Restocking the Economic Toolkit: Changes to Social Policy and the Ability of the State to Manage the Economy

Article excerpt

Recent election campaigns have been dominated by the theme of 'responsible economic management'. Both major political parties have sought to take credit for the long economic boom in Australia. Yet, increasingly financial markets and economic commentators see governments and politicians as largely irrelevant to the task of economic management. Decades of deregulation and privatisation have removed, or placed political constraints on the use of, many of the traditional levers of economic policy.

The efficacy of the new policy-free economic model remains contested by political economists. Many continue to argue for more traditionally interventionist approaches, from a formal industry policy (Stilwell 2000) through to more radical interventions (e.g. Frankel 2002; Mitchell & Mosler 2002). Many of these proposals have merit. However, within the current framework, policy options are confined.

This article draws on an earlier Keynesian approach to Australian social policy and an emerging economic literature on welfare provision to argue for a renewed focus on the economic implications of welfare state policies. A number of social policy analysts have argued that Australia's model of social policy has often used economic policy tools and goals such as macroeconomic stabilisation, arbitration and full employment as the basis for achieving social policy outcomes (Castles 1985; Smyth 1994; Cass & Freeland 1994; Battin 1997). Here I wish to focus on the reverse, that is how the policies of the welfare state play a role in the traditional jobs of economic policy, particularly in the context of the (largely ideological) constraints that many claim prevent governments from utilising other more traditionally 'economic' tools.

Social Policy and Economic Policy

The distinction between economic and social policy is a contentious and not always useful one. However, since the 1970s, there has been significant change in the policy frameworks generally associated with economic management--such as interest rates and exchange rates, public ownership, trade policy and industry policy. Yet the scale of public spending, largely connected to the welfare state, has, if anything, increased. This suggests different political dynamics, and makes it more useful to distinguish between economic policies where the deliberative role of the state has been curtailed and welfare state or social policies where government appears to be playing a larger role.

Demographic changes, such as population ageing, along with the rise of an affluent consumer culture, have changed the way governments interact with the economy. Many of the biggest economic challenges facing the long economic boom are now fundamentally problems of social policy. The declining size of the workforce, increased dependency ratios, rising inflation, the shortage of skilled labour, even production bottlenecks--many of these problems are best understood as problems of social policy, or are at least significantly connected to social policy decisions. While the economic debate in Australia has been focused on the narrow confines of aggregate public spending, social policy reforms have perhaps become more crucial to achieving longer term economic goals.

A number of social policy analysts have highlighted the economic costs associated with under spending and privatisation in individual areas of social policy. Similarly, many economists have focused on the economic, as well as redistributive, role of welfare state policies (Barr 2001; Quiggin 2007). My aim is to build on this analysis to make a broader argument about how social policy can be used in a coordinated way to achieve desirable social outcomes and address some of the challenges now facing the boom. In effect this is an argument to reunite the analysis of economic and social policy and to examine the role of the state in managing both these spheres.

This article begins by addressing the emerging consensus amongst many financial and economic commentators that governments are less and less responsible for the task of macro economic management, and the policy changes that have given rise to this perception. …