Tuesday, November 4, 2014

The use and abuse of price signals

I was somewhat confused to read in this morning's Oz about Tony Abbott's plans for the G20.

We all know that the G20 goal is to try to come up with initiatives to increase global growth by 2%. Apparently the PM's approach to this is a bit like his approach at the World Economic Forum - to just tell everyone what we are doing domestically.

Apparently the PM told the Oz "that price signals on healthcare and market fees for universities would be part of the nation’s formal pledges at the G20 summit."

The Australian went on to note "Mr Abbott played down the chances of a major commitment on climate change and confirmed his plan to make the gender gap on workforce participation a key issue at the event."

So let's just unpack those two for a moment. The PM is apparently a fan of the use of "price signals" and "markets" when it comes to traditional Government service delivery like health and education, but his most significant election commitment - now delivered - has been the abolition of a price on carbon. 

He wants to move away from Government spending on health and education and instead make direct payments to industry to reduce carbon emissions. This is a Prime Minister who embraces the concept of "markets" only when the direct beneficiary is the corporate sector, and embraces Government action when the direct beneficiary is...the corporate sector.

The PM who wants to be known as the "infrastructure Prime Minister" asserts that "the continued move from short-term consumption spending to long-term investment spending will continue." And yet the infrastructure Minister is struggling to find anything new to announce other than projects where rail has been de-funded to fund a road (Melbourne's East West link).

He also says "Australia’s commitment at the G20 would be to promote growth through private investment rather than relying on public outlays." This marries up with e B20 message about infrastructure. It is the corporate sector's desire to have Government fund the private sector to build infrastructure which the corporate sector benefits from. 

Let's be really clear that the main beneficiaries of the PPP model are the finance sector and the construction industry. The latter is corrupt to the core and is responsible for Australia having the most expensive construction sector (just use the North West Rail as a guide).

But let's go back to two issues. The value of price signals in health and education and the economic value of increased female workforce participation.

Despite the pervasive presence of public sector delivery of health and education services, these are not actually free. There are already prices for many of the services in these sectors - and they are included in the ABS statistics on the Consumer Price Index. In fact, they are both measured with their own group index (education since 1982 and health since 1989).

That means we can inquire into how the price of these services have changed relative to other prices. The chart below is prepared by converting all the group and overall indices to a common base of 100 in September 2014. The group indices have then been divided by the overall index to effectively create a "real" index. 



This shows that the real price to Australian consumers of health and education services has been growing solidly over the last fifteen years. Somehow the PM seems to be under the impression there is no "price signal" already in this market, whereas the reality is the price signal is very clear and has been increasing. 

Anyone who seriously wants to address the question of "cost of living" pressure faced by households should study this graph. (As an aside since this is the DigEcon Gazette - I will write more separately about the decline in communication prices...but will simply note that trend line actually stretches over 40 years!)

Now let's turn to the question of workforce participation. Two things stand out. The first is that when unemployment is high, the availability of labour as an economic input isn't a constraint on growth. The second is that the PM talks as if his initiative of a paid parental leave scheme will be the first great intervention to grow participation.

The G20 wants to increase growth BECAUSE of persistent high unemployment rates, especially in the European economies (see list below taken from the 25 October 2014 Economic Data in The Economist).

Country Unemployment Rate
 Argentina 7.5%
 Australia 6.1%
 Brazil 5.0%
 Canada 6.8%
 China 4.1%
 European Union 11.5%
 France 10.5%
 Germany 6.7%
 India 8.8%
 Indonesia 5.7%
 Italy 12.3%
 Japan 3.5%
 Mexico 4.8%
 Russia 4.9%
 Saudi Arabia 5.6%
 South Africa 25.5%
 South Korea 3.2%
 Turkey 9.8%
 United Kingdom 6.0%
 United States 5.9%

Workforce participation rates between the two genders have been converging.  


Analysis of only the lines themselves might suggest the convergence is slowing - but measuring the difference (green columns measured on right hand vertical axis) shows the trend continuing.

In other words, accelerating female labour force participation is unlikely to be the most important critical issue. (I should do additional analysis by age because I suspect that part of the effect is due to older segments of the female population having a lower participation rate - paid maternity leave doesn't fix that).

So our PM is going to lecture other leaders about his inconsistent application of price signals and markets, and a post hoc justification of his expensive PPL when labour availability is not their major issue.

This is the PM trying to sell his modern day Thatcher/Reagan agenda as economic planning. 

The PM is more accurate when he simply says "“Lower taxes, less regulation and long-term fiscal discipline are at the heart of our plan." Just what the BCA asks him to say.

It would be nice if he and his Treasurer could really look at what the economy of the future looks like and what the capabilities we need are - a skilled and healthy workforce and (as I wrote on my other blog) clean energy.



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