective. It is a poor bastardisation.

      Your remaining political rhetoric suggests you have not yet fully comprehended the ramifications of this post or the other post you like.

      • Thanks for providing the link, I am always happy to stand corrected.

        Your lede indicated that the Liberals have used the graphic to launch their NBN counter policy, when in actual fact it is not featured at all on the Liberal website (see http://www.liberal.org.au/fast-affordable-sooner-coalitions-plan-better-nbn) but rather featured on Facebook (of all places) for a un-elected Liberal candidate. I have not seen it anywhere else.

        I think it was this fact that you failed to mention that the info graphic is actually a bastardised version of an existing Labor image that I felt was a little misleading.

        I may be nitpicking here but I do think that there is a difference and that you probably should of disclosed that the image is a bastardised version of Labor’s and where you found the image.

        Perhaps you should include such references to source material in your posts in future to assist your readers determine the veracity of the material?

        In terms of the branding / marketing elements of the image, if the general premise of the argument is flawed then the size of the fonts does not matter. The general premise of future generations repaying debt racked up today is either correct or incorrect. From a MMT perspective, deficits are not intrinsically bad or undesirable. In this context the message is incorrect and changing the fonts pointless.

        In relation to me not comprehending the “ramifications” of your posts, I think the word you are looking for may be implications. There are no ramifications of your posts – nothing has happened because of them. There are however implications for Australia and the wider global economy that could be taken from your posts. There would be ramifications if MMT was adopted globally by governments as it would change how much of the world economy operates and looks at monetary policy.

        My comment about the value of your MMT arguments was prefaced by the statement that from my understanding, MMT is not an economic theory that has been adopted by the political parties of Australia.

        Although one could argue that from Labor’s past record they obviously don’t see deficits as necessarily bad, although they do recognise that the rest of the country does, otherwise they wouldn’t have promised a surplus over 300 times and fiddled with budget accounting for the past 18 months in an effort to make it magically appear.

        While the legislative requirements may as you say be easily dispensed with, the fact remains that there is a legislative requirement here in Australia to fund deficits through the issuance of government debt.

        With all this said, I stand by the comment that Labor plans are to fund it’s policies through government debt by way of the issuance of government bonds. It is in that context that I mention policy priorities. All of the ones I mention are important, but some are more important than others.

        I’d be interested in your opinion on S&P’s warning this morning of possible downgrading of Australia’s AAA credit rating. It seems some people still think that the monetary system is not a closed loop as MMT would suggest and that fiscal responsibility is a desirable outcome as opposed to running a decade of deficits.

        Thanks for responding, I hadn’t come across MMT “officially” prior to reading your posts. It wasn’t a theory that had wide prominence when I was studying at University, at least where I studied.

      • Thank you for that response. Clearly I am aware now it is a bastardised graphic, but it does not mean I was initially aware.

        I wont give any of the major parties the time of day by visiting their websites. Yes, an unelected Liberal candidate but a certainty and it was issued from their campaign site.

        All of this is nitpicking over political jargon which is irrelevant to the point of the post.

        I’m afraid you have a complete misunderstanding of MMT – as it relates to debt in this post it is just a description of what is – it is not something MMT recommends – it just the way things currently operate.

        As for the remainder of your post, MMT despite having theory in the name is not a theory per se. The larger body of work is a simple description of how a sovereign currency works on a free floating exchange. Once that is understood, policies can be designed – that is the theoretical part. Debt as described above is not part of the theory. Political parties work the other way around. Debt would still be issued under the Coalition NBN’s and the same argument would apply. You are attempting to put a political one on a description.

        The issuance of debt will still occur but it does not particularly affect you, me or our kids.

        As I get to the bottom of your post, I see that you have not really heard of MMT before. In academic circles it is better known as neochartalism – MMT is more of a branding. It comes from over 40 (?) years examination of empirical monetary operations rather than what conventional theory says. You can visit my other blog – Modern Money for a walkthrough. It also has many related links. I would also note there are differing definitions of fiscal responsibility.

        As for ratings agencies – we can’t run out of money or default unless we choose to do so politically so who gives a fig what they think? Not to mention than monumental screw ups rating junk as AAA which brought on the GFC.

      • G’day Senexx,

        Agreed. The finer points of the political argument is irrelevant as both parties will seek to fund their respective policies in a similar manner.

        You are correct in that I hadn’t previously heard of MMT or neochartalism but exposure to non-convential theories can often come down to which Uni you went to or which Professor you studied under, or what you were interested in whilst studying.

        Anyway, MMT seems to definitely have an interesting take on economics that I would like to understand better. Suffice to say that the world and it’s attitude to economics has changed markedly since I graduated over 12 years ago and will continue to do so into the future 🙂

        With this in mind I will definitely check out your other blog to try and wrap my head around the concepts more fully.

        Thanks for discussing this with me

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