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Costello Report: first look

May 1st, 2013

The full version of the Costello Commission of Audit Report has finally been released, along with the Newman government’s responses. As it turns out, the “Interim” report was the Commission’s last word on most of the big issues, such as the state’s debt position and fiscal outlook. The Final Report consists of

* A general discussion of the role of government, which is just a restatement of the market liberal orthodoxy of the 1980s and 1990s, proposing privatisation, competitive tendering and contracting and so on
* The specific claim that Queensland can deal with the problem of rising demand for health, education and similar services in coming decades by permanently raising the rate of productivity growth in those sectors.
* Detailed discussion of all areas of government activity.

Of these, the second is the important one. The fact that productivity grows more slowly in human services than in other sectors of the economy, and that this implies relative growth of the public sector, has been known since the work of Baumol in the 1960s. This pattern is unlikely to be changed by the kinds of measures being proposed by the Commission.

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  1. Josh
    May 1st, 2013 at 08:53 | #1

    Thanks for your highly illuminating review of the previous parts of the Costello audit, Professor.

    But is it true that Mr Costello did not audit certain Qld Government corporations that hold up to $110 billion in cash?

    And that, had he done so and yet still claimed the Qld Govt is in debt, he could have been criminally liable under Auditing and Assurance Board Standards?

  2. John Quiggin
    May 1st, 2013 at 09:05 | #2

    The cash holdings of GOCs are nowhere near $110 billion. But, his gross debt measure excluded the value of the GOCs, which is substantial. Queensland has large positive net worth.

  3. Josh
    May 1st, 2013 at 09:18 | #3

    Thank you very much.

  4. TerjeP
    May 1st, 2013 at 09:46 | #4

    The fact that productivity grows more slowly in human services than in other sectors of the economy, and that this implies relative growth of the public sector, has been known since the work of Baumol in the 1960s.

    How much slower? And is there an agreed definition for “human services”. Aren’t all services provided for humans?

  5. Ikonoclast
    May 1st, 2013 at 10:02 | #5

    There is nothing I could say about the Costello report that wouldn’t involve me repeating myself and boring myself as well as others.

    As an amusing sidelight it occurs to me that TerjeP would enjoy the novel “Mr. Midshipman Easy” by Captain Frederick Marryat published 1836.

    It satirises my view of life and supports TerjeP’s. It is rather amusing and witty. The three cornered duel is one of the funniest scenes I have come across in any novel.

  6. Pia Robinson
    May 1st, 2013 at 11:25 | #6

    Given Costellos history, the idea that he could even recommend how to run a chook raffle in a pub is laughable.

    The laziest treasurer……failure to undertake economic reform….pretending to run surpluses while in fact flogging assets. Reducing govt income by selling many of those assets (goodbye to dividends paid to the govt) while bribing the electorate with middle class welfare.

    What was that about structural deficit?

    The 2 most profligate spending by govt periods in the last 200 years?

    Lying about the source of inherited debt (almost half of which was left to Hawke/ Keating by the Fraser government.

    Ah yes, the “golden years” of Howard. Groan. More of the same recommended for QLD it seems.

  7. J-D
    May 1st, 2013 at 11:27 | #7

    @TerjeP
    A careful reading of the original post shows that it implies synonymity (or near-synonymity) between ‘human services’ and ‘health, education and similar services’. There is obviously some inexactitude in that definition; do you think there is enough inexactitude to matter?

  8. Josh
    May 1st, 2013 at 11:52 | #8

    @Pia Robinson Appreciate your restating this. Newbies to the debate like myself just don’t know this history (which of course can then be searched in more detail).

  9. kevin1
    May 1st, 2013 at 11:54 | #9

    @TerjeP
    Baumol’s insight has a logical basis. “Human services” have high labour content with less role for capital productivity and scale economies eg. services like hairdressing, arts production, education, personal care in health, disability and childminding, cleaning. Most of these functions are in the public sector, with limits to govt’s ability to gain efficiencies from tech. change. His original article on the performing arts said of a Mozart piece composed in 1787 that 223 years later, it still requires five musicians and the same amount of time to play. And, reflecting economic trends, their real wages will rise over time.

    Absent organisational changes, reduction in labour content usually means reduction in quality, so labour sweating is the focus to get “higher productivity” – a category mistake because more input to get proportionally more output is not higher productivity, although the political imperative is to fudge the difference (and create hostility from workers in education and nursing.)

  10. Ikonoclast
    May 1st, 2013 at 11:56 | #10

    Here is a good, succinct and generally accepted definition.

    “Human services refers to a variety of delivery systems such as social welfare services, education, mental health services, and other forms of healthcare.” – Wikipedia.

    There is no need to get too pandantic about it. I know that’s rich coming from me. Perhaps in older parlance these were termed “social services”. I prefer the older term.

  11. Pia Robinson
    May 1st, 2013 at 12:18 | #11

    @Josh
    a pleasure. Stephen Koukoulas is worth reading, on some of the history. 🙂

  12. Josh
    May 1st, 2013 at 12:44 | #12

    @Pia Robinson
    Merci, but I can’t seem to find his books on any library website, Wikipedia, Bookworld.com.au, Dymocks, Barnes & Noble or that OTHER book shop.

    He sure “tweets” a lot.

  13. Pia Robinson
    May 1st, 2013 at 12:51 | #13

    @Josh

    @Josh, have tried to post a link, can’t. Google STEPHEN KOUKOULAS MARKET ECONOMICS

  14. John Quiggin
    May 1st, 2013 at 12:52 | #14

    @Ikonoclast

    “Social services” is commonly taken to include transfer payments such as pension, which I don’t want to refer to in the relevant para, and sometimes taken not to cover health and education, which are the big-ticket items.

    As regards pedantry, excess exposure to libertarian literature is a major risk factor.

  15. Josh
    May 1st, 2013 at 13:02 | #15

    Thanks Pia. There’s also a “zombie” book that looks v engaging.

  16. Jane
    May 1st, 2013 at 14:36 | #16

    I am so sure that immigration is/was too high so as a result we will be forced into privatisation or have increasingly lower standards. High rise will be the only viable option the way we are going!. The imagery I have is of Howard/Costello taking the cream off all the booms be it real estate, stock market or mining and the highest level of immigration since WW2 and leaving all the bills with the state government and local councils. Not their knitting apparently!

    So I actually blame Costello for much of our debt. They should have passed on some of the windfall revenues so that the subsequent infrastructure demands and service delivery could be funded.

  17. Marginal Notes
    May 1st, 2013 at 15:18 | #17

    Presumably Baumol’s work did not anticipate the potential productivity gains from technological change and capital investment in IT. Even the Mozart concert can now be enjoyed in higher quality by more people for the same input of labour and skill.

  18. May 1st, 2013 at 15:44 | #18

    In Yesterday’s AFR there was a piece I found hilarious, in a dark way.

    It was about the recent sale for $5.1 billion of the 99 year lease of the ports of Sydney and Wollongong. The headline was: “Asciano chief fears rent rise after port sale” and some highlights include:

    In addition to the Abu Dhabi sovereign wealth fund, the consortium consists of super funds Industry Funds Management, AustralianSuper and QSuper. Reassurances from some of the powerful union-influenced funds that they will not “sweat” the assets has not convinced the Asciano CEO.

    “That’s what they said in Brisbane, and we got 100 per cent rent increases in Brisbane in the space of the first few years. They’re in business like we are and they’re out to improve their returns as much as they can.”

    …, the privatisation of the strategic infrastructure assets could warrant broader inquiry into the role ports play in fostering the nation’s economy, Mr Mullen said. “It actually begs a wider question for government almost, what do you want a port to be? Is it just something that sells, you get your dollar, and then have the new owners extract the maximum possible rent? Or is it actually a gateway, a facilitator of trade for your state? I mean, you maximise the rent, ultimately the exporter and the importer pays.”

    Communist! Next he’ll be suggesting public education and healthcare are too vital to our society to be handed over to corporations for profit-making.

    I see LNP is going to sell public housing to property developers now too. Apparently owning a home is now a bad thing, if you follow their ‘logic’, too. They believe all that real estate which you might think is probably an asset is actually “ageing and a burden on balance sheets.”

  19. Jim Rose
    May 1st, 2013 at 16:44 | #19

    The cost drivers in the health sector are new treatments and new drugs. Even an ageing society is a small driver in comparison.

  20. crocodile
    May 1st, 2013 at 16:52 | #20

    The cost drivers in health are also due to the two most powerful unions in the country

  21. rog
    May 1st, 2013 at 17:14 | #21

    @Pia Robinson I was surprised how reviled he is in Collins St; he has no standing in the financial community.

  22. rog
    May 1st, 2013 at 17:33 | #22

    @Megan

    I see LNP is going to sell public housing to property developers now too.

    you have to wonder how a developer can supply housing at a less cost and still make a profit. I believe the answer is that the developer is not constrained by policy and bureaucracy and can focus on the job at hand. The public service is subject to ministerial intervention which may be democratic but can be frustrating.

    However the process tends to be self defeating – those in need are excluded by price.

  23. kevin1
    May 1st, 2013 at 19:32 | #23

    @Marginal Notes
    Yes of course he couldn’t predict the digital revolution (he was writing in 1965). But the Mozart example was only a simple illustration – the main game was health and education and its influence on public finances, which looms larger, as our revealed preferences switch towards consumer services.

    If your dependent parent/child is domiciled in an out-of-home residence, are you more able to monitor and influence their day to day life by a face to face relationship with their carers, or remotely, by phone or skype?

    Re education, having just completed a M. Com. online at a major Aust university, I believe it was done just about as good as it could be, but the loss of intimacy from face-to-face interaction with teachers and fellow students is a detriment to learning. Not to mention the sotto voce comments and networking followup students often make to one another on leaving the classroom!

    There is a deliberativeness associated with online interaction (like this blog) which elevates the discussion, but does anyone believe that remote (not face-to-face) interaction adds to output quality in education and personal care?

  24. kevin1
    May 1st, 2013 at 20:26 | #24

    @rog
    Rog, can you expand on this? He is a highly qualified ex-Treasury economist I believe, is the opposition to him just ideological (sectional interests)?

  25. rog
    May 1st, 2013 at 21:55 | #25

    @kevin1 I am not aware that Peter Costello has any economic qualifications.

    His legacy includes shifting the debt burden from the public to the private sector.

  26. kevin1
    May 1st, 2013 at 22:26 | #26

    @rog
    I was referring to Pia’s comments about Stephen Koukoulas, not lawyer Costello, who proclaimed Richard Nixon as his political hero! (His son is actually more qualified in Economics, I taught him at Deakin Uni. He was alert and engaged but pink/green hair was a slight distraction to me.)

  27. Pia Robinson
    May 2nd, 2013 at 07:31 | #27

    @kevin1

    I guess that is hardly surprising re Koukoulas…..he is not a pack follower, and is clearly not conservative. He spent many years in the financial markets, I find his understanding of those markets rare amongst commentators.

  28. TerjeP
    May 2nd, 2013 at 07:35 | #28

    I understand that the definition of health services may be soft around the edges. But if you claim that a sector has lower productivity growth it is fair to ask how much lower. If the difference is in fractions of a percent and the definition of human services is very fluffy then from a policy standpoint it should probably be ignored. However if productivity growth in human services is half what it is in the general economy and human services is tightly defined then it is an important consideration. I don’t know the answer so I asked the question.

    Anecdotally there would with advances in technology be huge scope for productivity savings in health and education. After all the NBN has been sold partially on the basis that it will revolutionise both. Whether or not these trends actually show up in the data is another matter. Maybe technology is expected to deliver huge productivity benefits in the future but hasn’t thus far. These are genuine questions.

  29. TerjeP
    May 2nd, 2013 at 07:39 | #29

    p.s. Inventions like penicillin vastly improved the effectiveness of health services but do they show up in productivity measures?

  30. Marginal Notes
    May 2nd, 2013 at 08:39 | #30

    Kevin1 @ #23
    I agree with your remarks about the limits of digital technology in health and education. There cannot be complete substitution for personal face-to-face contact. As a university lecturer I am made acutely aware of the limits of on-line teaching. The point is that there is in fact a major source of potential productivity gains in these public services – remote diagnosis, remote surgery, global delivery of quality courses by elite universities, open access to research literature, etc. The irreducible human element (nursing, tutoring, research supervision) may still limit the rate of productivity growth relative to private industry but this is an empirical question.

  31. kevin1
    May 2nd, 2013 at 11:23 | #31

    @TerjeP

    Anecdotally there would with advances in technology be huge scope for productivity savings in health and education.

    As MN #30 points out, medical telemetry (is that what it is called?) is growing in relevance, and online education incorporating group blogs and electronic journal access is a big upgrade on correspondence courses, and these improve productivity. It may be that the degree of dependency is a predictor of the limits to reducible labour content in service provision. For the bedridden, aged care provision (including meals on wheels, daycentres), dementia or palliative care sufferers, psychiatric patients, disability day and residential services, the range of people who social workers deal with, and also childcare, the amount of human contact is a major contributor to service quality – conversation/engagement as therapy or stimulation. (I suspect there are studies out there which show better recovery rates where more and better staff contact occurs.)

    I don’t know enough to put numbers on these things – productivity measurement is a slippery beast. Anecdotally, I recall the growth of word-processing capabilities in 1990s workplaces leading to increases in document production times: multiple versions became the norm as there was no longer an incentive to get it right first time. Rather than get tied up in formalisms like definitions of broad industry sectors devised for other purposes, I have given examples of occupations and services to illustrate that there are publicly funded or provided functions where input quantity of labour is closely related to service quality/client satisfaction outcomes, staff economies through labour reorganisation are not available as recurrent sources of productivity improvement, and these are growth areas. Of course, if you promote the notion of govt taxing as theft, you add to the pressure on govt to scrimp on labour inputs in these areas and downgrade quality – I was offered a teaching position with half the normal contact hours, the rest would be done by “homework”. Rather than pick on the most vulnerable in society, you could demand that govt not fund GP consultations of more than 10 minutes as a productivity measure. Then we’d find out the timevalue people put on services.

  32. kevin1
    May 2nd, 2013 at 11:33 | #32

    Re productivity, a quick look at Australia’s Productivity Performance and Real Incomes by
    Patrick D’Arcy and Linus Gustafsson (RBA Bulletin June quarter 2012) finds the comment “But, for the non-market sector, including large parts of the health and education industries, there are no market transactions for output, making it difficult to measure output – and therefore productivity – independently of inputs.” Maybe someone else has some measures, I’m looking at the analytics of work practices, in non-trivial areas of the economy. (I left out Public Administration, traditionally also not measured due to difficulty of specifying outputs, but not in the dependency areas I mentioned, so ICT economies more available.)

  33. J-D
    May 2nd, 2013 at 16:57 | #33

    @TerjeP
    If Baumol said ‘that productivity grows more slowly in human services than in other sectors of the economy’, I don’t know the basis for that or how reliable it is, but I do know that saying ‘productivity grows more slowly in human services’ is not the same as saying ‘productivity does not grow at all in human services’; the original assertion is clearly compatible with the possibility that productivity does grow in human services, so evidence of productivity growth in human services does not refute it.

    You are right that it is fair to ask what the difference in productivity growth rates is supposed to be. However, when the original post says ‘the second is the important one’, to me it clearly implies the assertion that the difference in rates of productivity growth is important, which is not a complete answer to your question but does anticipate it in significant measure.

  34. kevin1
    May 2nd, 2013 at 22:30 | #34

    Of course the other difficulty for public sector workers is that they do not have the same potential to deliver measurable trade-offs in return for pay rises, if output is hard to measure, is not monetised, “profitability” is not a negotiating variable, and a rise in the capital-labour ratio, the dominant source of productivity, is less available due to high labour component. So squeezing “productivity dividends” through budget cuts are the proxy, which may require labour intensification.

  35. Val
    May 3rd, 2013 at 07:00 | #35

    “Productivity” seems to me one of those economic concepts which have been so far abstracted that they become black holes of thought into which all meaningful discussion are sucked and disappear – especially if it’s about ethics, care for others or the environment, quality or what kind if world we actually want to live in and leave for our descendants. Rhetorical flourish of course – but I actually seriously believe that there are major epistemological problems with economics as a field of knowledge and theory – including the tendency to abstract into meaninglessness.

  36. Val
    May 3rd, 2013 at 07:02 | #36

    Apologies for failures if verb-subject agreement there! Got confused by my own metaphor

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