12
Sep
2017

What philanthropy, advocacy, and policy influencers can learn from political economy

by John Daley


Address to Philanthropy Meets Parliament Summit, Tuesday 12 September

INTRODUCTION

This Summit is looking at the place of advocacy in philanthropy. It’s a big topic.

I want to focus on the broad public interest. Advocating for the interests of refugees, the dispossessed, and the marginalised matters. These things matter. A lot.

By contrast, things that affect everyone – but only a bit – tend to have less heart-rending human stories and fewer pictures for the evening news. But as I will show, the effects add up to very big numbers. And so these questions about the broad public interest also matter. A lot.

Consequently, philanthropic funding to advocate for the broad public interest is vital to getting better government. I’m going to explore four themes about the public interest and philanthropy.

First, I’m going to introduce the concepts of “political economy” and “public choice”. As I’ll explain, these theories predict that many policy decisions get made in favour of vested interests, so that on average we are all worse off.

Second, sometimes we get better results than the somewhat depressing predictions of these theories. I’ll discuss why, even in the face of powerful vested interests, we can sometimes get decisions that on average make us better off – in other words they are in the public interest.

Third, I’ll look at what it takes to be successful in defending the public interest.

And finally, I’ll ask what are the implications for philanthropy.

WHAT IS “POLITICAL ECONOMY”

“Political economy” may be an unfamiliar term. But in essence it’s about walking and chewing gum at the same time. It analyses our world using concepts from both politics and economics.

So for example, we can examine political actors – politicians, parties, lobby groups, individual voters – and assume that (like economic actors) they try to maximise benefits and minimise costs in their self-interest. The decisions of multiple self-interested political players interact to produce overall political outcomes which affect our economic welfare.

Public choice

One branch of “political economy” is known as “public choice theory”. This theory explains why politics often produces outcomes which benefit a particular interest group, but which reduce overall welfare.

The applications of public choice theory

Take salary packaging. Overall welfare would increase if we did away with it. After all, the salary packaging “industry” isn’t really an industry. It doesn’t actually produce anything, and it requires an army of lawyers and accountants and consultants to execute. But people employed in the salary packaging exercise depend on it for their current livelihood, and so they lobby hard to keep the complex rules alive.

Public choice theory predicts that concentrated interests – like the owners of salary packaging businesses – are likely to be pretty effective in getting political outcomes that suit them. If they do, then most people will be worse off. The universe of taxpayers will all have to pay a bit more tax to keep the packaging industry alive. The general population will all be a bit poorer on average because talented people are spending their time figuring out ways to game the tax system rather than doing something useful. But because the interests of the general population are diffuse, they often don’t prevail.

In a famous book, The logic of collective action, Mancur Olson explained why concentrated interests win so often, even when overall we lose. The essence of his argument is that collectively diffuse interests – what we often call the “public interest” – tend to be less organised, and to lobby less. Krystian Seibert summarised how this theory applies to advocacy for policy change.

In a large group, there’s a good chance that the benefits of change for any individual will be smaller than the costs of getting informed and organised. Australia overpays for its pharmaceuticals by more than $500m a year. It’s costing the typical taxpayer about $40 a year. Getting to a parliamentarian’s office is usually going to cost an individual much more than that. Forming some kind of Coalition for Pharmaceutical Reform typically gets harder if a lot of people are involved. And there’s a free-rider problem: every person affected has incentives to hang back and hope someone else does all the work taking on big pharma.

By contrast, for the 43 members of Medicines Australia, that overpayment is worth more than $10m a year. Each. That’s worth getting out of bed for. And they do. Through Medicines Australia, they employ 17 people to ensure that your parliamentarians don’t change things. And to help, most of them employ plenty of in-house people with titles like “Executive General Manager of Government Affairs”.

The problems are particularly acute in health. They’ve become institutionalised as Commonwealth governments now routinely sign five year agreements with various health lobby groups in which the lobby groups promise not to oppose some usually pretty marginal changes in return for the government promising not to make any other policy change that affects their interest over the five years of the agreement.

Our policy is riddled with examples of this kind of thing. As Paul Fritjers and Gigi Foster found when they analysed Australia’s Rich 200 list, “over 80 per cent of the wealthiest Australians have made their fortunes in property, mining, banking, superannuation and finance generally – all heavily regulated industries in which fortunes can be made by getting favourable property rezonings, planning law exemptions, mining concessions, labour law exemptions, money creation powers and mandated markets of many stripes”.

Democracies have particular problems because of the ballot box calculus. About 2.5 million Australians receive an Age Pension. They have lots of incentives to lobby for higher pensions – and they’re certainly more likely to be noticed at election time. The cost of the pensions for 2.5 million people are spread amongst 10.7 million people who collectively pay the tax that funds those Age Pensions. And so each Age Pensioner has four times more reason to care than each taxpayer. These dynamics are playing out in most developed economies, with generous pension schemes that are probably not sustainable in the long term.

And once a special interest group has captured an advantage it becomes even harder to take it away. Most of us have a behavioural bias to care more about keeping what we have than making a new gain. And so if the public interest lies in taking away some special privilege granted to a particular group, that group is likely to fight particularly hard to avoid losing it. And the group is likely to fight much harder than the general public who only have the prospect of a future (and individually small) gain.

POLITICAL ECONOMY ISN’T EVERYTHING

But public choice isn’t everything. Reality is more messy than theory. There’s at least three wrinkles that must be added to public choice theory.

• Players in the policy game at least claim to care about the public interest.
• Institutions can be created that systematically represent the public interest and oppose vested interests.
• The dispersed interest can get so large that people do organise collectively – or at least start to vote that way.

The culture of public interest

First, we have a culture that says that policy decisions should be made in the public interest. And so, in public at least, even the most venal of interest groups constructs arguments about why the policy outcome they want – invariably an outcome that benefits their particular interests – is also in the public interest. Often they pay accounting firms a lot of money to come up with a big number about their contribution to the national economy. And sometimes they’re right.

Sometimes this culture gets pretty thin. For example, the Property Council opposed changes to negative gearing primarily by talking about how many people would be adversely affected in each electorate. Not much principle and public interest there.

But most of the time, everyone in the policy game feels constrained to focus on the public interest. As a result, lobbying can be more or less effective, depending on how stretched the public interest argument becomes. The more that the arguments are challenged, the less effective they are.

Perhaps the most important example of this in our history is the work of the Centre for Independent Studies back in the 1970s and 1980s, explaining the costs of protectionism. Ultimately governments bought the story, brought down the tariff barriers, and we have all benefited enormously from the consequences. And of course, this was part of a wider global movement resisting the vested interests that benefited from restrictions on free trade.

Institutions

Second, we can set up institutions that give the public interest more voice. For example, the Productivity Commission (once upon a time the Industry Assistance Commission) was set up precisely to quantify and publicise the public interest in reducing protectionism. And over time the Productivity Commission has been remarkably effective in both building public awareness about the cost of tariffs, and in changing laws so that Australia has one of the least protectionist regimes in the world. And on average, Australians are much better off as a result.

Of course, institutions don’t always work. Any number of government agencies, and the public service itself, are supposed to represent the public interest. And often they do. But often they fall victim to “regulatory capture” – the people they are supposed to regulate end up with disproportionate influence over them. It’s human nature. If people who work on intellectual property policy in the Commonwealth government spend most of their day talking to intellectual property lawyers, and copyright holders, and very little of their time talking to ordinary members of the public who read books, it would be no surprise if they wound up more worried about the interests of IP holders than the public interest.

The calculus can change

Third, the calculus can change if the dispersed interest gets big enough. For example, Australia pays a lot to have its superannuation administered and managed. The costs per Australian have been increasingly rapidly for years. But we’re now at the point that it costs $21 billion a year. That’s more than $2000 per household. And at that point the political economy changes. It becomes worth it for households to take an interest – and for politicians to resist the blandishments of the super industry. And so we’ve seen grinding steps towards reform through a Grattan Institute report, the Murray Inquiry into Financial Services, and a Productivity Commission report. We’re not there yet. But my guess is that we will be soon, because the costs to households are now large relative to the costs of taking an interest.

WHAT DOES IT TAKE TO BE SUCCESSFUL

So what can make a difference in trying to defend the public interest?

Arguments matter

As the super argument illustrates, it often requires someone to do the work to show where the public interest lies. Sometimes this is about doing the analysis. The superannuation industry came up with a huge range of specious counter-arguments about why $21 billion is an eminently reasonable price to pay for managing our superannuation. Three people at Grattan spent 12 months dealing with these arguments, which in the past might well have distracted decision-makers.

And it’s also important to get these arguments into the public debate. Not everyone is a policy wonk. But plenty of people take a passing interest. If you look at the front page of the Herald Sun or the Telegraph, ultimately they’re often about policy issues.

Converting a complicated policy analysis into things that speak to the front page of the Herald Sun isn’t easy, but it can be done. For example, four years ago the Essential Services Commission of Victoria – a government agency – had done the work showing that retail electricity competition wasn’t working so well. The established retailers deliberately used very confusing advertising to make it harder for people to compare prices and know if they were getting a good deal. But nothing happened.

Then six months ago Grattan Institute published a report called Price Shock that laid out what was going on in words the Herald Sun reader could grasp. Within days both the Commonwealth and State governments had announced substantial reviews. And the Victorian government is said to be close to introducing legislation to wind back the regime.

Advocacy

A bullet-proof argument and crisp communications are never enough. The work of advocacy then begins. Usually it will be important to talk both to the public and directly to decision-makers and insiders. A Grattan Program Director typically meets 140 stakeholders per year. And it’s still not enough. James Button, Grattan’s former Editor, once warned me: “Until you think that if you have to go through the argument one more time you’ll be sick, you’re not winning.”

Patience

As this implies, effective advocacy takes time. We’re told that the same-sex marriage campaign in the US took 10 years and $15 million before it gained momentum. A week might be a long time in politics, but three years is a short time in policy. It took 26 years to get a GST after it was recommended in the Asprey report. In the UK, it took William Wilberforce 20 years of campaigning to abolish slavery, and it took 26 years and mass famine to repeal the protectionist Corn Laws.

It’s even harder to be patient when most of the things you care about are hard to measure. Of course you should measure what you can – everything from opinion pieces published, to media hits, to meetings held, to official citations. But these are all remote proxies for actual policy change, which is the real objective.

But over five years, it’s surprising how much can be achieved. A lot of Grattan’s reports that are more than five years old have led to substantive policy change.

THE IMPLICATIONS FOR PHILANTHROPY

So what does this mean for philanthropy?

Creating forces for the public interest is important

First, putting resources into representing the public interest really matters. Most of the time, the public interest doesn’t have many friends. We’d all be better off if things changed, but no individual has an interest in pushing for change.

But if you a “lover of humanity” – as philanthropists are by definition – then you might be motivated to represent this public interest on behalf of lots of people.

It’s easy to understand why vested interests – like the Minerals Council of Australia – aren’t very keen on other people representing interests as diffuse as our individual concern for the environment. But if someone like Grattan Institute doesn’t represent our dispersed interests in reducing the costs of managing superannuation, who will? If philanthropy doesn’t fund the representation of dispersed interests, who will?

The heat of advocacy

Advocacy is not always entirely comfortable. Public policy is a contact sport. When billions of dollars are at stake, there can be plenty of eye-gouging. The people doing the research and advocacy will often take most of the heat – which can be helpful for the philanthropy behind them. Where this is an issue, the relationship can be deliberately set up at arms length to give the funder more plausible deniability. But ultimately, there is every chance that unhappy vested interests will try to buttonhole trustees. If you’re not making enemies with advocacy, you’re probably not doing a very good job of it. But inherently, philanthropy has independence. It should be able to stand the heat. And as always, planning for that outcome will help.

Responsibility

As Sarah Davies, the CEO of Philanthropy Australia pointed out, the ethics of this for philanthropists aren’t easy. Philanthropists are beholden to no-one – and so they can afford to get involved and oppose vested interests. But philanthropists are also accountable to no-one, and so there’s plenty of scope for abuse.

We’ve seen this in the US where a number of think tanks have been funded by extremely wealthy individuals to argue for lower taxes on corporates, investment income, and high personal incomes. Whether or not these are good policy reforms, those individuals had a clear vested interest in an outcome, which was concealed behind anonymous donations and the veneer of think tank respectability.

So I think some safeguards are probably in order. It is perfectly reasonable to ask that anyone engaged in advocacy discloses their donors. And it is equally reasonable that as part of such a reform, corporates disclose how much they are spending on advocacy (including paying their in-house team), and interest groups disclose the source of all their funds.

CONCLUSION

In conclusion, public choice theory shows why the public interest needs more friends. It’s not the only form of worthwhile philanthropy, but it can have a lot of impact per dollar spent. Gathering the evidence matters. Clear communication of that evidence matters. Advocacy – both to the public and to decision-makers matters. Patience matters. It won’t always be a comfortable process. But there’s a good chance it will make a difference.