“When you go to Washington and talk to people at NIH, what are they excited about? Theyre excited about that $5 trillion number. Theyre excited that, boy, we could do something that could generate tremendous value for people. We can cure disease and lengthen lives, both of which make people much better off. The work that Bob and I did quantifies that number; it says its huge, $5 trillion for that 10 percent reduction in cancer.
You walk across the street and talk to the guys who have to pay for it, and theyre terrified that people are going to come up with more new medical treatments that theyre somehow going to have to finance. So, to me the bottom line is those two people have to work together. That is, we have tremendous ability to create value for people. We also know that health expenditure is a very important part of the equation. What we need to do is focus our research on finding affordable treatments.
…
The question of should we have a bigger NIH budget is not a question of whether we would be wasting the money. The question is, what are we going to get out of it? If were going to get affordable treatments, a bigger NIH budget sounds great. If we have no cost containment, its a much more dicey equation. We need to work together on, one, cost containment, and two, increased and better research.”

The hard bit is only discovering affordable cures. I suspect the process of discovery does not work like that.

One thing that is missing from Murphy’s discussion is the cost and benefits of treatments that improve the quality of life rather than the length of it. I expect that the cost/benefit analysis is even more difficult when talking about new hips.

But in areas like child care, education and aged care there haven’t been large gains in productivity.

What do you think the implications of Murphy’s argument are?

it’s worth noting that the Baumol effect was first described by William H. Baumol in the creative arts, and that some arts economists remain sceptical about whether there truly is a “cost disease” in this field.

Tyler Cowen, for instance, has written a persuasive paper entitled “Why I Do Not Believe in the Cost-Disease” in which he points out:

The now-famous example of the string quartet illustrates the operation of the cost disease. Today’s string quartet appears hardly more productive than a string quartet in the eighteenth century. In 1780 four quartet players required forty minutes to play a Mozart composition; today forty minutes of labor are still required.

The technology of electronic reproduction, however, has vastly improved the
productivity of the string quartet. A given quartet performance now reaches thousands of listeners rather than just a few. Even if the number of musical performances does not rise, the quantity of performance output, measured in consumption units, has skyrocketed.”

Since we are not just talking about the arts, but other public services like health care, we can also think about what he cost disease means in these policy areas. I’d point you to wide-ranging interview with Kevin Murphy in the journal The Field, who points out that some of the side-effects of increasing cost in health care are things like increased life-expectancy outcomes and lower morbidity, and these effects are real and actually do make a difference to people’s well-being.

Here’s an excerpt from this fascinating interview, in which Murphy discusses the cost effects of a medical research break-through:

lets suppose that we make a discovery and from some date onward, we have a 10 percent lower death rate from cancer. We estimate that a discovery that reduced cancer death rates by 10 percent has a present value of about $5 trillion. Thats a big numberits less than half but more than a third of a year of GDP. Thats a lot of value.

So now lets think about a program designed to try to capture that $5 trillion gain. Lets say were going to propose a big National Institutes of Health budget increase to try to work on the new War on Cancer. Say we spent $100 billion on our new War on Cancer. $100 billion is a lot of research money. If you talk to people, theyd say, we can do a lot with $100 billion; theres a good chance we can achieve that 10 percent reduction in the cancer death rate.
You might be tempted to think, well, isnt this a no-brainer? I spend $100 billion, and even if my chance is one in 10 of being successful, Im going to get $500 billion in expected value. So what a great return on your money, a five for one, even with a one in 10 chance.

But whats left out of that equation? Whats left out is the cost of implementing whatever cancer treatments I discover. If it costs $10 trillion in present value to implement these new treatments that generate the $5 trillion gain in life expectancy, weve lost money. The discovery has negative value, not positive value. On the other hand, if it costs only $2 trillion, well, we will end up with a $3 trillion net gain.

In this calculation, what matters? Does the $100 billion invested by NIH matter? What would happen if I made that $200 billion? Or I made it $50 billion? The answer is it does not matter much. Even the probability of success does not matter too much.

What really does matter is the cost of treatment. If treatment costs are $10 trillion, the project has a negative net present value even if the research is free. With $2 trillion in treatment costs, the net gain from success is $3 trillion, so that we would get a good return even if the probability of success was one in 30. So when you think about research, its not the dollars you spend that matterwhat matters is the cost of implementing the treatment that might be discovered. The downside to research is not failure, but unaffordable success.
I think the following message comes out of that exercise: Cost containment and health progress are complementary. That is, if we can control costs, that makes research a much more attractive option. Thats the most important lesson I learned from doing this work.

The social justice argument is really a naked emperor. It is obviously nonsense to say that redistribution is just per se. So one has to refine the argument to say that a particular level of redistribution is just; but how is the justice of any particular level of redistribution to be established? If you say that the democratic process makes it just then you can’t complain that other government decisions are unjust.

I hate to say it, but the problem Don identifies is only a problem if you favour a particular form of social organisation. For people who are less in favour of the State that problem is really an opportunity.

When it comes to public education I struggle to discern any evidence in the system of a commitment to either social justice or efficiency. I believe we have a system that largely exists for the benefit of teachers and bureaucrats.

Put more simply, I water coming from many sources into a pot, and then lots of water coming out of the pot going to different places. You cant say the glass of water drunk by one person was put there by another. Its all homogenous when its in the pot.

I would have thought the entire discipline of Accounting was designed for the precise purpose of allowing us to say that the glass of water drunk by one person was put there by another. Admittedly, not all factors in the world can be captured by Accounts, only those that affect the level of water in this pot.

The Danes may love, (2.) but Australians are not Danes. Australians tend to be suspicious of a flexible labour market, or a flexible anything for that matter. Moreover (2.) can work against (3.) in many cases by persistent market distortion. To put it even simpler, if there’s no incentive to work, why would any rational person bother? If goods are getting cheap to the point where anyone can afford them, and services are provided on a universally equitable basis, then don’t I feel dopey for ever trying to work for a living.

If citizens expected to make a return on their taxes and had zero interest in redistribution, then theyd all be libertarians. It would make sense to replace government programs such as health care with private sector insurance.

I don’t have a problem offering immunization to the man next to me on the bus because immunization protects everyone on the bus (including me), but that’s argument (3.) again.

But most voters are not libertarians they want government to redistribute and the most common rationale for that is social justice.

There are so many layers of deception and compromise in politics that it’s an awfully bold statement to declare what the voters really want. Libertarianism is pretty dang scary stuff and people tend to have an emotional need for a father figure to look up to (even though he might beat them now and then). A quick google-news search gives 3k results for “social justice” and 50k results for “efficiency”. Searching aph.gov.au gives 50k on “social justice” and over 70k on “efficiency”, but really you hardly hear a the “social justice” topic pop up in political campaigns. If it’s social justice being sold then something else is written on the label.

The libertarian delusion is that most voters are too stupid to realise that theyd be better off with a far smaller government. No doubt this delusion enhances their self esteem.

I blame the education system much more than I blame genetic stupidity… plenty of deception and compromise goes on in the education system too. Difficult for libertarians to get their message to students when the State sets every curriculum, approves every teacher and sets itself up as the arbitrator of every pass and fail. Difficult for the voter to choose from two parties that both give excellent lip service to Liberty while quietly mangling it with their actions.

I can easily justify spending money on education of my neighbour for no other reason than having one less ignorant person to find a way to live with. I just feel that while I’m contributing money to education, I should get some say in what “education” is a euphemism for.

I predict the libertarian delusion is going to start looking increasingly attractive as more voters start to understand what it is that socialists deliver (and I’m including both the “right” and the “left” flavour of socialism here). But I’m yet to see the “big problem” in that.

Then again, almost everyone seems to haith faith in the notion that advertisers and marketers can cunningly change opion whilst having equally face that we are impervious to their overtures.

Tangentially to that, I I’m also interested in the way “wealth” distribution comes into the discussion in comments. It seems I have a cognitive bias where I disconnect government revenues and expenditure except in aggregate terms. For instance, when I was discussing ETS systems and carbon taxes with someone, they were surprised that I considered what the government would do with the revenue as an afterthought. The price signals were what mattered, the revenue was a side effect. But that’s not how everyone else saw it. They saw the taxes as getting the problem to pay for the solution.

Put more simply, I water coming from many sources into a pot, and then lots of water coming out of the pot going to different places. You can’t say the glass of water drunk by one person was put there by another. It’s all homogenous when it’s in the pot.

Subsequently with government provision of services, I tend to overlook the way everyone would see, say progressive income tax and universal education/healthcare, as taking money from the well off and giving to the rest to lif them up. I tend to see various services that for whatever reasons (externalities, informational asymmetries etc.) are more effectively and efficiently served by government provision. Seperately from this I see sources of tax revenues that are likely to produce less losses in utility and undesired changes in behaivour. The aggregates of these spending and taxes are then adjusted so they’re relatively in balance, adjusted according to macroeconomic climate.

But of course, these sources of taxation do look like redistribution. There is no huge reason why someone shouldn’t think of it like that. It’s certainly important politically.

I suspect this bias of mine is the parts of post-keynesianism that sees the constraint on government spending as being the level of economic activity relative to capacity, as opposed to funding in itself.
I wonder how widely shared this apparent bias is since it does obviously have largist implications for how we see things like this.

On housing though, while I agree that desirability (coupled with inner-urban redevelopment) has driven up house prices, there are other factors at play. You mention services, and the desirability of outer-urban areas has declined as Government’s have failed to invest properly in transport for example.

But that doesn’t explain cost alone. The rise in house prices comes back to simple supply side economics: there is not enough supply to meet demand. The boom in housing ownership post WW2 came off the back of cheap housing, but that housing was cheap because supply of land was plentiful. Today it’s not. Government’s lock up land and make it difficult to establish new housing estates, making supply weak, and what does come on tap more expensive.

Until Feb last year I lived in Regional WA. At the top of the boom there, a house cost the same as it did in middle suburbs in Sydney and Melbourne, and yet there’s was no lack of physical land, only land available for development. If you look to the North, towns like Karratha and Broome have been prohibitively expensive for years because you can’t access land to build houses, despite both towns being surrounded in millions of km’s of unimproved land.

The same holds true today in Melbourne (I’m not sure of the situation in Sydney) where the Government has only slowly released land for development, driving up prices across the board as demand has continued to outstrip supply.

Rising house prices aren’t a result of desirability alone, but artificial constraints on supply imposed by Government.

And don’t start me on stamp duty… I’ve just cut a cheque for $30,000 to the Victoria Government on a modest two bedroom townhouse…I’d hate to think how a first homebuyer could afford it, because even the Government grant wouldn’t cover it.

Perhaps the real big problem is that the believers in wealth distribution never really explained to the rest of the country why it is useful.

There are three points I could make about that.

1. Social justice: If citizens expected to make a return on their taxes and had zero interest in redistribution, then they’d all be libertarians. It would make sense to replace government programs such as health care with private sector insurance. But most voters are not libertarians — they want government to redistribute and the most common rationale for that is social justice.

2. Universal provision: In countries like Denmark, the government provides a range of services and benefits which are available to everyone. The Danes are remarkably resistant to giving these up in return for tax cuts. The security provided by the welfare state means that Danish workers accept a more flexible labour market.

3. The efficiency argument: Government funded services such as early childhood education and care can make the pie bigger in the medium to long run. This is the argument that James Heckman uses.

The libertarian delusion is that most voters are too stupid to realise that they’d be better off with a far smaller government. No doubt this delusion enhances their self esteem.

The “big problem” is that shifts in relative pricing has made this sleight of hand somewhat more obvious and the secret wealth distribution burden is increasingly visible. We may find out that Mr Democratic Taxpayer turns out not to be a big supporter of wealth distribution at all.

Perhaps the real “big problem” is that the believers in wealth distribution never really explained to the rest of the country why it is useful.

There seems to be a few paragraphs missing from this article to connect these seemingly disparate concepts

Yes, I think that’s a fair comment.

Maybe I can fill in a few of the blanks.

In his 1958 book ‘The Affluent Society‘, John Kenneth Galbraith wrote that Americans lived in a world of “private opulence and public squalor.” While the nation was flooded with televisions and over-sized cars, it struggled with underfunded schools and police forces.

In an interview in 2000 he explained:

There’s no question that in my lifetime, the contrast between what I called private affluence and public squalor has become very much greater. What do we worry about? We worry about our schools. We worry about our public recreational facilities. We worry about our law enforcement and our public housing. All of the things that bear upon our standard of living are in the public sector. We don’t worry about the supply of automobiles. We don’t even worry about the supply of foods. Things that come from the private sector are in abundant supply; things that depend on the public sector are widely a problem. We’re a world, as I said in The Affluent Society, of filthy streets and clean houses, poor schools and expensive television.

You’ll notice that most of the things Galbraith wants government to provide are services (the major exception is public housing). And what’s happening is that services are getting more and more expensive.

Like Hamilton, Galbraith thought that it was possible to shift spending away from excessive consumption of private consumer goods in order to solve the problem of underproduced public services.

The Baumol effect helps explain why this is more difficult than it seems.

Governments may respond to the problem of rising costs through tighter targeting and more user pays. This means that the people who pay most of the nation’s taxes would receive fewer services. That is, they’d pay the same tax but get less in return.

In this circumstance politicians have the option of offering this group a tax cut without threatening to reduce their access to services. All they need to do is reduce services to welfare recipients and low income earners. This is sometimes called exploiting the politics of “downward envy”.

Part of the price of a house is goods (i.e. the physical house, the materials, the appliances, the tools required, etc) and part of the price is services (location, schools, transport, shops, etc). Part of the price is also just good old fashioned status and people enjoy living in exclusive neighbourhoods where they can have a bit of confidence about who is going to move in next door (or more accurately, who is NOT going to move in).

Then there’s the deliberate policy of throttling land availability, and probably ten years of high immigration levels (carefully not talked about by either side of parliament), plus various “recession busting” strategies designed to keep the housing bubble inflated at all cost… but that’s probably all besides the point.

Now here’s the bit where I can’t quite grasp the leap of logic:

But the more people are expected to pay for their own education, aged care and transport, the less inclined they are to pay high taxes. Add in the aging population, the rising cost of social security and the availability of new technology in health care and you can start to see the scale of the problem.

So the world is changing and the market reflects this change, but I fail to recognise exactly why this is a problem. Or even why it is unusual or somehow peculiar. I mean, what other outcome would be expected? There seems to be a presumption that anything different to the status quo is a problem, but that presumption only makes sense for those who do nicely out of the current situation. There are inevitably winners and losers in any adjustment so for every “problem” there are equally many opportunities.

And its dangerous because it distracts attention away from serious social problems such as the lack of affordable housing for low income earners and the problem of raising taxes to fund redistributive policies in the future.

Hmmm, I would have thought that if taxpayers support income redistribution, then they are welcome to vote for it regardless of the relative distribution of goods and services. If taxpayers don’t support redistribution then by Democratic principle, we shouldn’t have it.

Housing for low income earners should be easier and easier to build as material goods get cheaper — well that’s the physical side of housing. Then there’s the status component of housing, but it doesn’t make sense to attempt to “redistribute” status, given that it entirely defeats the idea of status for everyone to have it. Then there’s the services that are associated with a prime location, and these services are getting shorter in supply, but services are getting shorter in supply everywhere so hardly a unique problem for the poor.

There seems to be a few paragraphs missing from this article to connect these seemingly disparate concepts…