By ROSS GITTINS Saturday 19 May 2001
Economics is highly susceptible to fashion. If you hang about long enough, everything old becomes new again. Wide ties go out, then come back in.
The fashion accessory that Bernie Fraser would like to see back knocking 'em in the aisles is fiscal policy.
And, as he is a former governor of the Reserve Bank and a former secretary to the Treasury, there are not many people who speak with more authority on the subject.
Fraser was speaking at a special pre-budget seminar in Canberra this week. The Australian Council of Social Service and the Committee for Economic Development of Australia organised the seminar.
Fraser reminds us that in the 1950s and '60s, fiscal policy - discretionary changes in tax rates and government spending programs - was the dominant instrument governments used to stabilise the economy as it moved through the ups and downs of the business cycle.
But this option largely disappeared with the blowout in budget deficits in the '70s and early '80s. Monetary policy - the manipulation of interest rates - became the dominant instrument for managing demand in the short term.
"Since that time, fiscal policy has had a mostly medium-term orientation, aimed at reducing public debt and raising national saving," Fraser says. "That ... was understandable, given the underlying budgetary problems. But with those problems now corrected, the way is again open to have greater recourse to discretionary fiscal policy to help moderate cyclical swings and sustain employment growth."
Indeed, to judge from the spate of recent measures - including reductions in excise on petrol and beer, and increases in spending on roads and other activities - it seems the [John Winston] Howard Government has rediscovered discretionary fiscal policy with a vengeance.
And, for the first time in ages, many business groups are openly advocating stimulatory fiscal measures to help counter the slowdown in economic activity. Fraser says debates over whether fiscal policy or monetary policy is more potent in helping to avoid recessions are essentially sterile. There will be circumstances where monetary policy is more effective and others where fiscal policy should be given greater weight.
During the euphoria of a speculative boom in share or property markets, for instance, when the lure of easy capital gains makes borrowers insensitive to higher interest rates, tighter fiscal policy may be more effective in cooling things down.
But the key point is that access to both fiscal policy and monetary policy is likely to be more effective in staving off recessions and higher unemployment than reliance on one or the other.
But Fraser is on about more than just restoring a place for fiscal policy in helping to manage the economy through the cycle. He sees it as having a role in governments' response to the growing discontent over economic rationalism.
He argues that the people advocating "reforms" to give freer rein to pure price mechanisms in the labor market, for instance, are "misguided, and underestimate the extent to which the separation of economic policy from political and social justice is no longer acceptable" to the public.
"This ... means that economic policy makers are under growing pressure to give more explicit attention to the social consequences of their actions. They need to strive harder to strike an acceptable balance between the interests of the marketplace and the interests of the broader communities they represent."
Opinion polls - and ultimately election results - are measures of the acceptability or otherwise of the particular balances struck from time to time, he says.
All this is complicating policy making, of course. But that in itself is a reason for having as many tools as possible in the policy kit - policies that can help to deliver solid and sustained growth, and policies to deliver a fair sharing of the wealth.
The point here is that fiscal policy is much more useful than monetary policy in redistributing income.
"Changes in tax rates and expenditure programs can be better targeted to reflect social and distributional goals and priorities, while still achieving the desired impact on aggregate demand," Fraser says.
But that is not all. Globalisation is another factor that makes fiscal policy more useful than we have tended to think.
According to United States pop economist Lester Thurow, "with globalisation, governments lose much of their ability to regulate and control economies to help people, and politicians become less important".
But Fraser disagrees.
"However one weighs up its opportunities and threats, it seems to me that globalisation - through increased exposure to external shocks and in other ways - has actually raised the bar for national policy makers, not rendered them either redundant or impotent," he says.
Part of the downside with global markets, he says, is their propensity to overshoot, in both directions. But part of the problem is also the very limited effectiveness of international institutions to moderate those excesses.
"Markets are good at promoting market interests - things like efficiency, choice, profits and shareholder value," he says.
"But markets - and least of all global markets - are not communities. They do little to promote community interests - things like fairness, job security, access to reasonable health and education services, and cleaner environments."
Community interests have to be pursued within the communities themselves. There is no one else. There are no global monetary or fiscal authorities, or other effective global political or social institutions to exert real influence over the global economic system. And none is in sight.
It is therefore largely up to national governments and policy makers to adjust to the outworkings of globalisation - facilitating some activities, outlawing others, and assisting groups that are disadvantaged by the whole process to find new livelihoods.
"Fiscal policy has an important role to play in all this, both in terms of its short-term stabilisation function and its longer-term growth and distributional functions," he says.
"This sounds like a very tall order for fiscal policy but, conceptually at least, the policy is capable of contributing to economic and social objectives simultaneously."
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