Doubting Thomas: Why skepticism of economics is crucial

I remember third-year economics. The lecturer played some sort of Wheel of Fortune game where he had students answer questions correctly for the chance to guess a letter. It was around the time we were learning about how markets would reach general equilibrium if left alone. The eventual phrase spelled out “Don’t screw with our markets.”

“It’s beautiful,” said the lecturer as he delivered the mathematical proof.

“Why can’t the arts students just see this!” exclaimed the girl in the row in front of me.

Classical Economics has some beautiful theories.

John “beauty is truth” Keats may well have been a free-marketeer. But beautiful theories are a trap.

The human brain has a wide range of biases, the most risky of which is a conclusion bias. We are inclined to latch on to an answer as soon as possible, which then goes on to frame our subsequent information gathering and processing.

Of course, a beautiful unifying theory will be very tempting for us. Succumbing to that temptation explains a lot, from biblical literalists, to libertarians and communists.

But the real world is very messy, and the project of the entire enlightenment is to get us engaged with that complexity and put aside our tendency to simplify.

I’ve written about this problem before: I Haven’t Decided Yet.

Some of the most intuitively appealing theories in history (e.g. from each according to his abilities, to each according to his needs) have proved unworkable.

The point I’m driving at is well encapsulated by the parable of the fox and the hedgehog. An ancient Greek Poem turned into an essay by Isaiah Berlin, the Fox vs Hedgehog debate has been given a new life by statistical guru and seer Nate Silver.

It classifies people into two groups, foxes – who rely on lots of little scraps of knowledge, and hedgehogs, who know one big thing. Nate Silver shows that in making predictions, having one big belief can be a block to seeing the future well, and being a fox is the better approach.

(Of course, that itself is a simplification, and a truly foxy approach will accept there are times when a big simple truth is just that: big, simple and true.)

I raise this issue now because I see two big examples where a simple, hedgehoggy application of economics seems to be taking sway.

1. Our federal government. A political fox willing to try anything to get into power, Tony Abbott turned into a policy hedgehog after occupying the Prime Minister’s Office. His latest budget is the repetition of one simple trick: apply market forces. From higher education to GP visits, via cuts to social security payments, the Budget tries to fix Australia by allowing the power of markets to seep in.

It’s not nuanced but it is no doubt deeply satisfying to those elements of the base for whom the solution to the world’s problems is obvious.

2. Piketty. A French economist working on inequality, Mr Piketty has made an enormous splash in 2014. His very long book entitled Capital in the 21st Century considers a lot of evidence and distills it to one simple equation: r>g. That posits that the growth in inequality is due to a mathematical problem – the return on capital (r) is higher than the rate of growth (g). Existing stocks of wealth grow more than the paycheques of workers and so the world grows more unequal.

I do not claim to be smart enough to prove that r<g, or that applying market forces to government services will always undermine them. But I hope to be smart enough to watch the debates unfold while remembering that a simple answer pleases a simple mind.

One budget is not enough to derail a government, normally. But this time could be different.

The 2014 Budget is the most significant in a long time. I have an eager – some would say obsessive – interest in federal budgets, and I cannot remember a Budget that has got as much attention as this one.

Today marks four weeks since the second Tuesday in May, and Budget headlines are still around. For example:


I went through the internet archive. It shows the 2014 Budget produced not only a much bigger spike in interest in the Budget, but a much longer tail.  It is not common for budgets to be sparking discussion three weeks after they are released – people normally move on fast and a government only dreams about getting three weeks of “traction”.


The graph above compiles mentions of the word Budget on the homepages of The Age and The Australian in the month around the Budget. I did an analysis for 2008 too, because the first Budget of the Rudd government would be a good comparison to the first Budget under Abbott. The data is a lot more spotty, but the pattern is the same. In 2008, Budget headlines died out after no more than a week.

Google trends data confirms that this Budget was a whopper as far as public interest goes.  The graph below shows share of searches from within Australia. (Google omits the vertical axis – I guess that’s proprietary data).

The massive spike in search should be a major worry for the government – search is trending away from “intellectual” topics and toward popular topics as the internet “matures” so you could expect successive budgets to show smaller spikes.



The fact that this Budget has captured the public’s imagination so sharply is a major negative for the government.


The polls show how much people like it. Newspoll has tracked the government’s fall from 51-49 on April 6 to 46-54 by June 1.

The Coalition hopes this Budget will be forgotten in 11 months when they bring down the next one, and in 23 months time when they bring down their pre-election Budget, stuffed full of goodies. 

But first impressions count, and the government may actually have counted itself out with this Budget.

One term? I wonder

Waleed Aly’s long piece in today’s Fairfax press about Tony Abbott is thoughtful, but the headline it carries: No Way Abbott Can Now Budget For Second Term is too strong.

Every reader fell greedily upon that story, I assure you, but the headline hints at far more certainty than the excellent Mr Aly projects.  Here’s three reasons why “one-term Tony” will win the 2016 election, and one reason he might not…

1. Parliamentary majority. 

Source: ABC

In the lower house, the Coalition leads Labor 90 to 55. Labor needs to peg back 21 seats to win. If you look at the pendulum, that means they need to win every seat that the Coalition holds be a margin of 4.3 per cent or less, while not losing any of their own seats.  That’s a lot.

Winning a lot of seats will be hard for Labor, because it requires not just a swing but a lot of good candidates, a lot of organisation and a lot of money.

2. Sophomore surge

In theory, someone who was an unknown at their first election becomes familiar at the second (sophomore) election. They enjoy a surge in popularity. This effect, if it exists, will help the Coalition a lot – they introduced 19 new MPs.

As the name implies, the sophomore surge is a US concept. Is it real in Australia?

Some bloggers argue yes.

This book written about the 2010 election thinks so:


That means that even if Labor gets 51 per cent of the vote in 2016, it can easily lose a lot of important seats and be stuck in opposition.

3. Budget trickery

Tough budgets now lay the foundation for easy budget later. I wrote about this last week. 

To most people, the grumbling of early 2014 [will be] as relevant to the political situation as the result of the 1974 VFL Grand final. Labor can’t get over the broken promises and keeps talking about the past, while Mr Abbott is focused on the future.

The evidence for the efficacy of this approach is mounting. Not only Victorian Premier Denis Napthine but also NZ PM John Key have unveiled more generous budgets on the eve of elections. (NZ is introducing free doctor’s visits just as we abolish them. Time to move to Wellington?)

4. But the polls are very bad.

55-45 is BAD.

I can see just one good example of a government coming back from that, in the early 90s. Keating took over a very unpopular government and won the next election.

Source: News


Howard was losing by almost as much prior to the 2001 election. I also commend to you this graphic of the newspoll:


If this polling continues, expect newspapers to push the idea Malcolm Turnbull should take over from Mr Abbott. Not only would it likely help the Liberals, the media have clearly learned that a good leadership challenge narrative attract eyeballs and, crucially, elevates their (our?) own importance.

How all these taxes will help Tony Abbott win the 2016 election

Tony Abbott is throwing his promises under the bus with glee. He promised no new taxes and has now pledged a debt levy and an increase in petrol tax.

He knows how electoral cycles work. Pain and broken promises early in your term are forgotten later:

The 2014 Budget is full of taxes and cuts.

The 2015 Budget will have a few more cuts and be austere.

Then in 2016, election promises will start getting made. “How can we afford these?” people willl ask.

Finally, with an election probably just a few months away, the 2016 Budget comes out. Lo and Behold! Australia’s fiscal position is in surplus, taxes can be cut and the spending can begin.

The press goes into a fury of congratulation over Mr Abbott’s “strong leadership.” Lots of photos appear of him standing outside new hospitals, with a big smile on his face.

To most people, the grumbling of early 2014 is as relevant to the political situation as the result of the 1974 VFL Grand final. Labor can’t get over the broken promises and keeps talking about the past, while Mr Abbott is focused on the future.

Don’t believe me? Evidence for how this works is right under our noses.

The coverage of the Victorian government’s first Budget looked like this:

“THE Baillieu government has been forced to slash more than $2 billion in spending from its first budget in an attempt to insulate the state economy from looming financial pain and deliver on its election promises.

And with Treasurer Kim Wells’ budget predicting a $4.1 billion hit to GST revenue alone over the next five years, the budget also launches a tax crackdown, with 50 new jobs at the state revenue office to raise an extra $235 million.

The Coalition went to the election promising $1.6 billion in savings, but yesterday announced deeper cuts totalling an extra $638 million.”

Coverage of the pre-election budget looks like this:



Mr Abbott is playing the long con. But with a shorter election cycle than was available to Mr Napthine, (federal is three years, not four) it’s more of a gamble. Will it work?