Polly on central management by target

Targets always tempt statistical massaging, but the extremity of this cheating means no waiting-list figures can be trusted.

Indeed they do. Central setting of targets is always subject to gaming by those at the front end. This is exactly what people are complaining about about the banks. That hitting a short term target boosts the bonus of the banker at risk to the larger company, the bank, and possibly the financial system as a whole.

And this is wat Polly is complaining about in the NHS: that these centrally set targets are subject to such gaming.

What amuses is that Polly then makes the leap to an insistence that central management by targets must be continued.

And as for this:

Just to survive, the NHS always needs 2.5% above inflation,

Yes, we know, Baumol\’s Cost Disease and all that. But that\’s why we\’re trying to change the system from a centrally planned monolith to a market based (even if tax funded and free at the point of use) system., Precisely becuse total factor productivity increases faster in market based rather than planned systems. We\’ve the evidence of the entire 20th century for this.

And yes, higher tfp growth is the solution for a higher inflation rate. They\’re actually the sides of the same coin. A higher inflation rate is evidence that tfp is growing more slowly than elsewhere in the economy. To which, of course, the answer is to try and encourage tfp growth in this sector of the economy as well.

It may well be that Baumol means we\’ll never get tfp in medicine up to hte rate of, say, manufacturing. But this doesn\’t mean that we shouldn\’t at least do the best we can.

19 comments on “Polly on central management by target

  1. “Just to survive, the NHS always needs 2.5% above inflation,”

    I’ve always wondered (and never been able to find the data) how much of this inflation + 2.5% annual cost increase is the result of wage rises (labour costs being by far the largest single component of health spending).

    Polly talks as if the NHS needs inflation plus to keep up with new medical techniques, pricey drugs and increased longevity.

    But seeing as the public sector is seeing a 2-3 year wage freeze for all those earning above 17k I suspect we’ll see health inflation falling rapidly.

  2. I’d never heard of Baumal’s Cost Disease before but, being a hypochondriac, I’ve now added it to the terrifying list of conditions I suffer from. So anyway I checked it out on Wikipedia, and apparently it’s because people in jobs which do not increase in productivity need pay rises to keep up with those whose jobs do increase in productivity. Otherwise you can’t hire them.

    The error in this seems to me to be the fallacy that increases in productivity should translate into higher wages. That isn’t actually true is it? It comes back to something I said in another thread; presume a stable money supply (for simplicity); the national income (i.e. aggregate wages) has to stay the same year in year out, because there is only the same amount of money to pay people with. Where, then, can aggregate wage increases come from? There’s no extra money to pay people with.

    So, the aggregate income (or, per capita income) cannot increase above inflation. So there isn’t really a “Cost Disease” at all. So far as I can see. Just everyone trying to get pay rises to keep pace with inflation, regardless of their productivity.

    Or another way of looking at it, if a worker’s output increases by 5%, and his pay increases by 5%, you haven’t actually got a productivity increase anyway, since his per-unit output has remained static.

  3. “Or another way of looking at it, if a worker’s output increases by 5%, and his pay increases by 5%”

    But if output increases by 5% and pay by 3% then you have

  4. You could save a lotta loot by binning the preventative medicine fantasies – e.g. mass screening for breast cancer, statins-for-all, etc – plus operations that do more harm than good – e.g. for prostate cancer.

  5. It would also be handy to discover how much good evidence there is for “healthy living” doctrines – if, as I suspect, the answer is sweet FA, you could save lots there by sacking the propagandists.

    (I’m thinking of stuff beyond the obvious of “don’t smoke cigarettes, or drink so much that you bugger your liver”.)

  6. Emil, the full productivity gain being awarded as wages is merely the extreme case. Whatever wage award occurs, you’re reducing productivity overall by it.

    People don’t get wealthier because wages go up. We get wealthier because prices (of end user goods) fall.

  7. “Whatever wage award occurs, you’re reducing productivity overall by it.”

    In the extreme yes, but I guess the question is whether you would have been able to retain skilled workers without passing some of the reward onto them

  8. @Lawrence A, running a healthcare system in an economic manner is an economic issue. Economists don’t necessarily know much about any one industry. They may however know something about the economics involved.

  9. Social Policy professors don’t understand economics:

    Only if hospitals were short of demand would they have to compete, and they aren’t.

    No. This fails to recognise the “public service” fallacy. Patients aren’t the customers of the NHS, they are the product. If they pass QA, they come out well.

    Hospitals are already competing. For many things – funds, staff, equipment. Their monopsony customer is the NHS bureaucracy (albeit somewhat regionalised.) The drive of the Tory viewpoint – whether this bill will do anything to achieve it or not – is to shift that focus.

    The NHS sets resource constraints (largely budgetary.) Hospitals and other providers are then able to compete for customers to provide services within those constraints.

    Clearly, the NHS staff don’t want anything to do with ill people wanting any sort of control over what happens to them – that’ll get in the way of achieving targets. And the medics, trained from the minute they start that they are the beneficent channel for centuries of medical advances, really hate anybody with their own ideas.

  10. Emil, there isn’t any award to pass on if the free market is working properly, because the consumers will grab all the productivity gains via lower prices of goods.

  11. Efficiency gains have got to go somewhere regardless of the price level, otherwise they aren’t gains, are they?
    Whether they go to the rentiers, the capitalists, the workers or the consumers is a matter of economic history and political taste.
    My theory du jour is that at the moment they are going to the debtors. So we must be increasing efficiency somewhere, no?

  12. They can’t ultimately go to any particular class in the long run, that’s the Ricardian type fallacy. Consumers are producers, producers are consumers; the capitalists and rentiers and labour are just different subdivisions of the producer category which may be of interest or not. I can buy Photoshop from Adobe (capitalists) or rent it from them by the month (now, ooh, they’re rentiers). I sell comics what I draw myself to people, on a subscription. Am I a capitalist, a labourer or a rentier? Fucked if I know, or care.

    What’s this “price level” of which you speak?

  13. Actually, the Prof’s piece also denies pricing strategies. Okay, it’s slightly difficult to see when it’s all “free at the point of delivery” but …

    Many hospitals already compete (for central funding) by offering (expensive) specialist services – others concentrate on efficient, workmanlike delivery of commodity services.

    BA versus Ryanair. Places for both. What you don’t want is Ryanair service at BA Club World prices. Actually, this consumer doesn’t want Ryanair service. On Ryanair or anywhere else. But that’s a personal preference. It’s not going to stop O’Leary making money.

  14. IanB (13)
    I think you argue my point while denying it. I don’t care either where the efficiency gains go initially, so long as they are made.
    The price level of which I spoke doesn’t matter. If you had a sufficiently supple economy (which you’ll never have) you could live with any inflation rate.
    There’s an entropy in profit and efficiency gains. Arguing about whether the daughter of a kulak is a kulak is really for the nutters. If the corn rises higher, we should all be grateful.
    To go back to the original Polly – Tim disagreement. They too seem to accept that efficiency gains are slow to non-existent in the NHS compared to other industries or even in other health care regimes. Why?

  15. dearieme – “It would also be handy to discover how much good evidence there is for “healthy living” doctrines – if, as I suspect, the answer is sweet FA, you could save lots there by sacking the propagandists.”

    I can think of other reasons to sack them apart from cost savings. But the big increase in NHS spending seems to be mental illness. Which, oddly enough, we do not seem to be better curing now than we were 100 years ago. When people spent less time in treatment at much less cost. So restricting the definition of mental illness to something most of us actually think of as mental illness (as opposed to merely being unhappy or not wanting to work) would save a lot.

  16. I just looked up some healthcare insurance statistics. In the UK, prices increased on average by 6.6% per year above inflation over the last three years.

    So if the NHS can maintain service levels with 2.5% per year above inflation, it’s doing much better than the private sector. Huzzah for socialized medicine.

  17. the consumers will grab all the productivity gains via lower prices of goods.

    I can’t work out whether you’ve got this right or upside-down, but let me explain how I see Baumol. It’s not to do with money at all. Not in any way, shape or form. (None of economics, really, is to do with money. Money’s just a useful accounting tool.)

    Suppose we have an economy with two consumer desires: Goods and Services. Goods experience a steady productivity gains; Services experience no productivity gains.

    Now, as Goods production becomes more efficient, there will be more Goods to consume. (In the long run, some Goods workers may be laid off and move to Services. The following story is not really affected by this since it is a short-run effect.) Some of the extra Goods will be consumed by Goods workers. But not all: the same quantity of Services will be available as before, and therefore the exchange ratio of Goods to Services will move in favour of Services. Hence, the Services producers can command more Goods for their output than they did before.

    Note that the Services workers’ productivity has not increased and yet their consumption of Goods has increased. That’s Baumol’s Cost Disease; or at least, it’s the beating heart of it, without the money illusion. It’s just competitive consumer markets and differential productivity gains.

  18. So what we need is to find ways of shifting from a services model to a goods model. As has, indeed, happened with a lot of medical issues. Plasters and over-the-counter drugs mean that a lot of minor issues can be treated rather than merely tolerated because, at the most, we now have a quick discussion with a pharmacist rather than having a lengthy series of, or wait for, a doctor’s appointment.

    Even the two classics – bum-wiping and hair-cuts are not going to be immune to this if robots keep improving. You may still need one human hair stylist to discuss with you what you want to achieve but it may then be done by machine. A reflection of the current situation where, so I am told, much of the work in ladies hair salons is done by juniors.

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