Category: Economic policy

Something you’re not likely to see too often

John Quiggin36 Comments

A favorable citation of my arguments at Tech Central Station. Normally, I’d be pretty concerned about this, but it’s from Tim Worstall, the sole exception, AFAIK, to the otherwise uniform hackishness of that site[1].

Tim quotes my discussion of the Baumol effect to argue that the fact that the US spends so much more on health care than other countries is not necessarily a bad thing. At the aggregate level he’s right. We should expect the share of income spent on services like health and education to rise as income increases, driven by productivity growth in the goods-producing sector. In the case of medicine, the regular discovery of new and costly treatments adds to the problem (there’s an argument that this technological innovation is an endogenous result of the way health care is financed but I’ll leave that for another day).

Worstall is also right to imply that systems of public provision have, at least in some cases, led to pressure to hold expenditure below the socially optimal level. This was most obviously true of the National Health Service in Britain, though expenditure and service provision have increased greatly since the election of the Blair government, and are set to rise further. The same pressures are evident here in Australia.

That said, when you look at the US system in detail, it’s clearly not a matter of paying more to get more. While the health care available to the top 20 per cent of Americans (those with unrestricted Blue Cross style insurance) is probably the best in the world, the average American (insured by an HMO or a fee-for-service insurer with restrictions) doesn’t get any better care than in other developed countries and the uninsured are much worse off.

The real problems are the financing system (Worstall gets off a neat crack at the expense of JK Galbraith here, but the real problems go back to the 1930s, as discussed by Robert Moss in When All Else Fails) and the very high salaries of US doctors compared to those in other countries, reflecting both higher inequality in the US and the huge cost of becoming a doctor through the US higher education system.

One result is that, despite relying primarily on private, employer-provided insurance, the US government actually spends more, relative to GDP, on health than most others.

Finally, there’s the balance between medical care and public health, broadly defined. It’s well known that the US has a lower life expectancy than other countries that spend much less on medical care. This isn’t however, primarily due to inadequate access to lifesaving treatments (the poor miss out on lots of routine health and dental care, but they can usually get emergency treatment). Rather, it’s the result of unhealthy living conditions broadly defined to include guns, car crashes, the consequences of obesity and so on. These things aren’t easily fixed, but there’s more resistance to doing anything about them in the US than in most other places.

fn1. Why he keeps writing for them, I don’t know. Tim would do much better as the opposition writer in residence at a left or liberal site, a slot that is very hard to fill in my experience. He makes good points, is willing to admit that he’s wrong on occasion, and is gracious when he catches someone else in error, as he has done with me. Still, that’s his business.

Some thoughts on the AWB monopoly

John Quiggin40 Comments

Although I’ve worked on agricultural economics for nearly thirty years, I’ve never given much thought to “single desk selling”, the policy under which Australia nominates a single source (formerly a government agency and now a quasi-private business) to supply exports of commodities such as wheat and sugar. The scandal engulfing AWB (the former Australian Wheat Board, now privatised) has naturally raised the issue of whether this export monopoly should continue. On reflection, I think it should not.

There are a couple of reasons why we might favour an export monopoly. The first is the classic idea of exploiting Australian monopoly power to generate higher returns. There are a few problems with this. First, our monopoly power in the world wheat market is very limited, even allowing for the fact that wheat is not a homogeneous commodity. Second, in the absence of restrictions on the aggregate supply of wheat, this implies diverting additional wheat to the domestic market, depressing prices there. While that’s a benefit to consumers, it means that the net gain to wheatgrowers from the operation of the AWB will be pretty modest. Finally, it doesn’t appear to me that AWB acts in the way required. Far from that of a tightfisted monopolist, the AWB culture comes across as that of hotshot sales types, eager to do whatever is necessary to bring home a deal.

The second case for an export monopoly is that of countervailing power. Here the idea is that the buying side of the market is dominated by big players who will, if left unchecked, divide and conquer Australian wheatgrowers. In a situation where Australian growers were bargaining individually with monopsony buyers, the establishment of a publicly-supported export supplier might be a good idea. But, given that such a supplier exists, it’s hard to see why it needs to retain monopoly rights. If, as claimed, it gets better prices for wheatgrowers than they can get for themselves, or through other exporters, why would they switch?

As far as wheat is concerned, the question is, I think, academic. AWB’s reputation has been so badly shredded that any deal they make from now on will be open to attack by foreign competitors, unless it is at such a discount as to make it clear that it could not possibly incorporate a bribe. This is already happening in Iraq, (though the Americans had grabbed the market for themselves in any case). So if want to keep the single-desk policy, we’ll have to establish a completely new enterprise to work it.

Subeditors at work ?

John Quiggin12 Comments

The NYT reports the victory of Socialist Michelle Bachelet (briefly a refugee in Australia) in the Chilean presidential election under the headline “What Is Missing in This Woman’s Victory? Coattails?”

I would take this to mean that there were also Parliamentary/Congressional elections at the same time, and that Ms Bachelet’s party had lost, but the body of the report implies the opposite saying her win “assured another four years in power for the [centre-left] coalition, which has governed Chile without interruption since Gen. Augusto Pinochet was forced to step down in 1990. “Has anyone got any idea what the NYT sub-editor who chose this headline was thinking? As pointed out in the CT comments thread, this is a reference to the point made about halfway through that other female elected presidents in the region have been the widows of political leaders.

In other news from the Chilean campaign, the much-vaunted privatised pension scheme introduced under Pinochet is in serious trouble. Even conservative candidate Sebastián Piñera, brother of José Pinera who introduced the scheme, described it as being in crisis.

The success of the Chilean scheme was always illusory. It was introduced not long after Pinochet’s mismanagement of the exchange rate had generated an economic crisis and stockmarket crash. So early investors got the benefits of above-average returns as the market recovered. These were enough to hide the high administrative costs (between a quarter and a third of contributions) and poor design of the scheme. Once returns fell back to normal the problems became apparent. The government is still footing a huge ‘transitional’ bill, and coverage is patchy at best.

Have PPPs matured ?

John Quiggin8 Comments

I’ve been involved in the debate over private infrastructure and public-private partnerships for more than a decade, and have accumulated lots of evidence that the public sector generally loses from these deals. One response I get a lot is that the process has matured and that the failures of the 1990s are no longer relevant.

Sydney’s Cross-City tunnel fiasco makes it clear that this is not the case. This deal has all the features that I and others have been criticising for years – secret clauses, restrictions on future planning, closure of alternative routes, crippling penalties for changes and so on. But there’s more. The inclusion of an upfront payment to the RTA, effectively creating a slush fund outside the normal budget process, is an abuse that wasn’t even contemplated a decade ago.

It’s reported Treasury is furious over this and I’m not surprised. They’ve been trying to establish a coherent PPP process, but toll road projects seem to fall outside its scope. But the fundamental problems are, as far as I can see, inherent in the whole concept.

Other recent developments make it clear that we need a moratorium on PPP deals. How can the public interest possibly be protected when any politician or public servant involved in these processes can expect a multi-million dollar sinecure on retirement, provided they don’t upset the applecart? You only have to look at the payrolls of the major players in the industry to see what I mean. Tony Harris, the former Auditor-General who exposed the dodgy accounting behind many of the early schemes is one of the few people involved in the process who doesn’t have a cushy job or consultancy of some kind.

PPPs and upfront cash – part 2

John Quiggin18 Comments

I’ve been thinking about the upfront cash payments that are apparently part of most recent PPP contracts signed by the RTA in New South Wales. In essence, the government is borrowing money at the average cost of capital imputed to the project (I’d guess this is at least ten per cent), paying fees to the consortium for the privilege and repaying the loan by increasing the allowable monopoly toll. As Chris Sheil said in comments on the previous post, this takes us back to the good old days of selling taxes.

These arbitrary payments undermine claims that PPP contracting has matured and that everything is now to do with value for money and optimal risk allocation. THe purported official rationale I saw was to “ensure that taxpayers are not out of pocket”, which is redolent of the kind of cash-based accounting mentality that got us into the private infrastructure mess in the first place. This is an illustration of the fact that we’ve never got past the kind of deal-driven rent-seeking mentality that has characterised these boondoggles all along.
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PPPs and up-front cash

John Quiggin9 Comments

I only recently caught up with the fact that the Cross-City Tunnel and other PPP projects in NSW involve upfront payments (in this case around $100 million) from the private parties to the Road and Traffic Authority. I haven’t had time to work through the implications of all this, but it certainly raises a lot of questions.

Toll opposes privatisation

John Quiggin10 Comments

Today’s AFR (subscription only, and not yet accessible on Factiva, but on p 10 of the print edition) reports the head of major private transport companies Toll Holdings opposing the privatisation of rail infrastructure, on the grounds that “

if one of those infrastructure groups got hold of the rail network [owned by Macquarie Infrastructure Group, as noted in the report-JQ] it could go the way of Sydney airport. We could see costs jacked up

Mr Little also said that private infrastructure groups would not invest adequately.

I made some similar points in my piece on Telstra a couple of weeks ago, and in my latest piece (over the fold), but this is the first time I’ve seen a large private corporation acknowledging the poor performance of privatised infrastructure networks.
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