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Costello again

May 11th, 2013

The Final Report of the Queensland Commission of Audit, headed by Peter Costello, has been released. It largely abandons the claims made in the Interim Report, suggesting that the state’s fiscal problems are the result of irresponsibility on the part of the previous government. To its credit, the Commission identifies the real problem, namely, the long-term tendency for the share of expenditure going to human services such as health and education to rise over time. Since these services are largely provided or funded by governments, they can’t be provided, on the scale people would like, without increasing taxation.

Unfortunately, that’s where the credit stops. The core of the problem, identified by William Baumol in 1967, is that, for obvious technological reasons, productivity in these services tends to grow more slowly than in other sectors, most notably goods-producing sectors. The Commission’s proposed solution is breathtaking in its simplicity – if we could raise the rate of productivity growth in the human services sector, the problem would go away. Yes, and if wishes were horses, beggars would ride.

My response, which got a run in today’s Courier-Mail, is here.

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  1. Jim Rose
    May 11th, 2013 at 15:50 | #1

    john, Tyler cowen wrote a few interesting papers questioning the baumol cost disease

  2. kevin1
    May 11th, 2013 at 17:49 | #2

    Like the post Word for Wednesday: Reform, the mantra of “productivity” needs to have the veil lifted, and the choices spelt out, as the diminishing returns from continuous reorganisation means labour intensification may become the hidden driver of productivity. The sticky wage assumption is surely less relevant now, since we have one of the highest rates of casualised labour in the world.

    I don’t know much about Qld, but if the target is a 1% a year increase in productivity (presumably implemented as a 1% cut in dept budget allocation), it sounds pretty small. I have heard that a 1% target is common in the private sector.

    If the audit commission has produced figures to show the extra funding from the Forster review was wasted, that is a problem which I presume interested parties are working to refute. The “tax more to get more” proposal needs numbers attached to sell it politically.

    FYI, a few truncated sentences in the document – p 7 “Some combination of these measures”, p 6 “As the Commission notes, growth in demand”

  3. conrad
    May 11th, 2013 at 19:26 | #3

    “but if the target is a 1% a year increase in productivity (presumably implemented as a 1% cut in dept budget allocation), it sounds pretty small”

    I assume that this is wrong if wages growth is similar to that of other areas, which means even if you got the 1% increase in productivity, you would still have to find money for the wages growth. Either that or you could just not allow wages to grow in these areas, in which case those professions would be paid comparatively less over time. A good example of the problems with this can be seen from who now enters the teaching workforce. A similar situation might make for exciting times for those going to hospital.

  4. kevin1
    May 11th, 2013 at 20:04 | #4

    @conrad
    I haven’t seen the audit report, just taking the target figure from JQ’s piece, so I am referring to base-level costs ie. budgets before adjustment for servicewide wage increases. I guess that the only people who employ teachers are states, so there is a monopsony or monopoly employer, and state differentials occur. Fixed relativities with other industries don’t exist nowadays do they?

    There is often said to be a large surplus of teachers except in special areas like maths/science. I presume the same factors apply as to most health workers like nurses and hospital employees. Only a large state differential will cause emigration to other states or overseas. 1% real reduction even after full wage pass-through sounds easy to achieve.

    What is your take on the operational consequences of this announced objective? On inputs (wages, other costs) and outputs (not sure how this is measured or can be measured in health and education).

  5. conrad
    May 11th, 2013 at 20:36 | #5

    I don’t know much about what goes on Queensland, alternatively, I do work in the university sector where we have had these sorts of ‘efficiency gains’ in one form or another for years, and the main way this is solved is by cutting corners (or more like bits from pies now). This would be even harder with medical stuff where patient/staff contact is more important, unless you can think of a good way to reduce the amount of time doctors etc. spend with patients (I can think of some longer term solutions — like introducing more allied health professions that replace the more expensive doctors, although even this would only be a marginal gain).

    “There is often said to be a large surplus of teachers except in special areas like maths/science.”

    Do you mean a surplus of people with teaching degrees, or people with teaching degrees that want to teach and got TERs of, say, more than 60?

    “I presume the same factors apply as to most health workers like nurses and hospital employees.”

    The Australian government thinks that this is not the case: http://www.immi.gov.au/skilled/medical-practitioners/

    I’m not saying here that you couldn’t 1% incidentally, but the onus is really on the people saying you can get it to say how that might be achieved, and not just via saying that if magic happens everything will become more efficient and there will be no consequences (especially because the vast majority of costs in education and health are on staff wages). You could, for example, say you want bigger classes in schools or you will charge people more to see doctors etc. . That way where the 1% comes from is obvious.

  6. John D
    May 11th, 2013 at 22:04 | #6

    Productivity should be measured in terms of output per available man-hour. This means that the countries apparent productivity can no longer be “improved” by moving less “productive” people out of the workforce.

  7. May 11th, 2013 at 22:40 | #7

    None of you tossers ever work it out, do you?
    Yep that’s question needing an answer.
    The problem with queensland is that anyone setting up their shingle to do something honest gets immediately scragged by the multitude of corrupt bastards waiting for some idiot to make a start at doing something honest.

    Regardez vous the fact of that.
    Anyone doing something honest (to make an honest buck) has to be sunk immediately – for the simple reason it looks bad compared to what else has been happening in queensland ever since the dump was established.

    Oh, what utter tosh – you all might say.

    So go back and look at the history of the place.

    But the bludgers running queensland don’t even have the imagination to make movies about our history.
    God save us – some low budget production rattling about our past could make the ‘Godfather’ or ‘The Exorcist’ look like A ‘Looneytunes cartoon™ ’in comparison.
    Queensland, these days is still about consolidated corruption.
    The only sort who win a raffle in queensland are corrupt. That includes those who win the electorate raffle.

    Anyone game enough to take a look at what those bludgers are about will be fascinated to find that their main interest is accruing real eastate in order to to sell it off as quickly as possible to foreign interests.

    It is about time that Australians, whether black, white, or brindle started doing something about this treachery.

  8. May 12th, 2013 at 00:50 | #8

    I am wondering whether the issue related to human services might be understood as coming under a heading such as “the human capital problem”.

    A good example could be teaching, which I understand in secondary schools is increasingly reduced to administering tests rather than encouraging learning. In my opinion to take advantage of good education opportunities that allow for individual differences requires appropriate preparation. It is not a wholly new for the educational process to be secondary to testing and examinations. No employer, in my experience, has ever sussed these results.
    Similarly, if the task is perceived as a mechanical performance, personality and any talents a person might possess are irrelevant.

    I noticed at the supermarket that I was in effect being processed at the checkout subjected to a stereotyped performance. Throughput and low costs might give an illusion of efficiency and productivity. We are not machines. To act like a machine is to become dehumanized. In this case I would suggest slow down and we all could be a bit more patient.

    Just an opinion, and acknowledging that running a business can be tough. Tosspot, you have not provided specific details. There are probably things, which you might not have thought about, that you could do, and would make a difference regardless of which State you live in. Interpersonal relations, for example, count more than you might think. I say this on the basis of my subsequent dealings with a plumber, who I reckon overcharged me heaps.

  9. boconnor
    May 12th, 2013 at 11:02 | #9

    JQ

    I can get to the report via the Courier Mail article, but not via the Dropbox link, which returns a 404 error (using iPhone).

  10. Pete Moran
    May 12th, 2013 at 11:54 | #10

    @ boconnor

    Just take the accidental ‘http://’ off the end of the link

    https://dl.dropboxusercontent.com/u/29646818/QueenslandAuditFinal1305.pdf

  11. kevin1
    May 12th, 2013 at 15:45 | #11

    @conrad
    Yes, it sounds like variability of skills is a hidden aspect of teacher “supply” issue and over supply is big in Qld. http://www.theteachersareblowingtheirwhistles.com/therearenojobs.htm

    When I said same factors apply to most health workers as to teachers, I meant the dominance of state govt employers and their ability to drive down wages/conditions without losing lots of workers. I agree that if govt was honest they would say how cuts and quality preservation are compatible, but obviously they won’t nominate service declines where the alternative of devolving responsibility to managers is available. Death by a thousand cuts is less visible. Still, I ask whether a 1% p.a. real decline has a mild or savage effect where the expansion has been high in recent years. If health workers are upskilling and becoming more productive this suggests quality enhancement and/or cost savings, if the former then the budget target is harder.

  12. kevin1
    May 12th, 2013 at 15:57 | #12

    @conrad
    Perhaps the most compelling example of the investment in quality is in education, where “Education experts, Gonski architect lead push for six-figure teaching salaries” News.com.au April 6, 2013.

  13. Jim Rose
    May 12th, 2013 at 16:12 | #13

    Tyler Cowen is very good in showing how arch-typical Baumol disease industries such as the arts benefited greatly from technological progress.

    Innovations in paint in the 1840s allowed painting to be done outdoors for the 1st time. Further innovations with paint in about 1908 allowed the impressionists to paint with a great many more colours and textures and whatever else they made their name for.

    It is now much easier to learn from others through books and short trips and the internet rather than having to get on a boat and live abroad from a long time to learn from the masters.

    Talent pools are much deeper and better honed because markets are big enough and wealthy enough to support artists full time rather than as their second job.

    All products rely on an irreducible amount of creative labour to invent them.

    Most cost pressures in health care come from new drugs and new treatments rather than from labour costs and even from an ageing society.

  14. John Quiggin
    May 12th, 2013 at 19:53 | #14

    Cowen seems to be bowling from both ends. IIRC, he’s also pushing the line that tech progress in general has slowed.

    To respond more directly, it’s not that there has been no technical progress but that it’s been slow, relative to other sectors. For example, books and the Internet are both important, but it was 500+ years between Gutenberg and Vinton Cerf

  15. Nathan
    May 13th, 2013 at 00:00 | #15

    @Jim Rose
    Basically JQ beat me to it, but to reiterate, the artist argument is a rather silly strawman. I don’t think anyone is arguing certain field are immune to technological advancement, but clearly they develop at staggeringly different rates. If you were able to show, say, that painting and mining were equally advanced by the technology of the industrial revolution that would be something.

    Also, “Most cost pressures in health care come from new drugs and new treatments rather than from labour costs”? That sounds like an extraordinary claim to me. Any references?

  16. kevin1
    May 13th, 2013 at 08:29 | #16

    @Nathan
    Not only a strawman but a red herring too – the main game is health, not the arts!

    A quick look around suggests relevant aspects in workforce utilisation costs are the move to activity-based funding (casemix) rather than block funding to promote efficiencies, with the constraint of no increase in the bureaucratic proportion of the health workforce, and without overservicing. The Australian workforce has continually expanded through market downturns, but the professional sector needs workforce planning to increase supply if costs are to be kept down including more “health care extenders”, according to the new Health Workforce 2025 report. http://blogs.crikey.com.au/croakey/2012/05/04/some-solutions-to-health-workforce-shortages/

    Apparently Canada defied the international trend temporarily in the 1990s for budgetary reasons, but later increases were greater than before the cuts. http://www.crikey.com.au/2013/04/23/the-rise-and-rise-of-health-spending-but-dont-blame-the-old-people/ Will the Qld decision be an unsustainable short term fix?

  17. Ikonoclast
    May 13th, 2013 at 09:33 | #17

    @John D

    John D has hit the nail on the head. National productivity needs to be measured against the total labour force. Thus if you have significant unemployment, underemployment and discouraged workers then this inefficiency must be counted.

    Also, to reply to Jim, if we are going to refer to Baumol effect occupations we ought to refer to finance, upper management, CEOs and capitalist owners who have all engineered a super Baumol effect for themselves.

  18. kevin1
    May 13th, 2013 at 09:33 | #18

    @Nathan
    There are two graphs from the Grattan Institute Report “Budget Pressures on Australian Governments” relevant to your question. First is Figure 8 which lists in rank order ($bn) the major budget components which have had expenditure increases above GDP growth over 2002-2012, and 7 of the top 10 are Hospitals, Health-other, Primary care, Aged care, Welfare – carers, Disability services, Welfare-seniors. (“Health-other” is health workforce capacity; medical research; mental health; population health; community health; and preventative health.) Much of this looks like non-medical labour services without much capital equipment. Note that pharma is not in this top 10 – the other 3 are Foreign affairs, Superannuation and Infrastructrure.

    The other graph is Fig 45 which lists health expenditure components which were above CPI over the same period. Hospitals and “Other” (see definition above) lead the pack, and both are greater components of total govt expenditure in 2012 than pharma, to which state govts make no contribution (Fig 42.)

    My conclusion from this is that labour-intensive health services are growing in size and “prices” relative to CPI. I don’t know what the trend is for hospitals, the more capital intensive sector. The Grattan report shows Disability services, Criminal justice and Community services are another 13% of state govt budgets, and these all sound highly labour intensive.

  19. Troy Prideaux
    May 13th, 2013 at 10:58 | #19

    @Ikonoclast
    We have a serious productivity problem in this country (a self evident fact since the 2000s) and most of the concern is with manufacturing – which should be showing the strongest growth due to technology advances and an evolution of more efficient methodologies. Thanks to our wonderful free trade policies, which *inherently* strangle the most efficient and productive processes (which are most globally exposed) of the economy, but don’t affect the least efficient (niche) processes, we can expect to enjoy more of this lovely trend.

  20. Ikonoclast
    May 13th, 2013 at 11:52 | #20

    @Troy Prideaux

    So, what is the solution? Some would say protectionism. It has actually worked in the past. Germany, for example, became an industrial giant under protectionist policies in the 19th C.

    The USA and indeed much of the world, has gone down the free trade route and watched many industries and factories relocate the China. Meanwhile China pegs its currency to protect its fledgling industries and economy. The Chinese are completely outsmarting us. I admire them. They are pragmatic and flexible; not wedded to ideology but using whatever methods work.

    Meanwhile in the West we stick to neoclassical economics and austerity and wreck our economies and infrastructure; victims of our own self-inflicted sclerotic ideology.

  21. Nathan
    May 13th, 2013 at 12:14 | #21

    @kevin1
    Thanks for that, exactly the sort of data I was looking for! This seems to indicate pretty strongly that labour is indeed the major driver of cost increases in healthcare.

  22. Troy Prideaux
    May 13th, 2013 at 12:28 | #22

    @Ikonoclast
    I say and most (ie *THE PEOPLE*) have always said protectionism. Free trade economics works by the principle of an even playing field – ie. everyone playing by the same rules. If anyone is naive enough to think that this will ever be the case, they are seriously deluded. Whether it’s tariffs or subsidies or threats of sanctions or state controlled currency manipulation, we (those signed up to these policies) will always be competing against some form of globalised protection. Yup, Germany has built a healthy manufacturing empire on protectionism. Japan built its economy to #2 on protectionism and then ditto for China.
    Look at the US now with massive trade deficit after deficit and massive national and private globalised debt. China is participating in both cyber & traditional industrial espionage on a very alarming scale, but alas, the US is now in such a weak economic position thanks to its trade policies, its hands are tied to do much about it.
    Its a virus that’s only now started to show it’s ugly symptoms.
    Penny Wong was recently asked of how Australia would make its income in the coming decades- she had (and unambiguously conceded) no answer. Very alarming!
    Yup, you can sell the house, the farm etc to pay for consumer base economies, but eventually, the music has to stop and I fear a perfect storm is brewing when the mining and resource boom really starts to peter out

  23. may
    May 13th, 2013 at 12:37 | #23

    Ikonoclast :@John D
    John D has hit the nail on the head. National productivity needs to be measured against the total labour force. Thus if you have significant unemployment, underemployment and discouraged workers then this inefficiency must be counted.
    Also, to reply to Jim, if we are going to refer to Baumol effect occupations we ought to refer to finance, upper management, CEOs and capitalist owners who have all engineered a super Baumol effect for themselves.

    showing my ignorance once again—what is a super Baumol effect?

    that to one side and going back to a previous comment made about the effect on a very well known (among the caravan set) and popular caravan pk in a small community.
    the issue was sites given to a group of farmers at a very low cost.
    low enough that good season or bad the vans were parked and used by a group of locals.
    the park was sold,the new owners got rid of the farmers so the sites could be rented at a much higher rate,put in a manager and watched as their business model collaped in a heap.

    apart from the effect on the general store,restaurant,dive shop etc,what happened in the park itself could have been obviated by the purchasers visiting the joint and spending a bit of time to talk to and find out why the place was doing so well.

    they didn’t.

    this park was a prime example of social interaction.

    the farmers knew they were on to a good thing so on arriving some one would wander over to the ablution block and give it a good going over (they knew where the cleaning equipment was)
    the vans were down the back under some trees.
    they took care of the trimming.
    some one would check with the others if they were hanging a bit low(queue smartarse repartee and raucus laughter) and do the job.
    the grass was dealt to by some one or the other.snakes and fire risk are a no no.
    they kept that area rubbish free and tidy.
    park management never had to worry about that area of the park.
    if it was a busy and the management was run off it’s feet on the weekend,they had a group they could call on to help with rubbish collection,etc,so jobs would be done in good time and the look of the place didn’t deteriorate.
    having locals around mean’t there was somebody or other keeping an eye on what was going on,security wasn’t a problem
    having locals mean’t visitors from elsewhere could always find some one to natter to.
    find out things like the best fishing spots,maybe a farm visit,introduction to other locals.
    the locals found out what was going on in other places.
    the person put in as manager after these activities were eliminated is not some one to be envied.
    the farmers talked to each other so problems of isolation inherant in their proffession were aired and seeing suicide in drastic circumstances is an unaknowleged reality in the rural world,that is no insignificant thing.
    there were few problems with the young,any farm offspring playing up knew that there were always jobs to be getting on with back at the farm.

    all these activities were wiped out when the spreadsheet worrier decided to “monetise a lazy asset”.

    they not only threw out the baby with the bathtub,they turfed out the babies bath,the bathmat(babies are splashy little things),the soap,sponge,washcloth,towel,baby oil,layette,
    napkin and the bloody rubber duck.

    accounting and economic analysis from my perspective looks obsessed with a view where people don’t really exist.
    the map is not the territory.

  24. may
    May 13th, 2013 at 12:50 | #24

    and while we are on the subject of productivity.
    why do we not have a bit of attention paid to things like rios’ management not bothering to make sure thestuff out of the mine could actually get to the port,why the office work at billabong was such a dogs breakfast,why the management of one tel was in the same state and that the entrepreneur onvoved had the same thing happen with the imagineering previous,why time after time it is reported that administers of collapsed enterprises face a spaghetti mess in the records and contracts.
    the reported managerial incompetence displayed by market the rules “elite” compared to the constant grizzle about chaos from the governance area makes trust in what they say impossible to hold.

    i’ll shut up now.

  25. tgs
    May 13th, 2013 at 13:08 | #25

    Free trade economics works by the principle of an even playing field – ie. everyone playing by the same rules.

    The concept of comparative advantage never had this caveat when it was taught to me?

  26. kevin1
    May 13th, 2013 at 13:24 | #26

    @Nathan
    There’s a few revisions I’d add to what I wrote: Welfare for seniors, carers, disability is probably pensions so not a “service”, and pharma probably included in Hospitals and Primary care. Worth remembering that many of these service jobs have personal attention is a key part of the service; they’re not highly skilled and will always be low wage, which is a different problem. When I walk around the aged hostel where my mother lives with 80 others, hardly a piece of “equipment” to be seen other than the kitchen.

  27. Troy Prideaux
    May 13th, 2013 at 13:28 | #27

    tgs :

    Free trade economics works by the principle of an even playing field – ie. everyone playing by the same rules.

    The concept of comparative advantage never had this caveat when it was taught to me?

    Ok, fair enough. point taken. I’ll qualify my statement – I was referring to a playing field regarding state controlled influences that directly or covertly circumnavigate WTO rules and principles.
    Now what that exactly entails will always be ambiguous when it comes to things like environmental and human safety compliance and standards and the enforcement of such.

  28. sunshine
    May 13th, 2013 at 19:46 | #28

    I wish we (the wider Aust) would stop portraying the elderly like a dead weight on society. If they decided to stop doing all their unpaid work tonight the economy would fall over tomorrow .

    A general point; I think the primary problem is psycho-social not economic .

  29. May 14th, 2013 at 19:35 | #29

    Dear sunshine, #28
    I assume that you take the point of view of an older person..
    You mention – ‘not economic but psycho social’.
    And I would agree.

    We, me and my family, have lived on our plot for many years.
    The last few years we’ve been trying to work out why we are becoming somewhat crook.
    Only the last many months have we worked out that the industrial grade methamphetamine lab supplying the mining industry over the road might have something to do with our sickness.

    I have a lovely letter from our crackpot premier, Cando Newman, offering at the last line his sympathy.
    Funnily enough, we live in the electorate of our dweeby little police minister whose brother is into real-estate.
    We kind of get the impression that we should move out of our ancestral home and move under some bridge, somewhere.

    Death threats from drug fuelled crazies (allegedly responsible business-people) supported by police threats tend to make a person somewhat unsure about their status in modern society.

    But I guess that the death threats and the poisonous chemical effluent drifting through our windows is just something we have to live with.

    Gees. And I had reckoned the stuff we had to live with in the past labor regime was the pits!

    Anyone out there have any advice about how to fix those bastard’s wagon?

  30. May 18th, 2013 at 05:09 | #30

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  31. Martin W
    May 18th, 2013 at 06:34 | #31

    Ikonoclast :
    @Troy Prideaux
    So, what is the solution? Some would say protectionism. It has actually worked in the past. Germany, for example, became an industrial giant under protectionist policies in the 19th C.
    The USA and indeed much of the world, has gone down the free trade route and watched many industries and factories relocate the China. Meanwhile China pegs its currency to protect its fledgling industries and economy. The Chinese are completely outsmarting us. I admire them. They are pragmatic and flexible; not wedded to ideology but using whatever methods work.
    Meanwhile in the West we stick to neoclassical economics and austerity and wreck our economies and infrastructure; victims of our own self-inflicted sclerotic ideology.

    A year or 3 of reading this spot and that is I think the most understandable and coherent post I have read of yours Mr Ikonoclast.

  32. John Goss
    May 18th, 2013 at 08:45 | #32

    I agree that efforts to ‘increase productivity growth in the human services sector’ have had little success. But I don’t think that in health the majority of the problem is the Baumol effect. In the Australian data there is a large increase in the number of services delivered per case of disease. Nothing wrong with that if it can be shown that the increase in services leads to commensurate health improvements . The trouble is that the evidence is now indicating that most of the increase in services is leading to no or minor increases in health. So there is a problem which needs to be addressed. The issue then is working out incentives which will lead to better health for the increase in dollars.

  33. kevin1
    May 18th, 2013 at 17:07 | #33

    @John Goss ,
    John what is your data source for this, and who has published these conclusions? Is it possible that a higher service level reduces repeat presentations therefore is preventative?

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