The democratic cycle

Just as the business cycle seems to punctuate times of economic growth with periods of stagnation or recession, so there appears to be a political cycle in democratic countries, a cycle that features times of economic consolidation and progress with those of profligacy, deficit and debt.

In some countries a centre right government coming into office institutes policies that rein in spending and encourage the growth of the private economy. Supply side policies aid business development and expansion, and tax cuts increase rewards and act as incentives to economic expansion.

The growth that often follows the policies can lead to the re-election of the government that implemented them. The feel-good factor of improving standards, higher wages and inflation under control can enable such a government to secure re-election.

Memories are short, however, in the democratic cycle, just as they are in the business cycle. People come to take wealth and growth for granted, and to be less prepared to continue with the policies that led to them. People grow careless and are more ready to take political risks.

Quite often a party that proposes to concentrate on distributing the new-found wealth rather than on continuing to grow it, appeals to the electorate more than the one whose policies helped bring it about.

The centre-right government is replaced by one that leans more to the left. It sets about expanding benefits and growing the public sector. It tries to exact more from private business by increasing taxes. It needs to fund new programmes and borrows money in order to do so. For a time its largesse is appreciated, but increasingly investment and business find it harder to flourish in the new environment it has created.

Growth slows down, the economy grows sluggish. People begin to feel less secure and less wealthy. They begin to question the competence of ministers who seem unable to manage the economy. The left-leaning government sometimes wins its first re-election after a term in office, but often with less enthusiasm than that which first put it there.

The economy stagnates under the impact of inappropriate policies, and a centre-right government is sometimes then elected to clear up the mess. It implements the policies that encourage investment, applies fiscal responsibility, and makes it easier and less costly for firms to take on new employees. Gradually the economy recovers, and the democratic cycle begins once again.

It might be a feature of democratic societies that whenever wealth and growth are created, a popular party will eventually secure election on the basis of promises to redistribute that wealth. The less well-off can always outvote the more well-off. It means that instead of a steady continuation of policies that allow the economy to grow, there is more likely to be a staccato, with periods that help the economy alternating with those that stunt it. This is more about politics than it is about economics.

This is just sooo embarrassing

There’s many things that we don’t know much about and they tend to be the things that we don’t opine upon. There’s a (rather smaller) set of things we do know something about and we do tend to opine upon them. We would put this forward as useful general advice in fact. So it’s just too, too, embarrassing to see one of our national legislators revealing that he’s got an opinion on a subject where he is obviously entirely clueless:

USC collapsed into administration in January but was rescued days later by another Sports Direct subsidiary, Republic, as part of a controversial pre-pack deal that saw staff given just 15 minutes notice of their redundancy.

In a testy three hour exchange, Ian Davidson, the Labour MP who chairs the committee, said that while Sports Direct was legally shielded from the losses incurred by USC’s collapse, it had a “moral” duty to foot the bill for USC’s oustanding debts and redundancy payments.

“You have managed to retain all the good bits remove bad bits. You’ve done over the taxpayer as well. We have ended up carrying the debt and you’ve strolled off into sunset with the money. It’s good business if you can get away with it. It may be legal but it’s not moral,” he said.

A market economy is, in one sense, an experimental economy. People continually try new combinations of whatevers, within the technological envelope of what is possible, and see what happens. Most of these experiments fail but enough succeed that the general living standard rises over the years and decades. We like this. An extremely important part of such an experimental economy being, well, what do we do with the failed experiments?

The complaint here is that the debts have been put over into one pot while the potentially productive assets have been detached from the debts and sold on (for whatever sum) to someone who might be able to make better use of them. This is the complaint note: but this is not a bug in bankruptcy, it’s actually the entire damn point.

If we leave those potentially profitable assets attached to that debt then the value of the combination is less than zero. That’s actually what “being bankrupt” means. Those assets cannot therefore be used to do something more useful as no one will take them on. Who would take on something with a negative value, if you lose money just by walking in the door? Thus what the process of bankruptcy actually is. Separating the debts, into one pot, from the assets into another. So that those assets might, at least potentially, be used in a manner that adds value rather than decreases it. If we don’t do this then every experimental failure leaves assets that cannot be used by anyone: and the entire society will thus become poorer over time.

“You have managed to retain all the good bits remove bad bits.”

Yes, that’s the point of having a bankruptcy process.

It might be a bit much to hope for our being ruled by wise Solons but might we at least expect that our Solons do in fact have a clue?

 

Miliband’s attack on profit is an attack on patients

Either Ed Miliband is struggling to understand the basics or his ideology is spiralling out of control.

The latest Labour pledge:

Labour would cap the amount of profit private firms can make from the NHS, Ed Miliband will say as he launches the party’s election campaign.

He will pledge to halt the “drive to privatisation” he claims has taken place in the health service since 2010.

The future of the NHS is “on the ballot paper” and only Labour can guarantee the funding it needs, he will say.

Under his plans, private firms will have to reimburse the NHS if they exceed a 5% profit cap on contracts.

Companies make profit by keeping costs as low as possible while producing a product or service that people want (and ideally choose) to consume. Apologies for the simplicity, but apparently Ed needs it.

Pledging to fix levels of profit that a company can make ruins any motivation for the company to bring costs down. Given the NHS’s current financial situation, Miliband should not be so quick to toss aside the importance of efficiency gains.

Nor should he be ignorant of private firm’s impacts on patient outcomes.

Private firms are hardly private when working for the NHS; they are still under the jurisdiction of NHS bureaucracy and are often dependent on public funds for their operations. But where private firms and independent sector treatment centres do differ from the public sector is in their record on patient outcomes. Research from 2011 showed that ISTC surgery patients are healthier and experience less severe recovery conditions than patients undergoing the same surgeries with NHS providers.

Furthermore, Circle’s management of Hitchingbrooke Hospital turned a failing trust into one of the highest ranked hospitals for patient happiness and cut waiting times drastically; their recent failings were not a result of bad healthcare but rather bad business.

One of the reasons Circle reneged on its government contract is because it’s a struggle to make efficiency gains under NHS regulations as they currently exist; if Labour gets its way, this will become nearly impossible.

Miliband’s attack on privatization and profit is an ideological attack on buzzwords; unfortunately, his crackdown could have real affects on patient outcomes.

To describe drug pricing as free market is simply ignorance

Suzanne Moore has a very powerful piece about the meningitis B vaccine and its pricing. Sadly, the core of her argument is also entirely wrong:

Second, and maybe not so emotional, is that this is actually the market in all its gloriously free form. It is a choice. The market can charge what it likes for vaccinations against meningitis, as it will do for Ebola or malaria if these are developed. Cancer drugs, retrovirals, the new anti-rheumotoids: they are all expensive. There is something utterly immoral about the market holding not just the NHS to ransom, but the sick and the suffering around the globe. These untramelled market forces must be challenged.

There is nothing remotely free market about the pricing of drugs. For those who develop such drugs are granted a legal monopoly upon them for 20 years. We call this monopoly a “patent” and legal monopolies are not part of that “free market”. Indeed, the existence of such legal monopolies such as patents and copyrights is a flat out admission that the free market, the market unadorned, does not deal well or cope with every problem. The art is in working out when this is so and what should be done at that point.

The most obvious two examples of when the unadorned market does not cope well are pollution and public goods. Yes, Coase pointed out when there are indeed private solutions to pollution: but equally his analysis pointed out when they will not work. Public goods are, by definition, non-rivalrous and non-excludable. Knowledge is an obvious example. That once knowledge has been attained we cannot stop someone from using it, nor does their use diminish the amount other can use, poses an economic problem. It means that it’s terribly difficult to make a profit from having uncovered that knowledge.

We’re also pretty sure that people respond to incentives: thus, less profit from uncovering knowledge will lead to less knowledge being uncovered. And we like knowledge being uncovered, it’s one of the things that makes us all generally richer over time. So, we deliberately construct these time limited monopolies in order that people who uncover knowledge can profit and thus have the incentive to do that grunt work to uncover it.

This is not, by any means at all, a free market. It’s that flat out admission that the free market does not work in all circumstances.

And this is, of course, what happens in drug development. Getting a new vaccine through testing (please note, this is not an argument about the original research, whether that was government funded or not) costs in the $300 million to $500 million range. Someone, somewhere, has to spend that much. We can indeed do this in different ways, none of them will be free market ways because of that simple public goods problem. Once we know how to make the vaccine it is terribly cheap to reproduce. Almost all of the cost is in working out how to make it.

And thus we come to the argument about how much should that monopoly holder be able to charge for access to that new drug. We can’t just say “a reasonable return on manufacturing costs” because that is ignoring the very problem that led to the construction of the legal monopoly of the patent in the first place. We also can’t say that they “deserve” some amount of money, possibly equal to the human misery and suffering that won’t happen as a result of the roll out of the vaccine. There is no “deserve” here. Nor can we say that bugger them, that suffering is so great that we’ll just nick their $500 million. For what we’re actually trying to achieve is to leave people with the incentives to go and spend the next $500 million on developing the next vaccine.

We are not weighing in the balance the amount the capitalist b’stards are trying to charge against the joys of wiping out meningitis B. We are, in these price negotiations, trying to work out how much profit we let them make on this vaccine so as to incentivise the development of all the future vaccines that might ever be developed. This is a rather difficult question.

And it really is a difficult question. Which is, of course, why we really do try to use markets where they work even acceptably if not perfectly. Simply because using non-market methods is so damn difficult.

Economic Nonsense: 35. Big companies cut safety & build in obsolescence to boost profits

If big companies actually did this they would be very silly indeed, and would not remain big companies for long.  What companies want is satisfied customers, preferably repeat customers.  They want customers to value what they are buying, and to come back for more.  They want customers who will spread the word and encourage others to become buyers as well.

One thing companies do understand is that reputation matters.  If they made unsafe products that became unusable, they would soon gain a reputation bad enough to deter buyers.  Buyers are not captive; they can turn to other firms.  It is because of this that firms compete against each other, trying to outdo each other in the value they provide.  That value includes both safety and quality.

Some products do become obsolete, of course.  In areas characterized by innovation and rapid progress, this year’s wonder product can be out of date in a few year’s time, or even sooner.  Most buyers would not want a computer or a phone that would last 50 years.  There would be no point.  But this is not obsolescence that is deliberately built in; it is obsolescence brought about by improvement.

Because firms compete against each other, they can attempt to occupy different market niches.  Some people would prefer to buy things that are cheap and cheerful and not as long-lasting, rather than things that are more durable, but cost significantly more.  Competition allows both types of people to be satisfied.

The claim that companies cut safety and build in obsolescence is often made by people who are simply anti-business, and these are usually people who do not understand what business is all about.  They think business is some kind of conspiracy against the public and that firms make profits by swindling people.  It is in fact about supplying value for money that will leave both buyer and seller feeling they have gained by the transaction.  This is far more likely to be achieved by selling safe products that are long-lasting enough to satisfy customers than it is by cheating them.