ESA (Vic) 2014 Professional Development Seminar #15 - James Giesecke - 'Quantifying Dog Days'

THE TOPIC

In his recent book Dog Days, Garnaut (2013) argues that the Australian economy faces significant economic challenges, with a risk that just as the investment phase of the mining boom ends, Australia will enter an economic environment characterised by declining terms of trade, a rising dependency ratio and rising world interest rates. In this paper, we evaluate the consequences of these challenges for key macroeconomic variables and per-capita measures of economic wellbeing using an economy-wide model. With plausible assumptions on key inputs to our model, we produce a scenario that is broadly consistent with the pessimistic picture for the immediate future of the Australian economy as portrayed in Dog Days. But as Garnaut notes, there is a risk of mismanagement of the policy adjustments that will be required in the face of Australia’s new economic environment. We simulate this through a scenario in which growth in public and private consumption, and real wages, do not adjust to the new realities of Australia’s lower national income. The macroeconomic adjustments that this scenario entails ultimately generate significant volatility in consumption, unemployment, wage rates, and national debt. Maintenance of our recent experience of rapid growth in per-capita income will require an increase in multifactor productivity (MFP) growth. In our third simulation, we model the size of the increase in MFP necessary to offset the forecast declining terms of trade, rising dependency ratio, and other forecast economic challenges. We find that the rate of productivity growth required to maintain current living standards is of a level similar to Australia’s long-run average MFP growth rate, while maintenance of the past decade’s rate of growth in living standards will require MFP growth of a level not seen in Australia since the last program of major structural reform in the 1990s. Both targets look challenging in light of Australia’s recent experience of low MFP growth rates.

THE SPEAKER

James is a Research Professor at Victoria University, where he is Director of the Centre of Policy Studies (CoPS). His research is in the development of multi-regional and national computable general equilibrium (CGE) models, and the application of these models to the analysis of economic growth and structural change, forecasting, and policy analysis. In these areas he has undertaken many commissioned research projects for public and private sector clients, and published approximately forty papers in peer-reviewed journals and edited books.