Economic analysis and politics

One quick point.  Everyone keeps telling me “but in political reality” whenever I say that there are trade-offs being missed in political party discussions.

I would like to point out that when an economist does analysis they don’t give two-cents worth of a care to this.  When it comes to making a policy it is essential, but it isn’t part of the first stage of description.

It is just like the “equity” trade-off with efficiency in economic analysis.  Economists focus on efficiency when describing a situation – but there are welfare trade-offs which imply that a policy based solely on efficiency is unlikely to be socially optimal.  An economist can go so far as discussing the trade-off by describing how deviations from the efficient allocation work – but they can’t sit down and say “this is what society wants”.

In the same way, I have no doubt that political actions are politically optimal – they are being determined by utility maximising individuals after all 😉 .  However, just because it is politically optimal doesn’t mean anything to me when I’m trying to discuss the framework and trade-offs inherent in the policy.

However, I have noticed that pointing out these trade-offs relative to the way political parties have been marketing themselves leads to a HEAVY amount of emotion and argument – which is fun. I suspect this is part of the partisan nature of politics.  I hope that people from each party understand that I attack all political parties on this blog with equal boring economic analysis, and some (hopefully transparent) priors.

Over the last few weeks it has also taught me that there are a number issues many of the parties don’t understand very well – even regarding their own policies.

Update:  To be absolutely clear here, I am talking about the political parties – not the excellent comments and emails that I have received from people about the issues.  The comments and emails have been intelligent and balanced, and I appreciated them greatly.  Furthermore, the criticism is not just of ACT and the Greens (given my recent posts about those parties) it is equally about ALL parties.  Fundamentally the discussion around policies has exposed confusion all around the show in my opinion.

This is fascinating, as I had assumed the parties were being manipulative rather than confused.  If I had to vote right now, I would struggle to pick anyone :/

Of course, I’m not too worried about this feeling – as I think political parties try to give the impression that they do a lot more than they actually do, be it the result of abridled ego or straight self-deciption 😉

  • The first half of your post sounds like the standard Musgrove public finance position: we provide advice for the benevolent despot; he does with it what he will.

    The public choice folks take that as a first step before trying to figure out how to maneuver things to get towards best policy.

    So, suppose that best policy for NZ really would be to do nothing on climate change. Not saying that is necessarily best policy, but let’s say that you’re convinced of that. And, suppose you’re also worried about problems of expressive voting: that folks will vote for things that they never would support if they were individually decisive because voting isn’t about choosing policy, it’s about self expression.

    Optimizing then subject to the constraint: sign on to Kyoto, but do absolutely nothing to achieve its targets while waxing on about how wonderful Kyoto is and how committed we are to the process, knowing that every other country in the world is doing exactly the same thing. Folks get their feel-good jollies from signing on and aren’t really worried about the details on whether it’s implemented properly.

    Now, I still tend to be an “implement a low carbon tax now” guy, but the position outlined above is not at all incoherent.

  • @Eric Crampton

    Hi Eric,

    “The first half of your post sounds like the standard Musgrove public finance position: we provide advice for the benevolent despot; he does with it what he will.”

    I do believe that is how I roll.

    “The public choice folks take that as a first step before trying to figure out how to maneuver things to get towards best policy.”

    This is where public policy students roll – at least that is my impression.

    “Optimizing then subject to the constraint: sign on to Kyoto, but do absolutely nothing to achieve its targets while waxing on about how wonderful Kyoto is and how committed we are to the process, knowing that every other country in the world is doing exactly the same thing. Folks get their feel-good jollies from signing on and aren’t really worried about the details on whether it’s implemented properly.”

    Agreed, but this seems to presuppose a very specific sort of social preference – in a similar way to a lot of arguments that define policy out there. I see this as an example of “economists can formulate an explanation to any policy ex-post to make it optimal”.

    Also, to be clear I am not specifically talking about the post on the ETS that mentioned ACT here – just in the same way that I’m not specifically talking about the post on the Greens electricity policy. I tried to clarify this in the update once I realised that the post may come off that way – given how recent those two posts were.

    I am generally disheartened by the way policy rolls – I suspect this is the result of my personal belief in the social contract which makes me easily irritable following any implied manipulation by politicians.

  • WH

    Henry Ergas might be in agreement with several of your points Matt – see this presentation at a Treasury guest lecture ( http://www.treasury.govt.nz/publications/media-speeches/guestlectures/ ) “Is serious cost benefit analysis dead the Australian experience” http://www.treasury.govt.nz/publications/media-speeches/guestlectures/pdfs/tgls-ergas.pdf

    But we sould never forget that we do not operate in an environment of super rationale person. I’d argue for bounded rationality which means politicians consider development of policy that already fits into people’s heuristic framework – which may or may not be to use costs benefit analysis (or more a really shortened version of it, such as I like to have a drink but don’t like drunken 18 year olds, so lets ban 18 years from drinking). Its a bit like how most people are mercantilists in terms of there view of the world. That is if I sell something to you I am better off, I would prefer not to give you any of my income, therefore a trade barrier/protection is a good idea. As individuals we don’t consider that we operate in a world of repeated games, so on an individual level our preferences are for policy and analysis based on one off non repeat scenarios. Given that politicians operate in the market of policy proposals they are clearly supplying to the customers preferences. Thsi does not mean some people would preference better analysis (namely economists) but that economists are yet to establish a credible buying capacity to ensure their preferred policy analysis is supplied or alternatively to create a new market/product of policy analysis that provides customers a product with a higher marginal utility for the individual.

    What I would argue is that in the long run due to slight marginal preferences for some good policy (short terminism is not the be all) there has been an improvement in overall policy analysis/research/information on trade-offs.

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  • I don’t think you can critique policies without reference to the context in which they were made. You say that it’s a problem that parties don’t understand the economic consequences of their policies; but perhaps those consequences are relatively unimportant to the policy decision.

    You can’t conclude that policies are not properly constructed by examining only the economics, unless you believe that the economics is important to the policy. Given that you’re not a policy analyst and not qualified to make that judgment – your previously expressed sentiment – I don’t think you can reach a policy-relevant conclusion with your analysis.

    Perhaps you need to either engage with the political nature of the discussion, as Eric suggests, or you should refrain from purporting to make trenchant policy critiques.

  • @rauparaha

    “I don’t think you can critique policies without reference to the context in which they were made. You say that it’s a problem that parties don’t understand the economic consequences of their policies; but perhaps those consequences are relatively unimportant to the policy decision.”

    Given that the descriptive context a policy decision should (so IMO) be made in is the same context where we analyze trade-offs, I think it is possible to criticise the lack of recognition regarding trade-offs – if not the final conclusion per see

    “Given that you’re not a policy analyst and not qualified to make that judgment – your previously expressed sentiment – I don’t think you can reach a policy-relevant conclusion with your analysis.”

    Agreed on the second point.

    However, as I have said repeatedly I do believe I can talk about trade-offs – a little bit. Criticising parties based on the fact that they are selling policies in a one sided fashion is something I can do within this frame – even if it shouldn’t be the main purpose of analysis that I do.

    In the context of the media/ACT post for example, my critique was regarding the fact that a free-lunch was being implied – one that did not exist. I admitted that given different prior beliefs policy conclusions could be different.

    “Perhaps you need to either engage with the political nature of the discussion, as Eric suggests, or you should refrain from purporting to make trenchant policy critiques.”

    I read Eric’s post as saying that, when policies are made there is a political constraint AS WELL AS the underlying other constraints in the economy. When all I am doing is stating that a fundamental trade-off is being ignored, the fact I am not looking at political constraints is, in itself, irrelevant. In fact, that is what this post said.

  • @WH

    Interesting points WH.

    While I do agree with bounded rationality as a descriptively accurate trait, I am uncertain how it should be taken into account when looking at policy – we can after all discuss the bounded rationality of policy analysts and politician as much as the bounded rationality of plumbers and economists 🙂

    Fundamental policy conclusions are an issue that is made for people far smarter than myself. All I am interested in is making sure that people keep the full set of trade-offs in mind when making choices, especially those that would use the institution of government to guide the actions of others …

  • @Matt Nolan Re ex-post: I’m not so sure. That’s actually the position I held before coming round to a low carbon tax.

  • @Eric Crampton

    Interesting. Maybe my point of view will change in the same way – but with a lag 😛

    Obviously need some sociologists studying economists in my opinion.

  • @Matt: Not sure we need to be first off the mark, but having the apparatus in place for a low carbon tax before things become critical allows for an easy ramping up and tax shift should things wind up looking more dire than I’m currently expecting. Prefer the carbon tax to emissions trading for the usual reasons around transitional gains traps.

  • @Eric Crampton

    Personally prefer carbon tax simply on the basis that it is a price mechanism – so is easy to adjust, and can be used to reveal information regarding the value of carbon.

    Labour steered away from a tax because they didn’t want to use the word tax – now we are paying for it with a mess of an ETS and a lack of transparency regarding policy. I blame policy wonks …

  • @Matt: Aha. “change in the same way” was about adding in the political constraint, not about liking a low carbon tax.

  • @Eric Crampton

    I see I see.

    Are you suggesting I am an idealist. I like that.

  • @Matt: It’s good to wear many hats. Round one ought always be the pure economics hat. Next re-run things wearing the pub choice hat. Then, re-run things wearing a personal evaluation hat. Trick is to be clear about which hat you’re wearing…I try to do that, but maybe it isn’t always clear enough.

  • @Eric Crampton

    I agree with this. I discussed my own trials and tribulations with this here:

    http://www.tvhe.co.nz/2010/01/05/evolving-blog-focus/

    I struggle to trust myself with more than one hat in honesty – but it is hard to make that clear. And as a person we have to put on a bunch of hats to make a decision – which is annoying.

    As a result, I’ll remain idealistic and yell at people for daring to do what is optimal when wearing the second hat for now – I see it as a foil to my position defending economists.

  • When I used to work in policy the one thing that annoyed me no end were experienced policy makers using the “in political reality” throw away line. Often I suspected it was a tactic to discredit any policy that one did not “like” by appeals to authority – internal politics.

    But let’s assume this is not the case and indeed the policy makers were merely rationally looking out for “politically optimal” solutions to a policy problem. What still frustrated me was the fact some took issue with even doing the “pure” policy analysis first and foremost – as if by knowing the “optimally optimal” solution (so to speak) we would somehow undermine the politically optimal one.

    I never understood this.

    I was always pragmatic enough to step back from the initial analysis and admit it might not be politically optimal, and try and work within certain restraints. But I always wanted to understand the optimal solution (within my own bounded rationality). Something to do with understanding the fundamental drivers that would lead to a certain type of “good” being achieved. However you “tickle” those drivers, you still needed to know what they were.

    It seemed that the cognitively easy route was always to do something that was minimally better than before, but annoying to the least amount of people. It seemed the primary good of any policy process was political optimization rather than efficiency optimization (as long as there was some sprinkling of that).

    I was never blindly intellectually idealistic – I just believed policy makers, and politicians always had much more power to create their own political realities than they often realize.

  • @sigma1

    Nice comment.

    I definitely find what you are saying appealing. Deep down I do believe it is a lack of will that prevents politicians, policy analysts, and society from getting an idea of “how things work” and “what we can do to move in that direction” – not a lack of ability.

    However, in some areas of policy I’ve found that there is the will – but there is a seeming unwillingness on the part of some people to actually think about how things function. To describe things in neat, yet arbitrary, black and white moral boxes – often unrealistic ones (in the way where necessary assumptions are obviously violated). This reminds me of the first sort of person you are talking about.

    I find these people extremely frustrating – because they care, and they don’t understand that when you are pushing them to get a framework for their thinking you are trying to help, you are not trying to be “evil”. In the end, these people get funny policies in their head and try to push them through government without any actual “understanding” going on.

    As a result, it is the people with the will to do something that scare me the most really 😛

    *Hopefully this rant was actually related to what is going on here – it is in my head, but by 4pm on a Friday I get tired 🙂

  • @Matt Nolan

    “because they care, and they don’t understand that when you are pushing them to get a framework for their thinking you are trying to help, you are not trying to be “evil”.

    Ah, yes, yes indeed! I guess it is difficult for these people to imagine that while all of us have certain “axiomatic” beliefs, some invest much more of their “identity” good into the beliefs themselves, and others are much more interested in the process itself (perhaps, even invest their “identity” good into that process). Thus, it is both cognitively likely (and ultimately self-serving) to see a non-politically invested person as merely “part of the problem”. I myself have peculiar (to others) beliefs and the amount of times I have been accused of being a radical greeny or a uncaring right-winger…The irony is that I am a political “scientist” and yet I seem to always be being ‘intellectually’ discredited by my less, er, ‘politically aware’ but more politically active colleagues! No wonder so many people who study politics past MA level can’t stand party politics etc and retreat into nothing but cynical sniping from the bleachers.

  • Andrew Coleman

    Hi Matt
    You might like to read
    Ulrich Witt “Economic policy making in evolutionary perspective” Journal of Evolutionary Economics 13 (2003)

    for a discussion of the potential role of economic analysis in developing policy. He focuses on the issue of the bounded rationality and limited attention of voters, interest groups and policy makers , and how the key to successive policy development is changing the beliefs of these groups about (a) their incomplete knowledge of the problems (b) the possible solutions. “Precisely because in the past attention has been directed to only some information, it may also be possible to discover hitherto ignored information and to change beliefs and perceptions over time, sometimes even dramatically.”

    I suspect incomplete knowledge was especially true with government policy analysts during Rogernomics (and possibly with the highly politicised public sector during the recent recent Labour Government ), when broad or unfashionable viewpoints were looked down upon by policy agencies.

    As much as I loathe Greenpeace for their dedication to publicity stunts and their wilful disregard of truth, one has to admit they are extremely good at focussing attention on otherwise ignored issues and at changing the parameters of debates so that society gradually changes its views and adopts approaches to the environment that are more sensible than earlier approaches. I tend to agree that this is a key to good policy making: a picture of a penguin on the end of fishing hook is worth a thousand papers on the optimal fishing quota for orange roughy, because it changes perceptions, and the changed perceptions lead to a search for a solution.

    Andrew
    who, for reasons of sunk costs, regrets that marketing policy is more important than economic analysis, but who also figures that economists who advocate living by the market should also fall by the market.

  • @sigma1

    Good points sigma – I have a friend who did honours level politics and is thinking about hitting up a masters at some point, and he also feels a great degree of cynicism. I’ve tried to get him to write on the blog, but he has been a bit busy 🙂

    @Andrew Coleman

    Hi Andrew,

    Interesting stuff. That is very true. I agree with your points on Rogernomics and Greenpeace. I would probably be less willing to give modern Greenpeace much credit – but the way they had changed views regarding animal welfare and the such is remarkable.

    “but who also figures that economists who advocate living by the market should also fall by the market”

    Agreed. Preaching the efficiency of the market while protected from all risks isn’t exactly a fair position to be in 🙂

  • StephenR

    If I had to vote right now, I would struggle to pick anyone :

    Weren’t you once leaning voting National because they wouldn’t change the Reserve Bank Act? Easy! 😀

  • Hello Matt excellent article, I am a big time fan of your site, keep up the superb work, and I will be a frequent visitor for a very long time.