November 15, 2014
When I came to Australia in late 2000, I received an interview call from the Commonwealth Treasury (CT). They were about to send me the air ticket for an interview in Canberra. But by then my son had been given a scholarship by Melbourne Grammar School (supposedly one of the best private schools in Melbourne), so I decided to stick to Melbourne and declined the interview offer. I was to join, soon after, the Victorian Government's largest regulator, and later, the Victorian Treasury. In retrospect, this was a good decision.
I've had occasion to interact with the CT on a few matters. I won't go into details since doing so will breach the public service code of conduct. But from my vantage point as close observer of numerous economic debates and based on published papers and policies of the CT, I am able to write in support Judith Sloan's critique of the CT.
Let me detail Judith's concerns.
1) The CT does not focus on the prosperity of all Australians
To understand this point, we fist need to understand Amartya Sen's deplorable confusions. The disastrous Human Development Index adopted by the even more confused UNDP was his "contribution". Mixing up social and economic variables using subjective weights can never be justified. This is mumbo-jumbo; pure nonsense. The Victorian Treasury's vision is uni-dimensional: a prosperous future for all Victorians. Period. Per capita real GSP is the key measure in such an approach. People can buy wellbeing IF they have money. The government's job is to enable and support the ability of the people to earn money.
But from Judith's analysis, it appears that the CT uses a mushy way of thinking (perhaps in the Sen tradition?):
It is quite difficult to pinpoint the exact start of the decline. My feeling is that the adoption of the mushy, confusing and unhelpful wellbeing framework in the late 1990s marked the beginning of the Treasury's loss of prestige. "The wellbeing of the Australian people" remains one of the core elements of Treasury's strategic framework. Where, once upon a time, Treasury essentially focused on maximising per capita gross domestic product, there are now five elements of wellbeing, some contradicting each other. These elements are: opportunities, distribution, sustainability, the level and allocation of risk, and the complexity of choices. [Sanjeev: What do these terms mean!! ] The real problem with using five ill-defined criteria to judge policy is that without some explicit weighting of the five factors, virtually any decision can be justified. [Sanjeev: No, Judith, these non-economic terms are pure nonsense, in the same category as the meaningless term 'social justice'. Multiplying nonsense with 'weights' can never create sense.] Sure, a policy will reduce per capita incomes, but just look at the improvements to sustainability. It is heaven on earth for the Greens.
As economics professor Jonathan Pincus notes, "any decision made by Treasury can be justified by (the wellbeing framework) unless it can be shown to worsen wellbeing in all five dimensions". The framework relies on the subjective (and political) value judgments of Treasury officials to weight the five dimensions of wellbeing. Of itself, this politicises decision-making within Treasury. [Source: Treasury's fall from grace started with wellbeing, Judith Sloan, 13 November 2012, The Australian]
This serious muddle-headedness apparently started in around the mid-1990s (HDI was created in the early 1990s and soon became a joke among real economists). It is possible that had I joined the CT in 2000 I'd have been a misfit and left it, long ago.
2) The CT recruits Keynesians and lefties:
This is news for me: a shocking disclosure from Judith, today:
The Treasury has leaned left for some time. Potential graduate recruits, for example, have been asked for their views on the pricing of carbon dioxide emissions and the value of stimulus spending to deal with economic downturns. The “correct” answers have been pretty obvious. This bias and the perceived politicisation of the Treasury, more generally, have to be eliminated." [Source: John Fraser will face challenges to restore Treasury’s reputation, Judith Sloan, 15 November 2014, The Australian].
If what Judith is saying about Treasury recruits is true, this is a sure way to ruin any prospect of objective, sensible economic policy advice.
3) The CT's approach prevents it from looking objectively at data
Then there is this third critique – that the CT uses subjective, rosy glasses while looking at data:
Another example of Treasury's loss of status and respect is reflected by comparing the first edition of the Intergenerational Report released in 2003 and the one released in 2010. Originally commissioned by Peter Costello when he was treasurer to highlight the fiscal implications of the ageing of society, the first edition was a solid piece of work. The 2010 edition, which was brought forward by Wayne Swan, is a complete embarrassment.
It is an overly long, verbose document that spends most of its time praising the government for its current policy stance, even though the focus of the report is 40 years out. It even includes a ridiculous chapter on climate change and the environment, a topic that quite rightly was not included in the previous editions. What the reports also demonstrate is that Treasury is completely incapable of forecasting basic variables such as labour force participation, even a few years out. (This point could be applied more generally to the credibility of Treasury's modelling.)
If you read the first report, you would conclude that we will all be "rooned". The second one (2007) was a bit more upbeat about our prospects, but the last gave the impression that, because of the outstanding and far-sighted policies of this government, everything will be fine. [Source: Treasury's fall from grace started with wellbeing, Judith Sloan, 13 November 2012, The Australian]
EXAMPLES OF BAD POLICY ADVICE
I have been frequently disappointed with the macro-economic (and even micro-economic) policies advocated/ supported by the CT. Judith points out a few examples:
- The CT's approach to taxation of employee share options
- The CT's design/ advocacy of the mining tax
- The CT's approach to changes to the fringe benefits tax
- The CT's modelling of the impact of pricing carbon
- The CT's "contrived modelling of the impact of the government’s stimulus spending spree in response to the global financial crisis that, according to Treasury, “saved” 200,000 jobs. The Treasury also tried to argue that the countries that had boosted government spending the most were least affected by the GFC. It turned out that the Treasury had cherry-picked the countries for inclusion in its analysis. When a comprehensive list of countries was included, the relationship fell away."
In my view, the CT's advice has badly damaged Australia's prospects in the coming decades. The Rudd 'stimulus' was a disaster. Any attempt to justify it should rank in the category of NONSENSE/ quackery of the sort that Keynes spouted, e.g.
"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. [Keynes, “General” Theory (and other crap)]
[Indeed, combining Keynes and Sen would be the surest way to destroy any society’s future prospects, almost as certainly as using Marx’s ideas]
Stephen Anthony wrote last year about the shortage of brain power in the CT [Source: Treasury needs more brainpower and less of the touchy-feely, Stephen Anthony, AFR, 29 April 2013]. I don't think this is a brain power issue. Brain power (IQ) is of no use without the right way to think. That's why high IQ people throughout mankind's history (till around 1700) achieved nothing, while ordinary people with the right thinking since 1700 have achieved wonders.
The CT's problems seem to stem from a fundamental failure to understand economics. Let me I quote (genuine Nobel Prize winner) Ronald Coase and hope that the CT will pay heed to one of the greatest economists of all time:
Economics thus becomes a convenient instrument the state uses to manage the economy, rather than a tool the public turns to for enlightenment about how the economy operates. [Source: Ronald Coase, Saving Economics from Economists, Harvard Business Review, December 2012]
My advice to the CT, for whatever it is worth, is this:
1) Try to understand the process of the price system and how this process balances the self-interest and local information (including budget constraints) of all people on this planet, simultaneously.
2) Try to understand, therefore, how your interventions will invariably distort the price system and reward rent-seekers and frauds at the expense (very often) of hard-working savers and workers.
3) Finally, try to understand that governments necessarily play the game of politics, marginal seats and lobby groups. Their game, while essential to a liberal democracy, also imposes costs and damages society in many ways. Democracy is not costless. But we are not in this game. Our job is to limit the damage caused by government interventions, not exacerbate it.