The problem with price fixing NHS drugs

Markets have a funny way of getting around behind the rational planner and biting him in the buttocks. And so it is with price controls on NHS drugs. Sure, it sounds great that we use the power and majesty of the law to keep taxpayers' money out of the hands of those rapacious Big Pharma companies. But the problem is that this is leading to there being no drugs for people to take:

Patients are being harmed and put at risk because of national shortages of some prescription drugs, doctors have warned.

Medicines currently subject to shortages include Tamoxifen for breast cancer, Naproxen for arthritis and Amiloride, used to treat heart failure and high blood pressure.

A poll of GPs has revealed that more than nine in 10 family doctors have been forced to write prescriptions for “second choice” medicines because the drug they wished to provide was out of stock.

In recent years, scores of medicines, including those for breast cancer, arthritis and schizophrenia have run low because drugs intended for British use are being diverted abroad for profit, while others have been subject to production problems.

The survey of more than 600 family doctors by GP magazine found that one in three said their patients had suffered harm as a result, or faced a longer recovery.

The background to this is that there is an absolute freedom of trade across the EU. This is what the Single Market means. And we also have the NHS insisting that it will only pay certain prices for certain drugs. Fine, volume discounts aren't a problem and, if we're to be honest about it, nor is the use of countervailing economic power as a near monopsonist argues with the monopolies that pharma companies have over their still in patent drugs. But we do get to the standard problem with price fixing. Set the price too low and you'll get a shortage of whatever it is you've set the price of. Too high and you get a glut, fix prices at what the market price would be anyway and what's the point?

Here what's happening is that the freedom of trade is bringing that iron law of one price into play. Different EU countries fix (or don't even try to fix) drug prices at different levels. So there are arbitrage opportunities to buy pharmaceuticals in one country, at that country's controlled price, and move them to another EU country where the price is higher. It is this that is causing the shortages here in the UK.

Of course, people are trying to deal with this:

Because of the shortages, the Department of Health has introduced a system of rationing, which is supposed to mean the right number of drugs are held in stock. However, the system often means particular parts of the country run low on stocks, because they are not allowed to have more than their quota of medicines.

Facepalm. If the problem is initially caused by having fixed prices too low then the solution is to raise prices, isn't it? Remove the arbitrage opportunity and there won't be any arbitrage.

Will fracking lead to a UK energy renaissance?

Jared Meyer, policy analyst for Economics21 at the Manhattan Institute, wrote an op-ed for City AM detailing the barriers that still prevent the UK from taking full advantage of fracking:

For the first time in six years companies are able to bid for natural gas exploration licenses in the United Kingdom. The UK became a net importer of petroleum and natural gas last year and domestically-produced natural gas now accounts for only a third of consumption. Prime Minister Cameron’s decision to go “all out for shale” is a welcome sign and will aid in reversing the trend away from energy independence. If done correctly, increased energy exploration will also help the economic recovery gain strength.

Three problems still inhibit the UK from taking full advantage of potential gains from fracking. First, the energy exploration permitting process is far too time-consuming. Second, private landowners do not own the mineral rights beneath their lands, leaving them with little incentive to support energy exploration in their backyards. Addressing both these issues will help overcome strong environmentalist opposition, the third obstacle.

This article was originally published in City AM. Read the full article here. 

Climate change is three times worse than we thought, apparently

A new paper tells us that climate change is actually three times worse than we thought. For there may be tipping points, catastrophic changes, that cannot be worked back from and this shows that the carbon price should actually be three times higher than it is:

Climate policy aims to internalise the social cost of carbon by means of a carbon tax or a system of tradable permits such as the Emissions Trading System set up in the EU. But how do we determine the social cost of carbon? Do we take everything into account that should be taken into account? Most integrated assessment models (Nordhaus 2008, Stern 2007) calculate the net present value of estimated marginal damages to economic production from emitting one extra ton of carbon caused by burning fossil fuel.

However, global warming has many non-marginal effects on both the economy and on the carbon cycle. Climate catastrophes can occur that lead to sudden flooding, hurricanes, desertification, water shortages, etc. Many of such changes may be irreversible. Other catastrophes such as reversal of the Gulf Stream or sudden release of greenhouse gases from the permafrost lead to a sudden and long-lasting change in the system dynamics of the carbon cycle. Such changes in the system dynamics of the economy and/or the carbon cycle are called regime shifts. When such a shift takes place, this is called a tipping point. Scientists predict that at some point, structural changes will occur with effects that are very difficult or even impossible to reverse. The usual marginal cost-benefit analysis of existing integrated assessment models then puts us on the wrong track. The problem is much more serious than we think.

This argument seems, superficially, to have some legs. However, it doesn't really hold up for their conclusion is:

If the potential tipping point is ignored, our calibration yields, in steady state, a social cost of carbon of $15 per ton of CO2, which is about the same as in well-known integrated assessment models. If the potential tipping point is not ignored, the social cost of carbon increases to $55 or $71 per ton of CO2, depending on whether we take a constant or an increasing marginal hazard rate as a function of the stock of atmospheric carbon. These are big potatoes, we would say. The precautionary returns are 0.6% per year and 0.5% per year, respectively. The need for precaution indeed decreases when emissions are reduced more with a higher tax on carbon.

Splitting the social cost of carbon into the three components provides additional insights. For example, the $71 per ton of CO2 is split into $6 for the marginal damages, $52 for the risk-averting component, and $14 for the raising-the-stakes component. The risk-averting component is by far the largest, and it is clear that ignoring potential tipping points is putting us on the wrong track when discussing climate policy to curb greenhouse gas emissions.

The problem here is that public policy is not based upon a carbon cost of $15. Rather, it's based on the Stern Review result of $80. Which means that we're already doing enough to cover the new findings of this paper.

In fact, we're actually doing too much. The fuel duty escalator has led to us taxing petrol as if the correct carbon price is $160 a tonne CO2-e. The truth is we're doing too much to avert or mitigate climate change even if (or perhaps especially if) we take all of the scientific consensus about the subject entirely seriously.

Criminalizing consumption: Alcohol tags are a step too far

At 2:30pm, I’ll be going on Sky News to argue against the implementation of alcohol tags the Mayor of London has announced will be piloted in four major London boroughs: Croydon, Lambeth, Southwark and Sutton. For 12 months, courts will be able to instruct "alcohol abstinence and monitoring requirements” on 150 offenders for a determined period of time. Any consumption of alcohol could lead to stricter punishment, including imprisonment. As custodial sentences go, alcohol tags are highly intrusive; the 24-7 monitoring over one’s consumption undermines their entire sense of autonomy. If such a policy were to be adopted, we must ask when – if ever – this kind of policing should be enforced.

The primary problem with the Mayor’s pilot plan is that is does not distinguish between violent offenders and more minor, drunken offenses. These tags are supposed to be part of an effort to create tougher community sentencing, which one could receive for committing assault, fraud, or playing music too loudly at night; policing one’s lifestyle choices for owning a speaker system seems nothing short of absurd.

There are also more principled problems, including the assumption of a second offense, which arguably undermines the notion of innocent until proven guilty. There is also a question of misplaced priorities; why does the government always jump to scale back the liberties of offenders, rather than addressing the deep, underling problems that lead to the offense in the first place?

Some former offenders have argued that alcohol tags have helped them to overcome their issues with substance abuse that have led them to commit crimes. Such testimonies, however, suggest that alcohol tags could prove useful in a voluntary, op-in system, when the offender has decided to tackle alcohol abuse and can use the tag as part of their support system.

But apart from that voluntary aspect, this new pilot sets a dangerous precedent that the best way to create order in society is for politicians and law makers to monitor and ban consumption and behavior until everyone fits neatly into line. Autonomy is sacred; even those criminals with their iPod docks don’t deserve to lose it.

The solution to climate change killing all the little fishies

News today that climate change is going to kill off all the little fishies off Alaska. The rise in atmospheric CO2 leads to a similar rise in the ocean where it forms carbonic acid and thus reduces the alkalinity of the water making it hard for various species to operate. This ending up with a reduction in fish as the lower parts of the food chain suffer. The part of all of this that we might have difficulty getting our heads around is that there's a known technique to deal with this problem: it's just that the UN insists that we don't use it. Odd that we're not actually allowed to do something that will mitigate both climate change itself and also alleviate one of the effects of it. The story about the fishies is here:

Alaska’s fishing industry could soon be threatened by increasing ocean acidity, says an NOAA-led study to be published in the journal Progress in Oceanography. The acidification is due to increasing carbon dioxide release, which is absorbed by the ocean

Molluscs, such as the aforementioned Red King crab may struggle in acidic water, and find it difficult to maintain their shells and skeletons. As well as this, it has previously been shown in studies that Red King crabs die in highly acidic water, and both it and the Tanner crab grow more slowly in acidic water.

Alaska is particularly threatened by ocean acidification for a number of reasons: cold water will absorb more carbon dioxide than warm water, communities in certain parts of Alaska, namely the South-East and the South-West are reliant on fishing, and there are fewer other job opportunities in these areas than other parts of the state.

OK, is there anything we can do to deal with this?

When a chartered fishing boat strewed 100 tonnes of iron sulphate into the ocean off western Canada last July, the goal was to supercharge the marine ecosystem. The iron was meant to fertilize plankton, boost salmon populations and sequester carbon. Whether the ocean responded as hoped is not clear, but the project has touched off an explosion on land, angering scientists, embarrassing a village of indigenous people and enraging opponents of geoengineering.

The iron did fertilise plankton, there was an algal bloom, fish numbers increased and at least some of that carbonic acid was removed from the local waters, all at the same time. There was even some amount of the CO2 being deposited as nascent rock on the ocean floor and thus it being sequestrated for geologic periods of time. All in all it sounds like a most wonderful technology really, doesn't it?

The project was also on uncertain legal grounds. Ocean fertilization is restricted by a voluntary international moratorium on geo­engineering, as well as a treaty on ocean pollution. Both agreements include exemptions for research, and the treaty calls on national environment agencies to regulate experiments. Officials from Environment Canada say that the agency warned project leaders in May that ocean fertilization would require a permit.

Other than this, probably illegal, experiment the last official one was done 10 years ago. It's just great that everyone's working so hard to find even a partial solution to what we're generally told is the greatest problem of our times, isn't it?

We've spoken to one of those who studied, in detail, that last official experiment and there's no doubt that it works, would be extremely cheap and is capable of not only increasing fish numbers but also of sequestering some 1 gigatonne a year of CO2 into rock. But the powers that be won't let anyone actually do it and there are no further officially approved experiments in the pipeline either. It's almost as if people don't want solutions to climate change, isn't it?

Clement Attlee's Lesson

Biteback Publishing have published a new biography of Clement Atlee.  Authored by Michael Jago, it explores what motivated Atlee and drove him to become one of the most influential of Labour Party leaders. Atlee had a remarkable record in putting through his programme.  In 6 years he achieved major structural reform of Britain's economy and society.  He is thus to be admired dispassionately as an effective Prime Minister.  What he also did was to teach us all an important lesson:  Socialism doesn't work.  While other European nations were renewing themselves after the destruction and exhaustion of a world war, Britain wallowed in nationalization and allowed its industries to stagnate and decay under state ownership and control.  He left a country impoverished, heading down a slope that left it diminished, impoverished and ineffective.  Only in 1979 did Britain begin to shake off his influence, change direction, and once again climb back to prosperity and significance.  Atlee left a legacy that lasted, it is true, but it was a legacy that left his country ruined for decades.

It was an important lesson, though, and one we learned again just 25 years ago when the Communist empire collapsed and left exposed not just the terror that had sustained it, but the squalor it had concealed for so long.  Socialism doesn't work and never has done because it goes against the grain of human nature and the desire of peoples to make free decisions that can improve their lives and better the lives of others in the process.

We can only hope that people will not only read the new book about Atlee, but that they will also remember the lesson and the years of suffering that it took to learn it.

A bankers’ ethics oath risks being seen as empty posturing

The suggestion put forward yesterday by ResPublica think-tank that we can restore consumer trust and confidence in the financial system, or prevent the next crisis by requiring bankers to swear an oath seems excessively naïve. Such a pledge trivializes the ethical issues that banks and their employees face in the real world.  It gives a false sense of confidence that implies that an expression of a few lines of moral platitudes will equip bankers to resist the temptations of short-term gain and rent-seeking behavior that are present in the financial services industry.

In fairness to ResPublica’s report on “Virtuous Baking” the bankers’ oath is just one of many otherwise quite reasonable proposals to address the moral decay that seems to be prevalent in some sections of the banking industry.

I don’t for a moment suggest that banking, or any other business for that matter, should not be governed by highest moral and ethical standards.  Indeed, the ResPublica report is written from Aristotelian ‘virtue theory’ perspective that could be applied as a resource for reforming the culture of the banking industry.  ‘Virtue theory’ recognizes that people’s needs are different and virtue in banking would be about meeting the diverse needs of all, not just the needs of the few.

The main contribution of the “Virtuous Banking” report is to bring the concepts of morality and ethical frameworks into public discourse.  Such discourse is laudable but we should be under no illusion that changing the culture of the financial services industry will be a long process. Taking an oath will not change an individual’s moral and ethical worldview or behaviour.  The only way ethical and moral conduct can be reintroduced back into the banking sector is if the people who work in the industry were to hold themselves intrinsically to the highest ethical and moral standards.

Bankers operate within tight regulatory frameworks; the quickest way to drive behavioural change is therefore through regulatory interventions.  However, banking is already the most regulated industry known to man and regulation has not produced any sustainable change in the banks’ conduct.  One of the key problems with prevailing regulatory paradigms is that regulation limits managerial choice to reduce risk in the banking system, rather than focuses on regulating the drivers for managerial decision-making.

Market-based regulations that do not punish excellence but incentivize bankers to seriously think through the risk-return implications of their business decisions, will be good for the financial services industry and the economy as a whole.  A regulatory approach that makes banks and bankers liable for their decisions and actions through mechanisms such as bonus claw-back clauses will be more effective in reducing moral hazard at the systemic level and improving individual accountability at the micro level than taking a “Hippocratic” bankers’ oath.

What joy, another entrant in the not-think tank stakes

We're just so terribly fortunate to have another entrant in the non-think tank stakes here in London. Welcome to Philip Blond and ResPublica! The last time we looked at these two and their proposals they were suggesting that this Social Credit idea from Major Douglas might be a good idea and then hinting that perhaps Belloc and Chesterton were pretty good economists too. At least one reviewer of this combination pointed out that this was in fact the Fascists economic program: and the real Fascist economic program, not just the usual insult to be bandied about for anyone you don't like.

Recovering from this they've made a new suggestion:

An oath for bankers should be introduced to raise accountability and standards in banking, said the think tank ResPublica.

It said the lack of public trust in banking after numerous scandals was an "ongoing concern" for the industry and the government.

In a new report, ResPublica called for an oath for bankers to "fulfil their proper moral and economic purpose".

Well, yes. We know very well that nearly all people in modern society live in mortal fear of being an oath breaker, don't we? Most unlike olden days when no one believed in an afterlife of the threat of the devil waiting to boil those who broke their word. Most unlike. And of course Harold Shipman would have been stopped in the tracks of his rampage if only doctors did take that Hippocratic Oath.

But maybe Blond has actually got something here. Think how many choirboys would be unsullied if only the Catholic Church insisted that priests took an oath of chastity?

Government bans fracking in 25% of the country

The government has just announced that it's pretty much going to ban fracking for oil and or gas in 25% of the country. This is not actually what they've said, of course not, but it is what they mean. For they're saying that the rules will make fracking in national parks and or areas of outstanding natural beauty much more difficult. To the point that only if a deposit is of great economic importance will drilling be allowed. We might think this is just fine: we'd not drill under Westminster Abbey after all and there might be parts of the country that are simply so beautiful that we wouldn't want anyone to put a couple of shipping containers of equipment behind concealing hedges. That's possible, even if unlikely.

However, the part that people will miss here is quite how much of the country this blocks off. Some 25% of it in fact.

National parks and other areas of important countryside will be protected from fracking, ministers will announce in a move that will head off anger in the Tory heartlands ahead of the election.

While stopping short of a total ban, the Government will unveil new planning guidance to make it harder to drill fracking wells in national parks and areas of outstanding natural beauty.

In a significant concession, the new rules state that fracking should only be allowed in the most precious areas of British countryside in “exceptional circumstances”.

Any will say "Oh, how sensible" to that. But then add in quite how much land this covers. National Parks cover some 10% of the country. Areas of Outstanding Natural Beauty a further 15%. People don't seem to realise quite how much of the country is already being pickled in aspic.

There're very definitely people who don't want us to have access to this lovely cheap energy for whatever reason. Sadly, some of them are currently in government and making the rules.

Increasing access to private education will add billions to growth

• The UK’s average annual growth rate between 1960 and 2007 would have been almost 1 percentage point higher had it matched the Netherlands' long-term level of independent school enrolment since 1960. This in turn means that UK GDP per capita would have been over £5,800 higher in 2007 than it was.

• Better education boosts economic growth; improving students’ international test scores by 10% raises a country's average annual growth rate by 0.85 percentage points.

• UK GDP per capita would have been almost £5,300 higher in 2007 had it performed as well as Taiwan since the mid-twentieth century.

Britain could add billions of pounds to long-term economic growth if it increased access to private education, a new report released today (Tuesday July 29th) by the free-market Adam Smith Institute has found.

The report, “Incentive to Invest: How education affects economic growth”, illustrates how higher educational achievement boosts long-term economic growth, and the important role of private schooling in this process.

Through the use of existing research and new quantitative evidence, the author of the report, Gabriel Heller Sahlgren, establishes that test scores are closely related to growth. Lifting achievement by 10% hikes a country’s average annual growth by 0.85 percentage points.

Furthermore, the report illustrates how competition from independent schools has proven successful in generating higher international test scores, while also driving costs down. Sending 20 percentage points more 15 year olds to independent schools would raise growth by 0.4pp—or about a sixth—via its positive effect on educational achievement.

Based on his findings, Heller Sahlgren calls for the government to radically reform education policy by encouraging more privatisation and competition in the education sector.

Had the UK matched the Netherlands’ long-term level of independent school enrolment since 1960, its GDP per capita would be over £5,800 higher today, the report argues. At a time when policymakers are trying to cement and broaden the economic recovery, the report suggests that expansion of access to private schooling would be an attractive component of a long-term growth strategy.

Commenting on the report, its author Gabriel Heller Sahlgren said:

My research shows that a focus on increasing the number of pupils taking higher qualifications is misguided. There’s in fact no robust impact of average schooling years in the population on economic growth on average.

On the other hand, education quality, proxied by international test scores, has a consistent and strong effect on growth. According to my calculations, the UK’s real GDP per capita in 2007 would have been over £5,000 higher had we performed on par with Taiwan since the mid-20th century. So the dividend of improving children’s attainment is large indeed.

Yet there are different ways to do achieve this. Unlike expensive resource-driven education reforms, which are rarely cost effective, a good option is to raise the level of independent school competition, which other research shows both increases international test scores as well as decreases costs.

According to my calculations, the indirect economic benefit, via higher achievement, of increasing the number of pupils in independent schools to the Netherlands’ level would be a 0.92 percentage point higher long run GDP per capita growth rate. The government should therefore continue their market-based reforms on education and expand choice as widely as possible.

Sam Bowman, Research Director of the Institute, said:

This report shows that we need greater access to private schooling for all pupils regardless of background, not just to improve the welfare of the children themselves but to boost the UK’s overall standard of living and long-term economic growth.

Expanded access to private education through school vouchers and a revival of the assisted places scheme may be an easy, low cost way for the government to boost growth by improving the human capital of British workers. The results may take some time to materialize but studies like this show just how valuable a long-term strategy for expanding access to private schools could be.

Click here to read “Incentive to Invest: How education affects economic growth”.

For further comments or to arrange an interview, contact Kate Andrews, Communications Manager, at kate@old.adamsmith.org / 07584 778207.