Academic journal article The Economic and Labour Relations Review : ELRR

Comparing Australian Macroeconomic Management: Labor versus Coalition

Academic journal article The Economic and Labour Relations Review : ELRR

Comparing Australian Macroeconomic Management: Labor versus Coalition

Article excerpt

1. Introduction

An interesting question that we should like to answer is whether a particular political party is better at managing the Australian economy. This is important for economists and political scientists, but perhaps more importantly for the voters who are deciding on which party to vote for in the General Elections. For example in the last Federal elections the Coalition attacked the Labor Party for mismanaging the economy, in particular for leading to high interest rates, high unemployment, and budget deficits. This paper is an attempt to see whether we can use data to provide some light on this issue. To anticipate our conclusions we find that since it is difficult to know how the economy would have behaved if certain policies had not been introduced, it is difficult to provide clear-cut answers. In studying economic history-there is always the problem of deciding the counterfactual: how would the economy have behaved if a different set of policies or events had occurred.

The Australian economy has seen an unprecedented period of uninterrupted growth since 1992, surviving the Asian crisis of 1997, the stock market collapse of 1999, and the war in Iraq. Some politicians and journalists argue that this surprising good run for the Australian economy is a result of the skilful economic policies of the Coalition Government elected in 1996 after a long period under Labor (1983-1996). The ALP won government in March 1983 with the election of Bob Hawke's Government and continued in power with a new leader, Prime Minister Paul Keating, until March 1996. The Coalition Government won back power in March 1996 under Prime Minister John Howard who has been re-elected three times since then, most recently in October 2004. This paper attempts to assess the relative performance of the Australian Labor Party (ALP) and the Coalition governments in their management of the Australian macroeconomy.

The paper examines the behaviour of the major macroeconomic variables; growth rate of gross domestic product (GDP), unemployment rate, inflation, real rate of interest, and the current account deficit. It is common in macroeconomics to focus on the economy in terms of inflation, unemployment, and the growth rate of GDP as objectives/targets of economic policy. Different authors and politicians place different weights on these objectives. Generally we would expect a conservative economist or politician to assign a larger weight to inflation and a relatively low weight to unemployment. Central Banks, generally run by conservative governors, typically consider inflation as a serious evil that must be vanquished at almost any cost, although most estimates of the costs of inflation put them at less than half a percentage point of GDP, while the costs of unemployment are usually estimated to be higher than five percentage points of GDP (Junankar and Kapuscinski 1992). The focus on GDP as an indicator of welfare has been questioned by several authors (Hamilton 2003). However, most economists would prefer an economy that was growing more rather than less rapidly. Typically, these economists do not put a negative value on pollution or a positive value (a cost) on the loss of natural resources.

The focus on current account deficits as a cost to society has been questioned by economists such as Max Corden (1991), John Pitchford (1990), and by British politician Nigel Lawson in the 1980s. However, there is a view that large current account deficits lead to increased interest rates ('contamination effect') and hence a distortion of saving and investment decisions. In the earlier period of our study the Reserve Bank of Australia (RBA) and the Government often changed policy variables if the current account deficits became too large, as they were concerned about a run on the Australian dollar. In some cases they raised interest rates in an attempt to slow down the economy to improve the current account deficits--Paul Keating's 'recession we had to have'. …

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