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INTERVIEWS
WITH ECONOMISTS
DR ERNST BOEHM
Dr Ernst A.
Boehm
was a Reader in Economics in the Department of Economics at the
University of Melbourne until 1985 and, since then, a Professorial
Associate in the Melbourne Institute of Applied Economic and Social
Research.
He developed
the Westpac-Melbourne Institute indexes of economic activity and
a leading index of inflation, and was responsible for the monthly
report on these indexes during the years 1985–94.
You have
done some pioneering work on identifying and dating business cycles
in Australia. Could you briefly and simply describe the methodology
you use for this purpose?
The methodology
which I use to identify and date Australia’s business cycles
is based on procedures developed since the 1930s at the National
Bureau of Economic Research (NBER), New York. I identify two types
of business cycles: classical cycles, which involve the recurrent
alternating expansion and contraction phases in the absolute level
of aggregate economic activity; and growth cycles, which are the
recurrent fluctuations in the rate of growth of aggregate activity
relative to the long-term trend rate of growth of the economy.
I identify both cycles through the economic indicator approach.
This entails the construction of a coincident composite index,
which combines six statistical series of key aspects of income,
production, retail trade and the labour market. The series has
a proven record in portraying the general course and level of
business activity.
The process
of dating both business cycle chronologies involves applying well-established
NBER rules. This process mainly entails taking a combined view
of the cyclical turning points in three respects: in the coincident
index; in the coincident index’s six components in which
the turns tend to occur in clusters; and the median of each cluster.
The clusters can generally be identified fairly easily.
How do
you compare the methodology you use with that used by other Australian
economists such as Allan Layton?
There are
several alternative methodologies for identifying and studying
the recurrent fluctuations in the level of business activity and
in its deviations from trend. I believe that no alternative method
has been found to produce superior results to the NBER’s
in identifying business cycles. This methodology has furnished
comparable chronologies of classical and growth cycles for more
than a dozen market-oriented economies. These chronologies have
received widespread recognition by economic analysts in both government
and private sectors.
A special
objective of the application of NBER’s economic indicator
analysis to other industrialised countries has been to achieve
as far as possible international comparability in the identification
and analysis of each country’s business cycles. This has
aided understanding of the international transmission and ramifications
of business cycles.
Another helpful
aspect of the comprehensive economic indicator analysis is the
inclusion of a leading index (combining nine series for Australia)
and a lagging index (combining six series). I have found that
both the leading and lagging indexes assist in understanding business
cycles and in economic forecasting. The lagging index helps to
confirm the picture seen first in the leading index and then in
the coincident.
Do you
think there is a need for official dating of the business cycle
in Australia?
There is certainly
a need for the dating of business cycles since this furnishes
essential information for the development of business-cycle theory
and aids forecasters and policy makers in both the government
and private sectors. I suggest that knowledge of the recent, current
and prospective phases of the business cycle should assist economic
planning and decision-making.
The dating
of the business cycle may be done officially or official recognition
may be given to the chronologies fixed by a private organisation
as in the United States, where the turning points of business
cycles identified by the NBER for the United States are acknowledged
officially.
The Australian
Bureau of Statistics uses its estimates of GDP(A) as the ‘reference
series’ of Australia’s business cycle. GDP(A) is, however,
available only quarterly. For economic forecasting and policy-making
I believe that at least a monthly series such as the Westpac-Melbourne
Institute coincident index is needed. A further problem in using
a single series is that it is more subject to revision than is
a composite coincident index. Moreover, I have found that a single
series such as GDP(A) occasionally experiences ‘extra cycles’
that are not anticipated by the leading index and are not seen
in the coincident index.
Why is
it that the Australian economy has been growing less rapidly since
the mid-1970s as compared with earlier periods?
A notable
feature of Australia’s economic development historically
is that periods of most rapid growth have been marked by —
indeed to a significant extent made possible by — relatively
high levels of immigration and capital inflow. Australia’s
net migration and the rate of natural population increase declined
significantly in the latter half of the 1970s. My research has
shown that slower population growth and the decline in capital
inflow at the same time were associated with the decline in the
rate of increase in capital expenditure, especially public capital
expenditure. Hence, there was also a slowdown in technical progress.
The slower
growth was also related to the considerable stagflation at the
time involving rising unemployment and higher inflation. Stagflation
dampened enterprise and growth prospects. Since about 1982–83,
Australia’s growth rate has been stronger, but not as fast
as in the 1960s and the first half of the 1970s, again partly
because of slower population growth from both natural increase
and net migration.
Slower growth
also reflected changing attitudes about the desirability of growth,
manifesting concern for the interrelated costs of growth and environmental
issues. Slower growth has not been peculiar to Australia. It has
been experienced in most industrialised countries, major and smaller.
Why is
it that inflation has been so low recently?
This is an
important and interesting question. One major reason, I believe,
is a wider recognition of the close causal link between rates
of increase in money wages and prices, with causation running
especially from wages and hence costs to prices. Thus, if inflation
is to be kept low, it is essential to keep money wage increases
also low. The ideal would be to have money wages and real wages
increasing moderately and no faster than the rate of increase
in productivity. It is now more widely understood (by both employers
and workers or their union representatives) that this would establish
a basis for relative price stability.
An associated
factor supporting moderation in wage and hence price increases
is recognition that this economic climate tends to be more favourable
to business enterprise (both public and private) and hence to
job creation through higher rates of real public and private investment
and consumption expenditures. I believe that there has also been
increasing recognition that a lower inflation rate is more conducive
to a more stable economy and to a sounder balance of payments
through the promotion of exports, stronger competition with imports
and a more stable exchange rate.
According
to your research, when do you think the next recession will be?
This, I find,
is always a challenging question for all market-oriented economies.
It is generally notoriously difficult during an expansion phase
to pick precisely the month in which the next peak will occur;
and similarly during a contraction to forecast when a trough will
be experienced. Forecasters may be aided through both the economic
indicator approach and an econometric model. The one may complement
and supplement the other.
Australia’s leading index has tended to foreshadow changes
in the direction of the economy with a lead of between six to
nine months at both peaks and troughs. The experience has been
similar for other countries. My latest reading of the leading
index to November 1998 suggests that there could be some slowing
down in the Australian economy in the latter half of 1999. But
at the present time one needs to be very circumspect about the
extent and significance of this slowdown. This is not unusual.
It could involve only a growth slowdown and not a classical (real)
recession.
Another useful
guide is to follow the course of business activity overseas, particularly
in the United States. This is in recognition of Australia being
a relatively small and dependent economy.
What are
your views on the effect of the Asian crisis on the Australian
economy? Is it true that we have not seen the worst yet?
The Asian
crisis has manifested unfavourable influences on the Australian
economy since the crisis began in mid-1997. These influences have
meant a slower Australian growth rate than would otherwise have
been experienced, particularly through lower commodity prices,
declining demand for Australia’s exports and increased competition
from Asian exports. The situation has been worsened by the Japanese
economy being in a deepening classical recession from about March
1997.
Nevertheless,
the general problems in Asia have not led to a world slowdown
or recession. On the contrary, North American and most European
countries have continued to expand during 1998. This has contributed
to aggregate demand in Australia remaining generally strong.
We may have
seen the worst of the unfavourable effects from the Asian crisis.
It needs to be allowed, however, that financial maladjustments
and associated crises tend to be slow in revealing themselves
and in being fully recognised.
I consider
that the actions being taken by the IMF to deal with the Asian
crisis and the policies being pursued by the Asian countries themselves,
especially to improve their institutional arrangements, should
enable these countries to be more able to ease the impact of the
continuing problems and to cope more effectively with future financial
shocks.
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