This is the first of four blog posts I will be writing for ESSA from the 41st Australian Conference of Economists, co-hosted by Economics Society of Australia and Victoria University. This blog aims to give its readers an insight into the key discussion topics at the ACE conference which created hearty debate amongst some of Australia’s pre-eminent economists.
The underlying theme of the conference is ‘The future of economics: research, policy and relevance’. This is a very topical and important issue for the economics profession post-GFC, given the erosion of public confidence in economic theory and its practical application to government policy.
It was fitting that the first key note speaker was Nobel-Prize winning economist, Sir James Mirrlees, best known for his work on economic choices in a world of imperfect information (research that yielded the concept of ‘moral hazard’) and the Mirrlees Review of the United Kingdom’s taxation system – Britain’s own Ken Henry. Sir Mirrlees’ speech was titled ‘Do we need a new economic theory’, implicitly suggesting that he would outline a new theoretical approach for analysing the economy that is more conducive to the post-GFC world. On the contrary, Sir Mirrlees did not offer a new approach, but rather highlighted the inadequacies of the accepted General Equilibrium model, before observing that the real problem was 1) a lack of decent economic research and subsequent theories in certain areas of economic policy and 2) that policy makers ignored established economic theory to their detriment before and during the crisis. He then focussed closely on the issues of moral hazard in relation to the current crisis, outlining how it created problems in the sub-prime lending market, with lenders focussing on the volume of lending rather than the quality of the borrowers. He also analysed the casino-style swaps market, and the financial problems created by those taking big bets on either side of the swap due to fundamentally different beliefs on future market conditions, which inevitably meant one side was always doomed to lose. Despite these notable problems, Mirrlees stopped short of suggesting that these markets should not exist. Instead, he concluded that markets need to be designed so as to provide the right incentives for improved decision making by market participants.
The second key note address I will discuss was from 2011 ESA Young Economist of the year and current Federal Member for Fraser, Andrew Leigh, who analysed patterns of income inequality in Australia over the last century. This was my kind of speech, with lots of hard data, scatter plots, graphs and regression analysis. Leigh illustrated how Australia’s income inequality fell significantly from 1920 to 1980, before rising for the following 30 years (excluding 2009 due to GFC). He showed that there were remarkably similar trends of inequality in English-speaking countries worldwide. In contrast, non-English speaking countries did not show the same trends, with inequality continuing to fall for the last 30 years post-market liberalisation. Leigh then looked at wealth distribution, and observed that wealth inequality was slower to move compared to income, since it depends on household saving and intergenerational transfers. Leigh identified the main causes of inequality as superstar labour markets (i.e. the internationalisation of the labour market and the subsequent bias towards English-speakers), changes in tax rates on labour and capital over time, and the effect of war on tax rates and capital destruction. Leigh’s econometric analysis showed that tax rates were the overwhelming factor affecting income inequality, explaining more than ½ of Australia’s income distribution levels. He concluded with his reasons of why inequality matters, arguing that it is important because it has a profound effect on the democratic process (political donations and lobbying), it leads to personal expenditure cascades for positional goods such as prestigious jobs and university places, and lowers overall societal utility given our innate preference for equality.
These were two fascinating speeches with very different flavours; one focussing on the theoretical underpinnings of the economics discipline, with the other a more practical, evidence-driven analysis of a growing issue in Australian policy circles. They set a fantastic standard that I hope is maintained throughout the next 3 days.
Coming up tomorrow from ACE:
– A special interest panel including Stephen King, John King and Rod O’Donnell will look at whether graduate economists are still fit for employment
– A sponsored symposium presented by Olivia Mitchel, John Piggott and Phil Gallagher will focus on the implications of population ageing on Australian fiscal policy
– A special interest policy session led by Executive Director of Macroeconomic Group at Australian Treasury, David Gruen on the ‘Economic Policy Challenges for 2012’
For all the latest from ACE 2012, follow us on twitter (@ESSA_unimelb) throughout the day, and look out for next blog tomorrow night which will analyse all the discussion from Day 2 of ACE 2012.
Follow me on twitter @dean_pagonis