Friday, 8 December 2017

Ideas? Sure. Answers? Not so much

Today's well-attended Government Economics Network (GEN) conference in Wellington on the theme, "Responding to Global Challenges", covered the back end - the challenges - pretty well. But as for "responding" - if I were in the policy sausage grinder, as many of the attendees were, I'm not sure I came away with enough new policy ideas, or even a clearer policy research agenda.

My highlights? The IMF's Jonathan Ostry made a good case that growth and (re)distribution as policy targets aren't as incompatible as once thought - indeed, redistribution may facilitate higher levels of GDP growth. Structural reforms, for example, often have winners and losers, and properly compensating losers may cement support for the GDP-enhancing reforms: win-win all round. That's a big policy lesson right there, and not one we knew enough about in the '80s and '90s when we were crashing through with our reform programme. So I would take one big bit of practical policy guidance away: check the inequality and equity outcomes of what you plan to do. If there's enough of a GDP payoff, and there likely will from initiatives like trade liberalisation, then there'll be enough cash in the kitty to see the losers treated right.

I also liked Australian National University Professor Warwick McKibbin's presentation on recent global trends and future prospects: he's very good at explaining the dynamic interplay of macroeconomic variables. But it's not all just seat of the pants judgement calls: he's got a multi-sector multi-country model which enables him to make a stab at calculating the global and national impacts of different policies or shocks. He modelled, for example, the Trump policy package of immigration controls, big tax cuts, infrastructure and defence spending increases, and higher tariffs, against a background of tighter Fed monetary policy (good for US GDP in the short term, pretty horrible longer term), and he also had a go at modelling what would happen if a global trade war broke out (bad news for everyone, but especially bad news for China and Germany).

What I took away from his presentation was that we ought to run any bright ideas we have - joining or not joining the Trans Pacific Partnership, introducing different forms of carbon emission policies - through a practical model like his, before we press any buttons. My impression from chatting to people in the policy game is that we don't*. And it's not helped by economists here and overseas putting the bulk of their modelling efforts into fragile DSGE-style models which fall apart if the wind shifts, rather than into more robust, empirical, simpler and useful models that will give you sensible answers to real world questions.

Kaila Colbin, 'New Zealand and Australia Ambassador for Singularity University' - no, made no sense to me, either - turned out to be a highly impressive speaker who made a convincing case that the pace of technological change is high and increasing far faster than practically anyone realises. And she also dealt to some of the more alarmist 'the robots will take all our jobs' perspectives. Wouldn't you prefer, she said, an artificial-intelligence medical device to read your X-rays with complete accuracy, and leave your doctor to talk through treatment options? It also left me - again - with the strong impression that our (and other countries') productivity and GDP data can't be properly capturing the full extent of these extraordinary advances in our capabilities.

But as with many of the issues raised, attendees might now have a better idea of some of the global trends that are going on around us, or might happen down the pike, but we weren't given many suggestions about what to do in response.

And the issues that were raised didn't cover all of the waterfront. Nobody knows for sure why New Zealand's got the low productivity issues it already has, and what we need to fix to meet both our current and future challenges. But a partial list of plausible factors would include insufficient physical and other infrastructure; weak entrepreneurial and managerial incentives and capabilities; low international connectivity; the deadweight burden of poor regulation (think housing land in Auckland, or local regulatory reactions to Uber and Airbnb); policy sluggishness in the bureaucracy and the legislature; low intensity of performance-forcing competition; social and cultural attitudes to success, innovation, unorthodoxy, experimentation and failure; and you've probably got some further candidates of your own.

They didn't get much of a look-in, nor (as the New Zealand Initiative's Oliver Hartwich pointed out in a panel session towards the end) did the challenges of urbanisation, which he rightly said was one of the most important global megatrends. It's also one of the challenges we're failing to meet: neither Auckland nor Wellington work properly.

So a good grade to GEN for bringing expert overseas and domestic speakers together, and a decent grade for consciousness-raising. And maybe the paucity of policy responses this year could be the motivation for next year's agenda.

*Update December 9 - this should probably be "we don't all the time" or "we don't enough", as John Ballingall at the NZIER has helpfully been in touch to say that the TPP was actually run through a model.

2 comments:

  1. Donal, Interesting post. I think GEN are doing a very good job. The full paper on Trump's economic policies can be found at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3028388
    Best Regards
    Warwick McKibbin

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    1. Thanks Warwick for the comment and for the SSRN link, which I'll follow up.

      I agree, GEN are indeed doing a very good job, and I wouldn't want the post to appear to suggest otherwise. Yes, the conference could have done with some more policy ideas, but it was still an interesting day. And as I think you said at the start of your presentation GEN does a fine job of bridge-building, and (my favourite) of ongoing professional development.

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