Too many economists in the carbon kitchen

There’s a lot of interesting material in the survey of Australian economists released last week.

But the results are not much use as a guide for developing public policy. Few political issues can be reduced to technocratic questions of policy design.

Conducted by the Economics Society of Australia, nearly 600 economists were quizzed about an array of policies.

The one which gathered all the attention asked whether they agreed “price-based mechanisms” (clearly the Government’s carbon tax and emissions trading scheme) were better than “direct regulation” (Tony Abbott’s direct action plan). Only 11 per cent did not.

It should have come as no surprise. Abbott has been unable to find any economists which back his plan, because direct action is obviously a bad idea.

That the overwhelming majority of economists support a price mechanism over direct action probably has as much to do with the clear deficiencies of the latter as opposed to the virtues of the former.

But does that mean emissions trading is the right thing to do? Not quite.

Economists are often ridiculed for making unrealistic assumptions in order to model human behaviour. But the first assumption policy designers make is the most crucial one: assume your policy is enacted wholesale, uncompromised by the brutish political process.

When asked how to tackle climate change caused by pollution, most economists would likely recommend a trading scheme or tax. Price the externality and move on.

But as a 2007 paper in the Natural Resources Journal concluded, “the introduction and implementation of [emissions trading] policies is explicitly political and should be recognised and analysed as such.”

Politics, not economics, decides how much pollution will be allowed. Politics decides who will be allowed to pollute. Politics decides the conditions under which the pollution permits will be traded.

In an unguarded moment in December 2008, Ross Garnaut complained that Kevin Rudd’s interpretation of his emissions trading scheme had been captured by “vested interests”, and wondered about the “wisdom of how far it’s gone”. Rudd’s legislation had deviated from his policy ideal. But what did he expect would happen? Economists must not assume that their ideas will be implemented untarnished by political calculus.

So while there is an economists’ consensus the ideal price mechanism is better than the ideal regulatory approach, its existence doesn’t take us very far. Policy is all about implementation.

The academic study of policy implementation – as opposed to policy design – only goes back a few decades. The title of the 1973 book which sparked this field is succinct – Implementation: how great expectations in Washington are dashed in Oakland: or, why it’s amazing that federal programs work at all.

As the authors argue, “The separation of policy design from implementation is fatal”. No matter how well designed and elegant a policy may be it will be useless, even counterproductive, if it is implemented ineffectively, inconsistently, or has been whittled down by the political process.

For the ideal model of emissions trading to achieve its goals, international action is the difference between successful implementation and failure.

You can’t resolve a commons problem simply by taking independent action. The tragedy of the commons is a tragedy for a reason. Perhaps global action is imminent. Nevertheless, that’s a question for diplomats, not for economists.

The results of last week’s survey are less useful than they appear in other ways.

The economists were asked if aid spending should be reduced, if jail sentences were an appropriate punishment for those convicted of price fixing, if corporate boards should have gender quotas, if non-government schools should receive funding, and so forth. Some they were for, some they were against.

These questions have their economic aspects. But most of all they involve questions about morality, liberty, equality, and social justice.

The discipline of economics can have insight into the effectiveness of policy, but it cannot define our values.

Should – as another question asked – governments “provide greater economic incentives to improve diet”? If we decide that as a society we want governments to make our eating habits a question of high public policy, the design of those incentives will be important. Yet it is far from obvious that’s the case.

Values pervade questions about climate policy as well.

Public choice economists (a sub-branch of economics which studies incentives in the political arena) have long recognised voters tend to prefer command-and-control approaches like Tony Abbott’s direct action. Economists protest regulation is less efficient than pricing mechanisms, as they should. But for many voters, regulation still seems “fairer”.

This accounts for the fact that regulation has always been more prominent in environmental policy than pricing. It may also explain the great political oddity of 2011: the extremely popular Coalition has an inferior policy for a problem the public believes is real and should be tackled. It’s just that, given the option, voters prefer regulations to price signals. Even when price signals are less costly overall.

In the 20th century, many economists and politicians thought technocrats were only limited by the amount of data or computing power they could muster. If we could assemble enough information, experts would be able to design perfect policy and run an economy to its maximum efficiency.

But we know better. The technocratic dream has very real limits. No matter how many specialists and experts agree on the way forward, effective policy may still be far out of reach.