We're in debt to Barnaby
Wayne Swan and Ken Henry owe Barnaby Joyce an apology. A year ago Joyce, then the Coalition's finance spokesman, warned of "economic Armageddon" if the United States government defaulted on its debt. He said the threat was "distant but real" and politicians should at least acknowledge the possibility of default, however remote it might be.
Treasurer Wayne Swan accused Joyce of coming from the "reactionary fringe of our economic debate". Ken Henry, then the secretary of the Treasury Department, claimed that Joyce shouldn't be talking about such things because it would frighten people.
So on that basis Austan Goolsbee must be from the reactionary fringe too. The trouble for Swan is that Goolsbee is a professor of economics at the University of Chicago, the chairman of US President Barack Obama's council of economic advisers and a member of the US cabinet. Presumably for Swan and Henry it's OK when Goolsbee speculates on the US going broke, but it's not OK when Barnaby Joyce does.
In January Goolsbee contemplated the result of the US House of Representatives, controlled by the Republican party, not allowing the US government to increase its debt. "If we hit the debt ceiling, that's essentially defaulting on our obligations, which is totally unprecedented in American
history," he said.
The context in which Joyce and Goolsbee spoke was different. Joyce was talking generally about the sustainability of US government debt, while Goolsbee was contemplating the unlikely event of the Obama administration being unable to raise its debt ceiling. But in essence Joyce and Goolsbee were talking about the same thing - namely the US government running out of money.
In the US Goolsbee's remark was taken as a simple statement of fact. In Australia Joyce's remark provoked outrage from Labor politicians and economics commentators. It was one of the reasons Opposition Leader Tony Abbott subsequently removed Joyce from the fmance portfolio.
Goolsbee was not the first to talk of the seemingly unthinkable. Last year the chairman of the house finance committee in the US Congress asked Federal Reserve chairman Ben Bemanke if there was "any realistic prospect of America defaulting on its debt in the forseeable future?" Bernanke replied: "Not unless Congress decides not to pay, which I don't anticipate ..." The question was rhetorical but the fact that it was asked speaks volumes about what's preoccupying American legislators.
The treatment of Joyce reveals just how ignorant Australians are about the financial situation of the United States government. Forty per cent of the money the US federal government spends is borrowed. In five years' time the US will be spending more on interest payments than on the defence budget.
In August last year, Admiral Mike Mullen, the chairman of the joint chiefs of staff, said the biggest threat to the national security of the US was not from China or the Middle East, it was from the national debt. A study released on Wednesday, the Sovereign Fiscal Responsibility Index, done in
conjunction with Stanford University, ranks the US 28th out of 34 developed countries in terms of the sustainability of its financial position.
The US ranks below Spain and Italy, and just ahead of Ireland and Iceland. The top three countries are Australia, New Zealand and Estonia.
The budget stand-off in Wisconsin between a new Republican governor and the public sector unions is a huge story in the US, not because anyone is particularly interested in Wisconsin, but because it could be a forerunner of what could happen in Washington. Even though the Australian media seems obsessed by the Tea Party, the story has received almost no coverage in Australia.
National governments have an advantage over their state and local counterparts as they control the currency, which is why, technically speaking, the United States is unlikely to go bankrupt. If a situation developed whereby the US federal government could not repay its borrowings, it would print
more money. The effect would be hugely inflationary, but at least bankruptcy would be avoided.
It's understandable that Swan and Henry, who presided over the biggest growth in Australian government debt since Gough Whitlam, didn't like Joyce talking about the consequences of government debt. But it's Australia's policymakers - who refuse to face the facts of the long-term consequences of America's financial situation - who are the ones being irresponsible.