IEA Blog

A key issue in individual access to healthcare is who decides who shall get what, when and how. Which economic instruments and direct incentives can do most to deliver universal access, improved care and better outcomes?

 
How can we actually deliver the services which the National Health Service has promised but failed to provide? How, too, can the NHS catch up with the best in the world?

 
If we want to achieve the access, equity, improved performance and patient guaranteed care we need to make sure that each individual has the power of money by creating an individual health savings account for everyone. In a sentence, money talks and preference walks.

 
This is essential if there are to be direct incentives for purchasers and providers to do more and to do better, and for service users to look after themselves properly. It is also vital if patients are to define what quality means to them, and to be able to reliably secure this. It is critical if we are to stimulate incremental, evolutionary, imaginative and creative change.

 
It is not markets which have cheated the poor, the disabled, the disadvantaged, the unlucky and the elderly. It is their absence which has robbed the least fortunate amongst us. Instead of interfering with markets we should equip those who have done least well from the NHS to gain the fullest benefits from them.

A new report by the OECD, Growing Unequal? Income Distribution and Poverty in OECD Countries, warns: “Poverty is rising in OECD countries. Over the past 20 years, it has risen from 9.3% to 10.6%, as an average for the 30 member countries.”

 
The report contains a lot of useful information on the various dimensions of inequality and their correlation with other variables. However, a major criticism is that the analysis relies heavily on a measure called “relative income poverty”, defined as the share of a country’s population that earns less than 50% of that country’s median income.

 
This figure gives some information about the distribution of income between the bottom and the middle of the spectrum, but little information on actual poverty. Or does it make sense to claim that poverty has been more prevalent in Switzerland and Luxembourg than in the Czech Republic and Hungary?

 
Defenders of this measure usually argue that:

 
1. Low-income earners in, say, the UK, do not assess their own situation by comparing themselves with people in Bolivia, but to people in geographical proximity to themselves.

 
2. Even if living standards rise across the board, a rising poverty rate stills shows that the proceeds of growth are not shared equally.

 
As for the first statement, even if we accept it, it still does not follow that the comparison group will coincide with the inhabitants of the national territory. Taking this logic at face value, one could argue that almost all Hungarians who live close to the Austrian border are “poor”, while most of those who live close to the Romanian border are not. Inside Austria, “poverty” would then rise the closer one gets to Switzerland.

 
The second statement is even more problematic because it treats wealth creation and wealth distribution as two “black boxes” unrelated to one another and pretends that policies affecting one of them would leave the other one untouched. But there is substantial empirical evidence, some of it produced by the OECD itself, suggesting that high taxes and steep progression hinder economic growth and job creation. The same measures that reduce relative poverty are therefore likely to raise absolute poverty and vice versa. This is the danger of using flawed measures of poverty: it can lead to policies that actually end up harming the poor.

Alistair Darling’s proposed spending spree on bringing forward major capital projects suggests the government is prepared to sacrifice the economy’s long-term interests for short-term political gain.

Anthony Hilton rightly points out the sums involved are too small to save us from recession. Yet they are significant in terms of the budget deficit. As the public accounts slide even further into the red, private investment will be crowded out and before long taxes will have to rise to pay for the Chancellor’s largesse. These effects will delay the private sector’s recovery and threaten to make the current slowdown more like the prolonged Japanese slump of the Nineties than the short, sharp adjustment experienced by the UK in 1981.

Only private enterprise can lead the economy out of recession. Rather than increase government spending, the Chancellor should focus on making life easier for British business.

There needs to be a huge bonfire of red tape to lower costs. Burdensome new environmental and employment laws should be abandoned and the minimum wage scrapped to address rising unemployment. Given the perilous state of the public finances, radical deregulation is now the only practical option.

Letter by Richard Wellings published in the Evening Standard on 23 October 2008.

Sir – Marx’s theory of the crises of capitalism is little more than a melodramatic description of the business cycle — standard fare in economic analysis. Every original contribution that Marx made to our understanding of capitalism is demonstrably false: the working class does not become increasingly immiserated; the class structure does not become increasingly polarised; no society has evolved from feudalism through capitalism to communism; the iron law of wages is fallacious; the State does not wither away when capitalism is abolished. Marx will continue to be neglected by serious scholars because he was wrong in every important respect.

Letter by John Meadowcroft published in The Times on 23 October 2008.

Men working full-time currently earn about 17% more per hour than women working full-time. This gender pay gap is widely held to reflect systematic bias against women in the labour market.

But when you disaggregate the statistic you find some odd differences within the male and female population that can’t be accounted for by employer prejudice.

Though married men earn more than married women, single women earn the same or, as they get older, more than single men. And there are other big differences.
 
For instance, Bangladeshi women earn more than a quarter more than Bangladeshi men, while gay men earn more per hour on average than “straight” men, and lesbians earn more than heterosexual females. These findings hardly support the hypothesis that labour markets are seething pits of discrimination.

So what accounts for the existing pay gap?  Should We Mind the Gap? shows that the pattern of pay is certainly more complicated than politicians think. Pay differences arise, for example, from variations in the fields people work in. The jobs men do tend to be less stable, more dangerous and involve longer commutes. Men are also more likely to work outside, to work long hours and unsocial hours. Inevitably pay will reflect this.

 
Moreover, women’s career preferences differ dramatically from men’s. Of the top 25 preferred graduate jobs for women in a recent survey, 12 were in the public or voluntary sectors, where very high pay is unusual, as against just four of men’s top 25. Career choices are bound to affect pay significantly over a working life.

 
Given the complex causes of the gender pay gap, it is clear that complete equality of pay is unlikely to be achieved without draconian measures that would restrict freedom of choice and damage the economic prospects of both men and women. Calls for new legislation on equal pay should therefore be resisted.

This is the best non-partisan short book on “Thatcherism” and the 1979-1990 era to have appeared to date. It is wide ranging, all encompassing, massively referenced with a great Bibliography and very fair. It digs out a lot of facts, gives useful insights and accords credit where credit is due as in (surprisingly to some) to Peter Walker and Michael Heseltine for the right to buy local authority housing granted to sitting tenants early in the first Thatcher term.

I particularly enjoyed the many quotations provided by Alan Clark, Nicholas Ridley and Jock Bruce-Gardyne - all sadly gone now. And I was struck at how often Nigel Lawson appeared, second only to Mrs Thatcher herself by my count.

The author (the blurb claims he “broadly predicted the Thatcher Revolution” but is neither pro- nor anti- just “dispassionate”) is Emeritus Professor of British Government and Administration at the University of Leeds and his scholarship and presentation skills do much to restore at least some faith in “political studies” as a discipline following the dreadful treatment of Lady Thatcher in a recent issue of Political Studies Review.

 
Indeed the contrast at all levels and on all fronts could not be clearer as Fry is a sober, scholarly, balanced and painstakingly accurate Professor who deserves our respect and wins our thanks.

 
If I have one quibble – other than the “artistic” interpretation of the cover’s Union Jack – it is with the smallish typeface and the Germanic paragraphs which combine to make for some hard going. I just do not like paragraphs that run for three whole pages! Phew! And I think Geoffrey Howe suspended exchange controls and that Nigel Lawson abolished them in the 1987 Finance Act.

 
But this will not stop me from looking out for the first two parts of this trilogy, namely The Politics of Crisis which covers 1931 to 1945 and The Politics of Decline which takes the story from that volume to this one.

The Politics of the Thatcher Revolution: An Interpretation of British Politics, 1979-1990, by Geoffrey K. Fry, Palgrave MacMillan.

Today, the government of Argentina will announce the annulment of the country’s private pension system introduced in 1994. The savings funds of 12 million workers will be nationalised. With this move, the government is taking over assets worth 13% of Argentina’s GDP, significantly increasing the state’s role in the economy. The private pension fund industry, which employs 10,000 people, will cease to exist as their clients are forced back into the state PAYGO system.

The official justification is that due to the worldwide financial crisis, “the private system ceases to be a valid option for old-age provision”. Left-wing parties and trade unions welcomed the expropriation of workers’ funds. An MP from the “Solidarity and Equality” Party called the move “brilliant … Currently, private companies are managing US$ 30,000m which should belong to the government”. A Socialist MP added: “Socialism has always been in favour of the PAYGO system, and against the financial business…” A representative of the Trade Union Congress (CGT) called the private system a “big swindle” – a strange remark given that some of the private pension funds are co-owned by trade unions.

 The private system began operation in 1994, when Argentinians were given the possibility to opt out of the notoriously unreliable state PAYGO system and transfer their money to a personal retirement savings account instead. This was a great relief to many because in the old system it had been a frequent political practice to plug budget gaps by freezing pensions in nominal terms while inflation was high. Since the beginning, the private system has been heavily burdened with regulation. Tight investment limits, especially for foreign assets, as well as underdeveloped domestic securities markets, effectively forced the pension funds to rely excessively on government bonds.

Despite all the obstacles, the private system managed to deliver real returns of 10% as an annualised average between September 1994 and June 2007. During the crisis of 2001 and in its aftermath, the private system struggled but it still proved to be more resilient than the public one. What is more, it gave workers a stake in the economy, and a range of choice that would have been inconceivable before. Once given the choice, most workers preferred individual accounts over reliance on the government’s promises. Membership in the private system grew steadily while the ranks of the PAYGO system shrank.

Given that there is an election campaign in 2009, it is not hard to imagine what the government will do with this unexpected windfall. But the people of Argentina will sorely miss those funds once their twilight years arrive.

The present financial crisis illustrates clearly the fundamental importance of institutional structure to the satisfactory operation of a market economy. Looking at the present carnage it is hard not to conclude that institutional failure has occurred on a massive scale.

To blame the actions of ‘greedy bankers’ or to deduce that such events prove the hopeless inadequacy of ‘unregulated Anglo-American financial capitalism’ is to miss two fundamental points. Bankers have always been greedy – or at least self regarding – along with everyone else. And Anglo-American Capitalism even in its most recent manifestation is certainly not unregulated. Most people who actually have the responsibility of making things work in practice know that we have lived for several decades in an age not of ‘deregulation’ but of increasing regulation.

Institutions evolve to regulate our dealings with each other. The temptations to which all market participants are subject – to deceive others, not to deliver on promises, to shade on quality – are obvious enough. Because people cannot know everything and will always possess only partial information about the actions and reliability of their business associates they look for protection. They do this by building institutions.

The Rochdale pioneers sought protection from local monopolists and adulterated food by forming retail cooperatives. People trying to provide for old age spontaneously formed ‘mutual’ life assurance societies – governed by their members – because trust in investor-owned institutions was an obvious problem. Mutual fire insurance societies emerged for much the same reasons though here the problem was the potential moral hazard of the insured as much as that of managers or outside owners. Health insurance and other benefits were provided by ‘Friendly Societies’. The early savings banks were often structured as non-profit or charitable institutions. These institutions were the outcome of evolutionary market processes and they have been effectively swept away by competition from the state in the provision of regulatory services.

The present crisis does not show up the weaknesses of unregulated financial capitalism. It throws into relief the weaknesses of financial markets when regulated predominantly by centralised state agencies.

Depositors seem at present genuinely surprised to learn that to place funds in a depository institution is to incur a risk of loss. Such naivety would have been rare fifty years ago. It has come about as consumer protection legislation has proliferated. In the case of banks, their governance arrangements have ceased to influence the users of their services. When lenders fail to notice the type of institution to which they are committing their savings, and pay attention only to promised returns, one of the main buttresses supporting conservative banking practice is removed.

If all institutions ‘look’ equally good to consumers and there is an apparently powerful regulator to guarantee this result, then Gresham’s Law will apply, and competition will tend to undermine quality – in this case financial safety. As the demand for yet more powerful and ever more centralised regulation grows, this essential intellectual dilemma is ignored. When institutions can find the means reliably to ‘signal’ their quality to consumers, competition will increase quality. When common ‘standards’ are centrally imposed, however, they have to be ‘cast iron’ (enforceable at low cost) or competition will perversely be directed into hidden (costly to detect) efforts to circumvent or to debase the standards.

Several bloggers, including Guido Fawkes, have rightly emphasised the relevance of Ludwig von Mises’ work to the current financial crisis. The writings of Mises’ pupil, Nobel laureate F. A. Hayek, also offer important insights. Here is an excerpt from page 102 of his classic book, Denationalisation of Money, which was re-issued in downloadable pdf format earlier this year:

Monetary policy a cause of depressions

What we should have learned is that monetary policy is much more likely to be a cause than a cure of depressions, because it is much easier, by giving in to the clamour for cheap money, to cause those misdirections of production that make a later reaction inevitable, than to assist the economy in extricating itself from the consequences of overdeveloping in particular directions. The past instability of the market economy is the consequence of the exclusion of the most important regulator of the market mechanism, money, from itself being regulated by the market process.

A single monopolistic governmental agency can neither possess the information which should govern the supply of money nor would it, if it knew what it ought to do in the general interest, usually be in a position to act in that manner. … Money is not a tool of policy that can achieve particular foreseeable results by control of its quantity. But it should be part of the self-steering mechanism by which individuals are constantly induced to adjust their activities to circumstances on which they have information only through the abstract signals of prices. It should be a serviceable link in the process that communicates the effects of events never wholly known to anybody and that is required to maintain an order in which the plans of participating persons match.

It might also be noted that Tim Congdon, in his IEA monograph Money and Asset Prices in Boom and Bust, was one of the few authors who was writing about the monetary causes of the current crash before it happened – in 2005.

How radical will the new Lord Mandelson be in seeking to reinvigorate the ‘New Labour’ brand?

With the regulatory levers in his fresh hands he has a key opportunity to free the public from NHS monopoly and to improve services dramatically. This would indeed be great achievement.

 
The NHS has been kept outside effective markets since 1945 – with calamitous consequences. Here is Lord Mandelson’s first major regulatory problem. He should solve it by referring NHS monopolies to the Office of Fair Trading. The IEA has now written to him, formally asking him to do so, as it launches my new book on health policy, Who Decides Who Decides? 

 
The role of Primary Care Trust and District General Hospital local monopolies seriously constrains patient choice, which the government has been seeking to enhance. It also unnecessarily limits fair competition.

 
Primary Care Trusts have patients allocated to them instead of individuals making empowered choices, while large District General Hospitals are protected from competition by the guaranteed income they receive from the government for Accident and Emergency services. They are also sheltered by being the only places where doctor training is authorised and by the lack of any contestability for their management.

 
At present public services cannot be referred to the Office of Fair Trading (OFT) or the Competition Commission. However, the OFT, which has looked at restrictive practices in the private sector, should have its remit extended to the public sector where the worst restrictive trade practices exist.

Lord Mandelson and ‘New Labour’ are surely no friends of the inexorable trend in the NHS towards ‘giantism’and local monopoly, nor of remoteness and unaccountability both in purchasing and in provision. Yet in 2006–07 the number of primary care trusts was reduced from 309 to 152. Current NHS hospital numbers are expected to shrink further, perhaps to 50. These will be very large institutions with turnovers above £300 million.

Mergers in the NHS should be prevented if they are against the public interest and if they disable competition. The remit of the OFT should therefore be extended to enable it to investigate these serious constraints on fair competition and patient choice.