Economics, Policy

65 – Thinking like an economist 20: Challenges for policy economists

In this article I discuss some of the more common challenges that economists face when attempting to influence the policy process to promote the public interest.

In the past few years, a fair bit of my research has focused on Australian government policy in the area of natural resource management. I’ve concluded that the design of that policy is generally pretty poor if we want to achieve meaningful outcomes in a cost-effective way. I wondered whether it is just the natural resource management area that have such poorly thought through policy, but talking to some colleagues in Canberra, I get the impression that it is pretty normal across many, and perhaps most, policy areas. I don’t know if that’s true, but if it is, it makes one doubt whether it’s worth trying to do anything about it – it suggests that the weaknesses are caused by more than just problems in a particular policy area. I haven’t raised the white flag yet, but it is important to be realistic about the natures of politics and bureaucracies, and their implications for developing good policy.

Related to that, I was recently asked to speak about the challenges for economists in the policy sphere. Here are some specific challenges I identified, extracted from Pannell (2005b).

There are often conflicts between short-term political objectives and long-term needs for efficient policies. “Good advice on economic policy is often about convincing others that short-term responses are inappropriate” (survey respondent Alistair Watson, quoted by Pannell 2004).

As an outside expert, it can be difficult to establish credibility with policy makers, especially if you are not based in their local region. A US study found that, to a remarkable extent, state-level policy makers limit their use of expert advice to within-state experts. The tendency to rely on local, trusted information sources means that the selection of information to use in policy formation is partial and somewhat hit-and-miss. Indeed, the “experts” who are listened to may not contribute to a more efficient or effective policy. They may not even be experts in the relevant issues: “Much of the problem with bad policy comes from smart, articulate people who are operating out of their skill zone” (survey respondent Gary Stoneham, quoted by Pannell 2004).

Politicians like a crisis because fear is a more powerful motivating device than comfort. The community responds to catastrophic predictions (Lomborg 2001), including, recently, the Y2K bug and global climate change. There is a strong temptation for advocates to exaggerate the severity of the problems they wish to have addressed, contributing misinformation to the policy decision process. This may prompt urgent and short-term responses, when the real need is for careful consideration and analysis before policy strategies are selected.

There is often a mismatch between the complexity of policy problems and the simplicity of policy responses. For some problems, in my experience particularly environmental problems, there can be a great diversity of technical, economic and social issues that need to be understood. This makes it difficult even to communicate succinctly to senior policy players who are not already well informed about the details of the problem. Policy proposals need to be simple and bland enough to achieve agreement, and this can tend to drive decision making to a lowest common denominator.

For some issues, an efficient policy would involve different policy mechanisms in different circumstances (e.g. Ridley and Pannell, 2005). However, the policy process prefers a simpler policy structure, preferably with a uniformly applied policy mechanism. In some cases this might be justified on the basis of lower transaction costs, but in others I suspect that it results in substantial opportunity costs to society.

Complexity and diversity can mean that there is no consistent message going to policy makers. For example, few people are well informed about the full range of background information relevant to salinity in Australia (which include hydrogeology, economics, biology, engineering options, water resources, the context of commercial agriculture, social aspects, biodiversity, and politics), and many contributions to the public debate are narrowly conceived and poorly justified (Pannell 2005a). Even among relatively well-informed commentators, the nature of the required policy response is disputed. Some expert commentators focus on the need for hydrogeological data for targeting investments, some on the development of new management options, some on the use of engineering options, some on the importance of communication and education. One has sympathy for policy makers trying to decide whom to believe.

Politicians like everyone to feel that they are winners, or failing that, politicians like to closely control who are the winners and losers. This can result in a tendency for program funds to be shared widely among all members of the relevant section of the community, when an efficient approach would involve targeting of funds to priority cases. One hears the concept of ‘fairness’ invoked in discussions about this. It appears that political fairness tends to focus on one dimension of fairness: the expectation of current beneficiaries. Whether it is fair to taxpayers to spend tax dollars in programs that will not be very effective in achieving their objectives is less often considered.

The very existence of a system of funding creates considerable political pressure for its continuation. Understandably, those involved in spending the funds actively participate in the political process to endeavour to preserve the system. Even if new information about the policy issue indicates that a change is needed, it may be politically difficult to achieve. For example, the National Landcare Program in Australia created many new positions for Landcare facilitators. The facilitators were imbued with a particular philosophy of working with farmer groups to address environmental issues on farms. Over time, it has become clear that this approach and philosophy are less effective in preventing land degradation than was originally expected. Partly in response to this, the Program is undergoing change. However, changing the system is made difficult by the existence of many hundreds of facilitators who are philosophically connected to and financially dependent on the existing system, connected within bureaucratic and political networks, and able to mobilise the more committed farmers from their groups to fight in defence of the status quo.

So what, then, is politics?

“Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.” Ernest Benn

“Politics consists in choosing between the disastrous and the unpalatable.” John Kenneth Galbraith

“Politics is perhaps the only profession for which no preparation is thought necessary.” Robert Louis Stevenson

“Politics is supposed to be the second oldest profession. I have come to realize that it bears a very close resemblance to the first.” Ronald Reagan

He’d know.

David Pannell, The University of Western Australia

Further Reading

Pannell, D.J. (2004). Effectively communicating economics to policy makers. Australian Journal of Agricultural and Resource Economics 48(3): 535-555. Full journal paper (138K pdf)

Pannell, D.J. (2005a). Farm, food and resource issues: politics and dryland salinity, Australian Journal of Experimental Agriculture 45: 1471-1480. Full journal paper (103K) Summary version (19K)

Pannell, D.J. (2005b). Policies and politics: Challenges and opportunities for agricultural and resource economists, Paper presented at New Zealand Agricultural and Resource Economics Society Conference, Nelson, New Zealand, 26-27 August 2005, Full paper (85K)

Ridley AM and Pannell DJ (2005). SIF3: An investment framework for managing dryland salinity in Australia. SEA Working paper 1901. CRC for Plant-based Management of Dryland Salinity, University of Western Australia, Perth. Full paper (126K pdf) Summary version SIF3 project page