Isra-Mart srl: Put down your gun: the tyranny of professional 'consensus'

www.isra-mart.com

I belong to one of those professions for which there is supposedly a 'consensus' - on using a carbon dioxide tax or an emissions trading scheme as the most efficient means of reducing the growth of emissions.

To suggest that more information is required, because the proposition may be more a half-truth than a truth, is not allowed. It is a case of being in or out, being with it or not with it.

When filling out the survey conducted by the Economic Society of Australia dealing with this topic and other economic statements, I found myself circling the 'do not know/no opinion' option in most cases. Without additional facts, it was simply not possible to reach a definitive conclusion, let alone agree or disagree strongly.

Notwithstanding this significant qualification to the methodology, much has been made of the so-called 'consensus' among Australian economists on the carbon tax. Indeed, this idea of 'consensus' is being used as a political weapon to disparage anyone in the profession who dares to express an alternative point-of-view.

The clear message is that if you are not part of the 'consensus', you are an idiot and no-one should listen to anything you say. Well, count me out of the 'consensus', because bald statements about complicated policy issues should never generate only binary possibilities - agree or disagree.

The then secretary of the Treasury, Ken Henry, last year tried to corral Australian economists into some sort of phoney 'consensus' about the proposed mining tax, the Resources Super Profits Tax (RSPT). While enjoying the contest of ideas within the economics profession, he declared that, "I think there are occasions on which economists might, at least for a period, put down their weapons and join a consensus."

But why, Ken? It was a complete dud, both in theory and particularly in terms of implementation. Not only were the assumptions on which the proposed RSPT - a Brown tax - completely unrealistic, its application to existing projects meant that there was no way that the impost would only be taxing resource rents. (To be slightly technical, quasi-rents would almost certainly have been taxed as well.)

The bit I really liked about the proposed tax - note my ironic tone - was that the Government would not actually be ponying up its 40 per cent share of expenditures of mining projects - after all, the fiscal position was getting pretty tight - but rather would provide companies with an IOU that would be inflated annually by the risk-free long-term bond rate.

The companies could then use these IOUs, so the argument went, to secure project finance at this rate and without any transaction costs. So even though the Government didn't feel as though it was in position to hand over the cash to the companies at the time, financial institutions could be 100 per cent confident that the Australian Government would pay its full obligations in the future. Go figure.

And when a senior economics journalist asked Ken Henry to explain how the imposition of this tax would not affect the incentives for mining companies to invest, he was handed two pages of algebra. Some consensus, Ken.

A necessary accessory of 'consensus' in the professions has, for some time, been the multi-signed letter, printed in the quality mainstream media. An early high-water mark for the global economics profession was the 364 economists in the UK who signed a letter in 1981, stating that there was "no basis in economic theory or supporting evidence" for the budgetary policy of the Thatcher government. Indeed, the letter contained a warning of a potential threat to "social and political stability".

As events panned out, these eminent economists - one is the current governor of the Bank of England - turned out to be wrong - dead wrong, in fact. Inflation was controlled, interest rates fell, the exchange rate adjusted, the budget was brought back into balance and, after a lag, the rate of unemployment fell. Investors began to believe that the UK government would stick to its guns (and resist the idiotic advice of the economists) and the British economy experienced a period of remarkably strong growth.

One of those economists who signed the letter, Professor Steve Nickell, now says that he did not agree with all the content of the letter but signed because it was "the only game in town". I guess that's what happens if you want to be on the 'right' side of the 'consensus' divide.

Like-minded Australian economists have also developed an affection for the multi-signed letter. There was one assembled to support the RSPT, one endorsing the Labor Government's stimulus spending and one to support the carbon tax. Not surprisingly, there is a fair overlap in the names on these letters.

Presumably, the principal purpose of these letters is to support the Labor Government in its bold, daring but correct policy initiatives, by lending the authority of a group of wise economists of renown to the cause. Indeed, the letter supporting the stimulus spending (which bravely mentioned the spending on roof insulation and the BER) ended with this little homily: "We hope that the economic achievements of the Australian Labor Government will be recognised by the population."

Of course, the more the merrier when it comes to these letters. The 50 who signed the stimulus letter was perhaps a bit disappointing and the numbers for the other two letters was lower again. Even so, it is important to create the illusion of 'consensus' within the profession because then those who have not got with the program can easily be labelled as imbecilic and out-of-date.

Perhaps the most extreme example of a fracturing of a consensus within the economics profession is occurring now in the United States, even though the possibility of a federal government default has been averted for the time being.

In the one corner are the Keynesians, typified by Paul Krugman, who regard any cuts to government spending as a guaranteed route to higher unemployment, double-dip recession and possibly depression. In the other corner are the economists who argue that the stimulus spending has failed, that there is no alternative to reducing the deficit and paying off the debt. Only in this way can there be a crowding in of private sector spending which will ultimately provide the basis for a sustainable economic recovery.

The surprising thing about this whole consensus thing is that anyone should ever have thought it could apply to economists. By reputation, they are one of the most divided professions and jokes abound on this very point. But the real issue is this: most public policy issues are complicated and nuanced. It is not possible to reach definitive and simple conclusions - it all depends - and we should not kid ourselves otherwise.