Tuesday, December 14, 2010

Health economics –unnecessary treatment and economic costs of illness... and goodbye

This blog has been quiet lately.  The evidence is mounting in support of much of my earlier analysis of Australia’s housing market, while the Government attempts one more manoeuvre to bolster the market.  The supreme risks to the market are no longer a secret, and our chronic supply shortage has been receiving far less airtime.  There is very little for me to add to the current discussions.

One reason for the lack of posts is that I am studying for the GAMSAT test that one needs to pass before commencing a graduate degree in medicine.  Yes, my disillusionment with economics has driven me to seek a more useful profession. And despite my rational nature, I will give up quite a deal of income for it.  At least this economist knows that money doesn’t buy happiness.

In this final sign-off post it may be worthwhile taking a look at economic issues surrounding medicine and health care.  This is a burgeoning field, with demand growing for paper shufflers of this particular specialty, and universities eager to fill the void with a qualification.

My core argument in this field has been that increasing preventative health care, while having the benefits of a healthier and long life, often come at increased total lifetime health costs, rather than decreased costs as is often proposed.  Remember, we all die some day, and any potential cause of death postponed will allow another to take its place, which of course has its own health costs.  Alternatively, a more healthy existence may make us more productive for longer and lead to us contributing more in taxes over our lifetime than the potential increase in health costs which were paid through the tax system for our preventative care.

Governments, and subsequently economists, worry about these things because many health care costs are borne by others though tax revenue, yet the net economic effect is anything but straightforward.

In light of these concerns a cottage industry of economic analysis has developed pandering to the interests of particular interest groups involved in medical research.  Each disease these days seems to have a lobby group, and to ensure funding for further research it is necessary to argue in terms of economic costs and benefits of a cure or treatment. 

Over at Catallaxy Files there is an interesting take on the abuse of economics and shady use of statistics when consulting firms are asked to produce reports on the economic cost and impact of a particular disease. After prodding around the reports from one firm, the author notes that:

Adding up the estimated economic cost of all these conditions begins to exhaust the GDP, which suggests that the estimates of the economic costs are grossly exaggerated for a number of reasons.  This should not come as any surprise of course since the sole purpose of these studies – they have no academic credibility – is to provide RHETORIC  to bolster the case for the RENT SEEKERS who are attempting to prize out additional taxpayer monies to support their particular activities, worthy though they may be.

One of the real problems with these studies is the double/triple/…  counting associated with these studies as many people have multiple pathologies.  Moreover, the projections of the numbers afflicted by these conditions in the future should be treated with a grain of salt (probably box).

These studies also conflict with the findings of the Productivity Commission in their work undertaken in relation to the National Reform Agenda. In large part because most people with chronic conditions manage to continue their working life, the PC’s estimates of the cost of most chronic conditions (including mental illness) are not especially high.

The interesting work of Eric Crampton at the Canterbury University – great paper delivered at the Mont Pelerin Society – also shows that government studies of the economic costs of alcohol use are grossly exaggerated. There are typically  both conceptual and measurement mistakes.

I have a slight problem comparing the sum of a total cost of over time (total economic cost) with a flow of production in a single time period (GDP), but the general practices of double counting, including a potential undiagnosed population, and taking the extreme assumptions of the diseases impact and applying to every candidate, are intentionally misleading.

This is perhaps one reason why proponents of preventative medical treatments overstate the aggregate benefits to the community and subsequently the reduction in health cost borne by the taxpayer. Another reason preventative health care does not always provide net benefits can be explored at an individual level.

Movember have been a huge promotional success, yet at the heart of the charitable event is a desire to raise awareness of prostate cancer and promote early detection and preventative treatment.  However, this particular cancer is possible one case where the cure is worse than the disease at an individual level.

This article argues the case against early screening for prostate cancer.

They know that prostate cancer is overwhelmingly a disease that kills men late in life. The average age of death for prostate cancer in Australia is 79.8 years, while the average age for all male cancers combined other than prostate cancer is 71.5.

The average age of death for an Australian man is 76 so on average, men who die from prostate cancer actually live longer. In 2007, just 2.8 per cent (83 men) who died from the disease were under 60, and 10 (0.1 per cent) were in their 40s.

The author notes that the unnecessary treatment undertaken by many men as a result of early testing often leads to impotence and occasionally incontinence, when there was a very high probability that they would have died from another cause before the cancer severely impacted their health. 

Medical associations and governments try hard to examine these issues prior to funding and promoting preventive health care.  Where current screening techniques return too many false positives the chances of over treatment are severe. One the other hand, a screening technique returning a high number of false negatives may not be such a concern if the disease develops slowly and screening is recommended periodically.

In all, it seems that the health industry is not immune to manipulative economic analysis and rent seeking behaviour.  I am sure there are positive ways economics have been contributing to debates on public health, yet in the haze of spin it gets very little publicity. 

Thanks to all my readers for contributing ideas and thoughts on this blog in the past few years. 

Merry Christmas.


Monday, December 6, 2010

Parkinson's Law

Work expands so as to fill the time available for its completion

Some might know Parkinson’s Law as it has been quoted above, yet the implications of this law are rarely acknowledged.  In bureaucracy this is especially the case. I have witnessed it firsthand.  Ironic, since the ever-expanding British bureaucracy was the focus of Parkinson’s original 1955 article.

Parkinson’s work may have been seen as mere parody, yet his insights appear to be consistently proven over time.  This very blog post was achieved under pressure of time, utilising this Law to my advantage.  Had I allowed myself and hour it would have taken an hour.  Since I allowed myself just 30 minutes, with a 3pm deadline, magically, I expect it to take that long.

Parkinson’s explains the theory behind his law starting at a position best summarised by this passage:

Granted that work (and especially paper work) is thus elastic in its demands on time, it is manifest that there need be little or no relationship between the work to be done and the size of the staff to which it may be assigned.

He finishes with this gem of a formula explaining the continuous growth in numbers of bureaucrats.

(Where k is the number of staff seeking promotion through the appointment of subordinates; p represents the difference between the ages of appointment and retirement; m is the number of man-hours devoted to answering minutes within the department; and n is the number of effective units being administered... and where y represents the total original staff)

Parkinson notes that this figure will invariably prove to be between 5.17 per cent and 6.56 per cent, irrespective of any variation in the amount of work (if any) to be done.

The figure for Australian States in the past decade was a measly 3.1% - still significantly faster than the rate of population growth.  Yes, government is outgrowing the country.

A further development of Parkinson’s ideas is his Law of Triviality, which suggests that organisations give disproportionate weight to trivial issues. Parkinson dramatizes his Law of Triviality with a committee's deliberations on a nuclear power plant, contrasting it to deliberation on a bicycle shed. A nuclear reactor is used because it is so vastly expensive and complicated that an average person cannot understand it, so they assume that those working on it understand it. Even those with strong opinions often withhold them for fear of being shown to be insufficiently informed. On the other hand, everyone understands a bicycle shed (or thinks he or she does), so building one can result in endless discussions because everyone involved wants to add his or her touch and show that they have contributed.

The Law of Triviality can be expanded to apply to the state of public debate surrounding important political decisions.  Debate over where to host the local Christmas carols often trumps the debate surrounding reform of the banking sector or our participation in wars in the Middle East.  Perhaps we simply prefer not to think about these big issues for fear of being overwhelmed.  

In all Parkinson's insights seem to be rarely used to our advantage.  

Tuesday, November 30, 2010

GDP only positive because of rain drenched agriculture

Today’s National Accounts figures were not a huge surprise - except, of course, to many of the mainstream economic commentators, some of whom continue to demonstrate their undying faith by stating that the decline is nothing to worry about.

Neither are the downward revisions to the June quarter figures worth a second look.  The June quarter growth trend down was revised down from 0.9% to 0.7%, and seasonally adjusted down from 1.2% to 1.1%.

And possibly my favourite lines from the ABS release
In seasonally adjusted terms, Agriculture (up 21.5%) contributed 0.4 percentage points to GDP growth driven largely by strong forecasts for grain crops... GDP increased 0.2% in the September quarter, while non-farm GDP fell 0.2%

If it wasn’t for the surge in agriculture driven by last season’s strong rains, GDP growth for the quarter would have been negative, and for the year, just 2.3%.

Perhaps it is time to revisit some forecasts by our favourite economists back in September.

Peter Jolly, NAB - Our year ended GDP forecast has lifted to 3¼% from a little under 3%
Christopher Joye, Rismark - The economy is about to embark on a period of above-trend growth
Warren Hogan, ANZ - Hogan believes we are about to see a period of serious inflationary pressures thanks to the commodities boom's income wave
Michael Blythe, CBA - reckons the income surge will add 3 or 4 per cent to GDP over the next couple of years.

Yet the serious inflationary pressures and above trend growth seem to be a little hard to come by at the moment.

At least I can give myself a plug.  Heck, isn’t that what economists do?  My prediction from early September - Inflation and GDP will surprise on the low side in the September quarter.

Steve Kates explains much better how the data early in the year was deceptive due to the dramatic impact of fiscal stimulus, and that the private sector recovery is yet to appear. 

Mid-week links

Using the National Accounts to better estimate changes in well being (PPT link) – from the OECD Measuring Progress Agenda.  Aka - Why I don’t feel like I benefit of changes in GDP.

A better comparison of the cost of living in cities around the world?  Numbeo provides a user generated cost of living index for any city in the world, with prices updated continuously as users add price data. 

One interesting comparison - Consumer Prices in Munich are 14.65% lower than in Brisbane, and
Consumer Prices Including Rent in Munich are 5.13% lower than in Brisbane. 

Who desires a longer commute? Apparently a 7% of people desire an extra 5 minutes commuting time (from here) -

In one of their studies, Mokhtarian and Redmond examined the commute (i.e. the trip to and from work). They conducted a survey in the San Francisco Bay area which asked subjects what duration their ideal commute would be, and whether their current commute is the “right” length or not.

Counterintuitively, very few people expressed a desire for a commute of “zero.” The most frequent response put the ideal commute at 15-19 minutes, and almost a third of the sample actually said their ideal commute was over 20 minutes. Only 1.2 percent answered zero; this surprising result was largely borne out in follow-up focus groups, where subjects were prompted that zero was a permissible answer.

A comparison of respondents’ ideal commutes and their actual commutes revealed that while most (52 percent) wanted their journey to work to be shorter, 42 percent reported their commute was about the right length and seven percent (mostly those with short commutes) actually wished it would take them an additional five minutes or more longer to get to work. On average, people wanted a commute of around 16 minutes.

I suspect there may have been confusion from respondents about what the question was asking – Do you desire to live in a location where the commute is X (longer, shorter, zero etc)? Or, do you want the commute from your existing location to work to be X (longer, shorter, zero etc)? Or, what is the ideal commute time from your current location with current transport systems?

More on the Peltzman Effect - Night clubs are employing emergency medics to monitor the crowd, yet the Australian Medical association has concerns that it gives a false sense of security to revellers. I can just imagine the conversation – “If you want to experiment with new drug X, do it here because they have medical staff!”

Finally, from The Onion, a spoof economics and finance article that might just make it to the front page of an Australian daily newspaper.

WASHINGTON—Some sort of tax cut or earnings or money or something was reported in economic news this week in further evidence that a lot of financial- related things have been going on lately.

According to numerous articles and economics segments from major media outlets, experts on banks and such have become increasingly concerned over a new extension or rates or a proposal or compromise that could signal fewer investments, and dollars, and so on.

The experts confirmed that the stimulus has played a role.

"This is a clear sign of a changing cycle," some top guy at one of the big banks in New York said of purchasing power parity or possibly rate of return during a recent interview on CNN. "Which isn't to say that a sustained drop in wages couldn't still occur, even if the interest paid on reserves is lowered."

"In short, it's possible but not probable that growth could outpace our initial expectations," added the banking guy, who went on to say other money things, too. "It depends on investor sentiment."

The man, who also apparently mentioned the Nasdaq, the Dow, and the Japan one at some point or another, talked for a really long time about credit or reductions or possibly all these figures, which somehow relate to China.

Greece was also involved.

Monday, November 22, 2010

Prison, parenting, selection bias, and measuring success

In both parenting and the legal system one must carefully consider the role of punishment.  Recently, the discussion surrounding imprisonment has become focussed on rehabilitation, using recidivism rates inappropriately as a statistical measuring stick of success.  This seems to be the product of confusing success in parenting with success in crime prevention.

Tuesday, November 16, 2010

The Australian Housing Fiasco

The Australian housing market has experienced a hiatus at this blog but has been the subject of intense debate elsewhere.  Time for an update on Shocking Tales, Government Intervention, Why we are different, A ridiculous publicity stunt, and Google predictions.

Shocking Tales
Some say the when he catches cold it takes a $40billion bail out to bring him back to health, and that he sneezes deflation, all we know is... that the Stig of Australian banking, insider ‘Deep Throat’, has provided spectacularly shocking insights into the world of banking and housing finance.  Consider the following comment about the use of automated valuation models to ratchet up home values on loan books.

So with roughly a revaluation of the property of 20% (ask any property spruiker, “That’s nothin’ mate!”) a bank can save itself $3.20 of capital per $100 of mortgage which can be recycled as capital to support another mortgage. Think about how that increase in both return on capital and funds allocated to another mortgagor slave is an absolute incentive for bankers to perpetuate the cycle up of house price valuations. Their reward? Huge bonuses based on what is in essence a positive reinforcement spiral where everyone pats each other on the back for what a great job they’re doing. Well at least, that is, until the money runs out

There are more shocking tales over at Delusional Economics, including a prescient story behind the latest intervention being considered by the Australian government to prop up the housing market and the banks.

Government Intervention
The proposed intervention involves extending a government guarantee to residential mortgage backed securities, ala Canada, essentially shifting risks taken by banks in the housing market to Australian tax payers in a bid to secure the ability of Australian banks to raise capital as asset values stagnate.  Welcome to the world of moral hazard that is banking.

What makes the whole fiasco so outrageous is that is has proceeded under the guise of increasing competition in banking and under the housing affordability banner more broadly.

Eager to spur competition in a banking industry dominated by National Australia Bank, Commonwealth Bank, Westpac and ANZ - now with rates higher than central bank policy - Canberra plans sweeping reforms to open up the mortgage market more widely to smaller lenders, by creating a bigger government-backstop to residential mortgage-backed securities. (here)

Regardless of whether we are following Canada into financial a black hole, the degree of continued government intervention is one reason why we are different, for now. Another is variable rate mortgages.

Why we are different
Australia’s love affair with variable interest rate mortgages has enabled monetary policy to be highly effective, unlike other countries that have suffered at the hands of the financial crisis. This gives government, via the RBA, plenty of ammunition to prop up house prices while appearing to act on affordability.  And it also makes our monetary policy far more effective than our counterparts in the US, Asia and Europe.

Of course the big dilemma is what is happening elsewhere in the economy. The dramatic drop in interest rates by the RBA in late 2008 failed to stimulate the housing market without the added assistance of the first home buyers boost.

Given this situation, and coupled with government’s obvious strong desire to see housing prices stabilise, one must be careful when entering into a bet on house prices.

A ridiculous publicity stunt
Australian property spruiker Chris Joye has challenged US fund manager Jeremy Grantham to bet on house prices. This comes as a result of Grantham’s scathing analysis of the extent of Australia’s housing bubble.

As others have remarked, it is a classic ‘heads I win, tails you lose’ bet.

This is the deal. Rismark believes it can facilitate a transaction whereby Mr Grantham will be able to invest $100 million into a short position over the RP Data-Rismark Australian capital cities dwelling price index, which is universally regarded as the most accurate and timely house price benchmark in the market.

Mr Grantham’s investment would be structured as a very simple “delta-one” transaction: for every 1 per cent fall in the index, Mr Grantham would receive $1 million. Conversely, for every 1 per cent rise in the index, Mr Grantham would pay $1 million away. The trade would be settled at the end of three years with monthly margining to manage credit risk.

There are three main reasons why this is all publicity and no substance

1.      The nature of the index
...look at the index Joye wants to use, the RP Data-Rismark Index. You may recall I mentioned above that Joye was the Managing director of Rismark International? Talk about a conflict of interest. Joye wants Grantham to take a bet, the outcome of which is directly reliant on an index which doesn't allow public examination of their methodologies and further to this one that Joye's company is directly involved with? Surely he jests! (here)

Have I mentioned the hazy area of hedonic price indexes before?

2.      Exchange rates
I’m no genius, but if I was an American investor I would want my return in US dollars.  At current exchange rates (which are already dropping from their record highs), the bet in AUD would expose about US$98million to the AUD.  He would be paid AUD$1million for any 1% decline in the index.  Unfortunately a decline in the index will be accompanied by speculation of lower interest rates leading to a decline in the Aussie dollar.

Say the price index falls by 15% and as a result of renewed uncertainty about the strength of Australia’s economy the AUD declines to $0.75USD.  Grantham would win the bet, but lose financially.  He would now have AUD$115million, which is only USD$86.25million – a loss of 12%.

Assuming his position does not entail actually having AUD$100million, but is simply a gamble on the move of the index, he would still earn just USD$11.25million for that 15% move. Remember, the greater the decline in the house price index, the greater is the likely impact on the exchange rate, so Grantham effectively faces a limit to his gains.

3.      Australian government intervention
When the counter-party to your bet has a direct line to many political power brokers (Malcolm Turnbull, the Liberal Party treasurer, had known Joye as a family friend for 15 years), and the Australian government seems hell bent on doing whatever it takes to prop up house prices, I wouldn’t be too keen to put my money on the line.

Even after offering this outlandish challenge, Joye disclaims his position by saying that Australian dwelling prices will be placed under modest downward pressure over the next 12-18months.  This makes no sense, until you look at the following scenarios.

The bet is taken, Joye wins. Now Joye can claim that his index is superior and used by international fund managers and that his analysis is so great he won a bet against Grantham (although his actual prediction was wrong).

The bet is taken Joye loses. Again, a claim of the validity of the index and that his prediction of price movements was correct (ignoring that he lost the bet).

The bet is not taken.  Publicity, and a win whichever way the price index moves.  If it increases he would have won the bet.  If it decreases it is in line with his forecast. 

Google Predictions
I have mentioned before that the frequency of Google search terms was quite a good indicator of the peak of the US housing bubble (see final graph). What is interesting is that the new more refined Google Insights for Search shows a dramatic upward trend for the term ‘housing bubble’ from Australia.

Last week’s auction results from Brisbane confirm the findings from Google – 21 auctions, 2 sales, 8% clearance rate.  

Monday, November 15, 2010

Updates and a CityCycle apology

Plastic bag banning continues to gain momentum

Well known demographer Bernard Salt had a stoush with Dick Smith in a little documentary a few months ago discussing Australia’s population growth.  Now he is back with more nonsense.

Brisbane’s CityCycle scheme, from my observations, appears to be well used.  I was pessimistic about the potential take-up rate of the scheme, but in the past six weeks of operation I have seen 27 people using these bikes – about 26 more than I expected. I do however live across the road from one station, work in a building adjacent to a station, and cycle past another half dozen twice per day.

Interestingly, I have seen one person using the scheme helmetless and smoking while talking on a mobile phone (I don’t have a problem with this if they are not riding dangerously, which they weren’t), and one bloke walk up to the bikes in work attire and promptly retrieve a helmet from his backpack before shooting off on a hire bike.  I can only hope that with more (are there more cyclist, or just people deciding to use the scheme to avoid bike theft and wear and tear?) cyclists there will be a strong push for more user-friendly bike lanes.

And just for fun, a hilarious rap battle between Keynes and Hayek to entertain the inner economics nerd.

Wednesday, November 10, 2010

Sin tax myths – why smokers reduce health costs

Smokers have been the target of Australia's latest sin tax. Meanwhile, debate continues over using sin taxes to reduce consumption of 'unhealthy' foods such as soft drinks and confectionary.

(The word unhealthy is used quite loosely due to the fact that there is sufficient uncertainty about health – Are eggs good or bad these days? Margarine? – and because it is typically not the food itself, but the quantity consumed of a single food that is unhealthy.  Almost any food item consumed in excess will be unhealthy).

The primary arguments in favour of sin taxes are that
1.      the taxes reduce ‘harmful’ or ‘unhealthy’ consumption, and
2.      the taxes raised offset likely health costs such behaviours incur on others.

Unfortunately neither argument is compelling.

Tuesday, November 9, 2010

Public and Private schools – evidence from economics?

As an Australian parent in 2010, the public versus private school debate is hard to avoid.  In a society where private schooling is becoming the norm, yet literacy and numeracy skills are stagnating, how does one objectively analyse the costs and benefits of school choice?

First, let me say that school choie is just one factor determining vocational, personal and emotional skills during adolescence.  Genetics, parenting, the home environment, peer groups, sports and other club activities, amongst many factors, all contribute to shaping young minds. 

Additionally, the composition of students at the school plays a strong role in determining academic outcomes.  Many private schools for example, offer academic scholarships.  If those students had instead attended the local public school, any difference in average academic results may be greatly reduced.

How then does one separate the impact of school choice from these other factors?

Without the opportunity to conduct controlled studies, for example, by studying twins who attend different schools while holding all else constant, the best analysis of the measureable benefits of private schooling would be a statistical test of various measures of ‘success’, controlling for external factors such as parental intelligence and education, household income and location, and child’s intelligence prior to arrival at the school.

Unfortunately, in this debate one of the most overlooked considerations is what measure of 'success' would potentially make private schools ‘better’ than public schools. Is it simply a matter of final grades and tertiary entrance scores, or do parents (and children) value a broader measure of success? Does a public school with more diverse student cultural backgrounds give a better social experience, or does a private school offer more valuable professional connections?

The results of any statistical study will necessarily be narrowly defined to reflect the impact of school choice on a single measure (such as academic test scores), ignoring social benefits and opportunities for extracurricular achievement. 

So what do economists and social scientists have to say?

Wednesday, November 3, 2010

Talking climate with Warwick McKibbin

I met RBA board member Professor Warwick McKibbin yesterday.  Alas, his reserved academic demeanour was a successful deterrent to a gruelling discussion on monetary policy and his thoughts on Australian housing.

I was, however, enlightened about his academic research and particular area of expertise – macro-economic modelling and climate change.

For such a diminutive guy he manages to raise a large public profile and promote intense debates on matters of macro-economic policy.  He was intensely critical of the government stimulus package, although many economists see it as very well implemented in hindsight.  

Some of the critics of the implementation of Australia's fiscal stimulus fail to see the broader political picture.  Professor Tony Makin, for example, argued that the fiscal stimulus was not necessary because adjustments in exchange rates and interest rates absorbed most of the impact of the crisis.  Yet he gives no credit to domestic impact of fiscal stimulus from abroad, particularly with our main trading partners.  His argument was that we should have been free riding on the stimulus of other nations.

The broader political picture reveals that there was an explicit agreement by G20 nations in November 2008 to take coordinate fiscal action to avoid this very issue.  In an international context our stimulus appears light on – maybe we still did partly free-ride.

But McKibbin is clearly most passionate about climate policy, driving hard his ideas for coordinated global action – The McKibbin-Wilcoxen Blueprint for climate policy.