August 27, 2015

Incentives matter … but in a perverse manner for public employees

Filed under: Bureaucracy, Business, Government, USA — Tags: , — Nicholas @ 03:00

On the Property and Environmental Research Center website, Warren Meyer explains why the US Forest Service is cutting ties with private organizations that have been running federally owned facilities for less than the Forest Service is able to do … despite the private company’s proven higher levels of service:

Private concessionaires pay all operations costs out of the entrance fees paid by the public — and without further taxpayer subsidies. In addition, the concessionaire pays the public agency a concession fee. The resulting savings to taxpayers can be quite compelling. In a recent PERC case study, I showed how a parks agency had to supplement every dollar in visitor fees with an equal amount of tax dollars to keep a park open. By privatizing the park’s operations, the need for tax revenues could be eliminated. And in fact, the park could be turned into a money maker for the agency.

While this may resonate with the public, it’s a hard sell to the agencies themselves. The National Park Service uses concessionaires to provide some visitor services, but it has not considered private operation of entire parks. Even the Forest Service — which does allow some private park management — often seems eager to go back to running the parks themselves.


No private company would behave like this. So why does the government? Over the years, I have observed three possible explanations:

1. Government employees have incentives that go beyond “public service.” For most agency managers, their pay and prestige and future job prospects are tied to the size of their agency’s headcount and budget. Privatization savings that look like a boon to taxpayers may look like a demotion to agency managers.

2. People who are skeptical of private enterprise and more confident in government-led solutions tend to self-select for government jobs. Even in the Forest Service, concessionaires frequently experience outright hostility from the agency’s rank and file. “It’s wrong to make a profit on public lands” is one common statement.

3. Government accounting is not set up to make these sorts of decisions well. Few agencies have reports that tell them whether an individual park’s revenues are covering its full operational costs. Costs can be spread over multiple budgets, making it seem as though public park operation is less expensive than it really is.

To overcome these obstacles, we’ve learned that progress generally has to start above the agency. Some sort of legislative push is necessary. And we try to find ways to pitch our solutions as a way for agencies to free up money to address other problems, such as fixing rotting infrastructure.

June 29, 2015

Price Ceilings: Shortages and Quality Reduction

Filed under: Economics, Government — Tags: , , , — Nicholas @ 03:00

Published on 25 Feb 2015

Price ceilings result in five major unintended consequences, and in this video we cover two of them. Using the supply and demand curve, we show how price ceilings lead to a shortage of goods and to low quality goods. Prices are signals that indicate to suppliers how much is being demanded, but when prices are kept artificially low with price ceilings, suppliers have no way of knowing how many goods they should produce and sell, leading to a shortage of goods. Quality also decreases under price controls. Do you ever wonder why the quality of customer service at Starbucks is generally better than at the DMV? The answer lies in incentives and price ceilings. We’ll discuss further in this video.

June 17, 2015


Filed under: Economics — Tags: , , , — Nicholas @ 04:00

Published on 8 Feb 2015

Speculation is often considered to be morally dubious. But, can speculation actually be useful to the market process? This video shows that speculation can actually smooth prices over time and increase welfare.

Speculators take resources from where they have low value and move them through time to where they have high value. We also take a look at speculation in the futures market — for instance, can orange juice future prices help predict Florida weather? Let’s find out.

June 4, 2015

Information and Incentives

Filed under: Economics — Tags: , — Nicholas @ 04:00

Published on 8 Feb 2015

What does an increase in the price of oil tell us? What does it signal? And how do we adjust to that signal? The price of oil gives users of oil an incentive to respond — by using less oil or substituting lower-cost alternatives for oil.

The key here is that we let people decide how to most effectively allocate the use of goods and resources. To solve the great economic problem, we need to solve information and incentive problems.

In this video, we take a look at how Nobel Prize-winner Friedrich Hayek described the price system and its approach to solving the information problem. We’ll also continue with our example of oil to show how the price is equal to the marginal value of oil or the social opportunity cost.

June 2, 2015

The Great Economic Problem

Filed under: Economics — Tags: , , , , — Nicholas @ 03:00

Published on 8 Feb 2015

In this video, we discuss how different markets are linked to one another. How does the price of oil affect the price of candy bars? When the price of oil increases, it is of course more expensive to transport goods, like candy bars. But there are other, more subtle ways these two markets are connected. For instance, an increase in the price of oil leads to an increase in demand for oil substitutes, like ethanol. And when the supply of oil falls, oil should shift to higher-valued uses. But, which uses? How do we decide where to use less oil?

This brings us to the great economic problem: how to most effectively arrange our limited resources to satisfy our needs and wants. Which approach — central planning or the price system — is better at solving this problem? Join us as we explore this question further.

May 28, 2015

Markets Link the World

Filed under: Economics — Tags: , , , , — Nicholas @ 02:00

Published on 8 Feb 2015

In this video, we discuss how markets link people and places all over the world. We’ll take a look at production and consumption markets and, importantly, the role that prices play in it all. Following up on our example of a rose, we take a look at other global products such as the Apple iPhone. Where is the iPhone made? It’s produced by thousands of people all over the world, working in cooperation in order to make one product that many of us enjoy. Join us as we observe the invisible hand in action.

April 9, 2015

Politicians love to build infrastructure – they’re not as eager to maintain it

Filed under: Bureaucracy, Government, Media, Politics — Tags: , — Nicholas @ 05:00

Politicians love big infrastructure projects, from gala announcement — featuring plenty of face time in the media for the politicos themselves — to ground-breaking, also featuring lots of media along with hard hats and “first shovel” action through to grand opening, usually featuring lots of media along with ribbon cutting and some sort of first action involving the newly built bridge/dam/tunnel/streetcar/etc. For some inscrutable reason, politicians are much less eager to get involved in making sure that the glitzy new infrastructure of a few years back gets appropriate and timely maintenance (and the permanent bureaucracy in charge of the now-built infrastructure have rather different long-term goals):

I think the cause lies in a couple areas related to government incentives

  1. Legislatures never want to appropriate for capital maintenance. If the legislature somehow has, say, $100 million money it can spend on infrastructure, their incentives are to use it to build new things rather than to keep the old things in repair (e.g. to extend a rail line rather than to keep the old one fixed).
  2. If you want to understand a government agency’s behavior, the best rule of thumb is to assume that they are working to maximize the headcount and the payroll budget of their agency. I know that sounds cynical, but if you do not understand an agency’s position or priorities, try applying this test: What would the agency be doing or supporting if it were trying to maximize its payroll. You will find this explains a lot

To understand #2, you have to understand that the pay and benefits — and perhaps most important of all — the prestige of an agency’s leaders is set by its headcount and budgets. Also, there are many lobbying forces that are always trying to pressure an agency, but no group is more ever-present, more ubiquitous, and more vocal than its own staff. Also, since cutting staff is politically always the hardest thing for legislators to do, shifting more of the agency’s budget to staff costs helps protect the agency against legislative budget cuts. Non-headcount expenses are raw meat for budget cutters, and the first thing to get swept. By the way, this is not unique to public agencies — the same occurs in corporations. But corporations, unlike government agencies, face the discipline of markets that places a check on this tendency.

This means that agencies are loath to pay for the outside resources (contractors and materials) that are needed for capital maintenance projects out of their regular budgets. When given the choice of repairing a bathroom at the cost of keeping a staff person, agencies will always want to choose in favor of keeping the staff. They assume capital maintenance can always be done later via special appropriation, but of course we saw earlier that legislators are equally unlikely to prioritize capital maintenance vs. other alternatives.

The other related problem faced is that this focus on internal staff tends to drive up pay and benefits of the agency workers. This drives up the cost of fundamental day to day tasks (like cleaning bathrooms and mowing) and again helps to starve out longer-horizon maintenance functions.

February 14, 2015

“I, Rose” and “A Price is Signal Wrapped Up in an Incentive”

Filed under: Business, Economics — Tags: , — Nicholas @ 02:00

Published on 8 Feb 2015

How is it that people in snowy, chilly cities have access to beautiful, fresh roses every February on Valentine’s Day? The answer lies in how the invisible hand helps coordinate economic activity, Using the example of the rose market, this video explains how dispersed knowledge and self-interested actors lead to a global market for affordable roses.

Published on 8 Feb 2015

Join Professor Tabarrok in exploring the mystery and marvel of prices. We take a look at how oil prices signal the scarcity of oil and the value of its alternative uses. Following up on our previous video, “I, Rose,” we show how the price system allows for people with dispersed knowledge and information about rose production to coordinate global economic activity. This global production of roses reveals how the price system is emergent, and not the product of human design.

February 3, 2015

Senator Elizabeth Warren doesn’t really understand what “public goods” are

Filed under: Government, Science, USA — Tags: , — Nicholas @ 02:00

Tim Worstall on what’s wrong with Senator Warren’s most recent proposal to claw back profits that are derived from government-sponsored research:

The answer being that finding out basic knowledge is something we call a public good. This has a specific economic meaning and it really means that private actors, whether people or companies, will do too little of this whatever it is. Because it’s just simply too difficult to make money out of having done this whatever it is. That’s really what “public good” means. It doesn’t mean goods supplied to the public nor even things that it is good for the public to have.

So, given that private actors won’t do these things but we also think that it would be just great for lots of these things to be done, well, we’ve got to do something about it then. And the answer to that is government. Even the most minarchist of us (although perhaps not the anarchists) would agree that some of the public goods provided by government are pretty good. A military to defend us from the ravening Canadian hordes, a criminal justice system to protect us from crime, a Constitution to protect us from politicians. All seem pretty good to me. The answer really is government in those cases.

The argument gets extended: that basic research is a public good. It’s very difficult to make a profit from it therefore not enough of it gets done in the private sector. So we should get government to go do it for us. Excellent, so, when we get that research being done then we’re getting what we pay our taxes to get government to do. We’ve got our public good.

What both Warren and Mazzucato are arguing is that government should then come back for a second bite of the cherry. They should get some of the profits from that basic research. But there aren’t any profits from that basic research: that’s why we’re getting government to do it because you can’t make a profit from having done the research. If we can make a profit from having done this research then government shouldn’t be doing it because it’s not a public good.

January 24, 2015

Problems besetting the British health system

Filed under: Britain, Bureaucracy, Health — Tags: , , — Nicholas @ 04:00

At Samizdata, Natalie Solent shares a post written by “ARC” discussing why the National Health Service seems to be under such pressure lately:

1) Flow-though is crucial to A&E: you must get people out the back-end of the process to maintain your rate of input to the front-end. However ever-increasing regulations mean a patient without family cannot be released until a boat-load of checks have been done. This is clogging up the back end. It may be preventing the release of a few who had better not be sent home yet (not much and not often, is the general suspicion) but it is definitely delaying hugely processing the release of all others who could be. All this admin takes time and effort — delaying release and also using up time of staff in non-health work — and costs money.

This effect needs to be understood in the context of the 15-years-older story of the destruction of many non-NHS nursing homes by galloping regulation. These homes were mostly owned and operated by senior ex-NHS nurses and provided low-grade post-operative care. The NHS relied on them as half-way houses to get patients out of NHS hospitals when they no longer needed intensive care but were not yet recovered enough to go home. These nurses did not want to spend time form-filling instead of caring for patients, and for each home there was always one of the 1000+ rules that was particularly hard for that given home to meet without vast expense or complication. So they died one by one. The ‘waiting times have increased’ story of Tony Blair’s early-2000 years — “If the NHS were a patient, she’d be on the critical list” — was caused by this and the resultant bed-blocking more than any other one cause.

The problem with waving the regulatory wand to “solve” a problem like this is that it tends to create perverse incentives so that the artificial target can be achieved — like this post from a couple of years back where the regulators dictated a maximum time a patient could be kept waiting for admission to A&E. The reaction of the people running the system was to change the definition of “admission” so that now patients’ timers don’t start running until they’re unloaded from the ambulance … so the end result is people are spending more time in the back of ambulances waiting outside the hospital until there’s an open slot. This meets the artificial target, but creates a worse situation because patients are still waiting as long (or longer), but now they’re also tying up ambulances from attending other emergency situations.

Back to ARC’s list of NHS problems:

2) The new 111 service is sending many more patients to A&E.

2.1) The service’s advice is very risk averse. The people who set up the process were afraid of the consequences of the statistical 1-in-a-million time when anything other than mega-risk-averse advice would see some consequence that would become a major news story blaming them.

2.2) Thanks to the post-1997 reforms, GPs work less hours on-call but the doctors are not just slacking off and doing nothing. The huge growth in regulation means they are in effect putting in as many hours as before, but on form-filling and admin to provide all the info the NHS and other government demand, to ensure they tick every box, etc. The out-of-hours on-call time they used to have is now swallowed by this work. So they are not in fact working less; it is the balance of what they are working on that has changed: less on healthcare, more on admin. Thus 111 must send people to A&E, not an on-call GP (and, of course, fewer on-call GPs mean more people phone 111).

From context, I assume the 111 service is a telephone health advisory service like Telehealth Ontario.

February 3, 2014

The welfare trap

Filed under: Britain, Bureaucracy, Government — Tags: , , , — Nicholas @ 09:27

An older post by A Very British Dude discusses the real problem with most of the public welfare/income support/unemployment benefits in Britain, but the same argument applies to most Western countries:

So your taxes, about a third of which go to paying working-age benefits, about a third in pensions, and the rest, everything else are part of a decent society in which everyone’s helping everyone else. Or they would be if the system wasn’t comprehensively broken, failing at all the significant tasks the welfare state is supposed to achieve. The welfare state is supposed to prevent poverty. It is, in fact, its major cause.

The problem is one of incentives, and not just those faced by the poor themselves. It’s obvious to anyone who isn’t paid handsomely to farm the poor, that for many people, it’s simply irrational to work. Once they’ve paid for taxes, clothes, transport and lunch, they’re considerably worse off than they would have been had they stayed in their pyjamas and watched Jeremy Kyle. Why would you take a miserable, boring, unpleasant minimum wage job instead of existing on benefits? The job insecurity at the bottom of the pyramid and the bureaucratic complexity of informing the authorities of a ‘change in circumstance’ is a further barrier. So when when the low-waged is “let go” after a couple of weeks, he’s got to re-apply for Housing benefits, Job-seekers’ allowance, Council Tax Benefit, income support and so on, from scratch. He may be genuinely destitute as a result of payments stopped, then restarted again too late, thanks to an abortive effort to “do the right thing”. Is it really any wonder so many feel trapped?

So, who benefits from this system? Certainly not those getting the benefits many of whom are comprehensively trapped in a life they wouldn’t have chosen. Not the Children of those getting benefits, who learn no other life thanks to the distorted incentives faced by their parents, but in whose name the benefits are paid. Certainly not the people paying the bill, John Q. Taxpayer, who thanks to the system face a sullen and resentful underclass, some of whom spend their non-working lives looking for ways to relieve you of your easily saleable property in order to buy sufficient narcotics to break the tedium for a few hours.

The main benefit of the benefits system accrues to those employed on secure graduate salaries to administer the system. These people are the farmers of the poor. This is not just the civil servants and local government employees who administer the system, but also the charity employees who don’t see the homeless and destitute (they outsource this to unpaid volunteers). It’s the police who are part of the state-crushing of the spirit of the young who find themselves trapped in this hell. The that the poor exist at all causes fear in the hearts of the affluent, and justifies the need for a police force. The Bureaucracy is an excellent provider of jobs. Which is why none of the solutions suggested by the Left of the political spectrum would ever reduce bureaucacy or police numbers, or the benefits bill. For that would involve firing sub-paying members of Unite or the PCS, and Unite is by far the biggest funder of the Labour party.

H/T to Amy Alkon for the link.

Update: A useful reminder from Rob Fisher at Samizdata — inflation hits the poor much harder than anyone else.

The Institute for Fiscal Studies is pointing out that while poorer people are paying more for food and fuel, richer people are enjoying low interest rates. So government spending and borrowing and the artificially low interest rates that go along with that are harmful to poor people, as are taxes on fuel, and income tax on minimum wage earners, and countless other instances of state meddling.

January 17, 2014

The Nanny State ethos – you’re too thick, so we’ll do the thinking for you

Filed under: Bureaucracy, Government — Tags: , , , , — Nicholas @ 08:37

At the Adam Smith Institute blog, Tim Worstall talks about the way regulatory agencies approach problems:

It’s claimed as one of the great victories for enlightened (sorry) regulation, the way that the EU and US have both banned the incandescent light bulb through bureaucratic action. The ban came about by raising the efficiency standards required: this meant that the traditional bulb could no longer be sold.

The argument in favour of doing things this way was, in public at least, that everyone’s too stupid (or, in a more polite manner, subject to hyperbolic discounting) to realise that the new bulbs will actually save them money in the long term by consuming less electricity. There are also the more cynical in the industry who insist that it’s actually a case of regulatory capture. The light bulb manufacturing companies managing to get us all away from using cheap as spit bulbs and onto something with a decent margin on it.


This has a number of implications in the larger world as well: for example, it means that bureaucratic regulation on car mileages (like CAFE in the US) is contra-indicated. A simple tax on petrol will drive up average mpg because we’re not all as thick as bricks. Assuming that climate change really is a problem that must be dealt with then a carbon tax is going to do the job. For we’re not all so dim that we cannot work out the utility of using fossil fuels or not given the change in prices.

That is, we don’t need to be regulated into behaviour, we can be influenced into it through the price system. Something that really shouldn’t be all that much of a surprise to us market liberals: for we’re the people who already insist that people do indeed respond to price incentives in markets.

May 12, 2013

British emergency wards are overcrowded … so we’ll fine the ambulance service!

Filed under: Britain, Bureaucracy, Health — Tags: , , — Nicholas @ 08:59

Hard to come up with an explanation for this perverse policy:

Ministers came under fresh criticism for their handling of the NHS last night after it emerged the ambulance service will be hit with £90 million in fines — as punishment for the chaos blighting casualty departments.

Critics said the fines will simply deprive trusts of vital funds that could help tackle the deterioration in patient services.

A new penalty clause that was written into ambulance trust contracts from last month will levy fines of £200 for every patient who has to wait for longer than 30 minutes for admission to A&E, and £1,000 for each patient forced to wait more than an hour.

You can understand the desire to speed the delivery of injured people to the emergency services they need, but how does it make any kind of sense to punish the ambulance service because the emergency wards they need to get their patients into are overcrowded? Unless the ambulance service has some kind of magic ability to shift priorities in the hospitals, fining them for patients’ wait times makes less than zero sense.

But acute overcrowding in A&E departments has led to increasing ambulance ‘jams’ formed as they queue to unload, with waits of four hours recorded at some hospitals at the busiest times.

Damning new figures reveal that during the past year there were more than 265,000 occasions in England when ambulance staff took more than half an hour to deliver patients into the hands of hospital doctors.

And shockingly, more than 37,000 patients had to wait over an hour to move on to the wards.

Official guidelines say ambulances should deliver patients, clean the ambulance and be back out on the road within 15 minutes. A longer wait is seen as ‘unsafe’.

Yet the chaos in A&E departments is so bad that at one, the Norfolk and Norwich University Hospital, doctors were forced to put up a tent to act as a makeshift ward to treat patients alongside the ambulance queue.

March 14, 2013

The scare stories about increasing antibiotic resistance

Filed under: Bureaucracy, Business, Health, Science — Tags: , , , , — Nicholas @ 09:36

In sp!ked, Robin Walsh debunks some of the scare factor from recent reports about antibiotic resistant diseases and the looming pandemic:

The UK’s chief medical officer (CMO), Professor Dame Sally Davies, made a splash in the media this week with her warning that antibiotic resistance is the new climate change. There is a ‘catastrophic threat’ of ‘untreatable’ diseases, she said, which promise to return us to a ‘nineteenth century’ state of affairs. The CMO has form: she warned the House of Commons health select committee about the same problem in similarly stringent terms back in January — a case not so much of apocalypse now, as apocalypse again.

As with all such stories, reading the actual CMO’s report leavens some of the hysterical excesses of the press, which were stoked up by the CMO’s excitable media appearances. Setting out the epidemiology of infectious diseases in the UK, the report highlights that while some drug-resistant infections, such as the well-known Clostridium difficile (C diff) and MRSA, are becoming less widespread, there is an increasing occurence of harder to treat multi-drug resistant bacterial infections, which, although still only in the hundreds of cases per year, are on the rise. The report states that only five antibiotics to fight such infections are currently in phase II or III trials, so the cupboard seems worryingly bare of new, necessary drugs.

So if we’re running short on drugs, how can we make more? A sensible article in the British Medical Journal from 2010 clearly set out the challenges facing the development of new antibiotics. Firstly, there are many regulatory hurdles that make running clinical trials in this area difficult. More importantly, there is a major financial disincentive for drug companies to develop antibiotics. Currently, drugs which are profitable are those for chronic conditions that are prescribed lifelong: painkillers for arthritis, diabetes drugs, and the like. A drug that you take once to cure you is unprofitable; doubly so if it is likely to be husbanded to prevent resistance developing until the patent runs out. A change in government payments to incentivise new antibiotics, like that which already applies to so-called ‘orphan’ drugs for rare diseases, would be an easy and rational step towards producing more drugs that meet our needs.

February 20, 2013

Incentives matter (a lot) — the growth of “Disabled America”

Filed under: Economics, Government, USA — Tags: , , , , — Nicholas @ 09:40

Colby Cosh discusses the rise and rise of “Disabled America”, the increasing number of adults of working age who are claiming disability support:

Just looking at fiscal and demographic stats from California will cause a cold, invisible hand to clutch at one’s throat, but talking to an endless series of seemingly able-bodied people who casually disclaim any capacity for honest work is even more chilling. When I got home I found out it’s not just California’s problem. In the OECD’s 2010 “Going for Growth” report, the percentage of the working-age labour force (20 to 65 years) receiving any kind of disability benefit or worker’s compensation is estimated at around 5.1 per cent for Canada. For OECD nations as a whole, the figure is 6.7 per cent.

Northern European welfare states, amiright? But for the super-competitive U.S.A., land of the proudly threadbare social safety net, the number was 9.2 per cent.

[. . .]

There is a handful of economists working on the problem without ever gaining much traction in the popular press; the atmosphere of general crisis hasn’t made it any easier for them to be heard. Reading their papers and seeing them plead for the same reforms every few years is almost as depressing as contemplating Disabled America itself. Just as social security for the aged was devised at a time when workers could expect only a few years of life after clearing 65, social security for the disabled was conceived at a time when manual labour was the norm and “disability” denoted identifiable, incapacitating physical injury. No one envisioned a world in which clerical and “knowledge” work had taken over, but the number of people judged totally unable to work had skyrocketed, owing to vague musculoskeletal disorders, unverifiable chronic pain and an astronomical expansion in the definitions of mental illnesses.

If the system is set up to provide more income through disability payments than through a paying job, there will be a tendency for minor ailments to be parlayed into a disability. When the incentives are rigged to encourage a certain kind of behaviour, people will adapt to take advantage of those incentives. If the system will effectively reward you for being “disabled”, it should be no surprise that we get more people applying for disability support.

Even if the economic climate was better, it’s not likely that governments will crack down on those abusing the system for a couple of solid reasons. First, it’s a public relations nightmare waiting to happen and every government worker knows that you never want your name to appear in the media in this kind of context. Second, people on the disability programs don’t count as unemployed and therefore reduce the pressure on the government to “do more” about jobs. And third, it’s easier to just go with the flow and not try to create any ruckus.

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