Free Dog Days: Australia After the Boom (Redback) by Ross Garnaut Page A

work on local policy.
    The second development has been the commercialisation of contributions by professional economists. The culture of Australian economics was once set by academic traditions of independence from vested interests. By the early twenty-first century, most contributions to the policy discussion were made by economists employed directly by, or as consultants to, business.
    Some business economists – for example, most of those employed by banks – were usually not required to promote specific policy proposals. However, their incentive structures favoured focus on short-term matters: What will the Reserve Bank do to interest rates at its next meeting? What will the next monthly unemployment figures reveal? What will be the value of the Australian dollar at the end of the year? Other economists had specific policy briefs from their employers. Their work was riddled with undeclared conflicts of interest.
    Sound, disinterested analysis of long-term policy issues was crowded out by daily commentary and the noisy firing of the hired guns of business and political interests. Through the Great Complacency, gruesome examples abounded of economists capable of better things undertaking work of low professional quality on a commercial basis to assist businesses and lobbies that had employed them for this purpose. I mention two cases, not because they were more problematic than others, but because they illustrate two dimensions of the problem.
    A paper prepared for the Department of Foreign Affairs and Trade by well-known economic consultants demonstrated that in trade negotiations, a high proportion of the benefits for Australia would come from reducing US import barriers on sugar and beef. When beef and sugar were later excluded in the course of negotiations, a new paper showed similar benefits but from a source that had been newly introduced into the analysis – the easing of conditions applied by the Foreign Investment Review Board to US investments. As a Senate Committee was advised, this did not pass the ‘laugh test’.
    During the debate on climate change policy, articles were published in the News Corp majority press by people with professional standing in economics who were at the same time principals of a consulting company that had undertaken lobbying work on the issues discussed in their articles. Readers were not informed of this conflict of interest.
    The weakening of the authority of economic analysis and of economists’ independence helped to increase the influence of populism and vested interests on policymaking. And because employment and income growth remained strong until 2011, the dismissal of economic analysis and productivity-raising and stability-enhancing reform seemed to have had no adverse consequences.
    DID ECONOMISTS’ MISTAKES DISCREDIT THEM?
    Did mistakes in analysis contribute to the decline in the status of economics in policymaking? For the most part, reform worked much as economists had led political leaders and the public to expect. But the 1990–91 recession was the result of mistakes in monetary policy. In the early twenty-first century, the spending of the resources boom revenues more or less as they arrived was a mistake. It has left as a legacy the problems that are the subject of this book.
    The deep recession of 1990–91 started the backlash against reform. It resulted from mistakes of two kinds. First, deregulation made it hard to measure monetary tightness by reference to old measures of money supply. This contributed to the policies that left too late both the raising of interest rates and their lowering as high rates placed great strain on the economy. The lesson from this experience was learned early and well: the rate of inflation is a better guide to changes in monetary policy than any measure of the growth rate of the money supply. The Reserve Bank adopted inflation targeting as its main guide to policy from the early 1990s.
    The second source of error was