With an upcoming federal election that will feature a contest over tax policy, including negative gearing and whatever proposals the Government announces, Australians should brace themselves for an onslaught of economic arguments. The Government will argue the Opposition’s policy will crash the housing market, while the Opposition will counter that negative gearing is distorting the market and providing a tax rort for the wealthy. As always, economists will no doubt be called in for their opinions. As a former Treasury officer, and a participant in a number of public policy debates, I am well aware of the importance of economics in our society. Hence I was pleased that the new President of the Economic Society of Australia (Qld), Professor Flavio Menezes from the University of Queensland, included the following passage in his first note to members in mid-March:
“The perception that the relative importance of economics to inform public policy or business decisions has somewhat diminished over the last two decades needs to be countered by the positive stories that have emerged from the evolution of the discipline, especially over the last three decades. New concepts, techniques and ideas mean that instead of only being able to study societal problems, we can now actually address them. Thus, I want to make the theme of my presidency ‘why economics matters.’ This theme will be explored through greater engagement with the community including in the events we will run in 2016.”
Flavio is certainly correct. There have been great advances in the application of economics to public policy and decision making. Some examples that come to mind include, among others:
- auction theory and application to, for example, spectrum and liquidity auctions, such as auctions designed by Oxford Professor Paul Klemperer which raised £22.5 billion from the sale of UK 3G spectrum and helped enhance financial market liquidity during the financial crisis (see the Wikipedia entry about Professor Klemperer)
- the development of market-based instruments designed to cost-effectively achieve policy objectives, including social and environmental objectives (e.g. emissions trading schemes, tender-based approaches to promoting conservation such as the Environmental Stewardship Scheme, as discussed in the Henry tax review, and arguably social impact bonds)
- behavioral economics, blending psychology with economics (e.g. using “nudges” sent by SMS to get people to pay their taxes on time or changing the default setting and forcing people to opt out of organ donation)
- availability of larger, more informative data, and the development of econometric techniques, leading to rigorous program evaluation and deeper investigation of policy proposals (e.g. listen to the recent Econtalk podcast Adam Ozimek on the power of econometrics and data)
Of course, these are mostly microeconomic examples. The record on macroeconomics is less illustrious, although I would argue that better understanding of the economy and available policy tools did help western economies avoid a much larger downturn during the financial crisis. Also, inflation targeting, at least in Australia, can be considered a monetary policy success.
As Secretary of ESA (Qld), I very much look forward to working with Flavio in promoting a greater understanding of why economics matters.
Professor Flavio Menezes, UQ School of Economics
Queensland Economy Watch 
Gene
Congratulations to Flavio on his appointment and I really like it that the focus of the ESA’s new President will be on ‘why economics matters’. His “perception that the relative importance of economics to inform public policy or business decisions has somewhat diminished over the last two decades” is probably correct from his world view as an academic, and his focal area of research. But it is a reflection of his own world view.
The relevance of economics to public policy in the areas where I work (environment, water management, development, agriculture) has never been greater, and it is increasing. The biggest policy advances in the past 20 years were all designed by economists (e.g. the use of auctions like the Environmental Stewardship Program; the Reef Trust; water trading; tradable development rights; market-based allocations for common pool resources (including buy-backs)). Even the environmental NGO sector were using the occasional ‘nudge’ over 10 years ago as part of their program and contract design once the economists got involved. But most of these initiatives were designed and run by consultants and public servants, with barely an academic in sight (with a few exceptions, mostly from the 2nd and 3rd tier universities).
I think a lot of academic economists must be having a mild case of relevance deprivation at the moment, and I suspect many at UQ are having more of a crisis than most. More complex mathematics, game theory and massive econometric models don’t help the public service or businesses very much once you start working within the constraints of actual data availability and real world decision-making. As Bruce Willis said in Die Hard…. “if you’re not a part of the solution, you’re a part of the problem.”
Perhaps Flavio’s focus should really be ‘making academic economics more relevant again’, as the rest of the profession don’t seem to be having the same relevance deprivation problem. A good place to start would be revisiting the incentive structures for academics (too heavily skewed towards papers in obscure journals, rather than any applied work that is of direct relevance to government and the corporate sector). And the first place I’d start would be his own Department.
Thanks for the comment, Jim. As a fellow practitioner I also haven’t really felt the relevance deprivation syndrome. Also, I suspect Flavio hasn’t felt it himself but is responding to what is unfortunately a widespread view. I can’t speak for Flavio, but I anticipate he will aim to increase the linkages between academics and practitioners so that academics have a better idea of the type of research that would be relevant to policy advisers and decision makers. Finally, I should note that we wouldn’t want to completely eliminate purely theoretical research, because you never know what practical applications it may have down the track.