The Wild West ... the outback ... The new world of the 1800s was a time of true liberty. People stood on their own merits. They won or they lost and they reaped the rewards or swallowed the consequences. There were no cubicle dwelling civil servants hell bent on saving you from yourself. No planning permits no licenses no permissions no heritage overlay no bylaw no regulators no inspectors. And guess what ... it worked

This site is set up to provide a forum for a number of like minded professional economists to post and comment on contemporary issues. There are a number of regular contributors whose bios are made available on the site. Most if not all of these contributors use a pseudonym for the simple reason that they are practicing economists who must take into consideration the commercial implications of posting their opinions.

While some may feel that this is a bit of a gutless approach it is the only way we can ensure free and open discussion without jeopardising our paycheques.

Saturday, December 26, 2009

Santa Hates Me (Roy Rodgers)

Santa hates me ...

I've never done anything to Santa. I've always had a good word for the bloke. Despite a general distrust of altruistic institutions, the cult of personality and total aversion of the welfare state I have always made an exception for Santa.

I know he wears a big red suit and rules his own little fiefdom of socialist oppression where little elves (obviously deprived of their full nutritional requirements) are made to wear bizarre little uniforms and toil endlessly in factories producing purely consumptive goods that bear no reference to any sane economic output.

I've never been to the north pole but sure as hell there is a statue right in the middle of town. A nice big one of Santa toiling away. Just like the statues Mao was so fond of. Just like the statutes Stalin loved to build, just like the ones Saddam Hussein commissioned.

Despite all this I have stood by Santa... but no more ... this year Santa crossed a line that should never be crossed ...this year the bastard stuck a copy of "the capitalism delusion" by Bob Ellis in my Santa sack.

To be fair it wasn't actually Santa but my father who did the deed, and to be fair he did offer the critique that the only improvement the publishers could have made was to print it on extra soft double ply. However, at the end of the day he is still responsible. And while he is currently revelling in the hilarity of watching me foam at the mouth every time I read a passage from Bob's masterpiece, my father will rue the day he decided to take the micky on this one.

Bob's masterpiece

After reading a couple of pages I was beginning to come to the obvious conclusion that Bob, god bless his soul, was just another in a long line of delusional nut jobs who spend their lives rallying against the progression afforded the human race by the somewhat radical idea that people should be free ... free to choose what they want to do, when they want to do it and how they want to do it ... somehow, through some sort of twisted illogical process, people like Bob equate freedom with the extension of monopoly powers of coercion to a centralised state that then by definition has to direct people on what to do, when to do it and how to do it.

Here's a hint Bob ... the thing about free markets is that they are free. The thing about socially democratic economies or socialist economies is that they are not free.

But rather than rant and rave I thought there may be some value in having a look at exactly what Bob is saying and providing some rational evidence based discussion on Bob's little gems.

Before we start there are a couple of things that should be mentioned, so that the conversation will make more sense.
  • Bob appears to define capitalism as free markets, he also appears to take that definition to the extreme of free markets = no government (anarchy by any other name).

  • Bob's grasp of economics is fairly loose, the manner in which he fails to grasp some very basic economic principles and theories make the discussion particularly unsophisticated.

  • Bob does not appear to have provided any evidence anywhere for any of his musings, I suspect the research conducted for the book consisted of reading some Naomi Kline and watching Mike Moore's 'Sicko' (both acknowledged in the prelims) ... so don't expect any well informed or defendable arguments.
Before we start, its worth noting that most of these types of books are based on a core fallacy that is the fallacy of the false dichotomy. The arguments put forward will be framed in the following manner ... capitalism is crap ... it did this, it did that, it lead to this outcome, it lead to that outcome. It then follows that because capitalism is crap.... socialism must be good.

Well not really ... obviously no country has ever existed free of government and as anyone with any interest in politics knows, the difference between social democracy and liberal democracy is not one of absolutes but rather is one of degrees of government intervention. Liberal democracies have an explicit faith in their own people to make choices that benefit themselves and everyone else if they are by and large free to do so. Socialist economies think people are stupid and must live at the behest of vastly more intelligent cubicle dwelling planning bureaucrats. Liberal economies focus on market-based outcomes and will tolerate government intervention where markets cannot be established. Socialist economies favour planned outcomes and will tolerate markets where plans don't seem to be working (i.e. most of the time).

So it is worth mentioning that for all his bluster on the evils of capitalism, Bob never once outlines how his beloved socialist system would do it better. And that is the point most libertarians make ... we realise the world isn't perfect and allowing people the freedom to do as they wish when they wish to, may sometimes lead to outcomes that appear to go against the grain of what experts view as our collective aspirations. However, no matter what the outcome, you can reasonably assume (based on past experience) that it is better than the alternative that some pimply 30 year old wearing a polar fleece vest in a government cubicle somewhere in the wasteland of the civil service could provide (the socialist alternative, Bob's alternative).

Bob's little gem for the day

The best place to start is the very beginning, page 1.

If i were to say to you don't worry about the tsunami the free market will sort it out, you might think me a little mad.

Bob's problems start here with the very first sentence of the very first chapter. No the free market can not undo the tsunami but I personally would not think Bob mad at all to suggest allowing people the freedom to allocate their resources as they see fit in response to the tsunami as opposed to a centralised response, would provide for an effective response. Centralised disaster management has come under alot of scrutiny and criticism in recent times, especially given the what can only be labelled government failure in response to Katrina and the destruction of new Orleans. One of the primary criticism of centralised disaster responses is that it is often slow and ineffectual, primarily due to information problems.

Or if I were to say the Chinese earthquake, it isn't a problem. The issues arising from a schoolhouse falling in and the one child of a one child family being killed and his father having had a vasectomy and his mother wanting another child to replace him are issues that markets will easily fix, you wait and see

This is the second sentence and again Bob has a few problems. All of the schools that collapsed during the earthquake were government owned and run. They were designed and built to government specs, and as any architect who has worked in China will tell you, those specs are quite considerable. Further to this the fact the father has been neutered is a requirement of his socialist government's one child policy. So Bob's problem is that he seems to have put forward an example of the ineffectiveness of free markets that has absolutely nothing to do with free markets but is totally down to the absurdity of a socialist government. Of course that's not to say that the earthquake would not have had such horrible consequences for a market based economy, but one thing we can say with certainty is that the notion of compulsory neutering is not consistent with notions of a free market, and the prospect of thousands of childless families would not be as big an issue in a liberal free market economy.

Or if I were to say to you the killing of three hundred children by Israeli bombardment? And the destruction of fifty thousand buildings? Don't worry. The deregulated free market unguided by government interference will quickly fix all that.

Bob ... what in the name of sweet Jesus are you trying to say? The decision by a socialist leaning government to bombard it's neighbour over an apparent dispute centred on contested land and the demarcation of national boundaries, tied into an ongoing conflict between two sets of religious fundamentalists ..... has absolutely nothing to do with the free market. And the contention that the adoption of open boarders, open markets and free trade has no role to play in any future peace is idiotic.

The next little gem isn't the fourth sentence, but it's close. It's the central point of Bob's fourth paragraph.

.... or the killing by machete of eight hundred thousand harmless Rwandans, are well within the power of the free market to sort out ...

Well Bob ... given the blatant ineptitude of the centralised response provided at the time by the United Nations who sat idly by watching the slaughter ... one would have thought that, contrary to your dribble, this is a perfect example of an instance where free markets would not have hurt, if a defendable system of adequately defined property rights had been in place then maybe just maybe the world could have avoided the macabre result of tribal feuding and nepotistic governance that Africa so often produces.

What can we say about Bob and his book?

Well, based on the first four paragraphs .... I think he's an idiot. Let's hope as we get further into the book that he is a least an amusing one!

Saturday, December 5, 2009

Five minutes on a friday or monday (Roy Rodgers)

So its Sunday and I've spent the last 2 hours in at work trying to cattle prod the biggest most mindnumingly boring financial model to work. The only way I've been able to stay conscious is by running youtube on the second screen.

If you have five minutes spare I though you may enjoy sharing in the fruits of my youtubing.

The following tunes are mostly parodies of the GFC.

My favorite

Worth a listen

The bailout rap

Totally unrelated but nevertheless amusing ... heres a couple for the lads (theres even a mention of porters 5 forces)

More Ramirez

Thursday, November 12, 2009


WARNING The following blog contains explicit language, sexual references and is unfair in its treatment of the intellectually disabled.

I don’t know if its just me but I pretty sure I saw Lindsey Tanner saying the most incredible thing yesterday ... he said that Kzedong and the gang of four had decided to maintain protection for the Australian publishing industry on the grounds... wait for it ... on the grounds that the protection was rendered ineffective by Internet competition.

Please smack me in the head ... no not enough ... smack me again ... I just don’t get it.

Saying the current arrangements are ineffectual is an argument for giving them the arse, not for keeping them. And it also begs the question as to why publishers and authors fought so hard to retain protection if at the end of the day it was ineffectual and therefore provided them with no benefit.

This decision totally contradicts the advice given by the Productivity Commission, seems to ignore the last 30 years of microeconomic reform, and is at total odds with the idea of increasing productivity within Australia.

Surely they realise that protecting inefficient businesses (and if they cant produce at a market based competitive price they are inefficient by definition) helps no one. Consumers pay more and the sector itself suffers in the long run as it becomes fat and lazy. SHIT ME ... its not as if this is rocket science, its basic industrial policy. Exactly of the sort that has seen Australia’s productivity skyrocket from the mid 80s to now.

The massive increase in productivity attributable to microeconomic reform over this period is the basic foundation upon which our current wealth is derived. The reason we can all afford foxtel and all have 50 inch LCD tvs is because we stopped doing this crazy protectionist crap.

While Kzedong is currently reviling in the perception of his macroeconomic prowess (which is another blog in and of itself) he is starting to rack up an impressive list of microeconomic blunders that include the:

  • The implementation of price caps on gas (amazingly absurd)
  • Grocery watch (otherwise known within the hallowed halls of commonwealth gov as grocery botch)
  • Fuel watch (what can I say)
  • Supporting protection (see Tim Winton)
  • Rolling back labour market reform (thanks Julia)
  • Providing public guarantees for privately generated risks (to a select few)(see the bank guarantees)
  • Funding the liabilities of private companies (see James Hardy)

The idiocy of all this stuff is generally dealt with in the first year of an undergraduate economics course. Its not rocket science, its basic science.

The depressing things is that they seem hell bent on making these mistakes and the amazingly uncritical responses they seem to be getting from the media indicate that we are going to experience alot more of these before the electorate responds.

Here's what Kzedong had to say for himself when questioned about this latest microeconomic lunacy relating to publishers.

"When it comes to our micro-economic reform agenda, it is vast, it is comprehensive, it is across the entire regulatory agenda of the commonwealth and the states ... It is proceeding apace."

SMACK me in the head ... hard .... do it again .... once more just for fun ... I don’t get it.

There is no way Kzedong can be that self delusional. He is shaping up to be the biggest architect of anti-reform in the history of the country. Don’t get me wrong, i don’t think hes doing it intentionally, its simply the result of pursuing an unprincipled populist approach to governance. That and he is in the words of Peter Walsh (former Labour heavy weight and one of the primary architects of the Hawke/Keating reform agenda} economically illiterate.

Lets not be too harsh ... what do you expect from a prime minister with no formal economics training and an arts degree majoring in Chinese language and Chinese history (after all the Chinese are such bastions of economic knowledge).

The uplifting thing is that its consultants like myself and my mates that get paid to fix these things up when they comes to tears (and they will all come to tears). So while I lament the idiocy of the current regime I also thank them for providing me with enough coin to pay the kids tuition at Melbourne Grammar.

Apart from furnishing consultants with a future work stream, one of the other major unintended benefits of this decision is that it allows you to readily identify the economic retards in cabinet. The question of whether to remove protection is such a black a white easy question that anyone who opposed it must by definition be economically retarded.

Its the economic equivalent of a basic physics question, something along the lines of taking someone up to the 13th floor and asking them whether they would like to test the theory of gravity. Jumper = retard. Maybe retards a bit strong. Jumper = arts student.

So which little campers are sitting up the back of the bus? Apparently those in the cabinet most vehemently opposed to the removal of protection were:

  • Arts Minister Peter Garrett,
  • Attorney-General Robert McClelland
  • Industry Minister Kim Car
  • Finance Minister Lindsay Tanner,
  • The chairman - Kzedong.

Well boys is your head protection and there’s the back seat.

As an interesting aside, I’m sure the complete dismissal of the Productivity Commissions recommendations is causing Gary Banks and the lads a fair degree of heartburn. The sale of quickeze at the newsagent down in Collins Place has probably gone through the roof.

The interesting thing is that, while the PC is independent and its commissioners are holders of public office, it is still a government body that depends by and large on the support of government to exist. The PC depends on inquiries, inquires are its reason for existence and it follows that its existence is dependent on government feeding it its inquiries. These inquires cant be generated independently they need to come from the Treasurer.

It is far from clear that there is a space in the new regime for genuine independence. Like any good little dictator Kzedong has been very successful in muzzling discontent in the public sector. If the chairman decides the PC needs to go (or to be brought to heal) he can do this quite effectively by simply starving it of attention inquires, no terms of reference = no reason to exist = budget cutbacks = bureaucratic death = bye bye PC.

While the PC may currently be a little nervous about its place in the world it should at least be applauded for standing up for common sense and economic rationality. It s inquiry report by law must be tabled in parliament, and in doing so it provides the opposition with a wealth of well thought out, authoritative analysis of why the government’s policy on protection is shit ... its like a little pre Christmas present for big mal (lets hope he has the brains to use it).

In closing ... Amazon have some terrific sales on at the moment.

Thursday, October 22, 2009

Are people wising up? (Lone Ranger)

Not in Australia, alas, but in the US it seems that the voters are finally getting the measure of their new President.

Wednesday, October 14, 2009

Who are these guys? (Roy Rodgers)

This years nobel in economics went to Elinor Ostrom and Oliver Williamson. If your wondering who these guys are then you may find the following links helpful.

CATO ... defending their apparent liberal bents.

The Harvard Crimson ... seems Harvard are skirty that Oliver Hart didn't get it.

Vernon Smith on Ostrom ... good background on Ostrom

George Mason ... also has a number of Ostrom links

John Nye (Forbes) ... good background on both winners

Marginal Revolution on Williamson ... background on Williamson's major contribution

Its interesting to note that they both appear to be fairly free market based economists ... which makes you wonder how they got nobels in the current climate.

Health insurance and the tragedy of the common risk pool (Doc Holliday)

In my earlier posting (8 October 2009) I discussed the adverse effects of community rating on the efficiency of health insurance markets, and put forward a case for a modified voucher system for health care (which in the Australian context, I will call Medicare Savings Accounts or MSAs). In this posting I examine the tensions between health insurers and medical care, and propose some policy solutions.

A heated point of discussion in the health insurance debate is how to reimburse (that is, pay) doctors and hospitals. The traditional method of payment is the ‘fee for service’ – in which a doctor and a hospital is paid for the services they render. To an economist, this model appears to be fairly obvious – as a fee for service is basically the price of providing a service. Yet in the context of health care it has created all sorts of strange notions and policy prescriptions which are ultimately ill-conceived and self defeating.

The case against fee for service is that, put simply, doctors have an incentive to over-service their patients. The economics of this incentive is rarely put forward with any clarity by its proponents. They generally appeal to notions of ‘information asymmetries’ and ‘market power’. But none of these are adequate explanations. For example, market power assumes that doctors reduce their supply of services - but this is the opposite of what has been observed. Similarly, information asymmetries lead to adverse selection (Akerlof’s lemons problem), something which the medical colleges seem to adequately addressed.

The only explanation that makes sense to me is that over servicing is part of the wider problem of contractual enforcement - doctors have an incentive to charge and serve ‘that little bit more’ because insurers are unable to closely monitor doctors’ actions. Another way of looking at it is to think of pooled insurance being a 'tragedy of the commons'. The insurance pool is a common resource which doctors do not have any incentive in preserving. Rather, they have an incentive to encourage consultations and prescriptions believing that they are acting in the interest of their patient.

This problem is not unique to health insurance and examples can be found in other insurance markets. Consider the analogy of an automotive panel beater. I have lost count of how many times I’ve approached a panel beater and asked him to give me two quotes for the same job – a cash job and an insurance job. The quote for the insurance job is always more costly and extensive (in terms of work undertaken). The same logic applies in medicine. This phenomenon is analogous to moral hazard, but whereas moral hazard is normally associated as the patient's response to imperfect contractual arrrangements, this squarely puts it in the lap of suppliers.

One obvious implication is that free-riding on the insurance pool will give each patient additional care, but it is not clear whether the additional services necessarily lead to valuye-for-money. Another implication is that the logic of the tragedy of the commons applies to both private health insurance and to single-payer government fund insurance schemes.

My observations are not in any way new. Commentators have long observed the expansion in supply, and it has been dubbed as 'supplier-induced demand'. However, this explanation seems to have the best ring of truth to it.

But if fee for service in a pooled insurance setting leads to free-riding / supplier-induced demand (these terms should be used interchangeably), what have been the policy responses? In Europe, the United Kingdom and the United States, supplier-induced demand has led to the changes in the reimbursement of doctors and an increased monitoring of doctors' practices. In the United States where fee for service arrangements are commonplace, health management organisations (HMOs) have emerged. HMOs enter into contractual relationships with patients and doctors alike, and set limits on the practices of doctors. They can, for example, refuse to fund a course of treatment if it believes is not fiscally responsible. In the UK, the National Health Service has long salaried doctors in hospitals and has recently been changing the reimbursement of GPs. Now, doctors are reimbursed in terms of the number of patients on their books not how frequently they see their patients. In Europe, mutual sick funds have long operated their own hospitals and salaried doctors, and have closely monitored the prescribing behaviour of doctors.

There are similar pressures in Australia. Public hospitals in Australia have traditionally been funded on a capped budget basis, and doctors in public hospitals are salaried. Though some jurisdictions have increasingly adopted casemix funding of hospitals (such as Victoria) (which is essentially a fee for service arrangement) to improve productivity, in NSW at least, a public hospital is now funded according to how many people there are in its catchment area.

However, these policy prescriptions have two obvious deleterious effects. First, the close monitoring of the practices of doctors is in effect equivalent to regulating doctor behaviour. While it might be argued that it is welfare enhancing (relative to free-riding) it is not a first-best policy solution. Telling a doctor he can not give medicine x to a patient with condition y is a blunt (inefficient) instrument and misses the point that patients are highly individual and what might be an appropriate course of treatment for one patient may not be effective for another.

Second, paying doctors and hospitals fixed amounts reduces their productivity. As a community, you want doctors and hospitals to be as productive as possible (technically efficient) as they are very scarce and valuable resources. Yet paying a doctor on an hourly-basis will yield lower levels of productivity than if you were to pay them on a piece-work basis. Consider for example asking two house painters to give you a quote to paint the house: the one that gives you a fixed price quote will get the job done quicker than the one that quotes you an hourly rate. If doctors in public hospitals work long hours, it may not be because of the excessive workload they face, but because of the internal inefficiencies of the hospital caused by the financial incentives the hospital and doctors face.

This is not to say that regulating doctor behaviour and paying doctors on a salaried basis (or funding hospitals with fixed budgets) has no role in the community. But these are at best second-best solutions.

What then is the first-best policy solution? If it is the case that supplier-induced demand is simply free riding by another name, the answer is to ensure that the financial implications (market failure) of doctor behaviour are fully internalised. There are two complementary solutions to this. The first is to empower patients to resist over servicing. In my previous posting I put forward the case of governments creating Medicare Savings Accounts, abolishing community rating and making governments pay the actuarial risk premia to patients into MSAs. Under these reforms, patients will directly directly face the costs of their own health insurance, and will have a strong incentive in protecting their portion of the insurance pool. Doctors will not over service if the patient believes that the additional activity will not yield any additional benefits.

The second approach is not to employ and salary doctors but for them to own the health insurance business. Once doctors own the health insurance arm, they in effect internalise the costs of their own tendency to over service. Indeed, not only do patients have an incentive to look after their own health, but doctors will change their own behaviour away from simply disease treatment to disease prevention.

There is nothing in legislation or regulation that prevents doctors from starting their insurance fund, so in principle, it is possible. In Australia, however, there are a number of financial disincentives that inhibit such an institutional arrangement from arising. Two come to mind. First, there is little incentive for new businesses to enter into the health insurance industry. The presence of Medicare alone has severely curtailed the profitability (and degree of competition) among health insurers. When was the last time you read in the news of the start up of a new health insurer in Australia?

Second, since Medicare arrangements provide doctors with a nice little earner there is no incentive for them to champion a new world order of competition. You can bet your pretty penny that the Australian Medical Association will resist any attempts to reform Medicare. Replacing Medicare with MSAs implies greater competition for health insurance, which of course, doctors will not necessarily support.

This is not to say that doctor-owned insurance businesses do not exist. One standout example is the famous Kaiser Permanente of California. But a case study of Kaiser Permanente is for another posting.


Doc Holliday

Monday, October 12, 2009

Futures in everything (Roy Rodgers)

Sick of trying to predict the end of the world or how about something less mundane like the probability that Israel will bomb Iran … well has Roy got the website for you!


Intrade is a futures market based on political and current affairs predictions. It allows you to speculate on the probability of an event occurring. The exchange is structured around a group of trading categories, such as politics and current events. Each category has a set of contracts listed. A contract being an event that will have an unambiguous result, like will obahma be assassinated by a ranting libertarian nutjob before June 30 2010.

You then trade on what you think the outcome of that event will be. Each event has a time constraint at which point the contract will close. For example if obahma gets assassinated on June 30 the contract will close at 100 points, if he lives to socialise another day the contract will close at 0.

Until he is either assassinated or the deadline is reached the contract will fluctuate between 0 and 100. The price at anyone time is representative of what probability the market places on the event occurring. You can trade in and out of the contract as many times as you like prior to it elapsing.

Like any good futures market … if you want to max your profit, so you can buy that little 9 hole golf course up at Port Douglas, you need to take positions against the market … buy when the market thought an outcome was unlikely and sell when the market thinks its very likely.

Good luck …. Just remember futures have the capacity to make you either extremely wealthy or extremely poor … no risk no return.

Ps ... if this is your thing id get in quick before big kev or the grand o try and ban it!!

Thursday, October 8, 2009

Insurance, the Market and those pesky wowsers (Doc Holliday)

Now that my work has lightened up, I too will part a few shots at government and wowsers.

Health care puts forward a number of dilemmas for economists and policy makers. In this posting, I will consider the incentives and distortions that have arisen from government intervention in the provision of health insurance. I will also put forward a solution.

In any laissez faire insurance market, insurers charge insurance premiums that reflect the risk that people impose on the pool of insurance premiums. This is true for all insurance markets that I can think of - cars, houses, luxury boats, personal property. If you are 18 years old and park your Subaru WRX in Broadmeadows overnight, you pay the price!

Unfortunately, this doesn't occur in health. Instead, in every developed country that I can think of, everyone pays the average (pool) price - not the marginal cost. This is not because of a decision by health insurances but because of government regulation. The objective of community rating regulation as it is called, is to ensure that even the poorest can access affordable health care. Its effect is to smear insurance costs so that the rich and healthy subsidise the poor and the sick.

Community rating regulation appeared first in countries where private health insurance was the norm. But it also operates in the government-run single payer schemes (consider the National Health Service in the UK, Medicare in Australia and Canada). In these schemes, the costs of health insurance are smeared across tax-payers, not those seeking insurance. (The medicare levy surcharge is an exception, but this is only effective when we consider the role of Australia's Lifetime health cover rating system).

However, this has some rather unintended consequences (hello hello!). One is that it removes any incentive for individuals to adopt healthy life-styles. Why drink green tea and ride a bike to work if you know that someone else is paying for your healthcare?

In a laissez faire market, there would be a variety of insurance companies each offering slightly different products. Some might offer health-management organisation type contracts: you agree to change your behaviours (eg give up smoking) in return for discount insurance. (Funnily enough, the earliest health insurance schemes (organised by many religious and charitable organisations) at the turn of the 20th century did offer just that.)

But under community regulation, no one has an incentive to change their behaviour. This is a problem for both private health insurance schemes (as in US, Switzerland and Greece) and single-payer schemes (UK, Canada and Australia). In bid to protect the insurance pool against the threat of smoking and drinking geriatrics, wowsers step up to the plate to start issuing edicts: that shalt stop drinking, smoking, and growing old etc. The number of regulations that Roy posted are indeed scary. But in a dysfunctional market without marginal prices, the number of regulations can not but grow as bureaucrats scramble to change behaviour. Any market in which there are no prices will grow increasingly dysfunctional as successive layers of regulation are introduced to control it.

Is there a role for the market? I believe there is, and Australia already gives us an example. Some years ago (in 2000 I think), Australia introduced Lifetime health cover (LHC). It was introduced by the Howard Government in response to the adverse selection taking place as healthy people opted out of private health insurance to be covered by Medicare. LHC in effect penalises people incrementally the longer they remain privately uninsured. It acts like a second-best market price for private health insurance (PHI). The older and more likely you are to get sick, the more private health insurance will cost, so join up when

you're young. It doesn't give you the same incentive to change your lifestyles as an actuarially fair premium but its close. But it did influence PHI membership dramatically. It also demonstrates that people are sensitive to market prices - even for health insurance.

Back to my dilemmas for economists and policy makers. How do we get a healthcare system that is offers all the economic efficiencies that is currently lacking yet addresses the equity concerns of providing care for the poorest in the community? The obvious response is to introduce a voucher-type system. Governments provide individuals a voucher (it may be means-tested) to be spent on health insurance. The amount given to the individual reflects their risk-rating (so high risk individuals get paid more). Individuals can get to keep some of that voucher if they can demonstrate a reduction in their risk-rating (credited back to a Medicare Savings Account for use on a rainy, sick day). Individuals can use that voucher money to purchase private health insurance from any number of competing health insurers on the market.

There is another dilemma in health care that needs addressing - market power of medical professionals (doctors and surgeons). But that is for another posting.


Doc Holliday.

Wednesday, October 7, 2009

Re: Re: Wowser's worst nightmare (Lone Ranger)

Just found another clip by Serge.

I should add that I hate smoking and will lock my daughters up if they ever try it....

Re: Wowser's worst nightmare (Lone Ranger)

Not sure about Tom Waits, but the great Serge Gainsbourg was more than happy to smoke on stage.

Could not find a live performance on youtube that fitted the bill, but you get the picture from this one..........

Stuff (Lone Ranger)

This has nothing to do with anything on this site, but I thought I would post it for amusement value. What this link does tell us, however, is what happens to a society where:
  • the middle classes becomes progressively poorer through the debasement of the currency and outright theft by major investment banks of public monies
  • everyone loses their dignity
  • it becomes socially acceptable to wear track suits in public.

This could be Australia. Check out

Another argument against wowserism (Lone Ranger)

In support of Roy's recent posts on wowserism, I came across this from Time magazine (I hasten to add, I do not read this magazine as a matter of course...). Apparently, non-drinkers are more anxious/depressed than those is us that imbibe.

Needless to say as the father of two small children, alcohol is now a necessity rather than a luxury (contrary to what the do-gooders say, alcohol DOES make things better). Those annoying ads on TV that claim drinking in front of kids is a bad example for them get up my nose - kids need to understand that they cannot always do what the adults do. For God's sake. I wish the wowsers would stop trying to control our lives. The trouble is, they seem to congregate in government....

Tuesday, October 6, 2009

Wowser's worst nightmare.

The question --- Why are the wowsers wrong?

The answer --- Tom Waits

What do you get when you mix tom waits, 1/2 a bottle of scotch , a hand full of anonymous prescription drugs and packet of cigarettes on a stage with nothing but a microphone ... answer one of the greatest live performances of the last half century .

If not the greatest ... you have to admit the coolest. I'm a middle aged economist with a bad haircut. I don't smoke and like any true libertarian there is no way on earth i am going to allow my children to smoke... but i have to admit deep down that there is something cool about guy like tom puffing away while he belts out a tune.

The positive value created by this one performance must equate to at least 50 disability adjusted life years.

Alcohol and other mood altering substances have a long and proud history, they are a a fundamental part of the human experience and its about time that the positive externalities associated with their consumption be factored into cost benefit analysis and more specifically preventative health studies.

Will Farrell goes into bat for Obama

Dont you love it when celebrities get all political. Will Farrell recently jumped to obama's defense, airing the following tv ad.

It is so endearing watching extremely wealthy celebrities complain about corporate incomes? Whats the bet that will is one of those guys that quite proudly and self righteously declares himself a prius owner, and forgets to disclose that he parks his little underpowered rice burner right next to his gold platted hummer.

The following links are to parodies of wills ad. If your time poor the first one is is the funnier of the two.

The beauty of the web is that it gives everyone a voice not just the celebs.

Tuesday, September 29, 2009

Crime and punishment (addendum)

When I wrote the preceding article I sampled a dozen of the executed felons and in every case they made final statements consistent with my thesis.

However, my lovely wife just sat down to read the article and have a look at the database of last statements. As she did so it became apparent that a large number of the felons she sampled were not apologetic, thus totaly contradicting my contention.

Apologies ....

But we shouldn't let a little bit of sampling error get in the way of a good story.

Crime and punishment (Roy Rodgers)

All this talk of wowsers and their wowsery ways inevitably leads to the topics of crime and punishment. These two are perhaps the hardest concepts for anyone who takes liberty seriously to come to terms with. They provide an obvious conundrum. The libertarian has to somehow come to a position on the potential legitimacy of the state's use of coercive powers that range from simple fines, to incarceration, in some cases torture and in some countries all the way through to death.

Some laws where made to be broken...

Since the end of the second world war most developed economies in the west have seen an amazing boom in legislation. God knows what the page count is currently, there are laws and regulations for nearly everything.

I got fined $170 just last week for parking my car for longer than one hour in my residential street just outside my house during the day when the street was half empty .... apart from the fiscal pain this caused me, the law the I've broken or the crime that I've committed is obviously absurd. I got fined for simply parking my car ... there was no congestion issue, no one got hurt in any way. I was simply utilising a public asset (the road) in exactly the manner is which it is intended to be utilised.

And how about the guy in Port Melbourne who recently got fined $50,000 for demolishing his house which he paid for with his cash but which unfortunately had inestimable heritage value as an example of post war public housing. Yes that's right this guy got in the shit because he was rude enough to demolish the crappy public house that was standing on his $1million dollar block of land. ABSURD.

So the next time you've stepped out at 4am to get panadol for your loved one and you find your self sitting at a red light in a street that resembles the set of 28 days latter. Just ask yourself why the hell am i sitting here in my pjs like a big fat goose just because there's a red light. Ask yourself if i ran the light who would be to blame ... you or the idiot bureaucrat that forgot to turn the lights off when everyone went to bed. For god sake ... that light deserves to be run!

There is a legion of examples of laws and regulations that represent nothing short of state based abuse and should be canned immediately. Laws and regulations that have nothing to do with causing harm to others. Wouldn't it be good if someone had enough gumption to propose a libertarian day where it was the duty of every Australian to break some form of ridiculous law. A day where its your duty as an Australian to flip the bird to the cubicle dwelling bureaucrats. However, that person will not be me ... I'm sure it would be illegal to suggest such a thing.

the conundrum ...

Despite these seemingly pointless laws, it can not be denied that there are genuinely bad people out there .... or more correctly people out there who either want to, or are prepared to if the circumstances dictate, do serious harm to others. People whose utility functions include the disutility of others, who are totally indifferent to the utility of others, or those who take no heed of the reciprocity associated with doing harm to others.

The conundrum for the libertarian is that there are people who whether through circumstance, disease or stupidity represent a genuine risk to the rest of us. And the only way to effectively address this risk (at least in the short term) is to remove them ... to physically separate them from those to whom they wish to do harm. And as unfortunate as it sounds there is no institution better placed to do this than the state. The conundrum is that there may after all be a role for the state and it's not a very nice role. It's a role that involves using force and coercion, something any sane libertarian feels hesitant in allowing the state to use.

While there is a role for the state, it doesn't necessarily follow that it's doing a good job of it. In fact the state seems to be a bit confused about what its actually supposed to be doing. It would seem that the conventional approach to punishment and prisons is based on the notion that punishment is doled out to prisoners in the belief that it will reform them or rehabilitate them for their ultimate reintegration into society.

While noble, such a goal is not necessarily consistent with the idea of risk aversion. If you take the position that the state justice and prison system exist as a way of society managing the risks associated with it's criminal class, then you have to wonder how recidivists actually exist. If the system assessed their risk efficiently then they would not be released and they would not have the opportunity to keep perpetrating. In assessing the threat that a convict poses to society the authorities should reference the statistical probability that the prisoner will re-offend. Maybe they do?

It's worth recognising that rehabilitation itself is one way of addressing such risk. However, those that commit crimes that are highly recidivist in nature like pedophiles, serial rapists or serial murders are mostly likely highly probable to re-offend. So regardless of whether such individuals have found god and repent for their sins their actual release will also depend on the statistical likelihood of them re-offending. The point being that prisoners who have committed crimes or exhibited behaviour that indicate a probability of recidivism would not be released.

And I recognise that it doesn't sound anything like the rant of a libertarian and places a lot of power in the hands of the state .... when i said conundrum i meant it.

and now to the hangman ...

The following link takes you to an archive of the last words of executed inmates. The archive is maintained by the Texas Department of Criminal Justice. It's probably safe to assume its existence is due to a legislative obligation placed on the department.

As with the issues of crime and punishment, the archive presents libertarians with a conundrum. Included in the archive is the inmates rap sheet. I haven't gone through all of them but for the sample that i looked at based on their rap sheets and the horrible things they have done they can only be described as animals, nothing short of walking human excrement .... ... ... on the other hand when you read their last words you get the uneasy feeling that there is some humanity there. From the sample there was a universal profession of sorrow for the pain that they had caused others. Now I'm assuming that they are telling the truth and given that the statements are taken just before they get the needle there's no good reason for them to lie.

While in general crime and punishment is perplexing, one can form positions about some of the more extreme aspects, like capital punishment. Capital punishment is definitely something the world is better without. The primary reasons are:
  1. there has never been any form of government in human history competent enough to impartially administer a program of capital punishment, nor has any had enough nous to avoid the odd case of judicial murder
  2. I have a strong suspicion that given the appeals mechanism necessary in such systems and the opposition that such programs generate amongst your right for life types, the costs involved would far outweigh those of the alternative - long term incarceration.... and we pay enough tax as it is.
The economics of crime ...

One interesting thing worthy of note was that the last minute, seemingly contrite apologies, professions of sorrow and admissions of guilt were consistent with economic theories of crime and punishment.

One of the first economists to try and model crime and punishment was Gary Becker. Becker wrote a seminal paper imaginatively titled Crime and Punishment: An Economic Approach.

In his paper Becker argues that there is an optimal level of enforcement and punishment. More importantly Becker established quite convincingly the proposition that criminals are rational and that criminal behaviour follows rational decision making processes. The basic contention is that the criminals willingness to commit crime is a function of both the positive utility he/she derives from the crime (some of a pecuniary nature some of a non pecuniary nature) and the costs associated with the crime.

Under Becker's models the costs are a function of the probability of being caught and the value of the punishment. Sort of like analysis regarding contingent states of the world.

The paper is a good read. Becker proposes a framework similar to a classical one with the exception that its based on involuntary exchange. What would normally be the buyers are the victims and the sellers are the criminals.

It follows that (depending on the criminals level of risk aversion) the supply of criminal behaviour could be influenced by increasing the probability of being apprehended or alternatively by increasing the costs associated with penalties. Which is more effective depends on the criminals risk profile, for those with a risk affinity, increasing detection and apprehension is more effective than increasing penalty. Its less clear for the risk adverse, increasing either penalty or probability of apprehension would most likely do the job.

The interesting thing with the archive of last statements is that it would appear to represent a situation where the probability of apprehension and conviction is 100% and the cost associated with the penalty is as high as it could possibly be (assuming no one is suicidal). In these circumstances it would appear that all (or certainly all the ones i looked at) express regret and remorse. It would appear that when you reach the universal maximum for the cost of crime you may achieve some form of rehabilitation.

This universal expression of regret and remorse is dependent on the imminent penalty. We have no grounds for assuming that were the penalty to be removed or where we to introduce a probability that it would be removed, that we would get the same outcome.

Friday, September 25, 2009

2020 Health Overview (Doc Holliday)

Australians are living longer than ever before. In 2004-05, the average life expectancy (at birth) of Australian men and women were 79 and 83 years. This makes Australian among the longest lived people in the world. The cost of health care is, for the moment, quite modest by international standards.

Yet there is quite a clear agreement that Australia’s health care system is stuffed, that somehow it is failing to deliver the sort of results that we would like. We have too many fat kids, kids that don’t exercise enough, kids that eat too much, kids with bad teeth, kids that smoke too much, kids that drink too much, kids that pop too many pills. It was so much better in our days – when all we could eat were lard sandwiches, smoke cigarettes behind the shed, and play football barefoot on the street, while our mothers were in the kitchen quietly dealing with an unwanted pregnancy. But no, our kids are too soft and we know what’s best for them.

But don’t just pick on the littlies. Why not the oldies? They’re too demented to know what’s good for them. Why, if only they exercised more and ate properly, they wouldn’t fall over and hurt themselves or clog up our hospitals with renal dialysis.

Then you’ve got the old (ho-hum) rugby scrum between the stern-looking guys in white coats and the witch-doctors promoting alternative therapies: ‘You can’t trust them holistic types, there’s no science in them’. And finally, there’s always that big bogey-man everyone loves to hate: big fat rich corporations (health insurance, pharmaceutical and, wait for it, oil companies) and professional associations (greedy doctors and dentists) all seeking for ways to rip you off.

There is one personality type that permeates the baying crowd: the one who knows the Truth. In his view all Australians should hike before breakfast, ride a bike to work, eat sushi for lunch, and have a cup of green tea after work. This one wants to ‘educate’ you, regulate you, provide you with all the infrastructure and incentives you would need, and then tax you to finance it all.

There is no doubt that Australia’s health-care industry can be improved. The problems almost always arise from the strange horse-trading that masquerades as government policy. There is, for a start, a rather odd relationship between Medicare and private health insurance (PHI): why should anyone take out PHI if Medicare is available for free? But Medicare is a major of problems because taxpayers are shielded from the effects that their lifestyle behaviours have upon the cost of the system. Fixing health insurance should be our first priority.

2020 Health Submission 4313 (Doc Holliday)

I believe the Private Health Fund system is inefficient as there are too many funds which leads to much duplication of services. At the least the government should reduce the number of funds offering private insurance. This could be done by only allowing them. a reduced premium increase and letting market factors take their course. Those collapsed fund's members should be able to move to another fund without losing their accumulated benefits.

Better to put the several billions spent on private health insurance annually into public hospitals.

One of the great myths of the health insurance debate is that there is merit in having a single health insurer — that competition somehow leads to duplication.

The obvious extension of this logic is that all the clothes shops in Chapel St should be closed down, except one, since there is duplication. And while we’re at it, let’s close down all the souvlaki shops because, you know, there is duplication.

Where duplication does exist in health insurance, say in the number of actuaries employed, competition makes up for it through the innovation of new insurance products. Moreover, it is competition, not government mandate, that will eventually lead to lower insurance premiums — although the extent that this will occur will depend on how health care costs are controlled.

So if we have a single health insurer, why not make it publicly owned? And if we have a single clothes shop why not make it publicly owned too? Hell, why not combine clothes shops and souvlaki shops into Fur and Meat Emporiums and have the waif-thin fashionistas (‘That looks great on you’) teeter on high heels slicing lamb off the gyro.

Real reform to private health insurance can only be achieved by getting the right balance between private and public health insurance, and then deregulating health insurance to permit real competition. But we don’t like competition in health insurance.

‘Would you like yoghurt or sauce on your insurance policy, sir?’

Back of the envelope

  • Cost --- Many billions
  • Expected impact on average earnings --- Soviet era style living standards
  • Expected impact on economic growth --- Big cut in GDP from reduced competition
  • Impact on incentives --- Crappy customer service, poor health outcomes
  • Impact on government spending --- big increase
  • Impact on taxation --- big increase
  • Winners --- Party officials
  • Losers --- Everyone

2020 Health Submission 2015 (Doc Holliday)

Dear reader, I have discovered on my hard drive a couple more health submissions from the book that never was. I will post them and the health over view over the forthcoming week. For those that are confused I suggest you reference the very earliest posts on this blogsite. Doc

Major medical problems in Australia due to obesity, smoking and alcohol need greater preventive campaigns and free behaviour change assistance for all people at risk.

This statement single handedly captures the ridiculousness of Australia’s Medicare system. What does ‘free behavioural change assistance’ really mean?

Medicare is compulsory national insurance: everyone contributes to it and is covered by it. However, contribution is based upon not the risk one poses to the national insurance pool, but by how much one can contribute. Thus a person’s lifestyle choice (how much they exercise, how much they eat, drink and smoke) has no bearing upon his or her financial contributions. Instead, he or she is covered, no matter what they do.

So unable to influence behaviour through the insurance system, governments instead focus on other ways to change behaviour. Government tend to lecture you (say, a multi-million dollar television campaign telling you that a glass of vino after work is the work of the devil). Governments can even get tough: ‘if we catch you drinking, or not exercising or smoking, then you are in really big trouble …’. But incentives are still important, so of course, there are many examples of governments turning to their own citizens to enforce is dictates.

So if you, Tim, plan to head off to the race track tomorrow to place a few bets, tug on a few ciggies, you better watch out. Somewhere there is a little boy scout ready to dob you into the re-education camp Stasi. Instead, treat the problem at its source, by fixing health insurance.

Back of the envelope

  • Cost --- Multi millions
  • Expected impact on average earnings --- Unchanged average weekly earnings except for public servants enforcing the law
  • Expected impact on economic growth --- Big decrease in GDP as everyone lives in fear of little boy scouts
  • Impact on incentives --- Don't do anything remotely fun, in case your neighbour thinks you're behaving suspiciously
  • Impact on government spending --- big increase
  • Impact on taxation --- big increase
  • Winners --- re education camp managers, stasi officials and scouts
  • Losers --- TAB Tim at the races

Thursday, September 24, 2009

Five minutes on a friday.

Worth a look ... i think the boys put a fair bit of work into it.

This music video was created for an Economics Final at Frontier High School in Bakersfield (USA) by four classmates. It was written on Thursday, Song recorded on Friday, Shot in 5 hours on Saturday,

Id give em a distinction ... as good as the beasties

Wednesday, September 23, 2009

wowser, wowser, wowser (Roy Rodgers)

Lucky for us the good people over at the IPA have compiled a comprehensive list of all the new laws and regulations the task force put forward in its report.

As you can see quite a few!! enough to keep a whole armada of cubicles busy for the next 10 years.

All the economic consultants out there are going to start salivating the second they see this list ... wont be able to help themselves... just think of the revenue stream. But who am i to talk, the second i saw the list i decided to seriously consider the wife's contention that we just need that holiday shack on the beach.

New laws
1. Food and beverages classification
2. Junk food if self-regulation fails
3. Raise price of tobacco
4. Tobacco promotion ban
5. Tobacco out of sight in retail outlets
6. Plain packaging on cigarette packages
7. Ban smoking in public places "where children are likely to be exposed"
8. Ban smoking in cars
9. Second-hand smoke in workplaces, incl. outdoors
10. Second-hand smoke outside, "where people gather or move in close proximity"
11. Increase size of pack warnings
12. Tobacco brand names
13. further protections against sales to minors
14. Second-hand smoke outside, "where people gather or move in close proximity"
15. Ban vending machines sales, the internet, and at hospitality & other social venues
16. Nationally consistent liquor outlet opening times and density
17. Nationally consistent accreditation requirements for liquor licences
18. Nationally consistent late night outlet laws
19. Nationally consistent alcohol serving and training
20. Alcohol promotion regulation if voluntary regulation inadequate
21. Alcohol advertising during live sport broadcasts
22. Alcohol advertising during high adolescent/child viewing
23. Alcohol sponsorship of sport and cultural events
24. Alcohol promotion regulation
25. Alcohol availability restrictions, indigenous communities
26. Liquor licence hours restrictions in indigenous communities

New Programs and Frameworks
27. National Framework for Active Living
28. National Food and Nutrition Framework
29. National program to support Health and Physical Education in National Curriculum
30. Expand after-school health programs
31. Healthy and Active Families initiative
32. National Healthy Community Leadership and Education Program
33. Social Marketing Strategy
34. Multi-component community-based obesity programs in low SES communities
35. Multi-component community-based obesity programs in indigenous communities
36. National workplace health leadership program, and best practice guidelines
37. National accord for workplace programs and risk assessment
38. National program to alert pregnant and pre-pregnant women of dangers of excessive weight
39. National strategy to combat illicit tobacco trade
40. Multi-component community-based tobacco control projects
41. Develop further Framework Convention on Tobacco Control
42. Alcohol Diversion Programs, indigenous communities
43. Network of Alcohol-related programs
44. National Strategic Framework for preventative health research

New bureaucracies
45. Prime Ministers Council for Active Living
46. Healthy Food Compact
47. Regulatory body for required disclosure to government, communication to consumers and emissions
48. National Tobacco Strategy Steering Committee
49. National Prevention Agency
50. Preventative health strategic research fund
51. National preventative health research register

52. Research Program to inform National active living framework on economic issues
53. Commission review of economic policies and tax systems towards encouraging healthier food consumption
54. Work with industry towards food labelling
55. Voluntary industry scorecard
56. Nationally agreed accreditation standards for food labelling
57. Research: program to strengthen evidence of effective workplace health promotion
58. Research: legislative changes to encourage workplace health programs
59. Research: feasibility of grants and tax incentives for employees to encourage achievement of benchmarks
60. Health and PE in National Curriculum
61. Establish system to monitor policy of minimum 2 hours physical activity per week from K-10.
62. Research: How teachers promote health
63. Community Intervention Trials
64. Local Government Partnerships to encourage local councils to adopt health guidelines
65. Research: into effectiveness of the self-regulation of junk food
66. Expand allied health workforce
67. Clinical guidelines for allied health workforce
68. Carry out National Risk Factor Survey in 2010
69. National Children's Nutrition and Physical Activity Survey in 2012
70. Research: national research agenda for obesity
71. Research: ongoing research into obesity into indigenous communities
72. International agreements to combat illicit tobacco trade
73. Social marketing campaigns against tobacco use
74. Research into warning label effectiveness
75. Tobacco retailers licensing regime
76. Research: possibility of legal action by government and others against tobacco companies
77. All health services smoke-free, incl. Grounds
78. Patients quizzed about smoking status routinely
79. More money for: extra Quitline resources
80. Nicotine replacement therapy more affordable
81. Social marketing campaigns for indigenous smokers
82. Training in smoking cessation advice for indigenous health workers
83. Tobacco Control Workers in indigenous communities
84. Promotion to health professionals for Quitline
85. Poster advertising in disadvantaged communities
86. Increase efforts for anti-smoking for people with mental illness
87. Prisons and state-funded human services agencies smoke-free
88. Target parents to convey message to children to not smoke
89. Make smoking classifiable in movies
90. Constant alerts to public about dangers, and about new research findings
91. Tobacco surveillance system to assess whether anti-smoking targets are being met
92. Increase resources to develop and implement best practice for laws and regulations related to alcohol
93. Develop business case for COAG nation partnership on policing and enforcement
94. More money for: Drink-driving monitoring
95. More money for: Licence enforcement
96. More money for: Annual review of licences
97. Demerit points for licences
98. More money for: monitoring liquor laws
99. Social marketing strategy
100. Campaign to "build a national consensus on healthy alcohol consumption"
101. Campaign for awareness of alcohol guidelines
102. Campaign to de-normalise intoxication
103. Campaign to raise awareness of consequences of alcohol
104. Research: effectiveness of voluntary approach to alcohol promotion regulation
105. Research: alcohol modelling
106. Advocate: alcohol floor price
107. More money for: alcohol campaigns
108. More money for: healthcare providers, indigenous communities
109. More money for: staff training, indigenous communities
110. More money for: treatment programs, indigenous communities
111. More money for: coordinated case management, indigenous communities
112. More money for: responsible serving of alcohol provision
113. Community groups of indigenous to promote alcohol responsibility
114. Research: alcohol consumption, indigenous communities
115. More money for: health care for alcohol problems
116. More money for: health care for alcohol problems, disadvantaged groups
117. Nationally consistent principles regarding alcohol to minors without parental consent
118. Promotion of early drinking age discussion
119. Community support for parents and alcohol
120. Research: Alcohol use in families and with children
121. Research: nationally consistent collection and management of alcohol wholesale sales data
122. Research: National indicators on alcohol consumption

Link to IPA discussion

The good oil

The following pod cast gives a couple of alternative views about the lessons to be learnt from the great depression as they apply to our current global crisis. Worth a listen.

The New Financial Deal: What Do the 1930s Teach About Reforming Today's Financial Markets?

Speakers:John H. Cochrane, Myron S. Scholes Professor of Finance, University of Chicago Booth School of Business
Thomas F. Cooley, Dean, Leonard N. Stern School of Business, New York University
Charles Geisst, Professor of Finance, Manhattan College; Author of Wall Street: A History
Ingo Walter, Seymour Milstein Professor of Finance, Corporate Governance, and Ethics, Leonard N. Stern School of Business, New York University