I don’t stay on top of many of the latest issues. After all, they’re complicated, time is limited, so I’ll just satisfy myself with starting, largely ideological reactions (and of course not opine too strongly given my state of ignorance) about any number of public issues. Is climate change real? Buggered if I know but it would take a long time to come to a better view than I have now which is that it may be a disciplinary bubble of self-righteousness. It’s happened before. But given the preponderance of apparently reasonable people who know vastly more than me, it probably isn’t and given even a small chance that they’re right, we should do something. There! Job done. I can get on with something else.
Anyway, I always approved of the National Disability Insurance Scheme (NDIS) on similar grounds. Since the ‘marginalist revolution’ from 1870s on, ours has been a discipline based on the metaphysical notion that it’s good to satisfy human wants and that urgent, deeply felt wants are more important than whether I drive a Holden or a Ferrari. And apart from the technocratic notion of the diminishing marginal utility of money, there is our Christian heritage. I was hungry and you fed me – that kind of thing. There. Job done. Slam dunk really. The NDIS is a Good Thing. And if it’s not fully funded, and if its costs blow out and if it has its share of snafus (all of which I expect are more likely than not), we’ll cope with them, like we cope with falling iron ore prices and with farcically designed VET Fee HELP schemes and the like.
Anyway, the Australian Centre for Social Innovation has been getting involved in some work for the National Disability Insurance Agency. So I spent last weekend reading the Productivity Commission’s report that gave rise to the scheme. And it’s a marvellous document. It seems like a well thought out scheme though as I’ve said above, it will have its share of snafus – these schemes usually do. We’re trying to set something up which by rights would take ten years, in about three. But it’s a great national crusade to make the world a better place. And it’s the old story. With economists being probably the most important profession in tackling slavery, so here it’s economists who managed to snaffle for themselves the prestige to propose something as audacious as this – and everyone went along with it. Equity and efficiency together – what’s there not to like?
The report’s overview begins “Current disability support arrangements are inequitable, underfunded, fragmented, and inefficient”. It might have added “and those are its good points”. Anyway, the basic architecture is this
- A lot more funding – rather than gross underfunding
- Much more choice for users and their agents – rather than producer domination
- The financial ‘brain’ of the system being actuarial calculation of future assets and liabilities rather than pay as you go on the fly with poor practices racking up huge future liabilities by exacerbating rather than improving disabilities.
- National policy architecture and integration with other systems (as best can be managed) rather than the ad hoc patchwork of state systems we’ve had.
- A structure that is trialled before being rolled out more widely.
Whatever happens, hats off to the heroes who masterminded it as a political and bureaucratic campaign. Quiet achiever of the Hawke/Keating Governments, probably the person who’s done more good in the country in my lifetime – the quiet achiever – “no child need live in povery” – Brian Howe. Bruce Bonyhady led a bunch of other worthies on a campaign starting about ten years ago. The activists had the vision from the start – of an insurance based national scheme and now we’ll look after disabled people a whole lot better. Bill Shorten also deserves a lot of kudos. He championed the issue and apparently helped out even when his ministerial responsibility for it lapsed. Lots of pollies don’t do that.
And the PC put their A Team onto the project led by Ralph Lattimore and Bob’s your uncle. Just like the abolition of slavery, doing good is also the royal road to doing well. On the conservative assumptions of the PC it will be worth 1% of GDP. How so? Well 300,000 more people employed is a start. (Just getting to the OECD average of employment of disabled people adds 100,000 people. Then there’s doing better than that and the greater employment of those who are otherwise caring for disabled people.)
But wait there’s more. The diminishing marginal utility of income. And I quote:
[T]he system leads to adverse ‘intangible’ impacts that are not easily priced. For people with disabilities, these include loss of opportunity, being dirty and uncomfortable because people with disabilities cannot get adequate access to personal support, indignity, lack of choice, loneliness, and lack of respect. Just the most simple of things — contact with people — can be significantly lacking. ABS survey data … show that nearly one in five people with a profound disability have had no social contact with others in a three month period, while nearly all people without disability had at least one contact in that time.
So good on them. Utility or wellbeing finally made it’s way into a PC report rather than money as the ultimate end of economic activity. Who’da thunk? I feel like a man in a desert having fallen upon an oasis. It’s all set out in story form in Box 20.1:
A tale of two people
Mike has an annual income of $150 000, which he spends on all basics of life, but also holidays, a nice house and a car. In contrast, Mary, who has a severe disability, has an annual income — after government transfers — of $25 000, and she gets around half of her reasonable personal care needs met. Beyond the basics, she cannot buy the things that Mike can. … She would need another $15 000 to top up her support needs to an adequate level. She cannot get out much, she needs a nappy because she cannot get enough personal care, and she endures discomfort and indignity. (Later in this chapter, we will also discuss how these circumstances affect her employment, and the consequences this has for her and the community.) There are many people like Mike in Australia and relatively few people like Mary. Under the NDIS, 15 ‘Mikes’ give up $1000 each and Mary gets goods valued at $15 000 to buy the needed supports (closely equivalent to an income supplement of $15000).
Mary now has an income equivalent to around $40 000 and the 15 ‘Mikes’ have $149 000 each, only a very little lower than before. The loss in wellbeing experienced by each Mike is low, and is still likely to be low when summed across all 15 of them. The wellbeing gains for Mary in having her needs met are likely to be very large in comparison with aggregate lost wellbeing of the collective Mikes. The incremental consumption benefits in this case are equal to the sum of the losses in wellbeing for the 15 Mikes and the wellbeing gains for Mary.
The Commission goes on to calculate this number and explains it simply. The additional funding for the NDIS amounts to $6.5 billion annually. Running these numbers with a standard measure of the marginal utility of income in which the utility of an additional dollar equals 1/(income x 1.24) – a parameter obtained from Layard et al (pdf) generates this result:
The results suggest that non-NDIS taxpayers lose welfare equal to around $3.0 billion, while NDIS participants gain welfare benefits of $10.8 billion, or a net consumption benefit of $7.8 billion from re-distribution. Given the distortionary impacts of raising the funding [24% of the $6.5 bil raised], this would suggest net economic benefits from just this effect of over $6 billion.
Still there was some fancy footwork the Commission did to get there. After all when have you seen this in government reports before? (I haven’t but perhaps there’s been a bit of it). Here’s the money paragraph:
This is an area dogged by complexities, with the results highly dependent on the underlying assumptions. Nevertheless, it is common practice for cost-benefit analysis to provide higher weights from benefits or costs to people with lower incomes. For example, it is recommended by the UK Treasury where distributional impacts of a policy are important, and it has undertaken recent methodological research in this area.
The UK are well ahead of us on this as on many other things in public administration and, at least judging by the statements of senior politicians and bureaucrats – not least the former top bureaucrat Gus O’Donnell (GOD) have thrown the policy focus on wellbeing as the end of policy for some time. They’ve even recently opened a “What works” centre in wellbeing.
The problem is that, it seems the Commission couldn’t lay their hands on any similar statement of policy guidance in Australia. The Commission contents itself with this quote from Finance:
As a general practice, it is recommended that analysts refrain from attaching distributional weights to cost and benefit streams in the interest of avoiding subjective bias. The exception is where an unambiguous government policy objective can be identified to assist the specific group at which the project or programme is aimed; and where the priority of assistance to this group relative to other groups is also clearly established. These are stringent and restrictive conditions. (DOFA 2006, p. 86)
Anyway this is the Commission’s get out of jail card, as NDIS surely meets these conditions if anything does. It also quotes the great Kenneth Arrow (et al):
Not all impacts of a decision can be quantified or expressed in dollar terms. Care should be taken to ensure that quantitative factors do not dominate important qualitative factors in decision making. [p. 944].
It takes this advice only gingerly. Having got wellbeing into the measured dollar benefits of the scheme, it goes on to say that it is likely to have:
significantly understated the benefits of re-distribution because: … for families experiencing significant disability, the marginal utility of income, at any given level of income, would be higher than that found for the average person; and the . . . properly measured income would be lower than those recorded by official statistics. Were that effect included, it would raise the weights on the value of the income transfers to people with disabilities and further raise the net benefits.
But it fails to make good on that invocation by offering no quantification – however indicative – of these important points.
Finally, I note that the Commission’s assumption that taxes cost the economy 24 percent of deadweight cost for every dollar raised. To go back to an old argument which got people all riled up, if you put that into any modelling trade policy it further strengthens the argument that, Australia has no interest in lowering tariffs unilaterally beyond some point – which is likely to be substantially above the level to which we’ve already lowered tariffs (and just to stop any hares running, no, I’m not suggesting we increase our tariffs to that rate).
Anyway, the Commission estimated economic gains as around 1% of GDP with the scheme operating fully. But I expect if economics wasn’t so alienated from its source material – the everyday facts of life – the ‘best guess’ we could come up with as to how much the NDIS could improve human welfare, it would be many times this number. Remember the disabled and carers are not just disproportionately financially poor. They’re disproportionately wellbeing poor. And at least according to the methodology we cobbled together for the HALE index (which follows the same approach courts use for awarding damages), purchasing wellbeing for people with money is extremely expensive.
As we put it in our report establishing the index.
The survey of subjective wellbeing behind the Australian Unity Wellbeing Index shows that, on average, it takes $6,000 of additional annual income to improve the self-reported wellbeing of a household earning less than $15,000 per year by one percentage point. By contrast the same increment in happiness would require more than $100,000 for a household already earning over $100,000 a year.
Of course none of this means that the scheme won’t generate its share of headlines as it’s introduced. After all, while the handling of the Pink Batts program could have been better, the fact is that the roof installations that occurred under it were safer than those that had gone before. There were four deaths because the number of roof installations went through the – well the roof! It’s also the case that politics can take over – as it already has introducing some laxity into the administrative arrangements. The actual NDIS already has some lead in its saddle bags of this kind. But even if there’s a cost blowout of the kind now being talked about by those guardians of right thinking in the business community (these are the people who think tax reform worth 0.18% of GDP and the TPP worth 0.1% of GDP – if you ignore the harm it does – are what real progress is all about) it would still make the NDIS one of the biggest micro-economic reforms the country has seen. And a tribute to our Christian heritage to boot.
Postscript: The interview of the column can be downloaded from this link. And another one from this link.