A good time to be modest

23 Mar 2009

It's important to remember evidence-based policy focuses on specific interventions and can't always take into account the context in which they are implemented, writes ILAN KATZ.

THE social policy community (along with just about everybody else) is preoccupied with the impact of the financial crisis. I am not going to add my predictions to those of other commentators in the media and learned journals, but it is interesting to observe how the financial crisis has created some fascinating tensions in social policy thinking.

The most interesting aspect of this crisis has been the ambivalent reaction of the social policy community. On the one hand, most left-leaning people, including the vast majority of social policy academics, have viewed the crisis with a degree of schadenfreude, because it seemed to be a retribution for the excesses of greedy banks and large corporations. For some it has heralded the death of neo-liberalism or even capitalism itself. The scale of government bailouts has highlighted the need for state intervention in a number of sectors (finance, motor industry, child care), and this has severely weakened arguments for shrinkage of the state. Furthermore, the crisis has been caused in part by lax regulation and this has strengthened the arguments for stronger regulation, not only in finance but in other areas such as child and aged care.

The neo-liberal argument that regulation is a burden on service providers who would do much better with deregulated markets and little government supervision just does not hold anymore. So the combined effect of a reduced belief in “market” solutions to social problems, increased respect for regulation, and greater recognition of the state’s role in sorting out problems in society seems to herald a new and positive era for social policy, despite the short-term pain. On the other hand social policy, like all sectors of the economy, has been hit by the economic downturn and is likely to suffer quite considerably. Many ambitious social programs that the government intended to implement are now likely to be postponed or put off altogether. More parochially, universities are likely to suffer considerably, and the expected injections of cash into tertiary education are unlikely to be as big as expected. In times of fiscal restraint, research often suffers, as governments prioritise service delivery. This has not yet happened but it is a distinct possibility that research opportunities will reduce rather than increase.

Faulkner's speech


Further tensions arise in this situation. Firstly, it is not only greedy banks that have suffered from poor investment decisions. Many NGOs, universities and superannuation funds have equally been hit by the downturn in the markets. Should these institutions also be considered “greedy”? In any case this development shows how integral the stock market is to the whole of contemporary society. Another interesting tension is that one of the prime causes of the current financial crisis – the sub-prime mortgage issue – was caused at least in part by the US central bank relaxing lending rules to allow ethnic minorities into the housing market. So the motivation was not only greed and suspicion of regulation, and the consequences for future home ownership for marginalised communities are a real challenge.

A rather different message emerging from the crisis is the recognition that policy – in this case financial policy – is often determined by “groupthink.” Even the most creative policy-makers and politicians began to believe that “boom and bust” were over and that the world was set for indefinite growth. Financial analysis has a much longer and richer history than social policy and a lot more data to draw on. Yet despite the brilliance of the analysts, the sophistication of the analytic tools, the richness of the data and the length of historical precedent to draw on, fundamental mistakes have been made and all the sophisticated modelling has shown to be based on flimsy foundations.

Perhaps society is just too complex to predict or manage. Prediction (or modelling) relies on things happening in the future in more or less the same way as they have happened up to now. Most of the time this is accurate, but from time to time these assumptions prove to be wrong and the models invalid. This should offer some caution to policy-makers who rely increasingly on this kind of analysis for determining policy directions.

This also bears on the wider question of evidence-based policy (and practice). The financial crisis was not brought about because the models being used were inadequate. It was a result of externalities that were not even factored into the models. Similarly evidence-based policy focuses on specific interventions or policies and does not take into account the context in which they are implemented. The crisis has shown that it is the context which will often determine the success or failure of the policy, not only the specifics of the policy or intervention itself.

Perhaps if we set our sights a bit lower then a more sober and realistic picture will emerge. Although it may not be possible to predict or control the market or any other social phenomenon, it is possible that each time there is a crisis we are able to learn from mistakes so that the next crisis will be a bit easier to weather and the consequences will be less damaging. But this requires recognition that social policy may only have a marginal effect on societies and that other forces are more important for determining societal outcomes.

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