Friday, 27 February 2009

The importance of economics education

Roger Kerr writes in today's Otago Daily Times about The Importance of Economics Education (pdf). He uses Mankiw's list of of propositions to which most economists agree and adds some comments relevant to New Zealand.

Kerr writes
In chapter two he [Mankiw] includes [in his first year textbook] a table of propositions to which most economists subscribe, based on various polls of the profession.

Below is a selection, together with the percentage of economists who agree, and some related comments in brackets.
  1. A ceiling on rents reduces the quantity and quality of housing available. (93%) (New Zealand does not have rent controls, but state housing and so-called tenant protection regulation have a similar effect. on the supply of private rental housing.)
  2. Tariffs and import quotas usually reduce general economic welfare. (93%) (There are theoretical exceptions to the case for free trade but, as another eminent economist Jagdish Bhagwati has written, “Basically, in the world of practical policy, the subtle qualifications do not really amount to a can of beans. If you want to bring prosperity to people, free trade is the way to do it.” With only low tariffs now and the free trade agreement with China, New Zealand is close to becoming a free trade economy like Hong Kong and Singapore.)
  3. Flexible and floating exchange rates offer an effective monetary arrangement. (90%) (This was not widely recognised until the early 1970s when the Bretton Woods system of fixed exchange rates broke down. New Zealand’s floating exchange rate regime has served us well in responding to the present financial crisis and recession.)
  4. Fiscal policy (eg tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%) (This point is less relevant to New Zealand than to a large economy like the United States because much of the spending would go on imports. Also the Keynesian mechanism only works if workers do not realise that higher inflation results from the stimulus and reduces their real wages and thereby the costs to employers of employing them.)
  5. The United States should not restrict employers form outsourcing work to foreign countries. (90%). (Nor should New Zealand: we benefit from globalisation. Fisher and Paykel Appliances is one company that has gone down this path. While Dunedin may have lost out in the process, the company should not have been subsidised by ratepayers in the first place and the move has assisted it to survive.)
  6. The United States should eliminate agricultural subsidies. (85%) (Bravo! This illustrates the point that many subsidies and regulations benefit private interests rather than the public interest. Just because another country has a particular policy doesn’t mean New Zealand should follow suit.)
  7. Local and state governments should eliminate subsidies to professional sports franchises. (85%) (The Auckland Regional Council, which recently lost $1.8 million on the David Beckham fiasco, should take note.)
  8. If the federal budget is to be balanced, it should be done over the business cycle rather than yearly. (85%) (This is the rule in the Public Finance Act, which now incorporates the Fiscal Responsibility Act.)
  9. Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84%) (This calls into question programmes such as state housing. In the case of dysfunctional families, however, there may be a case for provision-in-kind – eg the equivalent of a food stamps programme.)
  10. A minimum wage increases unemployment among young and unskilled workers. (79%) (Regrettably, the Maori Party has not grasped the point that raising the minimum wage is likely to hit Maori disproportionately. The Council of Trade Unions has suggested to today’s Jobs Summit that the minimum wage should continue to be increased “to boost demand”. If that made sense, why not double or treble it? It doesn’t: in the absence of higher output from greater productivity, a higher wage for one person is a lower income for someone else. Aggregate spending power is unchanged.)
Let me add a few things I have said before. Given our government's recent moves on the minimum wage perhaps number 10 should be pointed out to them. Number 7 could be pointed out to the NZRU and NZ Cricket, along with the Dunedin City Council and Otago Regional Council . Number 6 would be great if followed by both the US and Europe. Number 2 needs to be emphasised a lot right now. Protectionism will not help the New Zealand economy. It will only help some areas at the expense of the rest of us and overall New Zealand will be worse off.

Kerr ends by saying
As Mankiw writes: “If we could get the American public to endorse all these propositions, I am sure their leaders would quickly follow, and public policy would be much improved. That is why economics education is so important.”

The same could be said about public understanding of economics in New Zealand.
I can only agree. As I have tried to argue here these unusual times don't call for unusual economics. Ordinary economics still holds, even in bad times, and the general public need to understand this. A more economically literate group of voters would mean that many of the stupid things we see governments doing right now could be stopped. Governments do respond if they think their polices will lose them votes.


Matt Nolan said...

Agreed. Basic economic literacy should be taught in third form. An understanding of scarcity and opportunity cost would clean up a lot of the confusion in society.

Paul Walker said...

Matt. In addition to that there is no reason I can see for not teaching the importance of incentives and the idea that we face trade-offs between different good objectives.

Anonymous said...

Talking of incentives and trade-offs...

Educators are already burdened with huge lists of 'things which should be taught in schools'. They can't do it all effectively, so they focus on their own personal interests and otherwise go through the motions. The result is large numbers of students who don't have the vocabulary to backup the type of thinking required to grasp economic concepts, and/or don't have the reading or basic numeracy skills to enable them to make any sense of those concepts.

To make matters worse, public choice theory tells us that 'economic literacy' as taught in our state education system would not be what we might like it to be.

Dave Christian

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