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  • Robert MacCulloch

Former World Bank Chief Economist doesn't see things the same way as Sir Michael Cullen


In an article for the NZ Herald, former Finance Minister Sir Michael Cullen greatly played down our huge build up of public debt, forecast to rise by $100 billion, or by 30 percent of GDP. He defends the build-up on the grounds that "the Government's cost of borrowing is now a fraction of what it was 30 years ago. All the signs are that will remain the case for the foreseeable future. The annual cost of servicing the new debt is reduced correspondingly".


However, Anne Krueger is way less blase. She writes:


"To be sure, some economists have argued that in this low-inflation, low-interest-rate environment, one shouldn’t worry about the size of the federal debt, the implication being that deficits should expand even more to finance infrastructure and other spending while borrowing costs are so low. But there is no guarantee that today’s financial conditions will continue indefinitely. On the contrary, if investors come to believe that the prospective increases in debt will require higher interest rates to induce people to hold it, they will not willingly purchase new debt (or even roll over existing debt) at the prevailing low rate".


Anne Krueger, former Chief Economist at the World Bank, became famous for writing "The Political Economy of the Rent-Seeking Society" which popularized the term, "rent seeking". It occurs when interest groups lobby for government favors in the form of tariffs, patents, subsidies, import quotas and other market regulations. Rent-seeking is inefficient because it wastes existing resources, rather than creates new wealth. Her article was named one of the twenty best articles in the first hundred years of the American Economic Review.