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INTERVIEWS
WITH ECONOMISTS
ASSOCIATE
PROFESSOR COLIN ROGERS
Colin Rogers
was Professor of Economics at the University of South Africa and
editor of the South African Journal of Economics for a period
in the 1980s. He has been Associate Professor of Economics at
the University of Adelaide since 1991, with a stint as editor
of Australian Economic Papers.
What is
your opinion of the current status of macroeconomics?
This issue
is often obscured by the changing fortunes of Keynesians and their
neoclassical opponents. In the period between World War II and
the 1970s, macroeconomics was dominated by the Keynesian perspective.
However, this perspective came in for heavy criticism during the
1970s as a result of stagflation — the simultaneous occurrence
of high inflation and unemployment. Many economists then rejected
the Keynesian perspective and replaced it with ideas championed
by Milton Friedman, which were based on the older quantity theory
of money. Some of these ideas in turn fell into disrepute. Since
then other pre-Keynesian, as well as new Keynesian, ideas have
been developed, and elements of many of these views influence
policy today. Ultimately, macroeconomists produce a synthesis
of the useful aspects of different approaches. So to answer the
question directly, we should not confuse the changing fortunes
of competing ideas with the status of macroeconomics. On that
score I don’t think that the status of macroeconomics has
changed very much. Macroeconomics remains both influential and
the battleground between Keynesians and others for the hearts
and minds of politicians. I think this provides for healthy and
stimulating debate that makes macroeconomics a dynamic and exciting
branch of economics.
Some economists
are disillusioned with macroeconomics, arguing that only microeconomics
makes sense. Do you agree with this view?
This is an
issue also related to the debates between Keynesians and others.
Early Keynesians were rather casual about providing the microeconomic
foundations for their ideas and were rightly criticised. But that
does not lead to the conclusion that only microeconomics makes
sense. Macroeconomics is concerned with the coordination of the
microeconomic units in the economy and, as a general principle,
that coordination problem cannot be understood solely from a study
of the isolated behaviour of the microeconomic units in the system.
Some theorists who are disillusioned by macroeconomics try to
avoid these issues by assuming that the macroeconomy consists
of a single individual. But this approach overlooks all the issues
of relevance to macroeconomists. Macroeconomics inherently involves
questions of strategic behaviour and the consequences of the lack
of information. A macroeconomic model is something more than the
sum of its microeconomic components. Hence, in my view, macroeconomics
will always be a separate branch of the discipline.
In your
opinion, which school of thought is most influential with respect
to the current thinking of the Australian Government and macroeconomic
policy makers?
I don’t
think there is any doubt that the neoclassical school is the dominant
influence. In this respect, Australia has largely followed the
international fashion. Milton Friedman was very influential in
the 1970s and early 1980s, while the theoretical basis for so-called
‘economic rationalism’ is neoclassical economics. That
is clear from the current government’s emphasis on the role
of markets and the push to reduce government involvement at all
levels in the economy. The current Liberal Government is somewhat
more committed to the neoclassical vision than was its Labor predecessor
as is evidenced by its abolition of the Accord and its further
attempts to ‘deregulate’ the labour market. The adoption
of an inflation target by the government and the Reserve Bank
is also a reflection of neoclassical theory. By making inflation
its primary (although not sole) objective, the Reserve Bank reflects
the view that the efficient operation of markets is best achieved
in a low inflation environment and this in turn will produce the
best employment outcomes.
What is
your view on Australian tax reform?
Although some
of the benefits have probably been overstated, overall I believe
it will be of net benefit for Australia to move from its current
system of wholesale sales taxes and payroll taxes to the new tax
system proposed by the current government. At the heart of this
proposal is the replacement of the existing ‘potpourri’
of inefficient taxes with a broad-based consumption tax. This
tax, called a goods and services tax (GST) in Australia and New
Zealand, is what economists call a value-added tax (VAT). A VAT
is a multi-stage tax that requires the tax to be charged and accounted
for at every level of production and distribution. This form of
tax has considerable revenue raising power which keeps pace with
the growth of the economy. It also has efficiency and welfare
properties, which are preferable to the existing system. A major
negative aspect of the GST is the unequal impact it can have on
the less well-off segment of society. But this issue is best dealt
with through the social security system rather than the granting
of exemptions. Granting too many exemptions increases complexity,
pushes up the costs of administering the tax and increases the
scope for tax evasion.
What is
your view on the role of government in the macroeconomy?
I believe
that government has an important role to play. As a general principle,
governments should seek to create conditions that provide an attractive
environment for private investment. By that I do not mean that
governments should provide special incentives or concessions to
particular industries but, rather, that they should provide a
regulatory and tax regime that strengthens markets. However, within
that approach there is also scope for the old Keynesian idea of
direct government investment in infrastructure. This idea is not
particularly fashionable but it played an important role in post-war
development around the world.
On the more
practical matters of monetary and fiscal policy, I think the Reserve
Bank retains an important role as regulator with ultimate responsibility
for the stability of the financial system. (Despite the new regulatory
framework, the buck stops with the Reserve Bank.) Financial markets
do fail from time to time. As far as fiscal policy is concerned,
it is now generally accepted that using the annual budget to steer
the macroeconomy is all but impossible. The timing and impact
of policy changes is too unpredictable. Instead budgets are balanced
over the cycle so as not to contribute to a growing national debt.
More attention could, however, be paid to composition of the budget
and the potentially important role of government capital expenditure.
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