Costello Report: first look

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.

36 thoughts on “Costello Report: first look

  1. @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.)

  2. @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.

  3. 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.

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

  5. 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.

  6. @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.

  7. 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.)

  8. @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.

  9. 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.

  10. “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.

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

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