ANDREW HAUSER: Why we need economists now more than ever

Over that past century, Australian thinkers have helped develop some of the most important building blocks in open economy macroeconomics — the branch of economics that seeks to understand how the global trading economy works.

Those were significant — sometimes world-leading — intellectual achievements.

But they were more than just that. Because they also shaped the policies and institutions that helped Australia navigate the global economy of that period so successfully, delivering wealth and stability for its citizens.

Indeed Australian macroeconomic research has pulled that trick off twice. First, powering the ideas that lifted the country out of the Great Depression to flourish after the Second World War. And, second, helping to design a reform program that rescued the country from the slump of the 1970s, and led to more than a quarter century of recession-free growth.

Two golden ages, marshalling thought into action.

But to thrive in the next 100 years, Australia’s researchers will need to go for the hat-trick.

And that’s because the tectonic plates of the global economic system are once more in flux, as free trade is rolled back; geopolitical alliances shift; climate change accelerates; and productivity growth slows to a crawl in most developed countries.

Simply coping with such changes will take skill. Turning them to Australia’s advantage — identifying and exploiting new trading structures and sources of growth — will require rich new thinking from Australian academia.

The good news is that many of today’s policy problems lie at the very heart of Australia’s intellectual comparative advantage. The challenge is whether we can relearn the lessons of the past — drawing in our best talent, strengthening the incentives for policy-relevant research, and forging deep links between academics and policymakers.

By any standards the past century has been an extraordinary story — of world-leading thinking, deployed by the country’s best academic minds, working hand-in-hand with policymakers, helping to pull the economy from the jaws of global turmoil and setting it on the path to prosperity.

So the killer question is this: can Australian macroeconomic thinking do it again, as the world economy is once more in flux?

Ask that question of the macro research community today, and some seem worried: about Australia’s ability to attract, retain and grow top academic talent; about diminished academic incentives to work on issues of greatest policy relevance to Australia; and about perceptions of a weakened partnership between academia and policymakers.

Views differ on how serious those worries are. The best Australian research remains world-class. And we don’t need to solve everything ourselves: the scope to draw on global thinking, adopting and adapting it to Australian conditions, is far greater than it once was.

But, where there are concerns, they should be seen as a call to arms, not a cause for despondency. And that’s because the defining macroeconomic challenges of our age — the rolling back of free trade; the implications of shifting geopolitical alliances; climate change; and the need to reinvigorate productivity growth globally — lie right in our areas of comparative advantage.

The long arc back to a more regionalised, less open, international trading system, coupled with the realities of climate change, poses fundamental questions for Australian macroeconomic research along at least three dimensions:

• First, how will the composition and geographical location of our export markets change in response to evolving trade policies and geopolitical alliances? What implications will those shifts have for domestic output, investment, labour markets and pricing? And how do we harness our natural and human resources to take advantage of those shifts?
• Second, how will global commodity demand change over time? How long will markets for “traditional” minerals including coal, gas and iron ore — mainstays of the economic model in Australia today — persist? Will markets for “new economy” minerals and renewable energy sources take their place, and how can Australia best position itself to take advantage of such trends?
• And, third, how will these and other structural shifts change the sorts of shocks that stabilisation policy, including monetary policy, needs to respond to? How will that influence optimal policy design? And how might we need to adjust our thinking about trade-offs, across the different policy goals and tools available?

Next we must consider: how can we deepen the links between academia and policymakers — the secret sauce of the first two Golden Ages?

There are certainly some great examples today. Several commissioners at the Productivity Commission are current or former academics. The Treasury’s competition review has an expert advisory panel, including academics. And many of our top universities and think tanks have groups focused on fostering engagement on macroeconomic policy issues.

One of the most profound issues of our time is how to reverse the productivity slowdown. Important work is underway on this topic in the public sector, some of it in conjunction with academia: for example, researchers at the Productivity Commission, Treasury and RBA have analysed the causes of the productivity slowdown, its links to competition, innovation and dynamism, and the implications for the wider economy. And the commission currently has five separate inquiries underway into potential practical reforms, which among other things will serve as inputs to the Government’s economic reform roundtable in August.

What can we do as a community to communicate the urgency of the challenge, to show its importance and draw new talent into this vital work? Bringing academics, policy economists and policymakers together can help us reach a common understanding, of both the problems and the potential solutions. But it is crucial that both sides — policy and academia — buy in. And we need to focus, as a profession, on how we communicate our thinking. As Danielle Wood argued at last year’s APS Economist conference, it has never been more crucial for economists to speak directly and plainly.

Two golden ages, forged in response to fundamental shifts in the global paradigm — powered by world-class thinking, ruthlessly applied to a single end — improving the lot of the Australian people.

As the global paradigm shifts again, the challenge is to go for the hat trick.

The good news is the policy questions facing us, and the world, lie four-square in Australia’s areas of comparative advantage.

But to exploit that advantage, we need to relearn the lessons of the past — drawing in our best talent, strengthening the incentives for policy-relevant research, and deepening the links between academics and policymakers.

As a trading economy reliant on world markets, we have no choice but to respond. But we can go one better: by marshalling our best brains we can turn this challenging environment to our advantage.

Andrew Hauser is the deputy governor of the Reserve Bank of Australia. This is an edited version of a speech he gave to mark the centenary of the Economics Society of Australia