Tuesday, May 12, 2009

Political renovation rescue

Economists are often deluded into believing that their years of diligent research into how government intervention can maximise the wellbeing of the populous may one day result in tangible gains to wellbeing. I must apologise. I am about to shatter the one way mirror currently shielding economists from reality.

A workable economic theory, once in the hands of a politician of any significance, stature, or importance, from local councillors to world leaders, will be utilised as a weapon for vote winning amongst a well studied, segregated and predictable bunch of right-wing, left-wing, religious, environmentalist voters who are easily convinced that ‘full of shit’ equates to knowledgeable and caring.

Let me take a Channel 9 reality TV analogy further than it should ever be taken. Imagine your lovable host Damie Jurie is wearing a toolbelt, complete with hammer and tape measure, talking the talk about fixing trusses to A-frames using through-bolts and nail-plates. The public immediately thinks he actually knows how to use those tools on his belt, and when he does so, we would trust that he does it right.

But if the tool is actually cost-benefit analysis, and the Damie Jurie is actually your favourite rhyming Prime Minister, Treasurer, Mayor, Premier, or any such figure, when they apply the economic tool that they are so fond of, the public has no expertise with which to criticise its application. If we saw Jurie using a hammer to drive in a screw we would be alarmed, question his intelligence as well as his sexuality, and change the channel, if not before we have circulated a series of new Damie Jurie jokes by email. But our politicians can get away with nonsensical applications of technical economic tools because we are ignorant about how they are best used - and they know it.

As a public sector economist I have been shocked at the prominent disinterest in economic models that attempt to capture flow-on effects of policy. Politicians like to know the economic benefits of policies to their target group. But if you live across the road from a working family, especially if they are farmers, and worse if they are a vocal minority group, the cost burden you face will be completely ignored in the ‘cost-benefit’ or impact analysis of their proposed policy.

Imagine my surprise when Federal Government documents explaining how to develop a project plan for a water buyback scheme explicitly state the any flow-on effect should be ignored. It may well have said

‘We need to sell this policy to the ignorant public, please use the most confusing economic terminology to make us look like that ever popular Jurie fellow. Please don’t explain how we’re taxing the general public and putting money directly into the pockets of an arbitrarily selected group of vocal farmers. And while you’re at it, make it look like we care about climate change’

Now, that may be a little cynical. Or maybe it’s extremely cynical. But to intentionally ignore these effects makes the whole thing look like a sales pitch. This time it is to the farming communities in the Murray-darling Basin. Who knows who will get the handouts next time (try working mothers), but gee I wish I was a farmer.

How about an example of the distorted analysis expected in the public sector. A recent ABARE report attempted to quantify the loss from a 10% reduction in water available in the Murray-Darling basin. They used an input-output matrix as one tool (that does not consider flow-on effects to any particular degree). They found about a 6% reduction in total production from the MDB region as a whole. But when using a CGE model (which iterates flow-on effects until a new equilibrium is met) they found that national production decreased a mere 0.04%! Given there are no statistical tests on this outputs of this model one has to wonder whether that is actually distinguishable from zero, or whether it is just a rounding error!

This rant has left me no closer to changing the world for the better. I comfort myself knowing that our political system is the best of the worst. We live in an imperfect world, and this type of vote manipulation, pork barrelling and bribery is a small price to pay for the freedoms we take for granted. I also think about the automatic stabiliser inherent in government, knowing that my salary is an important component of containing the excessive fluctuations of markets, and then give myself a pat on the back for being a great stabiliser!

But at least I feel better for getting it all out of my system. I’m off to buy a farm. Can you help me build a shed Damie?

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