Thoughts On Budget 2014 And The Dismissal Of Economics By Non-Economists

The difference between politicians and economists is that economists know that big numbers attached to a policy proposal shouldn’t be taken to be the gospel truth even if the underlying assumptions are fully understood and stated.

Politicians, in my cynical model, care about re-election and if a big number gets their policy proposal over the line, that’s all that matters. Single issue advocates also like big numbers because many journalists who are number-averse go “ooooooh” and “aaaah” and republish single issue advocates’ press releases without much investigation.

My concerns with ACT’s alternative budget are similar. Much like sports boosters come up with big numbers to justify stadiums that lose money hand-over-fist, both the left wing and right wing political parties have a tendency to make numbers up in an attempt to wow the electorate with their precise awesome predictions of an uncertain future.

Sure, there might be a spreadsheet they’re riffing off, but they’re still making numbers up because as Reinhart & Rogoff found out, the wrong cell reference could materially affect your conclusion. Also, as “neo-Fisherites” claim, the sign could be wrong on monetary policy (I’m very skeptical of this claim) and raising the policy rate could actually raise inflation!

Economists are often hassled for “hedging their bets” or “not offering an answer when asked”. I’m less concerned about economists having to justify their existence than some other economists.

Economics is what it is, non-economists can either accept or reject what economists have found. If more non-economists took the time to read deeply instead of having knee-jerk emotional reactions to something their lizard brain doesn’t like, they might find that the literature is reasonably supportive / not conclusive on something they agree with as a potential policy!

I think that a lot of the criticism of economics is coming from people who don’t actually know anything about economics. Projecting their personal academic discipline and its processes onto economics is a bit silly.

Economists have things to learn from other disciplines – psychology for example – but calls to re-architect the whole discipline because of “an inability to predict X, Y or Z” is a major overreaction to what I’d frame as a misunderstanding of economics because of people confusing it with politics.

So that little rant aside, what sorts of policies would I like to see in Budget 2014? Well, I’m reasonably happy with the current policy framework. The areas of improvement I see are in marginal tax rates faced by people wanting to move from welfare to work and the different way NZ Super beneficiaries are treated relative to all other classes of beneficiaries.

That’s basically the core of any changes I’d make – reduce marginal tax rates that hinder people moving from welfare to work, lead to long term negative behaviour like turning down a payrise to keep getting WFF and even limiting the number of hours a student supporting themselves through university without parental assistance can work when they need as much labour market experience as possible. (Talking about Studylink here).

To my mind, until this issue is solved, we’re going to keep getting the same tired rhetoric of beneficiary bashing or calling people bludgers. Most non-economists forget that economics has already “solved” or pointed out reasonable policy choices that would alleviate most of the “problems” any society faces. But the median voter is both economically ignorant and politically ignorant so policies that win elections tend to be quite far from policies that would lead to outcomes that have reasonable equity/efficiency trade-offs.

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