Monday, October 24, 2005

Health & The Fluffy Economist

Another Edinburgh blogger on the block, The Fluffy Economist has his inaugural post up.
However, he has touched only tangentally on the truth. Let us assume that a private sector employee, with hopes of career advancement and rising salary, is good at making profit for his company. Public sector employees are not so good at making profit. Their career advancement, we hope, is through competency in his chosen office. Any differential in competency we can put down to lower wages and fewer opportunities for promotion in the civil service (although the latter is changing).

This is, unfortunately, not true. At present, public sector wages and, of course, their non-wage benefits (such as final-salary pensions) are far outstripping that of the private sector.
Salary increases in the public sector under Labour are outstripping those in private business, prompting warnings that Scotland’s economy will suffer as a result.

Figures from the Scottish Executive show that, between 1999 and 2004, average wages in the public sector rose from £19,670 to £23,650, up 20 per cent. Over the same period, salaries in the private sector rose by only 18 per cent, and the average wage still lags behind at £20,000.

The Executive insists the salaries paid to public sector workers are in line with Treasury guidelines.

However, David Bell, an economics professor from Stirling University, believes the increases in public sector salaries are in danger of stifling the economy.

Prof Bell, who heads the Scottish Economic Policy Network, an independent economic think-tank, said: "People in the public sector get paid more and they are likely to have more job security and better pensions.
...

"The potential impact of the difference is that the public sector becomes a more attractive career option and the long-term consequences are that the private sector suffers. The private sector generates tax revenues so we want people to go into careers in the private sector to increase the rate of growth of the economy."
[Emphasis mine—DK]

The point is that a worker in the private sector who is not making a profit for his/her employer will not be promoted, and may even be sacked. As a contrast, many public sector promotions are made on the basis of time served, not on whether or not they are any good at their job. Indeed, in a sector in which profit is not a motive, it is very difficult to determine whether or not someone is any good at their job. Even if they are not, the nature of public sector contracts ensures that poor workers are virtually unsackable anyway.
However, let us underline that the private sector is there to make profit. All other aims are subsumed to this one ambition. As a result markets created through privatisation (wholly/fully) will have a structure to further this end. This will maintain no matter how many government regulations/targets/inspections are carried out.

Yes, either that or they go bust. Given that the level of bankruptcies is at a record high this year, one would tend towards the idea that more regulations and more complicated tax systems have increased the burden on businesses, and many of them just cannot sustain that level of expense. The public sector, of course, doen't need to worry about that: it is always going to be bailed out by the government, i.e. the taxpayers.
For services such as education and healthcare this is an extremely worrying prospect. The only antidote to such a situation is so much government monitoring so as to make efficiency gains questionable.

Or not. Although the pursuit of profit is, of course, the point of a private company, there is no way that a company can make a profit is it cannot sell its goods or services to the public. (In the case of monopolies, of course, this does not apply, e.g. Railtrack, and monopolies we should attempt to avoid.)

Let's imagine a healthcare system that features a number of private hospitals (let's leave aside the idea of whether treatment is free at the point of delivery and that sort of stuff). One of these hospitals makes a number of high-profile cock-ups in the quality of its care like—oh I don't know—removing the wrong kidney. Now, would you go to that hospital, or would you choose another, with a better reputation, even if it meant travelling slightly further afield? This is your health, and possibly your life, that we are talking about here. I think that you'd go to another hospital. So would everyone else.

Now, in the private sector, that hospital would probably go bust. It might then be bought over by another company with a better reputation, or it might just not exist. The point is that the company running the hospital have a hard cash incentive to ensure that cock-ups do not happen. Or, if they do happen, then they at least have the chance to fire the offending doctor. Or, to put it another way, what regulates the performance of the hospital is not the government, but the market.

What happens in the public sector? Well, generally, they just cover it up (see the Bristol heart surgery scandal, brought to light by MD in Private Eye). Someone might be suspended for a couple of weeks, or they might not. The point being that, whatever patients feel about the hospital, they have no choice in whether or not they go there. Those running the hospital have no particular pressure not to cock things up because, whatever happens, the government will ensure that their salaries are paid. (This is, in fact, exactly what is wrong with the public sector in toto: no matter how badly they do their jobs, public sector workers are almost guaranteed a job for life.)

Now, given this model, do we think that a network of smaller hospitals—much like the cottage hospitals, before nationalisation, that Labour are now so keenly shutting down—might be a better idea? I believe that, were the private sector to run the hospitals, then we would end up with a network of more, smaller, hospitals; smaller hospitals take much less capital to build, and are easier (and cheaper) to run. The pursuit of profit is not, in and of itself, a problem.

Be aware that this model cannot be compared to the PFI projects currently under way. The private companies do not have any financial exposure, despite the government telling us that they would. The fact is that this government has far too much pride (and money) invested in PFI projects to ever let them go bust; time and again, private companies have come cap in hand to the government, and have been bailed out. For instance, Mapely Steps Ltd, the tax-haven based company to which the Inland Revenue and Customs and Excise ironically sold all of their buildings a few years ago, have been bailed out extensively: we don't know how much by exactly ("commerical confidentiality"), but we do know that Mapely threatened to go bust if they did not receive an extra £100 million. Since they are still extant, we must assume that they got not much less than that.

If a private company were to build and run a hospital, without the promise of a government bail-out, they would have a (in)vested interest in ensuring that it ran profitably, efficiently and, thus, that the standard of care was high. The public sector has no such constraints.

(As an aside, there is now no A & E department in the centre of Edinburgh. The old site has been sold to developers who are building the usual load of flats, "affordable housing", shops and offices. Now, if I were them, I would also include a small A & E department, and charge people, let's say £20, to come in and be treated. In a taxi, it is going to cost rather more than that to get to the new ERI in Little France and little less to get to the Western General. There is a market for an A&E department in the town centre—especially on a Friday and Saturday night!—and I believe that it could also be a useful stop-in centre at other times too. but that's just me, I guess...)

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