Don’t get me wrong I am really encouraged that Mr. Moffatt took it upon himself to echo what we should all know by now: debt is not the story behind the Euro crisis. And as Mike rightly points out the real story is the rural idiocy of austerity and the absence of control over monetary policy for individual Euro members. To which Mike should have added the lack of a fiscal union within the Euro zone.
But what Mike leaves off in his analysis is not the problem with his note in the Globe. The problem is he feels he is obliged to put in parentheses. Right after explaining why debt is not the problem Mike throws out the following unfortunate canard:
None of this should be taken to suggest debts and deficits do not matter. High levels of debt matter a great deal, as they crowd out the ability of countries to finance worthwhile projects, which slows down long-run economic growth.
Either Mike does not know what he is talking about or he feels obliged to throw in a heavy qualifying dose of conventional wisdom to give his, less than novel (albeit worthwhile reiteration), analysis the hue of respectability.
Trouble is, he does not qualify it by what he had already mentioned. Namely, there is a qualitative difference between provinces and states within a federation and the federal government itself. Federal government, who is a currency sovereigns (i.e., who issues their own currency), do not face any particular debt or deficit constraint as they do not ‘need’ to face any particular financing constraint. Case in point, Japan was well over 200% of GDP before the Fukushima nuclear disaster and had no particular problems with debt crowding out in its response to the crisis.
On Mike’s crowding out hypothesis, the Japanese state should have been the least equipped to deal with such a crisis: it was not. An there in lies the lie. Debt crowding out is not an issue if the sovereign so chooses. The irony of course is that it is the hard currency, real debt burden posturing of conservative economists that is providing the theoretical underwriting service, or better put, spiritual incantation, that brought forth the very Zombie Mike’s analysis presumes to want to slay. That is to say, the myth that public debt crowds out worthwhile investment is the very elixir which sustains the Zombie he wants to bury.
All that said I am quite encouraged that Mr. Moffatt had the stones to reiterate the obvious, yet obscured, truth of Euro crisis. Debt is most definitely not the story. Unfortunately, for Mike, the crowding out Zombie must die too.