When you write a column about the economy, people assume you must be an economist. But though I had a full major in economics in my commerce degree, I was doing it to become a chartered accountant. I regarded the economics they stuffed into the degree as theoretical bulldust and promptly forgot it.
I used to tell people I was an accountant pretending to be an economist, but it’s decades since I did a tax return for anyone but myself. So now I just say I’m a journo who writes about economics.
This has a side advantage. Not being a member of the economists’ union, I’m free to tell you whenever I think the economists are laying it on a bit thick. Which happens quite a lot.
One lesson I’ve learnt the hard way is that economists are very good at developing reform proposals that look great on paper but don’t work well in the real world.
There are two reasons for this. The first is that the economists’ idea is put to work by politicians, who have their own not-so-pure motives. For example, it was probably an economist who first had the idea that government-owned businesses could be “privatised”. If they existed in a competitive market they could be sold to private owners, which would do no harm to consumers while releasing money the government could use to fund some new project.
The feds did a bit of this – privatising Telstra and the Commonwealth Bank – but the premiers went crazy over it, selling off everything they could find. Trouble is, their motivation was to raise as much easy money as they could, whereas the economists were motivated by the happy thought that these outfits would be better managed if they were in private hands.
So when potential buyers of the business suggested they’d pay more for it if the government sold it complete with some advantage over the other firms in its market, the pollies took the bait in a way that would horrify every economist.
The premiers were happy to get more for selling a business that reduced competition in an industry, allowing the new owners to push up prices at the customers’ (and voters’) expense in a way that wouldn’t be blamed on the government.
The second reason the economists’ grand reform plans have come unstuck is their universal practice of using models to understand how the economy works. A model is a simplified version of the real thing.
Their models are like a model aeroplane, except that economists’ models of the economy are these days expressed as a set of mathematical equations. Doing everything in maths, they fondly believe, will stop them making undetected errors, thus adding “rigour” to their analysis.
The point of developing a model of something that exists in the world is that it helps you see how that something works. A couple of major factors drive it, along with a host of minor factors and other distractions. A model leaves out the minor factors and distractions in an attempt to expose the factors that matter. (Oh, how I wish my lecturers at uni had taken a minute to explain that simple truth to me.)
Guess what. The reason economists’ advice doesn’t work the way they tell us it will is that they keep confusing their models with the real world. In the real world, the minor factors and distractions still add up to something that matters. What works on paper doesn’t necessarily work in reality.
To put it in econospeak, they keep forgetting to relax their simplifying assumptions. Because those simplifying assumptions get shockingly little attention in lectures, our academics send too many of their students out into the real world believing the model is the economy.
Sorry, in the real world nothing is simple.
Another invention by environmental economists is the special credit or offset. If a firm is required to reduce the damage it is doing to the environment but is able to find another firm that can make the reduction more cheaply, the first firm can pay the second firm to make the reduction on its behalf.
The second firm’s reduction earns it credits which it sells to the first firm as proof that it has facilitated the reduction in environmental damage required of it. To an economist, the great advantage is that the government’s need has been achieved at minimum cost to the overall economy.
Nice idea, pity about the way it’s been used by governments to do less actual benefit to the environment than it seems.
The Labor government’s “safeguard mechanism” limits the greenhouse gas emissions of our biggest polluting industries and reduces their emissions over time. But they can limit the reduction in their emissions by buying carbon offsets from other businesses that have promised not to cut down trees or promised to plant new trees.
Now Labor is proposing a new “improved native forest management” offset. The trees to be saved are in an area that includes the NSW government’s long-promised Great Koala National Park.
There are a host of problems with this. For a start, the trees are in an area the NSW government has already committed to saving. This breaks Treasury’s first rule for incentive schemes: don’t reward people for doing things they would have done anyway. That would be spending money for no net benefit.
Greatly increasing the number of offsets reduced the value of existing offsets. But the “opportunity cost” of offsets is high: we’re agreeing to more emissions. The damage those emissions do to the climate is permanent, but how long will the trees last? Not many will last for 100 years; some could be cut down in 20 years.
We’ve taken so long to reduce emissions that we should be reducing them and also protecting the trees, not one or the other. And while Labor is reducing emissions with one hand, it is licensing new gas and coal mines with the other.
The truth is that the economists’ lovely offset scheme is a sham Labor is using to make us think it cares about climate change when it doesn’t.
Ross Gittins is economics editor.
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