Policy options and barriers for the next government

In previous elections, I either gave a list of mistakes I wanted the next government to avoid, or policies they could follow. Some of the mistakes I flagged in 2007 were indeed made, and about half of a preferred policy was implemented, no doubt entirely unrelated to my advice. In this election I want to take the perspective of the incoming ministers of the various departments and briefly discuss the problems they could try to address and the essential barriers they will face.

Financial regulation

The essential problem faced in the area of finance is the lack of competition, in part because of the demise of mortgage lenders in the GFC, and in part because the use of financial services (insurance, superannuation) goes via complicated decision procedures involving third parties (often employers) that open up avenues for anti-competitive cream-skimming. Some of the recent reforms are already trying to address that.

The barrier to solutions in general are not just the vested interests in the finance industry, which is incredibly rich and can thus buy up former prime ministers and others as its advocates, but also the sheer difficulties of maintaining a group of financial regulators who know what they are doing: good financial regulators will be poached by the finance industry. One would thus not merely want to look at how to reform regulation but also as to how to engender a group of good financial regulators that stay within the state system.

Health

Two mayor problems in the health industry are that people don’t pay for their own health service consumption and thus naturally over-consume, whilst the other is that health providers co-opt the state into giving local monopolies to particular providers in order to increase their incomes. In turn, these two ultimately derive from huge agency problems in the health system in that consumers don’t know what is wrong with them and don’t know what will be wrong with them in the future (which gives rise to a role for intermediates and insurers), whilst providers will by design mostly be local monopolists (local hospitals, GPs, pharmaceuticals, professions, etc.) with an incentive and ability to organise themselves to grab more rents.

The barriers to solutions are again not merely the existing interest groups protecting their spoils vigorously, but also the complexity of the current system and the intellectual difficulties of figuring out alternative systems: unlike most other problems, where the ‘optimal policy’ is fairly easy to spot and one is ‘merely’ talking about the political difficulty of interest groups and societal beliefs in the way of that solution, the health system is so complex that no-one can honestly say they have a firm handle on what the optimal system would look like. In such situations, one basically wants experimentation at the local level and an ability to push through reforms at higher levels once local improvements have been found.

Besides encouraging and protecting experimentation, there are a couple of obviously dysfunctional interest groups that could be tackled by an incoming minister, to almost certain benefit of the community. The overpaid medical specialists protected by their unions (such as the Australian Medical Association), the too-expensive pharmaceutical benefit scheme protected by the media operations of the pharmaceutical companies, the barriers to entry to nurses to compete with GPs and medics inside hospitals, are three cases in point of obvious policy improvements waiting to be championed.

 

Welfare

In general, the welfare system (subsidies for unemployment, disability, single parents, etc.) has been in a catch-22 for a long time now: be nicer to people in need and you will get more people in need, whilst being harsher to people in need means you are harsher to people in need. The balance we have had on this one for the last few decades seems fairly stable without any obvious improvement in sight.

The one thing I can see happening is that ministries and state bureaucracies might find ways to hand more welfare money to themselves rather than people in need, effectively by creating bogus jobs. There are many possibilities to do this. Futile training for the unemployed, ‘account managing’ for the disabled, ‘financial councelling’ for all and sundry, etc., should all be seen as activities in great danger of becoming sink holes for the hidden unemployed within bureaucracies. As far as I know, Australia seems to have avoided the worst excesses of this, but I fear for what the ‘National Disability Insurance Scheme’ (DisabilityCare) is going to mean in practise.

In general hence, I would see the main task for the new minister in this area to be to keep the numbers of hidden unemployed in the ministries and local councils as low as possible.

 

Primary and secondary school education

Here the main problem is the lack of quality education for the general population. As i have indicated before, I see this as essentially arising from the ability of Australia to just import highly-trained people from elsewhere, negating the pressure to educate ones own children to the same degree. I can’t really see any political support for changing that implicit choice and, indeed, on reflection it is just not a problem: Australia exports its great culture and imports people who have gone through the pain of high-quality education. Win-win on both sides, really. Hence the barriers to meaningful reform are just too formidable and institutionalised to even bother enumerating. The main task for the minister will be to try and guide the national curriculum into something sensible and otherwise keep the number of hidden unemployed in the ministries down, which will be a challenge given the directions the Gonski reforms could go into.

 

Tertiary education, research and development

Here the main issue is the cream-skimming of too many bureaucrats. The obvious answer is a few razor gangs and perhaps a cap on the maximum salaries in this sector. The barriers are almost entirely institutional, ie come from the separation of powers between the commonwealth and the states. Still, if the ministry in Canberra wanted to stop the cream-skimming, I think it could get quite far quite quickly. So there is something for a minister to achieve here.

 

Industry policy, NBN, Infrastructure, property rezoning, mining taxes, etc.

Here the problems are the usual: economic interest groups who manage in a large variety of ways to get more than their fair share out of the community. From an economic point of view, the ‘solutions’ are not too hard, as the barriers are almost entirely political. Depending on the issue, one can either just repeal bad legislation (like with mining taxes: just let the states ramp up the royalty rates), beef up the bureaucracy’s ability to think through major tax and spend plans (such as via the parliamentary budget office), scale down particular programs on some pretext (NBN? Particular subsidised industries?), or commission a few reports on areas where one would probably want some new institution to improve the operation of the government machinery (such as property rezoning where one should think of some way to auction off the discretionary element in rezoning and exceptions-to-planning-rules).

Miscellaneous

In my post on this two weeks ago, many commentators gave long lists of policy options, ranging from the decriminalization of drugs, to land taxes, to health rebates, to being nicer or nastier to boat arrivals. Some seem very sensible to me, particularly an end to the health insurance rebate and regulation rather than criminalization of drugs.

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aidan
aidan
8 years ago

people don’t pay for their own health service consumption and thus naturally over-consume

Proof?

Paul Frijters
Paul Frijters
8 years ago

Proof for the idea that a demand curve is downward sloping? Its rather like asking for proof that water is wet, but I suggest you start here and then move up to any introductory economics textbook: http://en.wikipedia.org/wiki/Demand_curve

If those don’t convince, I doubt any academic or ministerial articles on (pending) over-consumption in health (such as the intergenerational report) will convince either.

derrida derider
derrida derider
8 years ago
Reply to  Paul Frijters

Actually, Paul, primary health care is quite price inelastic. If open heart surgrey was free my personal demand for it would not rise, because its not the financial cost that decides whether I purchase it or not. So yeah, that demand curve does slope downward – but not very much.

Which means that other forms of welfare loss, ones due to market failure – adverse selection leading to missing insurance markets, asymmetric information leading to supplier-induced demand, etc etc – are more signifcant than a lack of “user pays”. That’s why “single payer” systems outperform market-based systems on a bang for buck basis everywhere.

aidan
aidan
8 years ago

Its rather like asking for proof that water is wet

You have an arrogant tone. You’re not talking about thermodynamics here.

If people don’t pay for a service, as you claim, how is it even reasonable to talk about supply and demand and an equilibrium price?

In Australia the amount spent on health-care is half that of the USA and with much better efficiency. Which of those two countries is closer to a “free market” in healthcare?

Paul Frijters
Paul Frijters
8 years ago
Reply to  aidan

How can one talk of demand and supply in a situation with subsidised prices? Hmmm…. stop wasting my time Aidan.

aidan
aidan
8 years ago
Reply to  Paul Frijters

“people don’t pay for their own health service consumption”

Did you mean to say “don’t pay the full cost”? Your language is imprecise.

Sorry to waste your time, but if you want a general readership I don’t think it is that difficult to be a little less confrontational. If you don’t, fine, go and post on a specialist economics blog.

My first reaction to your “over-consume” remark was to question it’s validity, as it is clear people do pay for some of the costs of their healthcare and as a result the poorest in our society tend to under-consume. I admit I have no evidence of this, except anecdotal and recalled statements to this effect. I’d be glad to be proved incorrect.

Paul Frijters
Paul Frijters
8 years ago
Reply to  aidan

I am probably a bit over-sensitive today. Good thing I am off to Europe tomorrow!

john r walker
john r walker(@annesanders)
8 years ago

“over consumption” is a emotive term, Paul. For example while it is true that 48-49 out of 50 men treated for prostrate cancer don’t really need treatment, the one man in 50, who really has a aggressive form of prostrate cancer would not agree about ‘over consumption’.

Paul Frijters
Paul Frijters
8 years ago
Reply to  john r walker

With over consumption one doesn’t necessarily mean consumption with uncertain benefit, but rather consumption with less expected private and social benefits than social costs. Lots of health services are essentially goods with only private benefits (though not all), meaning that people will consume more of it than socially optimal when they know the private benefits but don’t have to pay the total costs.

Do you really find “over consumption” an emotional term? I guess I have seen it too often to register as emotional. I guess it once more shows the difference in the mores of economists and non-economists….

john r walker
john r walker(@annesanders)
8 years ago
Reply to  Paul Frijters

In this context it is a emotive term.
BTW I agree that there is quite a lot of last 6 months, treatment of people who are dying of old age, that is not cost benefit good, but you would have to be awful cold to say that to the grieving, numb relatives/ spouses .

One simple cost cutting and relatively un-emotive measure that could be done is to stop automatically giving the anti-pneumonia vaccine to the thousands of people with fairly advanced Alzheimers . Nurses used to call pneumonia the “old persons friend”.

john r walker
john r walker(@annesanders)
8 years ago
Reply to  john r walker

PS seriously Paul if you want to communicate your ideas to “non-economists” some sensitivity ( and restraint) is a good idea :-)

Paul Frijters
Paul Frijters
8 years ago
Reply to  john r walker

yes, the issue of how over-consumption can be tackled without getting into bitter and open political feuds is obviously important from politicians’ points of view.

wrt to that sensitivity, I am feeling less tolerant today than normal. In need of a holiday!

john r walker
john r walker(@annesanders)
8 years ago
Reply to  john r walker

Paul, if you cannot get a holiday, get yourself a bottle of Maurice O’Shea 2010 and barbeque some dorpa lamb chops (with just lemon juice, garlic, salt and olive oil) and mix a salad of bitter greens with a best quality balsamic dressing and then finish with a good blue cheese , Shropshire blue is a current fav….. it will improve your mental health no end :-)

Patrick
Patrick
8 years ago
Reply to  john r walker

Given his chances of survival, from a societal perspective, that probably is overconsumption.

aidan
aidan
8 years ago

How is it possible to “over-consume” heart bypass operations? What about physical rehabilitation following a stroke?

The nytimes had a nice piece on the cost of colonoscopies in the US health care system. In some ways this supports your contention about over-consumption, but for the most part people are only getting this procedure done because they have been advised to by their doctor, and their insurer is willing to pay for it.

We don’t seem to have the same problem here, and yet “people don’t pay for their own health consumption”. Hmmmmmmm.

Peter WARWICK
Peter WARWICK
8 years ago

I cannot speak of the theories, but I can speak from my own experience.

I attend 2 doctors – one a Medicare doctor, and one who charges $40.

I am quite healthy, and generally have no need for repeated visits to either.

When I do need to visit, I tend to choose the Medicare doctor – Why ? because he is free.

I know I am paying the Medicare levy, but I do not have to fork out cash with him.
The Medicare doctor is understandably brisk, but no worries for me – I do not need to tell him my life’s woes.

The $40 doctor spends a little more time with me, although I cannot see any significant difference in the advice/ treatment from either.

But I do concede that I have been to the Medicare doctor at times when a visit was not really needed. I could have waited for a “catch all” visit. Why ? because its free.

I work for a company that hands out fairly good quality biros. Its amazing how many biros people use.

I am convinced that everyone, at some time of their life (and some very persistently) have availed themselves of something simply because its free. Anything from a free ice cream, to an air seat upgrade, to a visit to the doctor.

aidan
aidan
8 years ago
Reply to  Peter WARWICK

I agree with the general principle that people will consume more if it is free. I do it myself, but …

I have been to the Medicare doctor at times when a visit was not really needed. I could have waited for a “catch all” visit. Why ? because its free.

How do you know it “was not really needed”? It is undoubtedly true that in some cases people go to the doctor when they think it is maybe not really urgent or necessary and find out that they are much sicker than they thought. There is an information problem, I know when I’m hungry, but I don’t have the skills to know if the mild symptoms I have are the result of a potentially life threatening condition. This leads on to the precaution principle. In healthcare it is much better to over than under service. The consequences of under service could be very serious, perhaps fatal.

I don’t think I am being naive, or ignorant, suggesting that the economics of a free market might not be that applicable to health care.

Marks
Marks
8 years ago
Reply to  aidan

I think you have hit on the nub of the problem.

Since people do not have enough information to know whether or not they are overconsuming, just using price as the only control in health is fallacious to a large degree in trying to determine whether there is over or under consumption.

The lack of information about their condition precludes the ‘perfect information’ criterion. Medical bodies such as the RACS have the de facto power to set their prices. There are plenty of barriers to entry to practicing medicine. So, even if there were no government involvement in the market, and prices were somehow left to find their own level, they would not be perfect market prices because of these other market deficiencies.

With so many other factors impinging on the operation of the health market, it is hard to justify the proposition that there is overconsumption over all. Certainly, as you pointed out previously, there is also the possibility that for poor people, there may even be under consumption.

derrida derider
derrida derider
8 years ago
Reply to  Peter WARWICK

But Paul’s assertion is not at you will choose the Medicare (free) doctor over others, but that you will go to SOME doctor more often because there is a free one available. How often people see the doctor, not which doctor they choose, is what determines the overall cost of providing doctors.

And as I said, free or near-free primary medical care does result in people using more of it, but not a great deal more – especially when you take into that more vistis to the doctor does do some prevention of much more expensive interventions..

Marks
Marks
8 years ago

Hm, in theory maybe.

However, if one is in an accident or has a heart attack/stroke etc. one is not at all likely to say to the paramedic attending: “Hold on, I think I need to consider the economics of supply and demand here”.

Also, I would suggest that there are plenty of people out there who avoid doctors no matter what the price….and yet who will impact the costs of the health system eventually. Further to that, unless one has almost no life at all, the time spent going to a doctor’s waiting room, sitting round with sick people reading two year old editions of ‘Readers Digest” is hardly an enticing thought, and seems to me (just my opinion) to be sufficient to stop most people going to the doctor for trivial reasons. Of course it won’t stop them all.

Then there is the point that there are many areas where you just can’t get to see a doctor for ‘free’ – you have to pay a gap. That means that some people who are poor actually under use the system, and only appear later on when cost of (free) treatment is much higher.

Add all these factors together, and I reckon there would need to be a pretty good case put up on either side of the debate.

desipis
8 years ago

Proof for the idea that a demand curve is downward sloping?

I believe the proof required is:
a) that if people were to pay directly for their health care that their consumption would be optimal and they would not under-consume due to knowledge/cultural/human/other factors; and
b) that the impact of not paying directly causes sufficient over consumption to warrant a policy response.

conrad
conrad
8 years ago

If you want evidence that people under-consume some types of healthcare, then just find the things people die of because they don’t go to the doctor. There’s a reason the Aus government has had campaigns on skin cancer and things like that — because historically people wern’t getting checked enough, and it is more expensive having people on expensive cancer drugs than getting a spot cut out now and then. Similar things are true for diabetes and I imagine some cardiovascular conditions, which is why you are told to get check-ups after a certain age. Even things like influenza vaccinations might get into this category if you look at the cost of hospitalizations (although god knows why you need to see a doctor to get them).

murph the surf.
murph the surf.
8 years ago

Indonesia is removing quotas on the live cattle export trade.

Carbon storage in soil is far exceeding the standard results according to those able to pull off this outstanding result.
http://w
Careful restraintand evidence based policy could a good policy approach on these issues.

murph the surf.
murph the surf.
8 years ago