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Why it pays to believe economists

Boom to bailout: Ireland’s economic implosion shows the consequences of unfettered policy. AAP

This year’s Economic Society of Australia conference saw a range of strong views expressed on what Australian policy makers have managed to get broadly right (carbon tax – hurrah!) and wrong (NBN – boo!). One symposium considered whether or not economics has a strong enough influence on policy setting.

Australia has given this topic more consideration than most nations. The country also has the advantage of a strong economics commentariat within mainstream media – something that certainly cannot be said of some other G20 countries. The carbon pricing announcement as an example was impressive for the efforts made to engage and translate the plan for the public.

That said, two questions are prompted. Firstly, does economics matter? And if it does, then how can we make sure it has the most impact?

Whether or not economics matters can perhaps be best answered by examining what happens when economics goes spectacularly wrong. The experience of Ireland – from boom to bailout in a most spectacular reversal of economic fortune – shows this in a particularly dismal manner.

What the boom in Ireland masked was lamentably poor fiscal and microeconomic policy control that imploded, taking economic sovereignty with it. The impact on the real economy has been stunning – taxes contracting, unemployment spiraling.

The most stark expression of policy failure are the Irish accents I hear around the city (including those painting the corridor outside my ANU office) – the return of migration has been the most obvious manifestation of bad economic policy.

So if economics matters, how do we make the most of it? It is firstly important to see economics for what it is.

Despite the perception, economics is actually a set of simple models. It matters most when it provides theory or advice that affects behaviour in the real world – when it does something. Economics should, therefore, be largely free of rhetoric.

The cliche goes that the taxi drivers bringing you in from Dublin airport can quote you Irish Government bond yields to two decimal places. The Irish – for all the wrong reasons – have become very savvy to economics, very quickly.

This may have unintended positive consequences. It stops anger spilling into the streets, as we have seen elsewhere. It shifts political engagement away from a highly clientelist model, where voters behave almost like consumers of politic power, to one where the electorate starts to recognise the challenge of economic policy – the trade off between efficiency and equity.

The electorate is, in my view, more daring than elected politicians. It has accepted radical moves, like large cuts in public-sector pay. And while politicians can’t resist putting gloss on things, the public knows better and accepts more.

My point is that an economically literate population can demand higher standards, can interpret policy choices, and can engage with the debate – though hopefully not always at the price of a 12 percentage point drop in GDP. Raising the level of debate and knowledge of economics in the population is a positive step.

However, equally for policymakers, economics is a specialty that needs to be developed. Public policy training often focuses on more generalist approaches, overlooking economics training.

Moreover, economists do not run riot throughout the public administration. Outside of treasury departments and some specialised government groups, they can be rare. Seeing economists within the public sector as a “branded” service within a service, with them working horizontally and flexibly between departments, is the best model of deploying economics in a policy setting.

Meanwhile, we need to stop promoting economists out of economics. The axiom that says to get ahead you need to be a generalist “gentleman civil servant” is a legacy of a Westminister model that should be killed off.

For our part, academics need to engage with policy in a more routine fashion. Part of the problem is that incentives are not aligned. The funding model for academic research is either blue sky research grants, with little incentive to prove wider value, or the contract research market, with little incentive to create science.

Good academic research in economics needs to be encouraged and translated into policy action. The best model puts government and academic economics on the same side of the table. It also avoids “agency” problems of academics bidding for contracts - that is what consultancies should do.

Academics should instead work with government in defining the agendas, and in return the government should resource research at the highest quality levels in areas of policy importance.

This is not a call for a dumbing down of economics to suit policy demand - horridly complex microeconomic theory has generated billions when used to design broadband spectrum auctions.

The success of Australia in sidestepping the GFC has come about for a combination of reasons including luck. Maintaining and sustaining the economy is the real challenge.

By raising the level of the understanding of economics, and the standards at work within the policy arena (including the private consultancy sector), Australia stands the best chance of avoiding the horrible problems that bad economic decision-making brings.

With thanks to my colleagues Stephen Kinsella, Richard Tol and Karl Whelan.

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