Australia’s weakening economy

Tonight, just a scan with a focus on economic statistics.

In a post (Should We Have Children?) Ramana referred to something that I hadn’t thought of, the impact of education debts on relationships and the decision to have children. I have written before on the very significant impact that the changing pattern in relationships has on other variables. As a simple example, by 1980, it was clear that the rise of two income families was reducing labour mobility because the need to earn two incomes, to have two careers, meant that couples had to take both careers into account before a move.

Yesterday, the Australian Bureau released the last of its series Employee Earnings, Benefits and Trade Union Membership, Australia, August 2013. One take home statistic: “Real (earnings adjusted by CPI) median weekly earnings in main job fell by 2.1% in the year to August 2013, the largest fall in a decade.” Mmm! That would fit with my observations.

That same day, the ABS released the Australian GDP figures for the March quarter 2014 showing a seasonally adjusted rise of 1.1 per cent for the quarter, up 3.5 per cent from the March quarter 2013. That’s a good result. However, the main driver in the rise was net exports, up 1.6 per cent. In industry terms, mining contributed 80 per cent of the growth in the quarter, The two results are linked, since rising export volumes of mining products was the main contributor to net exports,

Today, the ABS released the trade figures for April 2014 showing a biggish seasonally adjusted decline in trade terms. The main driver in the fall was coal, coke and briquettes, down $361m (10 per cent).
This fall was partly offsetting by metal ores and minerals, up $254m (3 per cent).  Since April, iron ore prices have come down suggesting that the trade figures may have deteriorated further. Oops! Building approvals have also continued to decline after a period of steady increases.  Then, in May Australian house prices fell by 1.9 per cent,the biggest single-month decline in house prices in more than five years, according to CommSec chief economist Craig James.

Finally back in May, the ABS released Australian Industry, 2012-13. It’s worth a browse.

In November last year, I was prepared to take something of a then contrarian view of 2014, suggesting the Australian economy was going to be strong than many expected. I held to that view in December - Friday Economics- economic outlook 2014. I’m not so sure now. I think that Australia may have stuffed up, despite the better than expected global economic growth. There have been too many shocks, too much instability.

I won’t call recession yet. That would be extreme. But it does look possible now, something I hadn’t expected I think that we will find out relatively quickly.

Update

Yesterday, Leith van Onselen had a useful piece showing that while GDP went up in the March quarter, Gross National Expenditure went down after really flat lining for the year. Today, he followed this up with a piece  looking at the expenditure numbers adjusted for population increase. Australia’s population has been growing, so the per capita numbers are in negative territory.

Meantime, Chinese growth continues to weaken slightly, with the IMF advising against new stimulatory measures. The Chinese Government faces a difficult task in unwinding imbalances in the Chinese economy, so some further slowing is not necessarily a bad thing.

Yesterday, Roy Morgan released the results of its latest survey of business confidence. The survey was carried out following the budget. Business confidence in May fell 5.5 per cent from April to 114.3. Business confidence is now 16.1 per cent below the peak of 136.3 in October 2013 following the new government and 7.4 per cent below the average over the last 12 months.

Where have all the economists gone, long time passing?

Chatting today to a colleague, we talked about the importance of system design in public policy. The same thing holds true, of course, for private sector business management. In the public policy case, the trigger was the difficulty of knowing just what the the latest proposed changes in higher education actually mean.

On a somewhat related issue, I really miss not being able to properly use the analytical tools I derived from economics in my work. Of course I do to some extent, but its actually quite hard to present economic arguments when the knowledge of mental constructs or analytical techniques are no longer there. I am thinking here not of debates on macro policy, nor of arguments based on particular intellectual models that have become absorbed in the culture, but of economics as an intellectual tool kit used to analyse particular problems. Neither a spreadsheet nor a financial model does an economist make.

I worked as a professional economist for over twenty years, a period  when economists came to rule the roost. Now in my professional life, I rarely meet one. It’s actually quite hard; nobody knows what  am talking about. 

In industry economics, and that’s all about sectoral change, we talk about about industry structure, conduct and performance. If I use those phrase, nobody knows what I mean. But how can someone talk about sectoral change when they don’t understand anything about the dynamic, the intellectual issues associated with industry performance?

This may not sound important, but in a world where so many activities are being outsourced, how can you make judgements about actual effects if you do not have any knowledge of industry economics?  Let’s grow the not for profit disability sector. Wait, we have a capability gap; let’s have a capacity building program.  Wait, now we have a governance gap; we don’t have enough board members or senior executives to meet needs. Let’s have a governance program. Wait, our suppliers are going broke because we are not paying them enough; we have to restructure our payments schedule. Wait, we  now have a quality problem; we need a new quality program. And so it goes on.

None of these programs are necessarily bad. The point is that they could have been avoided or at least reduced with the most basic industry economic analysis.

Economics, or at least some variant of it, is important in determining what will be outsourced. That decision made, the remaining economists absolve themselves of responsibilities. It wouldn’t matter so much if Western countries did not have a risk avoidance culture. Let’s take an example.

Say we want to grow the not for profit disability sector as fast as we can. That will bring longer term benefits. In the traditional private sector model, failure is part of the central equation. Businesses fail because they do not meet market demand in the most cost effective way. Employees suffer, as do some customers. That’s a necessary cost  to gain the maximum economic benefits. 

This can’t happen in the pubic sector. We outsource because economics tell us that this maximises public benefit, Business failure is part of the price. But, actually, we can’t do this, we can’t let the market decide. We reject the fundamental dichotomy between the failure the market demands and the reality. Our risk management strategies demand that we find a way to avoid failure. So we go for a twisted system that , in the end, gives the worst results. It’s all very difficult.

Postscript

Universities Australia had an interesting piece on the projected cost in Australian university fees. You can access it via this ABC story. Universities Australia is the universities’ industry association, so one has to be cautious re special pleading. Still, the numbers are interesting. Meantime, UNE VC Professor Annabelle Duncan has been talking to students. The university has just been ranked number one in Australian on-line offerings. It needs all the positive rankings it can get in our new world.

I haven’t said this before, but I am not necessarily opposed to uncapped fees. However, I do think that there is a design weakness in the current arrangements giving rise, in part, to what commentator DG has called moral hazard. There is a moral hazard in the universities can set their fees with someone else paying other than the customer. There is moral hazard in that a student can buy with the knowledge that they don’t have to pay.

From a Government perspective, there is an open risk of greater pay-outs now, lower paybacks later. That could become unsustainable. So, in system design terms, the Government has to set a cap on its payments. If a university wants to charge more, then the student pays out  of his/her pocket.   

England, Scotland & Mr Pyne’s proposals

Just following up on my discussion (Credential creep, the economics of education, with a dash of contract breaking or (alternatively) retrospective taxation, Over-reach: deregulation, fees and university education)  on the higher education budget changes. The UK has been cited as an influence on Mr Pyne’s thinking. This Wikipedia article gives you a slightly indigestible summary of the UK position. With devolution, the charging position varies to a degree between the different parts of the UK. This will give you an entry point for the position in Scotland where fees are lower for Scots. You can follow this site through to other parts of the UK to see what the position is there; it appears a good site.

There are several differences between the UK and the Australian proposals, but a few broad comments.

In the UK, the ability of universities to increase fees appears to have been capped at 9,000 pounds. Fees promptly increased to the capped price, in part (I think) because of the way it the scheme was introduced with cuts to university resources at the same time.

According to this Guardian piece, the 2012 UK changes have so far not disadvantaged lower income students. The UK loan scheme is structured to garner more from higher income earners. It also includes payments for living costs. That would greatly help student mobility in Australia. 

Finally, a Scottish kid seems to be in a much better position than an English kid when it comes to getting a university education. But then that’s been true for five hundred years!

I emphasise that these are not expert comments, just observations.      

Over-reach: deregulation, fees and university education

Sometimes, you have to be careful in what you ask for. In the run-up to the Federal election, the bigger Australian metro universities supported deregulation of university fees. What they hadn’t expected was that this would be combined with a significant reduction in base funding plus an increase in the interest rate on student loans. Now the alarm bells are ringing among just that group that previously supported fee deregulation.

We are in uncharted waters because we are dealing with interacting changes whose effects are very unclear. I don’t pretend to understand them. If we apply simple economics, service delivery costs mean that the price change for qualifications is going to vary very significantly between academic fields. That’s one thing that has the Group of Eight worried. If we look at the demand side, the price paid goes up by the combination of the fee increase plus the cost of the interest charge. Depending on price elasticties, that should result in some reduction in overall demand. However, because the price change varies, there are going to be differential demand effects across disciplines. 

One of my underlying points in Credential creep, the economics of education, with a dash of contract breaking or (alternatively) retrospective taxation, is that the absolute as compared to the relative return on some degrees may not be as high as people think. If people really want to be a nurse or teacher or fire fighter or an engineer, then they will be prepared to pay a certain higher price for that satisfaction. However, to the degree that people are motivated by financial return, there will certainly be demand shifts reflecting shifts in financial return at the margin. I don’t think anybody really knows what these will be. We will just have to wait and see while people crunch numbers and set new prices.

Minister Pyne places considerable weight on the suggestion that some degree prices will fall. I’m sure that’s the case, although it may take a little time. At  any price, you can get a supply so long as production costs can be sufficiently lowered. As former UNE VC Jim Barber liked to point out, new delivery technology means that cheap mass on-line delivery is possible. To the degree that the market demands or is required to demand a credential, that credential will be supplied.

One important issue ignored in the current domestically focused Australian discussion is the impact on the country’s export of education services. Measured by net contribution (exports minus imports), this is by far the largest Australian services’ export sector, yet the impact has not been discussed. Perhaps it’s not important, the changes won’t have any affect. I’m not sure about that, although I don’t have a formed view.

The political process will dictate changes, compromises, so we can’t be sure what will finally emerge. My feeling is that Minister Pyne and his advisers have not fully thought through the dynamic aspects of their proposals. They have over-reached. They will have to make changes.

Postscript

Minister Pyne is sticking to his guns on his claims. Noting that the Government had eighteen months to implement the new funding model, he said:

"I'm not going to respond to the different statements or claims being made by particular vice-chancellors because at the end of the day, I think competition will drive prices down and students will be the winner in terms of quality and price." 

The Universities face a complex commercial challenge in part because the Minister can actually retaliate to any decisions they make by simply cutting funding, in part because of pricing complexity. The Minister uses the phrase at the end of the day. That allows for unforeseen price effects being subsequently corrected via competition.

Ignoring Ministerial retaliation, I commented above that price change for qualifications is going to vary very significantly between academic fields. I want to amplify that a little.

All businesses work on cost plus a margin. To the degree that they cannot control price, cost becomes the immediate driver. However, they also have to balance quality. In the longer term, they try to influence price through product differentiation and innovation or restrictive practices. They also choose which market segments to operate in. If they get all this wrong, they suffer and so may the consumer.

In the university sector where domestic prices have been fixed, the main marker of competitive performance has been varying academic entry scores. These show quite clear variations between institutions and courses. Because Australian students are increasingly immobile, most wish to or are forced to study near home, universities with high population immediate catchments have an advantage.

Distance education and international education raise somewhat different issues. In Sydney, university education is effectively an oligopoly so far as campus study is concerned. Distance education is both more price sensitive and competitive since locational advantages are largely removed. International education generally involves full price. although prices vary between institutions and countries. I spoke of Australia’s exports of education services earlier. However, we also import, with an increasing number of Australian students studying overseas. Here students have made a judgement that they will get a better personal return despite the higher price. This imposes a probably minor if growing price constraint on Australian universities.

Australia’s larger universities are big businesses. You just have to walk any one of the campuses to see it. They have buildings to maintain, debts to service, residential accommodation to fill, fixed costs to meet. You can see why the size of the initial funding cut is causing pain. The hurt is greatest at the higher cost institutions including many of the metros. Later, when they can charge fees, the equation may change to some degrees. 

Last year, a number of the bigger universities placed an effective freeze on any further expansion in student numbers, using increased entry scores to ration places. We have become big enough, they said. This is important because it affects their market freedom, including their ability to price. If you don’t want to grow student numbers and have unmet demand, you can use price as a rationing device.

How all this is going to play out on the ground is beyond me and, I suspect, anyone else for the moment, To say, as Mr Pyne did, that students will be a winner in term of price is clearly a nonsense. A key part of the exercise is to make students pay more. Mr Pyne just hopes that the competition will limit the extent or price increases. The only exception I can see is the entry of vocational providers with lower cost bases into parts of the university sector saying to students that your HECS debt will be lower if you study with us. I think that’s the real competitive constraint.

Postscript two

My highly valued if unpaid research kvd found this post on the comparative costs of international education: COMPARING THE COST OF A DEGREE OVERSEAS. Some interesting stuff,

Saturday Morning Musings – sidetracking through history

I haven’t commented on the Eastman case. I worked with David for several years, knew him for longer. The issue in the Martin Inquiry was not whether or not he had a sometimes difficult personality, but whether he received a fair trial. It appears not. You will find the details here, here, here, here, here, here.  Obviously, its big news in Canberra. What a mess.

Over at her place, The Resident Judge of Port Phillip, Janine Rizzetti has continued her series of book reviews, most recently with ‘A Biography of Robert Baldwin: The Morning-Star of Memory’ by Michael S. Cross. It’s a good review. Janine followed Judge Willis from Port Phillip to Canada and then found, as I had done, the similarities between Canadian and Australian history. Canadian history is longer, more complex, but both countries evolved as part of the same empire.

Australian historiography has been through phases. In one phase, the more nationalistic phase, the Imperial connection was effectively written out of Australian history except to the degree that it was necessary to establish a counterpoint to the Australian point, or deal with one of the isms, imperialism or colonialism. Australia was defined by its differences from, to a degree conflict with, its parent. It therefore comes as something of a shock to find that our now somewhat distant siblings actually had similar experiences. It can be a bigger shock to conclude that one’s parent may have been right after all, or at least conclude that that parent had a defensible view.

At the moment, I’m deeply enmeshed in the history of two linked Australian families, the Wyndhams and Wrights. I hadn’t intended to go this route. However, in pursuing one topic I found that I actually had a series of books on my shelves dealing especially with the Wright family. Thank heavens for the bicentenary! It led to a huge burst of historical and especially small press publishing. The bicentenary has long gone, as has the publishing burst. The books remain.

The books that I am reading contain excerpts from letters and diaries. This was the material as well as her own memories that Judith Wright used to write Generations of Men. It is the small details of life that I find most interesting,

On 7 September 1876, Emma Halliday nee Wyndham wrote from Darjeeling to her Uncle, George Wyndham, at Dalwood. The letter is an affectionate one, mainly concerned with horses. George had sent her a stallion from the Hunter; Emma appears to have been breeding and selling horses. “We are staying here in the hills because my husband has sick leave, as he had fever and argue”, Emma writes. “However, we rejoin the regiment in two month’s time, and we go up to Cawnpore, which I do not fancy at all”. Wise words. Next year, Emma, her husband and their child would die in the massacre at Cawnpore during the Indian Mutiny.

As an historian who see himself as a story teller, I don’t have to get involved in the rights and wrongs of the Indian mutiny. What is more important is that it touched one family in the context that I am writing about. 

I had intended in this post to go on to discuss some of the issues that Winton Bates is raising on Freedom and Flourishing. The segue would have been the importance of time in making judgements when so much of current data is actually short term. I apologise, Winton. I am reading!

Credential creep, the economics of education, with a dash of contract breaking or (alternatively) retrospective taxation

Soon after starting work in the Commonwealth Public Service I found myself in the Commonwealth Treasury. While I had completed a major in economics, my honours degree was in history. Given where I was now working, it made sense for me to switch my master’s plans from history to economics. To do this, I had to complete a masters qualifying, achieving distinction status in a third year course, one of the honours courses plus a sub thesis. I mention this now because the sub thesis topic I chose was the economics of education.

At the time, there was interest in two different types of measurement. One was the contribution increased education made to economic growth. This was positive, providing an economic justification for increased state spending on education. The second measurement was the contribution education made to increased life time earnings. This was positive too. The combination meant that greater spend on education was justified in economic terms, but there was also a case for charging students something for that education since they received a direct financial benefit over time. The challenge was to find a way of striking a balance between the two. Charge students too much and you reduced the overall national return on education by reducing investment in education.

This simple analysis forms the basis of especially higher education policy in many countries including Australia. I am not implying anything especially profound with my own analysis, although it was new to me. The same logical paths were being followed by many others. 

The discussion today around the Australian budget changes to higher education reflects that old model. Minister Pyne talks about the high individual returns from university education, a claim that the ABC Fact Checker program concluded were overblown. I have a more fundamental problem, call it a confusion if you like.

When these calculations were first run, the proportion of graduates was far lower as was the proportion going onto year twelve. With the explosion in mass university education, both the absolute number of graduates and the proportion of graduates has exploded. Logically, you would expect the return on a degree to have fallen. Yet, somehow, it is still showing a significant rate of return. You have to ask why?

To my mind, and I have argued this before, we are dealing with a side effect of credentialism. The rates of a return on a degree are calculated by a comparison with the non-degree populations. Over the last forty years, swathes of sub-professional areas have moved in credential terms from the non-degree to degree space. They are now, as they were then, comparatively less well paid than the professions themselves. However, they are now as they were then, better paid than most semi-skilled or unskilled occupations.

My hypothesis is, and I stand to be corrected by someone who knows the numbers better than I do, that the absolute return on a degree has fallen with increased numbers. However, the relative return on the degree has stayed positive because the returns as compared to the diminishing non-degree group have been held up by the migration of mid range wage and salary occupations from the non-degree to degree group.

On a tangential if related issue, Fact check also looked at this question: Is the Government's plan to charge interest on existing student loans a broken contract? This measure really annoyed me because my daughters made judgements based on existing arrangements. Would they have changed their plans? Probably not, but they would have had to make a choice. If the change is not a breach of contract, then it becomes a retrospective tax measure. Still, as kvd pointed out, it makes it easier to sell the student loan portfolio for a bigger price. Surely that’s good?

New England Travels – journeys through space and time

Last year, my main writing for publication outside my weekly newspaper column and the blogs were two chapters, one a long one, in a book to be published to mark the 75th anniversary of the New England University College, the 85th anniversary of the Armidale Teachers’ College. I spent a fair bit of time on those chapters, trying to write as well as I could while ensuring proper historical referencing. I was looking forward to holding it in my hand as tangible evidence of my work. Frustratingly, the book hasn’t been published. First it was due to be published last year, then by the end of March this year, now who knows?

Last year, too, I began what would be two attempts to turn some of my existing writing into book form. Both stalled because of the degree of rewriting required. Now I am having another go, but this time in a different way. Instead of trying to edit and restructure my existing writing, I am writing from scratch in an area that I already know where I can draw from my existing work.

The working title is New England Travels – journeys through space and time. Part autobiographical memoir, part travel story, part history, my story meanders wherever it will take me. New England provides the unifying element, the frame if you like, but I am not restricted to that; the sands of Arabia, Lugard’s Nigeria, spying in Japan, boxing and boxing tents, life and death on the frontier, the rise and fall of dynasties and the strange by-ways of family life are already there, sketched on the canvas I have created; my choice now is to select.

I am not being too ambitious. For the moment, I have an income to earn, other things to write. My writing target is 300 words per day. So far I am sticking to it, although it’s very early days. For the present at least, I am finding the process liberating, an anodyne to other frustrations that bedevil me. I know that the draft will change greatly as I write. Even now it has changed several times as I strive to capture the right words, to achieve the balance I want. Accepting that, this is the present start of the book.         

“Dalwood House stands on a rise. From the side verandah, mown grass runs down to the old vineyard. The Hunter River lies beyond, hidden within its high banks. It was hot and still, the silence broken only by the distant sound of a crow. Even the working properties on the hills on the other side of the River were still, remote in the faint heat haze.

This was only my second visit to Dalwood. Many years before I had read Australian writer and poet Judith Wright’s Generations of Men, the story of her grandparents and the establishment of the Wyndham and then Wright pastoral dynasties; the book gripped me. I was especially caught by the almost lyrical descriptions of Dalwood House as seen through the eyes of Charlotte May Wright nee Mackenzie, Judith’s grandmother.

By chance, I had just finished the book when I went out to dinner in Canberra. Talking about the book over dinner, my hostess, herself a member of the Wright family, said “The house is still there, you know, although it’s a ruin now.” I got directions and visited it with a friend on my next trip to Armidale.

Many parts of Australia now claim Judith Wright as their own. Up in Queensland, the State Government has expropriated her for a performing arts centre. Her New England connection is dismissed in just a few words: “Judith Wright was a Queensland resident for over thirty years. She was born in New England, in regional New South Wales, and came to Brisbane as a young woman”. Later, Canberra and Braidwood would claim her too.

In all this, Judith remained a quintessentially New England writer. That was where her views were first formed, although her later experiences and especially her relationship with the older novelist and philosopher Jack McKinney would exercise a powerful influence over her. Judith met Jack McKinney when she moved to Brisbane. He was a much older man, some twenty four years her senior, only two years younger than her father. They fell in love, moving to Mount Tamborine in 1950; daughter Meredith was born in that year. In 1962, Jack and Judith finally married. Four years later Jack died, leaving a hole in Judith’s life.

Jack McKinney was the second of three powerful men in Judith Wright’s life. The first was her father, Phillip Arundell Wright, with whom she shared a middle name. The third was H C “Nugget” Coombs, a noted Australian economist and public servant, with whom she had a twenty five year love affair. Coombs was again an older man, in this case by nine years. Both were major public figures. Judith was a widow, Coombs long separated from his wife. Both shared common interests, including Aboriginal advancement and the environment. Judith moved to Braidwood to be closer to the Canberra based Coombs, but the affair was kept secret, if open to their friends and the Canberra network within which they moved.

Each man had a powerful impact on Judith, but I think that it was the father that formed her core views. It was he that gave her that love of the environment and of the country. It was he that gave her that love, affection and unstinting support that seems to shine through in the letter between them.

I knew her father as a much older man. PA, we all spoke of him as PA, was my grandfather’s friend; my grandfather was godfather to his son who bore the same first name; my copy of Generations of Men carries my grandfather’s signature, bought in the year the book first came out. To me, PA was a somewhat remote figure. I saw him at events and at the New England New State Movement Executive meetings that he sometimes chaired. I and my fellow students at the University of New England where he was chancellor poked gentle fun at him for his sometimes mangled English. It would be a number of years before I came to properly understand his contribution to Northern life and the causes he supported.

Judith loved her father, she loved the Fall country in which she grew up, she loved the life on the family properties. Her earlier works reflect that love, and then the joy she found in her relationship with Jack McKinney. Later, there would come a darkening of spirit, erosion in optimism, a rejection of elements of her past. “You ask me to read those poems I wrote in my thirties?” she wrote in Skins. “They dropped off several incarnations back.”

Judith had the misfortune to be born a girl in an age when men inherited. After the death of PA, she became separated from the properties and life she had loved. Towards the end of her life, she saw the end of the Wright family empire that had been carefully built by her grandparents and especially grandmother May Wright. The ABC TV Dynasties program recorded the event in this rather dramatic way:

By December 2000, he (brother David) had lost it all – his properties, his cattle and his wife to cancer. His sister, the poet Judith Wright, watched in despair and died soon after.

Six years later David, my grandfather’s namesake, died suddenly. On his death, University of New England Professor Bernie Bindon described David as one of the pioneers of the scientific research underpinning today's Australian beef industry. "I can't think of a beef industry person” Professor Bindon said, “who's made a bigger contribution to not only the growth of the beef industry but the science that underpins the beef business," The Herefords that formed the base of the V1V and V2V Wright brands began their life at Dalwood. It was Judith’s grandparents, the core characters in Generations of Men, who began the breeding program that created the Wright cattle.”

I hope that this will give you a feel for what I am trying to do.

Postscript

Message first via the UNE Facebook page and then a personal email from Jennifer Miller UNE Alumni Officer to say that the UNE book was back from the printer with a launch being organised. I was so relieved.  

Untangling co-payments: where the Government went wrong

Just when the Australian Government felt that things couldn’t get any worse, it appears that a rise in nickel prices has replenished Mr Palmer’s coffers. Oh dear. Perhaps the Government is going to be watching the Nickel Exchange as closely now as the public opinion polls!

Meantime Leith van Onselen in a piece in Macrobusiness has noted, as I have, the way in which certain sections of the Australian media have regrouped and turned to savage the Budget’s critics. The piece’s title, Media turns on Budget “whingers”, captures the flavour.  I think that you can forget a lot of the commentary at the moment. In the end, with a budget like this, it is the actual way that things work in practice that will determine the Government’s survival.

The starting point here should be not what the Senate might do, but what will happen if everything happened just as the Government intended. Then, too, the issue is not so much the macro-economy, although that might blow the Government out of the water if, for example, China went pear shape. Rather, the key question is the myriad of smaller changes rippling across the country. To illustrate this, this post deals with the health changes. My main sources is budget paper no 2, supplemented by some of the commentary. I am only dealing with major measures. 

Initially I struggled a little to understand the co-payment and I’m still not clear. But this is what the budget paper says:

The Government will achieve savings of $3.5 billion over five years by reducing Medicare Benefits Schedule (MBS) rebates from 1 July 2015 by $5 for standard general practitioner consultations and out‑of‑hospital pathology and diagnostic imaging services and allowing the providers of these services to collect a patient contribution of $7 per service.

For patients with concession cards and children under 16 years of age the MBS rebate will only be reduced for the first 10 services in each year, after which it will return to current benefit levels. A new Low Gap Incentive will replace bulk billing incentives for providers of these services. The Low Gap Incentive will be paid to providers where they provide services to patients with concession cards or children under 16 years of age and only charge the $7 patient contribution ‑ for the first 10 services in a year, or where they charge no patient contribution ‑ for additional services in that year.

The measure will also remove the restriction on State and Territory Governments from charging patients presenting to hospital emergency departments for general practitioner like attendances.

The savings from this measure will be invested by the Government in the Medical Research Future Fund.

Let’s unpack this a little. On the surface, the Government is proposing to reduce the medicare rebate on a standard consultation by $5. Doctors will charge their patient $7. The Government is $5 better off, Doctors $2 better off, patients $7 the poorer.

At this point, I would like to thank regular commenter DG. This post was due to come up first Friday and then yesterday, focusing especially on the industry and structural economics of the proposed changes. In simple terms, what were the likely reactions within the health sector, how might these interact with patient behaviour? I find this type of approach helpful in providing different types of insights compared with the more conventional economic analysis.

In his comment, DG pointed to the earlier US Rand Study, to the Singapore health system and, more broadly, to evidence on the low price elasticity of demand for health services. This led me to change direction somewhat, although my focus remains on the Australian context and the impact of the proposed changes in that context.

Elasticity of Demand

For those who are interested, this Rand paper contains a useful summary of evidence on demand elasticity, this paper provides an introduction to elasticities in general, while this post by Jason Shrafin provides an entry point for other discussion on various types of elasticities.

  To summarise the material, price elasticities for medical services appear low. This means that a one per cent increase in the price will lead to a .17 or so per cent fall in demand. However, there are variations in price elasticity between medical services. For example, price elasticities for preventative medicine are higher since this spend is discretionary. Charging for vaccinations might fall in this class. Falls in demand also appear to work themselves out not so much by falls in visits, I will go to the doctor less, but by falls in the number of people going to the doctor, I won’t go to the doctor at all. Finally, price elasticities are higher in the longer term.

In contrast to price elasticities, income elasticity is positive. As incomes rise, we go to the doctor more. That makes sense, although the income elasticities appear relatively low. Again that makes sense. We go to the doctor more because we can now pay for a wider range of services. However with exceptions, cosmetic surgery might be an example, there are only so many things that we might want done to us. Perhaps now we will have that hip replacement operation rather than putting up with the pain.

If income elasticities are positive, then it follows that if incomes fall expenditure on health services will fall by a higher percentage than the fall in income. My income falls by one per cent, my expenditure on health services falls by 1.5 or 2 per cent. I defer or cancel that hip replacement operation. I put up with my flue for a longer period.

Finally, health services are not single services. I go to the GP. The GP tells me that I need antibiotics. I go to the chemist. I have to make two payments, one to the GP, one to the chemist. The data suggests that price elasticities for pharmaceuticals are higher for GP visits. Again, that makes sense. I go to the doctor because I am ill. The doctor says that I have flue and should take this medicine. That medicine is costly. I may not be able to afford it. In any case, I am somewhat reassured by the GP, so I choose to not to buy and suffer. And maybe affect others. Alternatively, I am meant to take two courses of antibiotics. I take one, but only one.

Health Minister Dutton’s numbers.

Australian Health Minister Dutton indicated at a forum that Department of Health modelling indicated that the $7 co-payment would only stop one per cent of people going to the doctor in the first year of operation, falling to half a per cent in the second year. This led Joanna Heath in a Financial Review story entitled Dutton disputes health claims to conclude that the modelling undermined claims made by patient advocates that the co-payment would deter many people from seeking medical help when necessary.

I blinked a little when I saw this.  Surely that’s too low? Looking at it against the elasticities data, I thought okay. So this change means that one Australian in a hundred will stop going to the doctor in the first year, falling to one Australian in two hundred in the second year. That would fit with the elasticities data. However, the story doesn’t end there. I actually have no idea how all the changes will work through.    

Looking at the co-payment on its own

It is clear that doctors are presently confused at just how the co-payment system with its safety nets might work in practice. I am too! But just keeping things very simple.

At present, around 88% of doctors bulk-bill, mainly in the big clinics. In these cases, the patient presents their medicare card and the service is charged straight to the Government. The remaining doctors charge the patient direct, setting their own consultation fee. The patient then goes to the Medicare office and claims the rebate back. Doctors who follow this route tend to be independent GPS or practices located in better-off areas who have chosen for personal, professional and business reasons to opt out of medicare bulk billing. On average, they appear to charge more than the scheduled fee.

For doctors who have already opted out of bulk billing, the effect of the changes is to increase the net amount that their patients must pay by $5 per visit, the fall in the medicare benefit. While it’s a significant percentage increase in the cost to their patients, it’s also a small amount that will have little impact on their customer base. They also don’t have to worry about all the special conditions/exemptions intended to soften cost increases. They just charge. It’s up to the patient to claim back.

At the other end of the spectrum, the big company chains that now dominate the mass primary care marketplace as well as certain other areas including pathology services do have a problem. Their income has gone down by $5 per visit. That’s their profit margin. Further, they have to think about how to implement the special conditions/exemptions required to get, or help patients get, the higher medicare benefit in certain cases. That imposes costs.

There are some hard choices here from a market perspective.This is a volume business.

Looking back at some of the reports I wrote in my past consulting life, my reservation about the emerging chains lay in their ability to gain a profit from a corporate service paying its doctors compared with ordinary GP operations. At the time, the corporates were paying large sums to buy practices, older doctors were exiting gracefully. I couldn't see where the profits would come from. The margins weren't there.

I was wrong along several levels. I underestimated the extent to which volume might be increased with given doctor numbers. I underestimated the economies that might be associated with centralised back-office functions. Most importantly. I underestimated the extent to which flow-on business to higher margin areas such as pathology might support low margin services. Still, mass primary health care remained a low margin business. Now what do the chains do? How do they respond?

In the first instance, they have to keep volume up. The full changes don’t come in for a while. Meantime, there appears to have been a drop in GP visits because people don’t know what is happening, are confused. This had led the Australian Medical Association, among others, to issue statements saying don’t worry, things are as they were.

Meantime while keeping volume up, the chains have to address practical longer term business issues. 

At the moment, they simply swipe the patent’s medicare card. Now they need a new system. The simplest system is that already applying in some areas such as dentistry where medicare does not exist, where private insurance is the norm. A bill is calculated. Patients without insurance pay that. Where patients have insurance, the system allows the practice to lodge the insurance claim and then issue a bill with the insurance rebate deducted. The practice still has to either collect cash or lodge a credit or debit card for the remainder.       

My feeling is that this is the system that will be adopted, although there are still problems. One is the Government’s rhetoric, its attacks on bulk billing, for this is bulk billing in a different guise. A second is the costs and complexities associated with the safety nets and other changes.

This then raises a another question, the extent to which doctors will opt out of bulk billing, joining the 12 per cent of doctors who do not participate. I think that the chains will stay in the system since that makes the best commercial sense in the short term. However, I would expect a significant percentage of independent clinics to opt out.

In this context, the Government’s rhetoric is unfortunate.This Government has the habit, as indeed did the Rudd Gillard Governments, of speaking as though it expects people to obey. It doesn’t work like that. It simply cannot compel doctors to comply. They will do what they will do. They will opt out. Their role is to deliver medical services in the way that they see best, taking their own personal values and considerations into account. They are not servants of the Government.

If a significant proportion of doctors do opt out, then a new equation comes in. The elasticities analysis is based on price, not cash flow. A $7 co-payment is one thing, a $38 or $40 charge a second thing. Even if you can claim back, you cannot go to the doctor if you do not have the cash. The price point is not $7, but the higher amount. That could lead to significant drops in demand. 

Looking at the co-payment in context

The Government has introduced a major series of interconnected changes.

On the cost side, it has increased costs across a wide spectrum of medical services, each with its own price elasticity. Keeping it simple, a patient may now pay $7 for a visit to the doctor, but also has to pay more for medicines prescribed following the visit. The drop in the demand for medical services will be the combination of the two.

The Government had also introduced benefit cuts that will lower the income of many lower income people. The drop in demand for medical services is now the combination of the price effects for primary consultations plus the price effects for medicines plus the income effects of lower benefits. Who knows how all this will play out?

Conclusion

The really annoying things about all this is that it was unnecessary. I actually support the idea of a low co-payment because it keeps people honest.

If I was introducing it, I would have worked out my systems first. I would say something like people need to make a contribution for their health care. This will cost you a small amount of money, but it will be easy for you, it’s not complicated. This is what will happen. We, the Government, are going to save some money that we can then invest back into health care so that you are better off.

But what did the Abbott Government do?  It introduced so many changes that not a bloody person, and I include the Government itself as well as myself, can understand them!  Is it any wonder that people are reacting?    

Update One

Neil Whitfield pointed me to this piece on the financial impact of the medicare changes on doctors’ incomes. I had not picked up the impact of the removal of the bulk billing incentive. Ironic, really. As I remember it, that incentive was introduced because the proportion of doctors bulk billing had dropped significantly to the point that it threatened the success of bulk billing. There is not much point in maintaining a bulk billing incentive if you want to do away with the practice!

Looking at comment threads across sites, there is not a lot of sympathy around for the affect of the changes on doctor incomes. I suspect that misses a key point.  It is not clear to me that the changes will affect doctors’ incomes, although it will affect the economics of the health care companies that employ doctors. 

In a comment, Janene wrote:

I don't know if Armidale is typical of other regional cities in this regard, but here doctors do not bulk bill unless you have a health care card due to being on a very low income. I took my son to the doctor last week and paid $65 for a 5 minute consultation, of which I can receive $36 back. I have no idea why doctors here feel it necessary to charge almost twice as much as their city counterparts.

One of the interesting subtexts in all this is that it was Tony Abbott as health minister who effectively restored  medicare as a mass service. This piece in the Conversation from September last year, FactCheck: were just 67% of GP visits bulk-billed when Tony Abbott was health minister?, provides a useful historical perspective. By the time Mr Abbott became health minister in October 2003, the decline in bulk billing had become a significant political problem. The changes then introduced helped reverse that decline.

Even now as first marcellous then Janene noted, the incidence of bulk billing varies greatly across space. Not everyone has access to it. If, as appears to be the case, we are at the end of bulk billing, then everybody can now enjoy the Armidale experience. To the degree that demand for medical services is price inelastic, there would appear to be scope for doctors to compensate for volume declines through higher prices.

DG used the term moral hazard in the context of GP fees and bulk billing. However, it was always the case that those going to the doctor then had to buy the drugs where co-payment was alive and well. To the degree moral hazard existed, it wasn’t really a patient issue, but one linked to over servicing, especially in pathology, and that was a corporate issue.  

Concluding, one of the difficulties with the multiple changes is they way they feed into each other. Patients face increases in GP costs plus increases in drug costs. Oh, and by the way, optometry benefits have also changed. Welfare benefits are down.

We appear to be moving from a universal care system to a safety net system. If we are to maintain a universal care system with increased co-payments, then the system design elements become critical. The same holds true if we are to go to a safety net system.

The Commission of Audit provides a salutary lesson here. Some of its recommendations were simply stupid, unworkable, because they ignored systemic interconnections. The recommendations on rent assistance are a classic case.

All this will be winnowed now through the political process. That is the way the Australian system works. You get compromises that are then tested through experience. Things actually tend to balance themselves.

Mr Abbott’s bushfire

Budget reporting goes on and on while I try to work my way through it all. There is something extremely nasty about the responses running just below the surface on social media, peaking through from time to time into the more public space.  I can understand it, but I don’t have to like it.

Looking at the commentary especially in the Financial Review, the debate is not primarily about fixing the budget as some commentators think and the Government would like to present. It’s about the means adopted. The Government wanted to fix the budget and do the things it wanted to do. To do this, it had to cut out the things it didn’t want to do. It also wanted to force some structural, social and behavioural changes. I make this point only because it is quite clear from the numbers that the Government could have achieved the same budget outcomes with a different policy mix. It chose the mix, and those choices were its choices. That’s what the debate is about.

On the distributional impacts, NATSEM modelling would seem to confirm just how skewed the budget impacts are. You can actually see something of the same effects in the consumer confidence surveys where the fall in consumer confidence is most marked among Labor voters, with the diminished number of Liberal voters still positive.

If we put aside debates about budget aggregates, macro-economic impacts or indeed fairness, we are still left with the question of what it all means. What will be the impact of this budget on the way Australia operates and on the various sectors and activities affected by the budget and by all the associated policy changes? How might it work in practice?

This is where my present confusion lies, for I don’t understand the system design elements, the detail, well enough to track the likely impacts. I suspect the Australian Government is in the same position. Certainly the Opposition is.

This budget has timelines built into it. Changes come in at different points in time stretching well into the future. Those affected by the budget have to make judgements about impacts based in part on the what if principle. What if this actually happens?

To illustrate with a simple example, I can measure the possible impact on my daughters of the introduction of interest charges on HECS debts. All I need to know is their debt and then apply some interest rate ranges. What I can’t properly assess are the behavioural impacts.

Will better off parents or former students with access to cash draw forward their paybacks? Some will, giving the Government cash. What will be the impact on demand for university places? Now,that’s more complicated, for it depends in part upon movements in university fees affected by other budget changes. Normally with price signals, and that’s what this change is, you would expect them to work by reducing and also redistributing demand. That means fewer students going to university studying a different mix of courses.

For the universities themselves, the position is fiendishly difficult for they have to try to work out and respond to multiple possible interacting changes that affect every aspect of their operations.

I think that the Abbott Government has made a fundamental error with this budget. It’s simply too complicated, bringing in too many changes at one point. There is no prioritisation, no phasing, no picking of the key battlefields. In military terms, they have decided to invade on multiple fronts. Lacking logistics and with ineffective communications systems, the command staff is running around trying to push the campaign. Meantime, behind the front all the support activities are struggling to find the time and resources to follow up.

For the life of me, I cannot see just how the Abbott Government can have any hope of managing the changes they have unleashed. This is a practical, not political, judgement. It’s pink batts, but on a large scale. With every jurisdiction, every institution, every NGO, every peak body, every business and all citizens affected by the changes, the task of explanation is enormous. Every inter-government agreement is affected, every program. All this has to be managed in circumstances where, mixing metaphors, spot fires are breaking out all the time.

Staying with the fire analogy since Mr Abbott is a volunteer fire fighter. if you want to do some remedial burning, it’s not a bad idea to focus the burn instead of spraying fire starter across a vast expanse of bush. Perhaps we can call all this Mr Abbott’s bushfire. 

Postscript

Sue pointed me to this cartoon by David Pope from The Canberra Times on the fire theme.

Consumer sentiment down in the shifting sands of Australian politics

One of the immediate underlying issues in the Australian Government’s budget was well captured by some of the small business commentary I heard at the time. While welcoming many of the changes, a recurring concern was just what it all meant for consumer demand. Would people stop spending? What did this mean for sales?

The budget aggregates suggest that the immediate deflationary impact of the budget is relatively small. However, the impact is likely to be far greater than the raw numbers suggest because the impacts on household budgets seem particularly concentrated in relative terms at lower and middle income families who spend a higher proportion of their income; cuts here flow straight to reduced spending. It will take time for people to work out what it all means for them. Meantime, belt tightening would appear the safest option where that can be done. 

This type of view would appear to be confirmed in the latest consumer confidence data. This shows quite a sharp drop.

It is too early to know whether or not the drop will be longer term.

It seems that the budget debate has drawn youngest into the fray: Abbott Government backs traditional art forms, promises funding for cave paintings. I’m not sure whether or not she will maintain this interest, Political Discord may remain a one post blog, Meantime, it’s quite a funny piece. 

One thing that the Australian Government has achieved in all this is to shift the terms of the economic and political debate. To begin with, increased taxation is back on the agenda. One thread is the debate over the GST. a second the State based payroll taxes, with Treasury Secretary Martin Parkinson telling the states to use it to help meet their revenue needs. Then, in parallel, is the debate over Commonwealth-State financial relations. Finally, discussion over entitlements has been replaced by a discussion over fairness.

Now in all this is the National Partnership Agreement on Asset Recycling signed on 2 May 2014. Yes, it’s dry, but the Abbott Government’s infrastructure plans seem to depend on this.  Maybe I’m wrong, I’m sure that people will correct me, but I can’t see any of the states or territories rushing to implement this until the sands have settled.   

Postscript

A second consumer sentiment survey came out today, the Westpac-Melbourne Institute. As you might expect, it shows the same pattern of weakening confidence. 

Meantime, wage date released by the Australian Bureau of Statistics (release here, commentary example here) suggest very slow Australian wages, below the rate of inflation, meaning falling real wages. This has implications for Treasury’s revenue projections. 

Meantime, the budgetary commentary roles on. There are different views on what all this means for economic activity, depending a little on where you fit within the political and ideological spectrum. However, the analysis is slowly delineating impacts.

Yesterday, the Australian Reserve Bank released the minutes of its 6 May Board meeting. This meeting took place before the 13 May budget speech. The minutes summarised the economic outlook in this way:

Members noted that there had been little change in the outlook for the global economy, with growth of Australia's major trading partners in the year ahead still forecast to be around average. The latest data received on the domestic economy had evolved much as expected, with further indications that growth had picked up a little over the past two quarters. This had been driven by very strong exports as well as an increase in the growth of consumption and dwelling investment. However, the Board noted that overall growth in coming quarters was likely to be below trend given expected slower growth in exports, the decline in mining investment and the planned fiscal consolidation.

While a range of indicators suggested that conditions in the labour market had improved in recent months, the demand for labour remained subdued and was likely to remain so for some time. This had led to lower wage growth, which in turn had seen inflation decline for non-tradable items whose prices were more sensitive to labour costs. This was being offset by stronger inflation for tradable items as a result of the depreciation of the exchange rate over the previous year. Inflation was consistent with the target and was forecast to remain so over the next couple of years.

At recent meetings, the Board had judged that it was prudent to leave the cash rate unchanged. The expansionary setting of monetary policy continued to have the expected effects on economic activity. Notably, a sustained increase in dwelling investment was in prospect, consumption had strengthened a little and business conditions were around average levels. Recent developments had indicated that the economy had evolved broadly in line with earlier expectations, resulting in little change in the updated forecasts for activity and inflation. With growth in activity expected to pick up only gradually, and spare capacity in the labour market consequently remaining for some time, growth in domestic costs was forecast to remain contained, which would help to offset the ongoing effect on prices from the depreciation of the exchange rate over the past year. Given this outlook for the economy and the significant degree of monetary stimulus already in place to support economic activity, the Board considered that the current accommodative stance of policy was likely to be appropriate for some time yet.

In a way, some positive features but steady as she goes because of the downsides. I think that’s still right, although the budget has increased the downsides to some extent.

Mrs Stace’s jump

Today I feel like a break from more serious stuff. Well, not too serious anyway.

One of the issues at present in Australia is whether or not Prime Minister Abbott might choose to call a double dissolution election. ABC commentator Antony Green had a useful piece on the mechanics involved. My thanks to Don Arthur (@donattroppo) for the lead. As an aside, I’m inclined to agree with Don’s piece on Club Troppo, Humiliation and the dole: a forgotten debate.

One of he things that I enjoy about history are its byways.

This photo shows Yarrowitch woman Mrs Esther Stace setting  a world record for a sidesaddle jump of 6’ 6” (1.98m). The year is 1915, the place Sydney’s Royal Easter Show.

Yarrowitch lies to the east of Walcha on the Oxley Highway, so a local connection so far as I am concerned. I know nothing about Mrs Stace beyond the apparent fact that she came from Yarrowitch.  

I hadn’t realised now recent the modern sidesaddle was. It was invented in the 1830s by Jules Pellier. It was revolutionary, for it allowed women to ride at a gallop and to take part in equestrian events.

By time time Mrs Stace jumped, the sidesaddle era was coming to an end as changing concepts of modesty along with changes in women’s clothing allowed women to ride astride. I wonder if her record was ever beaten?

Update 16 September 2017

A comment from La Chienne Shady Lady provided a partial answer to my question, was Mrs Stace's record ever beaten? This fascinating 2012 piece from Flora Watkins, Side saddle high jump record broken, in Horse & Hound provides a partial answer. As an aside, I didn't know that when William "Will" Thacker (Hugh Grant) in the film Notting Hill said that he was from Horse & Hound I didn't realise that it was a real magazine!

Returning to my point. With the exception of one reported higher jump in the US which does not appear to be properly documented, Mrs Stace's jump is still the highest. But, and it is a big but, the height is challenged because the horse jumped off a springboard. I have no idea whether or not this is true, but it appears to be a major issue in the competitive world of sidesaddle jumping.

Update 10 June 2019

Cheryl Castle was quite cranky on this one. I promised to bring her comment up int main text:

"Hi Jim. There is no debate over Mrs Stace's use of a Springboard. One was NOT USED ! The jump was done at the Royal Show not a circus and a quick question to the R.A.S. would quickly debunk that ridiculous theory. If you knew how horses jump you would know that jumping off a springboard would slow them down as they jump off four legs not two like a human. This crap was made up by some American woman on her blog and is totally unfounded and a scurrilous LIE. Please stop perpetuating it. Horse and Hound UK also based their info on this LIE without ever checking the facts which is just LAZY JOURNALISM. It is easily fact checked!
Cheryl Castle"

Budget Blues

The latest public opinion polls (here, here) suggest that the Abbott Government is in fiendish trouble. From Labour’s perspective, this is a budget that just keeps giving as more and more people work through the implications for them of the myriad smaller changes within the budget.

Perhaps the Government’s biggest problem is that this budget is simply seen as unfair. I am not sure what happened in Canberra’s pressure cooker, but in the end the Government seems to have gone a bridge too far.

From a purely practical viewpoint, one of my difficulties in assessing the budget is that I have very little idea just what measures might finally get through the Senate, what will need to be changed or dropped. Some measures do not require legislation, others do. Australia is in for a period of considerable instability while all this is worked through.