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