How should we pay for medical research ?

John Quiggin33 Comments

In reading the discussion on pharmaceuticals and the US-Australia Free Trade Agreement, I thought it might be useful to look at the more fundamental question – how should we pay for medical research ? In the framework of neoclassical economics, it’s natural to start by looking at the free-market solution. In the absence of government intervention, firms innovate in the hope of securing above-normal profits by offering a superior product. They discourage imitators using a variety of methods such as branding and trade secrets. While these methods don’t work forever, in some cases they deliver enough profits to finance a satisfactory rate of innovation. But, as far as I know, no-one seriously suggests this is the case in relation to medical research. To finance adequate levels of medical research, we need some form of government intervention. There are three main options

* Patents

* Research grants

* Research rewards

Of these options, patents involve the most intrusive government intervention and the largest welfare costs.
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Explaining Howard

John Quiggin33 Comments

In my preceding posts, I’ve argued that Howard’s rejection of Labor’s seemingly innocuous PBS amendment was a high-risk piece of political brinkmanship, designed to force Labor into yet another backdown. But another thought occurred to me and others (for example, Brian Bahnisch in this comments thread), today. Perhaps the amendment isn’t innocuous after all, and Howard has been told that his great and powerful friends won’t wear it.

Certainly this is the line that Latham needs to push. So far, the debate seems to be going the right way. Howard’s counterargument, that the amendment might discourage US companies from investing in Australian ideas is a dangerous one. As I’ve pointed out previously, it’s inconsistent with the line that, as far as the PBS is concerned, the FTA is a non-issue.

Retrospective framing

John Quiggin25 Comments

It’s well-known that news tends to be framed in terms of pre-existing beliefs and prejudices. If there’s a general assumption that a public figure or a group of people has particular characteristics, stories will be framed in that way, and stories that don’t fit the frame may not get a run.

The coverage of the dispute between Howard and Latham over amendments to the FTA legislation illustrates this. When Labor Senators announced that the FTA would be supported, subject to some amendments, everyone treated this as the kind of minor facesaving that is usual when one side in a dispute backs down.

But as soon as Howard rejected the amendment on the PBS, the tone of media coverage changed completely. Howard is supposed to be canny and cautious, and Latham to be a wild man, liable to break out at any moment. So we get this kind of thing from Michelle Grattan.

It was typically Latham. Just when at last Labor’s course on the Australia-US free trade agreement looked relatively simple – the Opposition would agree to it after voting down the Left – the leader added a new, personal twist.

Grattan patches the holes in her argument by asserting that

The favoured game plan seemed to be that if these were resisted, they wouldn’t be pushed to the point of jeopardising the agreement.

but I saw no evidence of this game plan at the time.

Louise Dodson, Paul Kelly and Steve Lewis all take the same line.

The fact is that it’s Howard who has chosen to play high-risk politics here. No leader in Latham’s position could afford to back down twice in the same day, so his decision to dig in was a forced move, not an expression of character. But the idea of Howard as a reckless gambler doesn’t fit the established script, so it doesn’t get a run.

Greens Economic Policy part 3

John Quiggin9 Comments

In today’s Fin (subscription required) Sinclair Davidson has a response to my earlier article on the Greens’ economic policy. A couple of points in response. First, although he’s kind enough to describe me as “one of Australia’s leading theoretical economists[1]”, he’s happy to dismiss proposals for a Tobin tax as coming from the lunatic fringe, without noting that the late James Tobin was considerably more eminent than either of us as both a theoretical and a policy economist (at least that’s what the Nobel Prize committee thought). Similar ideas have been put forward by a more recent Nobel Prizewinner, Joseph Stiglitz. Of course, there are plenty of equally prominent economists who oppose the idea, but it’s certainly not outside the range of legitimate debate.

The second is a fallacy I’ve pointed out previously in Davidson’s work for the CIS. The Greens assert that middle-income earners pay more of their income in tax than high-income earners. Davidson denies this. His evidence? Australian Taxation Office data on the ratio of tax paid to taxable income. But the primary method of avoiding (and for that matter, evading) tax is the use of legal, semilegal and illegal devices for reducing your declared taxable income. Davidson’s ATO data proves nothing more than that the income tax scale is progressive. The Greens, and many others, assert that tax avoidance is sufficient to offset this progressivity. This is hard to prove either way[2], but Davidson has not even addressed the issue.

fn1. A backhanded compliment in the context of policy discussion, but still a compliment’s a compliment

fn2. My own estimate, FWIW, is that the two roughly cancel out.

Double or nothing

John Quiggin15 Comments

Not content with humiliating Labor over the FTA, John Howard has decided to raise the stakes, by rejecting a face-saving Labor amendment cutting off a minor loophole with respect to the PBS. On recent track record, Howard’s judgement looks sound. Labor will probably cave yet again, and look even weaker than before. This was, of course, precisely the judgement the Americans made on Howard and Vaile. By the end, the Yanks knew Howard would sign anything and proceeded to dictate one of the most lopsided treaties ever seen (in the absence of actual gunboats to enforce signature).

But maybe the worm will turn. The PBS is the most vulnerable single aspect of the deal. If Labor can’t fight and win on this, they can’t fight and win on anything. It seems unlikely, but perhaps Howard has overplayed his hand.

PPP = painless private profits?

John Quiggin5 Comments

There was an interesting report in Monday’s Fin (subscription required) showing how little hope there is for a coherent policy on Public-Private Partnerships. Over the past few years, all the state governments including Queensland’s, have produced impressive-looking policy documents saying that the idea of PPPs is to get reduce the cost of public projects (‘value for money’ is the key slogan) through efficiently sharing risk with the private sector. The documents are notable for denying that the idea is fund projects that would not go ahead otherwise, or that PPPs provide a way of getting infrastructure without debt.

But, as the Fin reports, the potential private partners have other ideas. They don’t want to take on risk and they don’t want the government to worry too much about saving money. What they want, it’s pretty clear, is private-sector rates of return on public projects, with the government ready to pick up the pieces if anything goes wrong.
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The small target strategy lives (and dies)

John Quiggin36 Comments

The report that Labor Senators will back the proposed FTA with the US, and that Caucus will almost certainly follow suit, is an indication that Labor has reverted to the small target strategy adopted in 1998 and 2001. The analysis done for the Committee made it clear that the economic benefits of the Agreement for Australia were trivial. This is on the assumption that there are no effects on the PBS. Since this assumption will almost certainly prove false, it’s reasonable to conclude that the deal was harmful in economic terms.

But this was always a political issue, and Labor has been comprehensively thrashed in political terms. In retrospect, it would have been better to capitulate immediately. Given that this hasn’t been done, it would have been better to withhold support and propose to renegotiate the deal after the US and Australian elections. Labor was under a lot of pressure over Iraq and the FTA, and it would have been hard to hold the line on both issues. But caving in on both, with the reinstatement of Beazley and the acceptance of the FTA is a total disaster.

Moreover, there’s no reason to expect anything better from the (still announced) tax policy, or anything new and significant in terms of health and education expenditure. My guess, FWIW, is that we can look forward to another three years of Howard. Of course, nothing is certain. The government is still unpopular, and could lose. Even if Howard gets back in, the economy could turn sour, and he could get the push from Costello. Finally, I suppose there’s a chance he might retire voluntarily.

Negligible net national saving

John Quiggin4 Comments

Alan Wood of the Oz, an occasional reader of this blog, has a piece in today’s Oz which links neatly to this post which in turn links back to Ross Garnaut in the Oz (thanks to Jack Strocchi for the link).

One striking feature is the statement that ”

total national savings – household, government and corporate – have plugged on at about 19 per cent of GDP

. This is superficially inconsistent with my observation, a while ago that net national savings are close to zero (I guessed 3 or 4 per cent of GDP). As this piece from the ABS shows, the actual rate is about 3 per cent. Wood’s observation presumably refers to gross national saving, which includes depreciation. I haven’t checked it carefully, but the number seems plausible.

It’s true that both gross and net national saving have been stable for the last decade or so, but I can’t say that’s comforting. A long expansion ought, I think, to have produced a recovery in national saving, rather than chronic reliance on overseas borrowing.

While I’m less sanguine than Wood, I agree entirely that

Slamming on the brakes now because of fears about our external debt and deficit would be a silly response, particularly as recent history has shown monetary policy cannot fix a current account deficit problem.

The correct lesson of the debate about the CAD launched by John Pitchford in 1990 was not that “deficits don’t matter”, but that contractionary macro policies are rarely a sensible response.