Economists have a glaring problem: themselves

By MILLIE MUROI, Economics Writer

Economists don’t often get the chance to look at themselves. They spend their lives keeping a close eye on the actions, behaviours and motivations of others: people like you and me. But the self-reflection they have done recently points to a glaring issue.

When I was first getting my bearings in economics nearly 10 years ago, there were four giant posters at the front of my classroom. The heads of four economists, including Adam Smith, Milton Friedman and John Maynard Keynes, stared smugly down at me as I took notes on all the important things: demand, supply and how to pass my economics exams.

The profession looks a little different now, although maybe not as different as we would like to think. It remains disproportionately pursued by one gender – and those who are relatively well-off.

It’s a sentiment shared by Treasurer Jim Chalmers who said in a speech to high school students last week that we still need to strike a better gender balance, starting with school and university enrolments.

“The economics profession will need to reflect the diversity of our country – I’m thinking especially of attracting more women into these roles,” he said.

Why does this matter? Because the people who study economics are the ones who go on to make some of our most important economic decisions: the governor of the Reserve Bank, the chair of the Productivity Commission, and the head of the Department of Finance to name a few.

All three of these positions are now occupied by women for the first time: Michele Bullock, Danielle Wood and Jenny Wilkinson.

Gender is just one of the diversity metrics we need to monitor. But it has a big impact.

A survey of professional economists in the US showed that while there wasn’t much difference in the perspective of women and men when it came to economic methodology, there were notable ones on policy. Women, for example, were 32 percentage points more likely to agree that income should be distributed more equally.

As Wood wrote in 2018, teams of people who are too similar – in terms of gender, race, age and class – perform poorly because of their narrow range of perspectives and because they are more likely to lapse into “group think” where bad ideas go unchallenged.

“Study after study has demonstrated that more diverse teams make better decisions,” she wrote.

So, what is the state of the economics profession? It’s a question that Jacqui Dwyer, head of the Reserve Bank’s information department, has probed – and it starts at high school.

First, there has been a dramatic fall in the size of the economics student population. Over the past decade, year 12 economics enrolments have been sitting about 70 per cent lower than in the early 1990s.

“Most of the fall occurred during the mid-1990s, with enrolments then drifting down before persisting at relatively low levels for the past decade,” Dwyer said. Part of this is because of the introduction of business studies in the early 1990s, which has become a substitute for economics that students see as easier to learn with clearer career prospects – and which teachers see as easier to teach.

This has, in turn, led to fewer schools offering economics as a discipline. Government schools in particular have dropped off. While almost every school in NSW across the government and non-government sectors offered economics in the 1990s, only about 30 per cent of government schools now offer the subject.

This has led to less uptake of economics by students from less advantaged backgrounds, while the share of advantaged students picking up the subject has grown.

There’s also been a stark fall in female participation. Male and female students accounted for roughly equal shares of year 12 economics enrolments in the early 1990s. Since then, female participation has fallen off: males now outnumber females, two to one.

These numbers are crucial because they feed into the economics student populations at universities. While enrolments have grown in fields such as management and commerce, STEM and banking and finance since the 1990s, the number of economics students has flat lined.

Another factor weighing on economics enrolments at university is the perception that economics is a “riskier” subject to study with a less well-defined career path than other disciplines.

That’s despite economics graduates having among the highest average earnings (only beaten by engineering graduates) and one of the widest array of employment options, in terms of industry and occupation.

Economics students do, however, face some challenges in landing their first job out of uni. The unemployment rate of economics graduates is higher than disciplines such as health, education and business, especially just after graduation (although, as Dwyer notes, it’s a similar rate to those in science and information technology).

The fall in the number of economics students also impacts economic literacy in the broader population. This is important because those who are economically literate make more informed economic choices, better understand the world around them and can influence public discussions and government action.

They can also make public policy more effective by aligning their expectations or behaviour with its intended purpose.

Unfortunately, diversity issues continue into university. Unlike at high school, the gap between female and male participation has always existed, recently sitting at a similar ratio to what we see in high schools.

Even worse, there’s been a sharp worsening of diversity in socioeconomic status. “Economics has become a socially exclusive subject, with a higher share of students from advantaged backgrounds than is the case for most other disciplines,” Dwyer said.

More than half of university economics students are from high socioeconomic backgrounds, whereas only about 7 out of 100 were from the bottom 25 per cent.

The economics discipline is often criticised for its shortcomings: flawed predictions, incorrect assumptions and policy blunders.

While it will always be an imprecise science, If we want to improve public policy and the questions and discussions shaping them, the state of the economics discipline must change, reflecting the diversity of the people it studies.

As Chalmers has pointed out: “numbers are very important. But the main reason we study economics is not numbers, it’s people.”

If we want economics to serve people, we need the faces at the front of that classroom, and in the classroom, to reflect a wider set of perspectives that better mirror how our economy – and its people – work. That’s step one of improving the state of the discipline.

Read more >>

The budget is rent-seekers central

Last week we got a reminder that, among its many functions, the federal budget is the repository of all the successful rent-seeking by the nation’s many business and other special interest groups. Unfortunately, it added to the evidence that the Albanese government knows what it should do to manage the economy better, but lacks the courage to do more than a little.

Rent-seeking involves industries and others lobbying the government for special treatment in the form of grants, tax breaks or regulatory arrangements that make it hard for new businesses to enter their market or protect them from competition in other ways.

Whenever that rent-seeking involves grants or tax concessions it weighs on the budget. Decades of continuous rent-seeking weigh hugely on every year’s budget, limiting the government’s ability to ensure every dollar of taxpayers’ money is spent to great effect in benefiting all Australians.

For example, a big lump of the feds’ spending on education is devoted to achieving the Howard government’s goal of enhancing parents’ choice of which school to send their kids to. When the callithumpians decide to build their own schools, so their children can be educated without contamination by people of other religions, the federal taxpayer coughs up.

That all this spending on choice leaves the great majority of kids attending public schools that aren’t adequately funded is just an unfortunate occurrence, which we may get around to fixing if we ever have any spare dollars looking for a home.

What you certainly couldn’t do is cut back the money you’re giving the callithumpians. They’d kick up the devil of a fuss and start telling their followers not to vote for you.

When rent-seeking leads governments to make grants to special interest groups, the details of this spending are there to be found in the bowels of the budget papers. Where it leads to some activities getting special tax breaks, Treasury attempts to keep track of these “tax expenditures” in an annual statement.

When it comes to extracting rents from governments, few industries or occupations are better at it than the medical specialists. (That’s not true of the GPs, however. Their Medicare rebates were frozen for years, as part of the former Coalition government’s pretence that it could cut taxes while in no way harming the provision of essential public services.)

Some years ago, a Labor government decided to cut back the Medicare rebate for cataract surgery because advances in technology now meant a surgeon could perform far more operations in a day.

The rest of the medical profession knew what a rort it had become but, under the ethical principle of dog doesn’t eat dog – or maybe, honour among thieves – they stood silent while their eye-surgeon brethren fought dirty to protect their swollen incomes.

They pretended the sky was falling, telling their elderly patients the wicked government had left them no alternative to charging them thousands more in out-of-pocket payments. If their elderly patient didn’t think this was fair, perhaps they might like to have a word with their local federal member, saying how terrible it was to have their lovely doctor treated so badly.

Predictably, the government backed off and the rorting continued.

Last week it was the turn of the chemists. Few industries are so heavily regulated by state and federal governments, all with a view to protecting pharmacists’ incomes. There are limits on how many chemists may set up within an area and, in particular, prohibitions on supermarkets having pharmaceutical sections.

Anthony Albanese and his government have made much of the way their introduction of 60-day medicine prescriptions – as recommended by an expert committee – has saved patients money and helped ease the cost-of-living crisis.

But hang on. Surely, that means chemists receiving fewer dispensing fees from the government? This evil must be opposed. Enter a union more powerful than any workers’ union, the Pharmacy Guild. This iniquity will see shortages of medicine and hundreds of chemists closing down across the land, it assured us.

The government fought back, refuting the talk of shortages and revealing figures showing a surge in applications for new pharmacies in the months following the announcement of the prescription change.

It had already promised to plough back into pharmacies the $1.2 billion it expected to save on dispensing fees. But the guild claimed pharmacies’ losses would be $4.5 billion, and last week the guild negotiated a new deal, which would see the government pouring a further $3 billion into pharmacies over five years.

Also last week, we saw the government releasing the report of the aged care taskforce, chaired by Aged Care Minister Anika Wells, calling for the well-off elderly to contribute more to the cost of their own care.

What was the problem? Wells spelled it out in a speech last June: “We must act now. The Baby Boomers are coming … We are going to need a fair and equitable system to meet the needs of Baby Boomers who, with their numbers and determination to solve problems, have shaken every single system they’ve come across.”

The report argued for the present mechanism used to get more from the better-off, the refundable accommodation deposit, to be replaced by a rental-only system.

But it called for the deposit system to be phased out over five years, and postponed the proposed start of the phase-out to 2030. With all its talk of “grandfathering” – applying the changes only to new entrants to the system – it remains to be seen how keen Albo & co are to take on the entitled Baby Boomers.

Finally last week, the Commonwealth Grants Commission’s carve-up of the proceeds from the goods and services tax for the next financial year was announced, bringing a bad shock for NSW and Queensland, and good news for Victoria and the other states and territories.

It was an unwelcome reminder of the separate, but related, special deal then-treasurer Scott Morrison awarded the West Australians in 2018. So great was the uproar from the other states that they were promised more money to ensure the sandgropers’ special deal left the others “no worse off”.

Meaning? That the West Australians’ successful rent-seeking is costing federal taxpayers from other states a bundle in forgone federal spending.

As the independent economist (and proud Tasmanian) Saul Eslake never tires of demonstrating, the Westies had less than zero grounds for arguing that they were getting a bad deal from the carve-up formula.

The grants commission was set up in the 1930s in response to their congenital paranoia that the rest of Australia was having a lend of them. For as long as they were classed as a “mendicant” state cross-subsidised by Victoria and NSW, they were happy.

But from the moment the growth of their mining industry was so great that they were required to join Victoria and NSW in helping maintain the quality of government services in the other states, it suddenly became yet another plot by those “over east” to do them down.

So, here’s the moral of the story for our weak-kneed federal politicians on both sides. Once you give in to rent-seekers, you’re gone. They won’t give up their ill-gotten gains without a massive, vote-losing fight.

Meanwhile, everyone else wonders why, despite the huge sums you’re raising in taxes, the quantity and quality of the services you’re providing is so poor.

Read more >>

Two-class school system a great way to entrench low productivity

In 2011, the Gonski report recommended that government funding of schools be needs-based and sector-blind. More than 12 years later, it still hasn’t happened. And it’s by no means certain it will happen any time soon.

The idea of sector-blind schooling – funding all students according to their needs, rather than their religion – fell at the first hurdle. Sectarianism has bedevilled attempts to ensure all our kids get a decent education since the introduction of compulsory schooling in 1880.

And so fearful of the religious vote are both major parties that this time’s been no different. Providing adequate funding for the more disadvantaged kids congregated in public schools could have been a simple matter of redistributing money from privileged private schools, but no.

Former prime minister Julia Gillard was straight out of the blocks, promising that private schools would be left no worse off. That is, disadvantaged kids would be helped only to the extent that extra money could be found for education, at the expense of all the government’s other responsibilities.

So the private schools – almost all of them professing some religious affiliation – have retained their funding priority. It used to be a matter of Catholics and Protestants but, thanks to the Howard government’s introduction of a new education priority – giving parents greater choice of which school to send their kids to – it’s now also a matter of Jewish schools, Muslim schools, “Christian” schools (code for the smaller non-conformist Protestant denominations) and soon, no doubt, Hindu schools and Buddhist schools.

If you wonder why the eternal enmities of the Middle East are echoed in faraway Australia, that’s part of the reason. “Choice” is a nice idea but, from the taxpayers’ perspective, it comes at a cost. Public schooling used to be part of the way we could be multicultural and still socially cohesive.

Now we’re paying more for it to be less so. Now, if you choose to have your kid grow up never having rubbed shoulders with people of other religions, that’s another service the taxpayer provides.

Except that it involves a monetary cost we’re reluctant to pay, and our politicians are reluctant to make us pay. How to square the circle? I know, let’s short-change the (majority of) kids still going to public schools.

But not to worry. The more things keep going the way they are, the fewer kids will be left going to public schools and the less the pollies will have to worry about the raw deal they’re getting.

We’ll have more kids leaving education with inadequate numeracy and literacy, of course, but who’ll notice that – or the extra cost to the budget – when we’ll all be so busy listening to the Business Council giving yet another sermon on the pressing need to reverse our declining productivity by cutting the company tax rate.

The beauty of a new plan to have most kids going to private schools – whether their parents can afford it or not – while only the kids of the rock-bottom poor are still going to public schools is that it’s self-reinforcing.

The more the better-paid and better-educated shift their children to private schools, the more those who are left will scrimp and save to join them.

And don’t forget this: public schooling is the default setting. One of the ways private schools maintain their reputation for greater discipline is to decline students with special needs, and expel students who cause too much trouble.

The public schools have no choice but to pick up the rejects. This wouldn’t be such a problem if they were given the extra funds needed to cope with the extra problems. But depend on it: they won’t be. This will give parents even greater incentive to get their kids out of there.

The plan does have a big drawback, however. No parent ever wants to admit it but, for many of them, a great attraction of private schooling is the greater social status it confers on the parents, as well as the old-school-tie benefits it confers on the kids.

Economists see education as a prime example of a “positional good” – a product that advertises to the world your high position in the pecking order. Trouble is, social status requires exclusivity. The more kids pile into private schooling, the less exclusive it becomes.

Economists say the demand for a good or service is “inelastic” if a rise in its price does little to deter people from buying it. As a positional good, the demand for private schooling is highly inelastic.

This explains why, not content with the big government subsidies they receive, the oldest and most famous private schools can charge parents huge fees on the top. Their fees rise faster than the inflation rate year after year, even in years of a cost-of-living crisis.

It may be that, the more parents pile into the cheaper Catholic systemic and other private schools, the more the elite private schools have to raise their fees to retain their exclusivity – their status as a positional good.

And, of course, the higher their fees, the more desirous status-seeking parents are to be seen paying them. Only the Reserve Bank’s ability to print its own money beats that. Remind me, why exactly is the taxpayer subsidising elite private schools?

Economists also say education is a “superior” good, meaning that the higher people’s real incomes rise, to more of that income they’re willing to spend on the product. In theory, people are buying more education or higher quality education.

But I have a theory that two-income families are more likely to choose private school education to prove to themselves their kids aren’t missing out. If so, they’re victims of a rarely remarked economic fallacy: anything that costs more must be of higher quality.

Fallacious though such thinking may be, the rise of the two-income family helps explain the shift to private schools and suggests it has further to run. Yet another reason to question why the federal government is propping up private schools at the expense of public schools.

Since Gonski, the feds have calculated the “schooling resource standard”, an estimate of how much total government funding a school needs to meet its students’ educational needs. The previous federal government’s agreement with the states required it to contribute 80 per cent of the private schools’ standard, with the states contributing the remaining 20 per cent.

For public schools, it was the reverse: the states pay 80 per cent, while the feds pay 20 per cent. Since the feds’ taxing powers are far greater than the states’, this deal had an inbuilt bias in favour of private schools.

As it’s worked out in practice, almost all private schools are fully funded, with many being overfunded, whereas almost all public schools are still underfunded, more than 12 years since Gonski.

The Albanese government’s Education Minister Jason Clare is renegotiating the funding agreement with the state education ministers, who met with him on Friday. They’re demanding that he hasten the public schools’ achievement of full funding by raising the feds’ contribution to 25 per cent.

You’d expect a Labor government to care about public school students getting a decent education. We’ll soon find out if it does.

Read more >>