Publications Officer, Eddie Watson, sat down with Professor Ian King earlier in the semester to discuss his career in economics, some advice he would give to first year students, and this year’s federal budget.
A little about Professor King
EDDIE WATSON: What motivated you to choose a career in economics?
PROF. IAN KING: My decision to choose the topic of economics was largely motivated by a desire to understand a few things. Growing up, I always thought the economy was big and mysterious, and I wanted to know how it worked. So I kind of see the global economy as one of the most powerful natural forces on the planet. I see it in biological, and possibly geological terms.
Humans have a huge impact on the planet, and we’re driven mostly by economic concerns. We’re going about doing what we need to do to feed our families, and that’s pushing us all in a certain direction.
Actually, political science was my first interest. When I first went to university, I took political science but I learned pretty quickly that everything seemed to be driven by economics. So I switched into economics. In terms of it being a career, I suppose being a professor, it’s not for everybody I guess, but what it buys you is a vast amount of intellectual freedom. Society pays you to sit down and think things through. And I guess if you enjoy thinking things through, then it’s like the best job in the world. Not everybody enjoys that, but if you’re the kind of person who does like to think things out, it’s a very good job.
You also get to interact with smart, creative students, and that’s inspiring.
EDDIE WATSON: So I had a look at some of your publications, and they mostly centre around macroeconomics don’t they?
PROF. IAN KING: I’ve worked in several different areas. The meat potatoes of my research so far has been search theory and unemployment — essentially modelling unemployment. But I’ve also done work on growth and languages and, recently, I’ve gotten more involved in development topics.
EDDIE WATSON: Coming from a Canadian background, I assume languages would play a particularly important role there?
PROF. IAN KING: That’s right, I have a paper in the Canadian Journal of Economics, way back in 1993, which was really motivated by the whole language issue there about bilingualism and government policy. So yeah, that’s actually to some extent the fun of the job, you see something out there in the world that is an interesting topic, and you can sit down and craft a little economic model to try to understand it.
I guess the issue that I’m most interested in these days is about the distribution of income and wealth, and the implications for things like child mortality and life expectancy. We’re in a world where everyone knows it, but to some extent we put it to the side of our mind. There are some people who are fabulously rich, and yet everyday literally thousands of children die from poverty. So I got interested in that – mainly just from seeing some data actually, maybe 10 years ago, that absolutely shocked me.
EDDIE WATSON: And you’ve now included that in the ECON1020 course haven’t you? The last week has a greater focus on some of these more social issues such as climate change.
PROF. IAN KING: That’s right, I’ve tried to broaden the boundaries of what’s in a course like that. But at the same time, I still have to deliver the standard material that’s in a macro course: things like aggregate demand and supply, and inflation and all that. So unfortunately, I’ve had to put a lot of the topics that I find interesting sort of relegated into the last lecture.
Advice for First Year students
EDDIE WATSON: That leads me quite nicely onto talking a bit about perhaps some tips for first years. Obviously taking an introductory course like ECON1020, you would see a lot of different students from different backgrounds, for example a lot of business and commerce students have to take the course. Keeping that in mind, is there any sort of myth about economics that you think some students struggle with. For example, some students be prone to think that economics is a lot about modelling, and a lot of that modelling is based on assumptions that might not be necessarily be realistic. Do you think that sort of affects how they approach economics as a subject?
PROF. IAN KING: Yeah, so I agree that that’s a myth, although it’s understandable because economics is largely a mathematical and technical subject. We need to understand though that the world is really an extremely complex, dynamic, and chaotic place. There’s a lot going on. I would argue that economics, in a real sense, is more difficult even than physics. In physics, it’s complicated, you’re dealing with difficult problems, but mainly it’s inanimate objects you’re dealing with. In economics, you’ve got sentient beings running around doing what they do, and you’re trying to understand why they do what they do, and the implications of what they do. So it’s a very difficult topic in general I would say.
Economics also tries to be a science, and all science basically has a load of data and theories. That’s all we’ve really got. And any theory is based on assumptions. The only way you can really make any headway at all of understanding these things is by making assumptions. The art of good theorising is to build theories where you’re choosing assumptions carefully, that simplify the issue without losing the essential aspects of what you’re trying to understand. The best theorists are good at that. It’s impossible to understand the real world as it is, it’s just too complicated, because there’s a lot going on. All we can really do is sort of say, ok let’s hold these things constant, let’s look at one channel of causation at a time. That’s the kind of the way all science progresses, and economics is like that.
What we try to do is boil it down so it can be actually captured in a mathematical model. The best thing about mathematics is that it can help. Believe it or not, mathematics actually makes things easier. Once you wrestle the problem down to the state of being a mathematical model, then you can use the awesome machinery of mathematics and computation, and it will spit out the answer for you. The problem with that of course is that, because it becomes so mathematical, a lot of people become excluded. A lot of people who are interested in the topic, but don’t have the mathematical background, get frustrated because they’ll look at an economics article and it just looks like a bunch of math to them. So that’s a key problem that the profession faces.
I would say that perhaps more effort could be made to make recent economic research more accessible. There is something called the Journal of Economic Perspectives, which tries to do that. Even for that, it’s really aimed at someone who is maybe a good undergraduate student in economics. Someone off the street would struggle with that.
EDDIE WATSON: There is definitely that air of exclusivity around economics as you mentioned, do you think that’s inevitable?
PROF. IAN KING: I think it really comes out of the necessity to try to model something that is quite complicated. The other thing also is that it’s always built on assumptions, and there’s really no way around that. Sometimes the assumptions are (hopefully) innocuous, but sometimes they’re, really, pretty bad. With the GFC, a lot of economists didn’t see it coming because the models they were working with were based on assumptions that financial markets were working ok. And it turns out that really isn’t a good assumption. But to be absolutely honest, I don’t think we can do any better, we build these models because we want to be quantitative. We want to get some sort of idea of percentages, for whatever you’re interested in, and the only way to really do that is to be mathematical and by making assumptions — we just kind of have to live with it.
EDDIE WATSON: Moving on to something a little more general, if you could give go back in time and give advice to yourself in your first year of university, what would it be?
PROF. IAN KING: I would say, take it seriously [laughs]. I remember when I was a first year student, I didn’t really have very good study habits. I guess I was just enjoying the environment. But then I learned the golden rule of studying, which I try to pass on: at least 2 hours of studying for every one hour of lectures. And honestly, that turned everything around for me. I was an ok student when I started, but when I started taking it really seriously, then suddenly I was getting good marks and things pulled up.
The other thing is, if you want to study economics, I would say keep taking math courses along with economics courses. The higher you go in economics, the more mathematical it gets. Mathematics is a powerful tool, it’s actually our friend, although a kind of a demanding one [laughs]. You want to get to know it, because it’s helpful. It’s also true that if you’re really interested in economics, and you want to go possibly on to do postgraduate work, maybe overseas, then it’s true that the very top postgraduate programs in economics are always looking to see what math courses you’ve done. And in particular, they’re looking for one course, “mathematical analysis”. Here at UQ, this is MATH2400 (although the School of Economics also offers some Stat Theory courses). They look for that, you know at MIT, Harvard, really top schools, they want people who already have a mathematical analysis course under their belt. I would say, if you’re serious about doing economics – and I think it’s a great profession, it was the best decision I made –it means you’ve got to take a lot of math as well.
EDDIE WATSON: Yeah that’s a very good point, and particularly since quite often the maths is often put to one side in favour of more qualitative theory, which might be prone to giving a skewed perspective on what economics actually is.
PROF. IAN KING: Yeah, you sort of want both. You want a broad discussion of what economics is and what it could be, but at the same time, the further you get into, the more mathematically demanding it’s going to get. And if you haven’t prepared for that, then you might go to graduate school and just get blown away by the math, totally intimidated.
I’ve seen it happen. When I was in graduate school, I was relatively lucky –I took the right courses almost by accident. Friends of mine who were in the program were on their knees, because of the level of the maths, and I just felt sorry for them. They didn’t know how mathematical it was going to be.
So yeah, I would say study hard, and try to keep going with the math.
2016 Federal Budget
EDDIE WATSON: On that note, perhaps we should move on to talking about this budget then. The Treasurer claimed ‘jobs and growth’ to be the underlying theme of this year’s budget, which tends to be a recurring theme in election year budgets. Do you think some of the supply-side policies they are looking to implement, such as cutting the corporate tax rate for example, are going to be effective in helping the economy pick up as we transition from the mining boom?
PROF. IAN KING: Yeah so there’s quite a bit of debate about this. I don’t think there’s much evidence out there that supply-side policies necessarily have a very strong effect, but it depends on the nature of these policies and the types of policies. Cutting corporate tax rates can arguably induce more investment in Australia, but it also implies higher deficits and debt – if you cut taxes, ceteris paribus, there’s going to be more debt. So at least in principle, that can lead to pressure for higher interest rates, and push investment in the other direction. There are other supply side policies that I think are more effective, for example simplifying tax codes, and generally making life easier for businesses, without necessarily hurting the government budget – we simply want to be more efficient.
Another one is deregulation, that’s a big Reagan-era supply-side policy. In my view, if it’s done really well – there’s obviously a lot of regulations out there that are crazy – it’s good. However, deregulation in general has to be done very carefully. The experience we had back in 2007 and 2008 was arguably (and a lot of people with some justification say) because of overzealous deregulation. This whole, Gramm-Leach-Bliley Act, overturning the Glass-Steagall Act, deregulating the financial industry, was something that most people will argue was kind of a disaster. So it’s something that has to be done carefully; granted, it has to be done, because over time you will have these arcane laws that need to be revised. But it’s also true that wherever you have a regulation, there’s always good money to be made by somebody by relaxing that regulation. So that can lead to unscrupulous political pressure.
I guess if I think about the situation in Australia right now, flexibility is really the key. For that, and it sounds like my own self-interest I suppose, but I think about education as being really key for keeping things flexible.
EDDIE WATSON: An interesting policy put forth that has come under some criticism from both sides of politics is the youth employment package. Do you think the government’s approach here addresses what you think to be the underlying issue with youth unemployment?
PROF. IAN KING: I would say that I applaud the general policy of trying to address youth unemployment. Through skills training, internships, subsidies and so on. But I guess we’ll sort of see how the specifics of this play through. Germany has actually had quite a bit of success with a program they instituted back in the early 2000s that was similar in spirit; they called it the Hartz reforms. And by most accounts this has been a spectacular success in Germany. If you go back to around 2005, their unemployment rate was around 10%, it was actually high relative to the rest of Europe. After these reforms, their unemployment went down to like 5-6%. Even going through the GFC, in terms of unemployment, the German economy didn’t really feel the effects. There was a strong downward trend in the unemployment rate, arguably, because of the reforms. So in principle, these types of reforms can be successful.
Youth unemployment is sort of an interesting case because if you look at the data, a disproportionate fraction of the unemployed tend to be quite young, under 25. However, at the same time, young people tend to be unemployed for short periods of time. However, I still think it’s very important to tackle it because it’s important that young people get a start in their careers. There is actually quite a bit of evidence that if you enter the job market in bad times, when there’s high unemployment, it can disadvantage your whole career. If you get off on the wrong rung at the beginning, you sort of get matched with a job that you’re not particularly well matched with, then you see these people generally having a lower income profile for the remainder of their careers. Even though it’s only short term unemployment, I see it as kind of really key to do whatever we can to help people transition.
EDDIE WATSON: There has also been a lot of discussion regarding the government’s change in rhetoric with respect to the budget deficit. Given the use of fiscal policy in regulating an economy (at least from a Keynesian perspective), is there any real concern for having budget deficits? In what circumstances do you think we should recognise the deficit as being a significant problem?
PROF. IAN KING: In general, budget deficits can be a worry when they get too large, you know, thinking about the implication for the stock of outstanding debt. If we owe a lot, then we have to pay a lot of interest payments. In some countries you can see that a large fraction of the government budget is just devoted to interest payments, which is clearly not ideal.
Then the question is, well, how large is debt in Australia? And how big a problem is it in Australia? The way that it is typically measured is the debt to GDP ratio: the debt relative to the size of the economy. Australia’s debt to GDP ratio is actually quite small relative to most other comparable countries. Most European countries, you know, the UK, France and so on, are somewhere between 80-100% debt to GDP. And it’s a similar situation in the US, which has a very high debt to GDP ratio. Australia’s ratio is only about 35%, and interest payments and debt make up only about 3-4% of the government budget. I would say, at the moment, there’s not much to worry about in Australia with respect to debt. I suppose the budget situation was better in the boom times, but it’s not that we’re facing anything close to a crisis. You could say possibly the short term implications of standard Keynesian policy are actually more important than these debt issues, as you were basically alluding to.
EDDIE WATSON: If you could choose particular policies to include in the budget, what would your focus be on?
PROF. IAN KING: Ok, so here my answer is probably a little bit different. I would actually put more into foreign aid. Also initiatives to expand immigration, initiatives to help people settle. This is actually one thing I do mention in the introductory class [ECON1020]; recently, there was a study done – a numerical model of the global economy was estimated – and the authors asked the question: what would happen to global GDP if all migration boundaries were dropped? It’s what they call open borders, anyone can move and find whatever job they want, kind of like what they have, roughly speaking, in Europe. The answer to that is that it would increase global GDP somewhere between 50% and 100%. Roughly speaking, it would double the global GDP. Of course, not everybody would be for this; there will be some winners and losers. However, I think moving towards something like that is where we want to go, gently by instituting government programs to make it easy for immigrants to make the transition to being successfully employed Australian residents. That’s where I would like to see more attention.
EDDIE WATSON: So what is the substantial cause for this big leap in GDP?
PROF. IAN KING: In the study that I mentioned, it’s efficiency gains. Very simply, allowing labour to move to where it’s highest marginal product is. You have people who are sort of trapped, to use somewhat strong language, in developing countries where there are no jobs. The unemployment rate in Zimbabwe is 95%! People have to live. These are smart people, people who would like to work, and put their children through school, and somehow they are just locked in these countries, and it just hideously inefficient and of course, also very inequitable. It’s inefficient that we have these human resources just being tucked away in very unproductive places.
EDDIE WATSON: Thank you very much for your time.