Economics, economic policy, public policy

Yesterday afternoon I attended a forum at Victoria University arranged to discuss ideas in a paper written by Gabs Makhlouf, the outgoing Secretary to the Treasury, and one of his staff, Udayan Mukherjee (currently doing masters study at Cambridge).  The paper is still described as “draft for discussion”, but that apparently includes wider discussion (I checked and the authors didn’t mind it being more widely quoted).

The paper is under the title “Economic Policy in the Public Square: A Perspective from New Zealand”, and is 30 pages of reflections on a variety of issues around economics, economic policy, and public policy more generally.  I’m not quite sure what motivated the paper, although The Treasury has faced some criticism –  mostly justified in my view – in recent years around such things as an apparent de-emphasis on economics skills, and various aspects of the Living Standards Frameworks (including caricatured representations suggesting that some previous generation of advisers or policymakers had once thought GDP was everything).   At very least, some of that criticism must have been context for the Secretary to the Treasury to have devoted his scarce time to such a project.

The paper itself didn’t end getting that much attention in yesterday’s forum: Mukherjee gave a fairly brief introduction, and then we had three panellists (one foreign PhD student, and two of the eminent figures of New Zealand economics, Arthur Grimes and Gary Hawke), each of whom had their own hobbyhorses to pursue, and the discussion constantly seemed to veer towards universities and what they should teach, or which courses a budding economist should pursue.

There were bits of the paper I quite enjoyed. I’m a history buff and any time someone addresses the history of economic policymaking in New Zealand I’m interested (Mukherjee is apparently doing work in this area for his masters).  I quite like playing devil’s advocate (mostly because I think it is actually a correct interpretation) around the contribution to economic policy of Sir Robert Muldoon (quite a lot of liberalisation happened on his watch, in very challenging times, even as some very costly choices – especially around Think Big – were made late in his term), and so it was good to see Jim McAloon’s book on post-war economic policymaking cited.   I’m less persuaded by their suggestion to de-emphasise debates about the post-1984 reforms (that suggestion seemed, consciously or not, more likely to reflect the fact that one author wasn’t here at the time, and the other hadn’t yet been born).   The biggest upheaval in New Zealand policy (economic or otherwise) for generations is inevitably a key point of reference, especially as policy subsequently has largely descended into somnolence.

But if there are interesting snippets, the paper overall seemed to be a bit of a muddle, especially for a piece carrying the imprimatur and co-authorship of one of our most senior public servants and policy advisers.  If the paper is ever revised and finalised (and Makhlouf will soon have time on his hands) I think it could do with quite a bit more work.

Thus, you’ll notice the title of the paper.  The suggestion is that the paper is about “economic policy”.  They don’t define that term, but I think it wouldn’t be unreasonable to take it as including macroeconomic policy (overall fiscal policy, monetary policy, perhaps financial system regulation) and things that are directly focused on overall economic performance (whether economywide or sectorally).   One could think of (most of) immigration policy, R&D policy, policy around trade agreements, tourism policy or whatever.  On such important issues, it seems pretty unquestionable that we should form our public service expert advice, primarily (although of course not exclusively) from an economics perspective.  On some of those sorts of issues, international perspectives and literature will provide most of what is needed. On others, there will be some distinctive New Zealand perspectives and angles.  We need advisers who are able to draw on (substantially economic) theory, evidence, and experience, debate and distill what is relevant and what (probably) isn’t, and so on.   That is particularly so when The Treasury is offering a perspective on proposed policy initiatives or expenditure (you might expect individual sectoral agencies to have a wider range of skills and expertise).

But to the extent there is a debate, I don’t think it is about those areas, or the centrality of economics expertise in shaping policy analysis and advice on them.  The Treasury hasn’t been very active in generating serious advice on productivity –  they might say they’ve been underfunded, or had masters who weren’t interested –  but I doubt they’d seriously suggest that if they were going to do much work in this field that economics/economic history wouldn’t be the primarily relevant set of skills.  The review of the Reserve Bank Act is being led by people with a pretty strong economics background, and appropriately so.

There is also some lack of clarity in the paper about whether they are talking about policymaking, or policy advice and the analysis that informs it.  Often they talk about policy makers, but mostly (I think) they means advisers (like themselves, although not necessarily limited to the public service).   Policymaking is mostly done by ministers (and, to their credit, Makhlouf and Mukherjee push back against suggestions that more policymaking should be done by independent agencies) and no one thinks that a formal economics training should be some sort of prerequisite for getting to sit in Parliament, let alone the Cabinet (even serving as Minister of Finance).  For what it is worth, Donald Trump’s degree majored in economics.  (Margaret Thatcher did chemistry, Roger Douglas accounting.)

But perhaps the more worrying conflation is around what sort of policy we are talking about.  Specifically, the authors do not draw any sort of distinction between things we might more normally think of as “economic policy” (see above, and the title of their paper) and “public policy” more generally.

If, as a Cabinet minister (or a voter) I wanted public service advice on the appropriate specification of an inflation target, or on positioning New Zealand to cope best with the next serious economic downturn, it is advice informed by economics that I should want, and would benefit from.     There may be some other useful perspectives, but they will be peripheral in nature.

But if, as a Cabinet minister (or a voter), I wanted advice on the appropriate freedom of information legislation to adopt, economics isn’t the set of skills I would sensibly be first looking to.   Same might go for abortion policy, or policy around freedom of speech, or defence policy, whether New Zealand should be a republic, or policy on scandalising the court.  It isn’t that there are no relevant insights that economists might offer on such issues, or questions they might pose –  including the always-relevant issue of resource constraints and opportunity costs – but it is unlikely to be the most useful paradigm (or even set of paradigms) for informing and framing decisions ministers and MPs have to make in such areas.

A senior Treasury official recently mentioned to me a conversation with another public servant, who had posed the question “if I’m doing public policy [perhaps “doing public policy well”], am I doing economics?”      To which the answer surely has to be, and should be “not necessarily”, and “it depends”.  Top-notch senior public servants need to be able to discern which skills and experiences, and formal frameworks, are relevant to which issues, and hire (and contract in, and consult) accordingly.

Many of these issues seem to resolve to the staffing and role/clout of The Treasury.   I happen to think that huge spending departments (eg Health, Education, and MSD) would benefit from having a stronger economics perspective in their policy advice and evaluation activities, but I doubt anyone thinks the policy and research functions of such agencies should be stocked only with economists.   But is it reasonable to expect that a small central agency such as The Treasury will be able to maintain anything like critical mass in the sorts of disciplines central to the advice and practice of these spending ministries? (One could say the same about climate scientists for example.)  I doubt it.   And thus, it still seems likely that when Treasury is challenging and reviewing ministries’ spending or regulatory proposals, the discipline they can most usefully and consistently bring to bear is economics (and, perhaps, some basic accounting).  It should be a matter for ministers, meeting as a Cabinet, to determine what weight to put on a Treasury perspective, as opposed to the perspectives of other expert advisers, and their own wider “political” considerations.  If there was a brief period when The Treasury (and its paradigm) was in some sense “too dominant” that was, in the end, a political choice.

In the end, there is a great deal of straw-manness about the Makhlouf/Mukherjee paper.  The authors quote the line from the former Secretary to the Treasury, Henry Lang, about “a fine mind” being more important than any specific formal academic qualification in a particular discipline.    They also note the importance of communications skills.  And they repeat a great quote from Keynes

“the master-economist must possess a rare combination of gifts. He must be mathematician, historian, statesman, philosopher – in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near to earth as a politician”

Has anyone ever argued that a narrow economics training is the only useful or appropriate qualification to be a good Treasury official, or a top public servant more generally?  I don’t believe so.  Of course, narrow expertise (of all sorts) has its place, and perhaps in a small country we are more at risk than larger countries of not even having those deep reservoirs of specialist expertise.

But isn’t Keynes’s conception –  although articulated as applying to a “master-economist” –  actually true to a considerable extent of what we should be wanting from the top-tier of public service policy advisers, whatever academic discipline they have taken their first degree in?   It is things about character, breadth, and depth, ongoing intellectual curiosity and sound judgement that are likely to be the key considerations (as distinct, say, from keeping on side with the State Services Commissioner).    I happen to think we should be recruiting as Secretary to the Treasury someone with credibility among economists, but it wouldn’t be close to the only thing I was looking for, and I can think of many senior economists who would be quite unsuitable for the role.  And there are plenty of people who took a broad range of papers at university, who have more or less given up on intellectual drive or curiousity by the age of 40, and are content to repeat (perhaps with some energy) current mantras and conventional wisdom in their middle age.    Trained in economics or not, such people are dangerous (if only because they fill spots which should be occupied by someone nearer that Keynesian vision –  if perhaps with a bit more humility, and awareness of the crooked timber of even the greatest official, than perhaps Keynes tended to foster, in himself or others.)

This post has gotten rather long and discursive.  Perhaps I would just end with one final point. The focus of the paper tended to be on the public service.  And yet a strong public service and effective policymaking is more likely when there is a strong academic contribution.    Unfortunately, there are not many academic economists making a prominent contribution to debate on economic issues (or an economic perspective on other issues) in New Zealand.  The incentives for them to do so are not particularly strong, and if there is one thing economists tend to agree on it is that incentives matter.  Perhaps the Treasury, in its stated desire for economics to play a bigger part (the Secretary talked in his closing remarks of this as “a moment in time” when economists “can really make a difference”), might look to their advice around incentives in the academic context. I’ve told before the story about the conference the Reserve Bank and Treasury hosted in 2011.  We were offering substantial amounts of money (by academic standards) for papers that might shed light on issues around (New Zealand)macroeconomic imbalances, productivity underperformance etc.   We managed to sign up the Irish academic who is shortly taking up the job of chief economist of the ECB.  We couldn’t find a single New Zealand academic willing to take up our offer.


3 thoughts on “Economics, economic policy, public policy

  1. I think Muldoon has been correct in his think big projects mostly significant engineering projects with high skilled labour demands. If Muldoon’s think big projects had been such projects as dairy farming and tourism then we would be wondering about our lack of productivity and our low wage economy much earlier.


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