SEAN INNIS. Economic thinking has driven policy making in the past, but will it in the future? Part 1

This article – the first in a two-part series – discusses the changing dynamics of the Australian policy environment, and how that affects the role of economics in the determination of policies. The second part tomorrow, will discuss the nature of the future challenges to which economic thinking will need to adjust.

Many in the policy community look to the 1980s and 90s as a pinnacle of rational policy making. And it is certainly true that this period saw reformist governments, working closely with other key actors, make sweeping changes to Australia’s policy landscape. The reforms were not without detractors but did enjoy reasonably broad support across political boundaries. Well, at least that is how it looks from today.

Track forward and many of the key players from that era look almost bewildered at the policy making environment in Australia today. In their eyes, Australia is now where politics and populism rule, where evidence matters less than ideology, and where the national interest has disappeared into a sea of competing self-interests.

A major feature of the 80s and 90s was the key role economic thinking played in policy development. Widely held economic theory, coupled with empirical evidence in areas like tariff policy, combined to present compelling answers to major problems besetting the nation. Economics dominated the policy kingdom; with social, environmental and foreign policy dancing to the beat of the economic drum.

Today, the strength of that drum within government has diminished. Economic thinking remains important but no longer dominates policy discourse – at least outside the overall management of the economy. Other frames, notably one around national security, have risen. Far from setting the agenda, many economists now wonder how to be heard.

There is little doubt that Australia owes a debt of gratitude to policy leaders, inside and outside government, of the 80s and 90s. The economic thinking which underpinned decisions then has helped create a socially coherent, prosperous and globally connected society whose economy has grown steadily for 30 years. But past success is no guarantee of future success. And it is increasingly clear that economic thinking needs to adjust if it is to continue to play a major role in guiding future policy.

To understand how economic thinking needs to evolve, we first must look at some of the key dynamics which define the policy environment today.

Today’s policy environment: four dynamics

Every era of policy making is different and complex. Looking backwards simplifies the world: today’s complexities and uncertainties become tomorrow’s points of historical simplicity. Even a short conversation with some of the key policy players of the 80s and 90s reveals nuance and uncertainty that history generally ignores.

Even so, there are a range of reasons why the environment confronting policy makers today differs from that of the past. Understanding these dynamics is important, as it defines both the context in which policy decisions are taken and the objectives those decisions are seeking to achieve. Of the many dynamics driving policy today, four seems particularly relevant to the role of economic thinking.

Dynamic 1: Expectations of government have increased and expanded

Expectations of government appear to have both increased and expanded over time. Competition for votes has tight focus on meeting the, often competing, needs and desires of the population. The problem, of course, is that when those seeking election lose sight of a coherent role for government or its ability to deliver, this strength becomes a weakness.

Democratic competition may be one reason for the increasing role government is playing in protecting people from harm. This is part of a long-term trend, which has seen government more willing to assume responsibility for ensuring the goods and services consumed by people are, to use the legal concept, fit for purpose. It has also seen government more willing to compensate people for losses incurred through bad luck or outside agency. This trend has not been the result of a conscious ideological agenda, but a path of policy evolution built on many small decisions over time.

Expectations have also expanded on what government should take an interest in. Care services provide a prime example. It was not that long along that, outside health, government funded care was a residual function focussed on those at the bottom of the economic distribution. Today government plays a leading role in most areas of formal care – health, aged, disability and child. In a similar way, the role of government in protecting and promoting a sustainable the environment has increased dramatically in response to both scientific understanding and community demand.

Dynamic 2: Confidence in government’s ability to deliver has fallen

Rising expectations have occurred alongside falling confidence in government. Trust in both government and the institutions of governance in our society are at historic lows. Amongst the complex factors behind this, two stand out.

First is that the ability of government to control some of the key factors influencing societal wellbeing has declined. This falling influence is partly the result of past, very good, policy decisions based on sound economic advice. There can be little doubt, for example, that Australia’s open, market driven, economy has delivered great benefits to our society. But with these benefits has come a lessening of government’s ability to intervene effectively in the economy. Globalisation inevitably means that outside forces, rather than home grown decisions, play a key role in our economic fortunes.

In a similar vein, it is increasingly clear that many of critical issues facing our society cannot be effectively addressed by Australian governments alone. Climate change is an obvious example. Effective regulation of supranational platform-based businesses like Google and Facebook is another. This does not, of course, relieve Australian governments of their responsibilities in these areas. But it does add to the complexity of policy making. And it is also notable that much of the economic benefit we enjoy today from globalisation comes from international agreements for which Australia was a keen advocate.

Government has also failed to deliver in areas that matter to society as a whole. A series of Royal Commissions and other inquiries has highlighted genuine failure in areas where government plays a major regulatory and/or delivery role – including through the creation and management of markets. These failures are not simply a matter of the rules failing to keep up with rising community expectations. In the banking royal commission, for example, existing rules (set by policy) were not the major problem; rather it was the culture of the banks and the ability of government to ensure regulatory standards were met at most question.

Dynamic 3: Policymaking has become more targeted and precise

A key shift in policymaking has been away from the setting of broad-based rules and institutional structures towards policies targeting relatively small groups seeking very specific outcomes. Even major initiatives, such as the National Disability Insurance Scheme, tend to affect (at least directly) relatively small sections of the population as a whole.

There are many reasons for this shift. One is maturity. Australia has in place comprehensive institutional structures and broad policy frameworks in place for most areas of policy interest. Changes are occurring within these structures rather than fundamentally to them.

A second reason is technology. Technology has allowed policy to target smaller groups of people. For example, actuarial analysis of Australia’s welfare system is able to identify very small groups of people for early policy intervention in a way that was not possible before. Modelling has also underpinned (often false) precision by claiming to show the detailed outcomes of policy on individuals and small groups. This encourages, for example, the pursuit of finely grained decisions designed to achieve detailed policy ends and to avoid policy “losers”.

The changing balance between broad-based policy making and precision-based policy making has implications for the way governments engage with the population. In particular it makes it harder for government to connect individual change to a narrative about society as a whole. The consequence is that policy is almost always about “someone else” reinforcing a “what about me dynamic” in the game of competing policy claims.

But within the pursuit of precision lies some dissonances. In responding to threats from the very few, recent national security legislation has been designed in a way that potentially captures the many. In this case, flexibility and convenience for the enforcer has proved more important than precision.

Dynamic 4: People live global and local lives

A key feature of the 21st century is the extent to which global dynamics influence lives of Australians. As noted earlier, the economic path of our nation is largely determined by events overseas rather than decisions at home. More and more people are engaging directly with overseas suppliers in making purchases, and more spend time overseas. Interest groups and cultural pursuits, facilitated by social media and internet, often cross-national boundaries. People live globally.

People also live locally, as they have always done. On a day to day basis the places they go and people they see tend to be geographically bounded. The weather, travel times, service availability, the availability of key resources (such as water) and local amenity play a major role in determining individual well-being. Local opportunities too are critical. The bottom line is that most people care about the community they live in and want to see it thrive.

Overlaying this trend has been a substantial long-term shift in the economic geography of the nation. Agglomeration effects have seen cities grow. Technology change, and the pursuit of economic efficiency, has seen some regional towns shrink as other grow. Immigration patterns and population ageing is creating greater diversity. Changes in ownership structures, especially away from the family-run farm, is affecting the size and dynamics of towns. These long-term trends factors are seeing a growing perception of unevenness in the prospects of different places across the nation. Weather events, natural disasters access to resources are also emphasising the vulnerability of individuals and places to Australia’s harsh and changing climate.

These dynamics are changing the focus of policy making. National decisions, during periods of sustained growth (now in serious question), have become less important than local ones in influencing the day to day lives of many Australians. This has heightened the focus of national governments on localised issues, creating competition with other levels of government and further blurring traditional lines of policy responsibility.

Conclusion

 The above four dynamics are by no means the only influences on policy today. But each of the four is playing a significant role in defining the deeper environment in which policy is made. The impact of COVID 19 also provides a reminder of how quickly the policy landscape can change, challenging past assumptions and creating a need for new thinking.

In this environment there is a risk that past wisdom gets jettisoned too quickly in favour of new thinking. But there is also a risk that past successes and formulae (from microeconomic reform to stimulus) blind us to the need for our policy thinking to respond to a new normal. This is biggest challenge for economic thinking: how best to capture the value it has provided in the past while adjusting to the emerging policy landscape that will define our future.

Sean Innis is inaugural director of the Public Policy and Societal Impact Hub at the Australian National University. A version of this article was published in The Mandarin on 2 March 2020.

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4 Responses to SEAN INNIS. Economic thinking has driven policy making in the past, but will it in the future? Part 1

  1. Geoff Davies says:

    “the 80s and 90s. The economic thinking which underpinned decisions then has helped create a socially coherent, prosperous”

    Hoo boy Sean. Can you look at some actual, simple evidence? Try this
    http://johnmenadue.com/geoff-davies-hawke-and-keating-set-australia-and-labor-up-for-failure/

    In short, financial instability and crash, increasing inequality, increasing fragility and … critical at the moment … increasing dependence on vulnerable supply lines. Other disasters besides.

  2. Wayne McMillan says:

    Sean, The failure in the economic policy making environment has been fundamentally compromised by economic groupthink across key govt departments and the Reserve Bank. This group think mentality of Treasury and Prime Minister and Cabinet, has encouraged flawed macro-economic thinking right across the public sector for over 30 years. It started with poor economic training at universities, then moved onto hiring graduates with flawed orthodox macro economic thinking like the senior govt policy officers/economists who hired them, and it continued even after the Global Financial Crisis of 2007/2008. Australian macroeconomic policy making needs a major rethink and it must start with good macroeconomic training at universities instead of the nonsense that masquerades as sound economic thinking.

  3. Scott MacWilliam says:

    `There is little doubt that Australia owes a debt of gratitude to policy leaders, inside and outside government, of the 80s and 90s. The economic thinking which underpinned decisions then has helped create a socially coherent, prosperous and globally connected society whose economy has grown steadily for 30 years.’

    `Little doubt’? Clearly Sean Innis is one of those economists who reads little beyond the self-congratulatory prose of economists who advised governments of that period. This is easy in Australia, where parochialism flourishes, but not so easy elsewhere. There the devastation caused, in some measure, by the influence of destructive economic ideas which also held sway in Australia, has been subject to critical analysis. The ex-Hayekian John Gray on the toxic effect of neo-liberalism in the UK is just one such critic, of whom there are many in other countries.
    Here in Australia, the destruction of trade unions and other forms of popular solidarity, has been praised as one of the finest achievements of the Hawke -Keating governments, encouraged by the British Conservative Party’s bagman Lord McAlpine of Once a Jolly Bagman fame. And there are many more pernicious effects of economic thinking of that period which could easily be listed,including a casualised, insecure work-force shorn of all semblance of class confidence.
    In short, think long and move beyond limited academic circles.

  4. Evan Hadkins says:

    Economic ‘thinking’ lead to the transfer of responsibility for old age from government to money markets – and vast transfers of wealth to the super’ funds. This was disastrous – as people’s returns in our low interest rate environment show.

    The big challenge is the habitability of our planet. No current politician has the courage and/or intelligence to take this with the seriousness it warrants.

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