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Close encounters of the economic kind

Date
Presenter
Ms Meghan Quinn
Position
Deputy Secretary of Macroeconomic Group, Australian Treasury
Location
ANU First Friday Economics, Canberra
Topic

Acknowledgements

Thank you to the Economic Society of Australia for the kind invitation to speak with you this evening.

Before I begin, I would like to acknowledge the Ngunnawal people, the traditional custodians of this land, and acknowledge their continuing connection to the land, water and community in which we live.

I would like to pay my respects to their Elders past, present and emerging and extend that respect to other Aboriginal and Torres Strait Islander people present.

I am Meghan Quinn, Deputy Secretary of Macroeconomic Group at the Australian Treasury.

The advertising flyer provided a summary of my background. And I am more than happy to elaborate on my career, if that is of interest, as part of the question and answer session.

Introduction 

But first, as promised on the flyer, I will provide a high-level perspective on the role of economics in public policy from a Treasury point of view.

When I began preparing my remarks for this evening I started by looking for an organising principle, as the remit is as vast as it is deep.

And one of the crucial roles of a public speaker, or a policy adviser, or a student for that matter, is to be able to engage with your audience.

Being an economist by training, I naturally look to optimise around constraints. However, to make a question or topic manageable, we as economists, make simplifying assumptions, or more accurately, we place constraints on our topic or research.

An unconstrained problem is, by its nature a difficult problem to solve.

And today when talking about economics and public policy, I’ve chosen to use the frame of a movie ­— Close Encounters of a Third Kind.

Partly because it makes for a snappy title. And partly because it provides a useful analogy for the world of economics.

And for the second part of my presentation, I’ve chosen to talk about the role of economics in getting us from 1978 — conveniently, the same year Close Encounters hit the big screen in Australia — to now.

Looking through both of these lenses, I want to demonstrate that agencies such as Treasury and the broader economic community must be open to new ways of understanding the world. We must remember that economics can be alien to some audiences and we need to engage actively and constructively to bring about lasting and beneficial policy change.

Framing Principle — Close Encounters of a Third Kind

Let me start with some background, as many of you will likely be too young to remember the movie, or perhaps unlike me are not a fan of 1970s science fiction.

Close Encounters of a Third Kind, released in 1977 in the US and 1978 in Australia, still makes it into many reviewers’ top 100 movies. The director was, Steven Spielberg, lead actor, Richard Dreyfuss and music composer, John Williams — all had previously worked on Jaws together.

Like economics, the movie might be a little worn around the edges, but I would argue that it remains relevant today.

The plot of Close Encounters of a Third Kind centres on a group of people trying to contact an alien intelligence.

Roy Neary (Richard Dreyfuss) witnesses an unidentified flying object. Through the movie Roy does not accept an explanation for what he saw and is prepared to give up his life to pursue the truth about UFOs.

A close encounter of the first kind is defined in the movie as a sighting, the second kind as some physical evidence and the third kind actual contact.

The first analogy here is that while many people see economics at work, or are physically impacted by economics, policy makers have actual contact with decisions that require an economic understanding.

The second analogy is that economics is often considered alien to non-economists — even referred to as the ‘dismal science’.

The third analogy is that economics requires a commitment to uncovering the meaning of what is going on, and yet it does not hold all the answers.   

The role of Treasury and economics

This is where Treasury’s role comes into the picture.

It is our role to support the Australian Government with economic policy analysis, advice and implementation for the good of the Australian people,

Like in the movie, there are many actors in society who are either focused elsewhere, or find it difficult to interpret what is happening.

It is core to the economics discipline, and to Treasury to observe the data, consider the possible options for what is happening, test the options where possible and provide advice for possible policy action (or inaction).

There are a set of foundational economic principles that come up again and again in policy work. ACCC Chairman Rod Sims listed many of them in a speech at the end of last year1:  

  • The invisible hand or more fully, the power of relative prices to shift behaviour throughout an economic system (Adam Smith)
  • Opportunity cost (Von Wieser)
  • Comparative advantage (Ricardo)
  • General equilibrium (Arrow and Debreu)
  • Externalities (Pigou)
  • Economic rent (Ricardo)
  • Imperfect competition (Robinson)
  • Market (Bator) and government (Coase) failure
  • Marginal utility, marginal cost, elasticity of demand (Marshall)
  • Consumer surplus, producer surplus and total surplus (Marshall)
  • Creative destruction (Schumpeter)
  • Align instruments with targets (Tinbergen)
  • Property rights and transaction costs (Coase)
  • Information economics (Stiglitz, Spence, Akerlof)
  • Game theory (von Neumann)

And I would add a few more based on policy areas I have been more heavily involved in:

  • The paradox of thrift (Keynes)
  • Precautionary principle (Arrow and Fischer)
  • Uncertainty (Brainard and Knight)

If you would like to add suggestions for this list please let me know.

To illustrate one of my core messages, most of you in the room will have nodded along to this list having flashbacks to your studies or work. Yet, when these concepts are flagged amongst non-economists they can cause puzzlement, if not distrust.  

For example, is it really true that putting a price on an externality will reduce the cost to society? Why is the first round impact of something not the end of the story — are taxes really mostly paid by labour rather than capital holders?

While we have had these economic theories, in many cases for centuries, the field of economics and policy advice has shifted significantly over time as our toolkit has expanded.

The increase in computer power, the availability of data, the ability to run behavioural experiments and randomised control trials have made it possible to more easily quantify the implications of actions.

And yet there remains uncertainty. In the end, we are dealing with complex systems of people.

What role is there for economics?

While sci-fi provides us with some insights on the parallel universe of economics, the real-life plot — the role of economics in getting Australia from 1978 to now — is a compelling story.

Late 70’s — Malcolm Fraser was in the Lodge; John Howard was Treasurer and John Stone was Secretary to the Treasury.

And for the 14.4 million people in Australia, government was omnipresent. The government owned two airlines, the phone company, a bank, a shipping line and airports. 

For most Australians, their water, electricity, gas, communications and, at least some, financial services were provided by Government Business Enterprises.

The exchange rate was a crawling peg; bank credit was effectively rationed; and monetary policy targeted the money supply. Wages were determined centrally.

The effective rate of protection on motor vehicles was 124 per cent and on clothing and footwear 204 per cent.

Australia had no capital gains tax, no fringe benefits tax, no tax on super, no general anti-avoidance rules: we were in the heady days of bottom-of-the harbour schemes.

The Treasury had staff numbers around 430. Looking at the senior organisation chart, there were no women.

Policy was focused on advising governments on how to set the level of a wide range of policy instruments — interest rates, government spending, tax rates, and also wages, the level of profits from GBEs and the exchange rate.

So in short, the world was very different to what we see today.

Reforms towards a modern Australia

The 1980s saw a marked shift in the Australian economy. Following the dismal economic outcomes of the 1970s there was a realisation that the status quo – an economy that had been built behind a tariff wall with significant state ownership and control – would not deliver the aspirations of the Australian people.

There was a realisation that the world was shifting and Australia needed to adapt.

This challenge was taken up by the policy makers of the time – as we have been reminded by the condolence speeches in Parliament marking the passing of former Prime Minister Bob Hawke.

I would argue the entire list of economic principles came into play as Australia modernised its institutional economic framework.

For example, it was the concept of opportunity cost, combined with the power of quantitative analysis undertaken by institutions such as the Industries Assistance Commission (now the Productivity Commission) that shifted the agriculture sector and its advocates behind the need to drop tariff barriers.

It was the comparative advantage concepts, combined with quantifying the benefits of change that drove Australia to take a leading role in the GATT negotiations that form the foundations of the trading system that has lifted hundreds of millions out of poverty.

It was the concepts of property rights and information asymmetries that were built into the competition framework applied to our newly privatised sectors.

The concept of aligning instruments with targets underpins our corporations’ law and our monetary policy framework — with the Reserve Bank of Australia operationally independent from Government.

The concept of an externality, the power of the invisible hand and information asymmetries are the foundations of policy debates around reducing nicotine and alcohol consumption — and greenhouse gas emissions.

Concepts for today’s policy

These concepts are as relevant to today’s policy issues as they were then. 

For example, the benefit of creative destruction, or dynamism, in driving productivity remains as true now as it did when tariff barriers were coming down.

Today, the importance of comparative advantage and opportunity cost remain core to the arguments against a move from free to managed trade. They underpin the arguments for a trading nation like Australia to defend the rules-based international trading system that delivers the highest consumer surplus to consumers across the globe.

And the need to allocate property rights for data carefully in the new digital age, to empower individuals and maximise the benefits that can flow from data to individuals and society more broadly.

However, I would argue that we are fortunate to have better datasets, and the ability to know more about the implications of policy action.

While there remains uncertainty, it is possible to learn from the past, and in real time, in a way that was not previously possible.

At Treasury, we are now more focused on the distributional implications of policy actions and consider more fully the policy requirements needed to support transitions from one state to another.

We welcome your interest in this work, either as a recruit or a collaborative partner.

Conclusion

To conclude, I would first contest that while economics has much to offer public policy we need to remember that our theories are not universal laws.

Secondly, economic policy making, like all policy making, is rightly a contested space. It is incumbent on agencies such as Treasury and the broader economic policy community to be reflective in our deliberations and be open to new ways of understanding the world.

And lastly, the closing scene of the movie has the words: ‘We are not alone.’ Economists need to remember that economics can be alien to some audiences and we need to engage actively and constructively with non-economists to effect lasting and beneficial policy change. Policy problems are often solved by the integration of the perspectives of economics and other disciplines.

Although, perhaps not yet with entities from another planet.

Thank you for the opportunity to talk with you today, and I look forward to your questions.


1Sims, R. (2018). Speech to RBB Economics Conference, https://www.accc.gov.au/speech/address-to-the-2018-annual-rbb-economics-conference