Academic journal article Agenda: A Journal of Policy Analysis and Reform

Real-World Economic Policy: Insights from Leading Australian Economists

Academic journal article Agenda: A Journal of Policy Analysis and Reform

Real-World Economic Policy: Insights from Leading Australian Economists

Article excerpt

Jan Libich (ed.), Real-World Economic Policy: Insights from Leading Australian Economists

(Cengage Learning Australia, 2015)

The book is a treasure trove of economic policy lessons that brings together some of the brightest Australian economic minds. It caters to a wide audience. For people with no economics background, the book goes a long way in explaining complex issues in a nontechnical and accessible manner. For policymakers, it offers an educational and comprehensive account of how some of the far-reaching policies were developed in Australia. For both young and established economists, it will spur them to think about interesting policy topics and consider different economic rationales. Finally, the book offers a novel way of presenting a dialogue on policy issues by means of interviews, and through questions raised by members of the audience present during the interview.

The discussions on designing effective microeconomic policy are particularly helpful for policymakers. Using the baby bonus as an illustration, the contributors show how public policy can create perverse incentives. Their discussions reveal how thousands of births were scheduled so that parents could qualify for the baby bonus. Clearly, in designing policy, the government should be mindful of 'introduction effects'. Importantly, the discussion puts a strong emphasis on holistically thinking through the impacts of policies, including the indirect, second-round effects.

Bob Gregory adds valuable insights about how to think about policy, and how politics interacts with economics. Gregory suggests a useful heuristic for all policymakers: don't just consider the effect of a policy, but also look at the counterfactual of either no policy (or an alternative policy) and then do a cost-benefit analysis to choose the best option. Gregory's counsel to be flexible in policy rather than rigidly applying textbook remedies is important. The example given in the book includes using both the monetary policy and fiscal policy to fight recessions and then looking at the context and the economic situation of each country to figure out what type of policy is needed more. One thing the chapter could have explored more is a deeper discussion on the strengths and weaknesses of monetary and fiscal policies and the context in which one should be emphasised over the other.

The chapter on fiscal policy rules provides a discussion on essential rules for fiscal deficit, debt and government size. It also discusses how systems of financial penalties that provide desirable incentives may damage the standing of politicians who institute them. However, this chapter could have also explored the specificity of the rules. For instance, Stephen Kirchner hints at setting the fiscal deficit at 2 per cent of GDP, but there was no discussion about why this particular figure makes more sense than any other number. The chapter also dismissed using fiscal policy to stimulate aggregate demand, which seems a bit incompatible with the evidence showing that fiscal policy played an important role in mitigating the impact of the global financial crises. This notion of not using fiscal policy to stimulate aggregate demand also seems inconsistent with some other chapters of the book that suggest that monetary policy and fiscal policy should be used to complement each other in times of economic crisis.

The chapter on population and ageing further explains how an ageing population and demographic trends will affect the fiscal situation of several countries. It shows how as the ratio of retirees to workers increases, the fiscal deficit is either going to increase or the governments will have to change some of their promises. In particular, the chapter points out that the ratio of workers to retirees has decreased from about six half a century ago to about four (or even three) currently, and then presents forecasts that suggest this value will decrease to around two within the next three decades. …

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