It is now more than three months since the Abbott government released its first budget. Amid the subsequent wrangling over controversial measures such as the A$7 GP co-payment and re-indexing the fuel excise, most commentators seem to agree on at least one thing: the Australian people are just not buying it.
Selling economic policy is a difficult job, even for the party that has historically been considered best at managing the economy – although this too might be changing. Part of the reason for this difficulty is that when faced with an economic policy agenda, the public must be persuaded on two fronts. They must believe the policy is justified by evidence, but they must also agree it is justified in the moral sense.
These two sides of the economic policy coin are generally termed “positive” and “normative”. Positive economics refers to economic statements or theories that are “value-free” or objective. For example, “GDP grew by 4% last year” or “inflation is directly proportional to the money supply” are “positive” economic statements. These statements are not necessarily true, but they can be debated in an objective way, using evidence and theory to test their validity.
Normative economics, in contrast, relies on subjective beliefs about what economic policy should try to achieve – for instance, keeping unemployment low or economic growth high.
Whether or not you think economists should have opinions about morality, it is obvious that policymakers must take into account both the positive and the normative aspects of a debate. Politicians then must convince the public that their policy is the right thing to do (normative) and that it will work (positive).
The Australian public is just as unlikely to support an economic policy that is morally justifiable but impossible to achieve – a 100% employment rate, for example – as one that is valid from a strictly economic view but unpalatable ethically. Witness the public rejection of Howard’s WorkChoices, for instance.
Since the budget, the government has failed to convincingly address both sides of the economic debate in a coherent way. As a result its message has been weak and confused.
As details of the specific policies have been revealed, this inconsistency has become increasingly glaring. Last week we saw a particularly good example of this confusion from treasurer Joe Hockey, who argued that poorer people would not be as badly hit by changes to the fuel excise.
While his comments were not technically incorrect, Hockey’s real mistake was insisting that the change would not be regressive, for which there is a fairly standard economic definition. By invoking the Australian Bureau of Statistics data, he had hoped to win the “positive” debate and prove the changes were fair from an economic point of view – even if the average Australian did not see it that way.
But in the end, Hockey was left looking worse off in both his understanding of taxation and the lives of poorer Australians. He apologised for the comments days later.
Education minister Christopher Pyne has had similar trouble convincing crossbenchers and the public of the merits of university fee deregulation, including changes to loan repayments. Pyne’s defence of this policy rests on what he argues is an obvious economic truth: that a deregulated market will always lead to higher efficiency, while increased competition keeps prices low.
Pyne has also made a normative case for the proposed changes, arguing that the average Australian taxpayer should not be made to pay for the education of a select few who go on to earn higher incomes.
However, when confronted with the fact that the changes to fee indexation would disproportionately hurt women and lower-income earners, Pyne refused to debate these objective (positive) facts. He thus lost control of the message and the debate.
While most Australians (and politicians) might think of economics as a fairly unemotional topic, making a convincing case for economic policy reform requires both the dry objectivity of “positive” economics and the moral – even emotional – world of “normative” economics.
A good policy message will contain the right balance of these two things. An argument based only on data and theory will never win over the public. One based only on emotion without hard evidence is little more than “truthiness”.
If the government wants to win back voters’ trust on the economy and get its budget through, in whole or in part, this is a lesson for which our leaders might want to revisit those old, worn textbooks from their student days.