SORRY I CANT KEEP IT IN ANY LONGER ... I MUST RANT (Roy Rodgers) 6:16 PM

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.

http://www.theaustralian.com.au/politics/pm-kevin-rudd-branded-an-economic-illiterate/story-e6frgczf-1225797124334

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 13^th 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 ...here 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 ...no 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.

Are people wising up? (Lone Ranger) 3:07 PM

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

Who are these guys? (Roy Rodgers) 3:02 PM

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) 1:58 AM

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.

regards

Doc Holliday

Futures in everything (Roy Rodgers) 5:08 AM

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

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!!

Insurance, the Market and those pesky wowsers (Doc Holliday) 3:19 AM

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.

regards

Doc Holliday.

Re: Re: Wowser's worst nightmare (Lone Ranger) 9:04 PM

Just found another clip by Serge.

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