No. 31

More argumentative economists please

Stone the crows! Where there was Rudd there’s a ranga! Given the crows think a coup is what chickens live in they have nothing to add to the political autopsies on the former prime minister and panegyrics for the present one.

But amongst all the politics last week there was an important policy story that did ruffle their feathers. That’s p-o-l-i-c-y, what politics is supposed to be about. And no, it’s not a synonym for plotting.

Last Monday Treasury Secretary Ken Henry addressed the pointiest of policy pointy-heads, tax academics. It was a good speech free of the public sector palaver that curses most addresses written by multiple hands in the bureaucracy.

And as Dr Henry’s immensely complex review is reduced to an argument over much tax miners in the money should pay, it put an important policy issue on the agenda – how economic hypothesises, the raw materials of politics, are developed by academics, refined by bureaucrats and shaped into saleable form, with the press offering instructive, and otherwise, criticism at every point of the process.

It is difficult to find consensus views among academics, perhaps especially in the social sciences in which even the most abstract theoretical proposition will betray a normative position. And yet, in the domain of tax policy debates, achieving academic consensus is the easy part. It is much tougher to convince a wary public; tougher still cynical media (sic).[1]

A sensible explanation of the status quo.  But it wasn’t what was in the speech, at least the text as released that attracted attention. It was what the ABC reported of Dr Henry extemporising on his ideas;

There are occasions on which economists might, at least for a period, put down their weapons and join a consensus on an idea

And he used the Rudd Government’s proposed emissions trading scheme as an example,

Even that idea which most academic economists would have accepted, I’m sure at least behind closed doors, was a sound policy idea. There were no end of academic economists who wanted to say it’s not bad but I’ve got a better one … And in the way in which political debate occurs, such a statement does enormous damage to the chances of sensible reform.

So what’s an economist to do? Stop arguing, apparently;

There are times when I think it would certainly serve the national interest if we economists, particularly academic economists, could just call a halt to the war for a while.[2]

What nonsense.  As Stephen Kirchner, one of the bickering fraternity, responded to Dr Henry, most of his peers “do not see their role as being cheerleaders for government policy because “economics encourages caution in policy making.” [3]

But more important, Henry ignored that arguing, often endlessly and sometimes pointlessly is what academics do. It’s called debate and it is how paradigms are shifted, applied ideas are tested and policies prepared for the tough task of explaining and selling them to the public.

And disciplines that don’t do it decay. Quick, name a university historian whose ideas have had an impact outside the academy on Australian history in the last 20 years (no Paul Kelly is not a professor, at least not yet).

Certainly it is up to the mandarins to work out how to apply ideas and to politicians to sell them but economists are the geologists of policy, identifying new intellectual oil to power economic growth.

And the search takes enormous amounts of energy and argument. It is all very well to assert academic economists should have got on the climate change cart but ideas that look intellectually elegant to the true believers don’t always survive close scrutiny. Even with the way the GST was watered down to placate the Democrats it was a better tax in the end (if only because it was adopted) than either Paul Keating or John Hewson’s earlier versions.

Not only is an old tax a good tax so is a new tax that is only adopted after years of scholarly scrutiny of its attributes and implications. Monash University tax professor

Rick Krever makes the point that ideas for tax take time to refine. The 1975 Asprey report, which still sets the standard for taxation reform, was not adopted for a decade, as its ideas percolated through policy discussions until there was an intellectual consensus strong enough to overcome the political opposition that inevitably accompanies proposals for new taxes.  Having a treasurer who knew how to use Asprey’s intellectual ammunition also assisted. As Krever has commented:

Asprey did almost everything from capital gains to fringe benefits. But it does take time to come through, for people to see its merits. And it needs a politician who loves a fight, like Keating,[4]

And as for the idea academic economists are always sticking their bibs into policy debate – oh that it was so. Perhaps it reflects who the crows like to listen to, but most economists who contribute to policy discussions and political disputes work for banks or are in the media.

If anything, a great many academics only appear interested in arguing with each other – in algebra  – while ignoring everybody who cannot help win them an ARC grant.  Daniel Klein makes the point that the major fields of academic economic research, model building and the search for statistical significance, are often incidental to the ideas and issues that policy makers face.[5]

And assuming individuals, or for that matter communities, behave in accord with mathematically expressed abstractions, ignores the way economics can identify and then begin to work out answers to the masses of daily decisions individuals make that shape the economy. As British economist Diane Coyle claims economics today, “is not the study of competitive markets but rather an understanding of society as the aggregation of millions of individual decisions.”[6]

Economists interested in applying their ideas to the actual economy, messy and irrational though it is, and who have the stamina for the long haul that change always involves make a fundamental contribution to society, by working which issues are most important and what approaches will work.

And Greg Smith, a member of the Henry Tax Review understand that reform always take time:

It is opposed by the lucky winners who are directly benefiting from the existing system. Like any change, it always comes with transitional adjustment and uncertainty costs. These three problems stop many politicians, political advisers and members of the media commentariat. … Reform always confronts an ambivalent policy process. It is resisted, slow and always late. But it will come, however surprising it will always seem for some[7]

But only if there are economists arguing out the ideas, even this annoys politicians and their pals who are in a hurry. .au

[1] Ken Henry, “Tax Reform: Opportunities and Challenges”, June 21 2010, recovered on June 26

[2] “Treasury chief lashes academic economists over ETS”, ABC Radio, PM June 21 2010 recovered on June 26

[3] Stephen Kirchner, “The economic consensus we could do without” Centre for Independent Studies, June 25 2010, @ recovered on June 25

[4] “Measuring up the latest take on tax”, The Australian, May 19,2010

[5] Daniel B Klein, “What Do Academic Economists Contribute” Policy (winter) 2000, 30-32

[6] Diane Coyle, The Soulful Science: What Economists Really Do (Princeton University Press, 2008)

[7] Greg Smith, “Tax reform may be unpopular but it is inevitable”, Australian Financial Review, June 18, 2010