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Recently, the Federal Government decided that it does not want to interfere in the market for the private provision of rapid antigen tests in the middle of a pandemic.
Preserving the right of private businesses to profit during the pandemic at the potential expense of the vulnerable is simply not a great policy.
What are the economics behind this, and what might they be missing?
Rather than assume it is simply a cop-out, it seems it is a naive application of Economics 101. However, the policy is not well thought through.
The implicit assumption is that there are no significant positive externalities in subsidising the cost of rapid antigen tests. That is the information benefits of knowing whether you have Covid and taking personal responsibility by appropriately isolating to avoid infecting other people are neither insignificant nor irrelevant.
The US National Bureau of Economic Research recently concluded that much of the decline in economic activity in the US associated with Covid-19 came from self-protective behaviour. As Australia re-opens its economy, this is likely to become a potential handbrake when uncertainty about managing the virus is widespread in the community. RATs provide a frontline but partial solution to this self-protective behaviour.
Research by the Royal Australian College of General Practitioners suggests there is a case for substituting PCR tests with RATs, and saving public funds. The benefit comes from earlier knowledge of infection and people isolating earlier, lessening the spread of the virus.
The government’s approach presupposes that rapid antigen tests are a consumer item rather than a public health consumable. A bit like asking people to bring their own oxygen bottles to hospital. Now that is something we have seen elsewhere.
The Australian Chamber of Commerce and Industry recognises the information value of RAT, advocating free rapid testing will improve business and consumer confidence, assisting in reopening the economy after a series of lockdowns and international lock outs. This will help minimise the extremely disruptive impact of snap closures and held businesses reduce risks to employees, customers and the community.
The government has argued that it does not want to provide ‘free’ rapid antigen tests. However, that is misleading. Publicly provided tests are paid out of taxation revenues. Either way, we are paying for these tests.
I find it difficult to believe that the Commonwealth cannot secure bulk supplies of these tests and distribute them at less cost than I could purchase one at full retail prices.
Also, it is surprising to me that given the extensive use of rapid antigen tests elsewhere, the Federal Government has not provided more effective leadership on this.
The Australian Competition and Consumer Commission is awake to the risk of price gouging and has indicated it will ‘name and shame’ those that do.
With Covid case numbers soaring again, the test and trace systems are simply not up to the task given volumes. Rapid antigen tests provide a viable alternative to enable people to be informed about their own health status and act accordingly. That has to benefit their families, friends and co-workers and, ultimately, the wider society and economy.
I was thinking that we were all in this together. The Federal Government still needs to catch up. We can’t afford another strollout in a fast-moving medical environment. Time and again, we have seen political processes simply cannot match the pace of this pandemic.
Let’s not think Covid has passed just yet. People are still dying.
Wishing clients, colleagues and friends a happy and prosperous 2022. Thank you to everyone who has worked with Lytton Advisory over the past year and has supported our efforts. We look forward to engaging with you all in the New Year.
Craig Lawrence, Managing Director
Recently I was reading a LinkedIn post about infrastructure that was drenched in buzzwords. It struck me that the big professional service fees are in new infrastructure and construction (building more).
That is what many large advisory firms are seeing and want. Fee incentives are all around the size of the overall spend.
However, I think a lot of the ‘thought leadership’ pieces from some of these firms skip over the maintenance and rehabilitation story (keeping what we’ve got going).
Those maintenance / rehab projects are more numerous and smaller in scale. Also, they reach deep into local government systems, bypassing large state and federal bureaucracies.
But there are no real fees for the large advisory firms in that.
Neither federal nor state governments have been successful in keeping the lid on the costs of large projects – they seem to blow out.
And there do not appear to be any real consequences for poor advice.
It is an old line that infrastructure spending kick starts the economy. Also the tired ’shovel ready’ cliche gets trotted out again and again. More of the same thinking, really. Get ready for that to be turbocharged in the upcoming federal election.
We really need to get more service from the infrastructure asset dollar, rather than just building big, dumb assets.
It is instructive that recently a major firm fired a partner for telling its government client they were wasting taxpayer money. That would never have seen the light of day without a transparent, independent inquiry process.
Some large firms are shamelessly conflicted with embedded contractors masquerading at senior levels as independent professionals when they are, in effect, overpaid departmental staff.
Are they being paid to steer projects or steer work to their firms?
Professionalism must be accompanied by independence and transparency, but the penchant for opinion shopping remains strong.
Quis custodiet ipsos custodes? (Juvenal)
I have an enormous amount of respect for planners – infrastructure planners, economic planners, financial planners, city and town planners – anyone that has to marshal huge reams of data, distil the essence of need and come up with a future path for all of us. Planning is one of the most difficult and contested activities around infrastructure.
Common to all planners is the need to look ahead and determine what investments are made when. More importantly, planners are front and centre in determining why these investments occur in the first place. Often, planners are actively shaping a ‘why’ that communities eventually embrace (or not).
It is often said that plans become obsolete upon first contact with reality. In the sense that a plan is an abstraction of reality, this may well be true.
Recently I completed a short course in behavioural economics that really helps economists understand we live in a world of people, rather than stylised profit maximising agents. And I am seeing how this affects the kinds of investments we make. Toll roads that are hardly used, dams that we barely drink from, office towers that lie vacant. It is sometimes difficult to reconcile perceptions of future use with the use that occurs. It often feels no one is accountable for the herd of white elephants that choke off better investments.
I was reminded on a recent walk to remain humble and remember the whole point of public infrastructure is to serve the needs of the people. Irrespective of drawing a seductive curve of path on a map, sometimes people simply want the utility of getting from point A to point B. The challenge is knowing when function must dominate form. My aesthete is always looking for that balance.
Lytton Advisory is pleased to advise that Craig Lawrence has been appointed as a consulting economist to the Asian Development Bank. He will be assisting the Bank by conducting due diligence on public sector investments proposed for ADB financing; and undertaking assessments and economic analyses on proposed ADB projects and programs.
Craig is Managing Director of Lytton Advisory. For the past eight years he has led teams of economists examining infrastructure and public policy issues.
Thanks to my colleague and good friend, Gene Tunny, for recently inviting me onto his Economics Explored podcast to talk about the circular economy. Listen to the podcast here:
As we increasingly incorporate a lot of the environmental externalities into the incentive architecture of the market economy, opportunities to improve our stewardship of finite natural resources will improve. Not only do we have to do things better, the approach underlying the circular economy encourages us to do better things.
“Start by doing what’s necessary; then do what’s possible; and suddenly you are doing the impossible.” St Francis of Assisi
This year has been extraordinarily challenging for all of us. Australia was ablaze with bush fires before the world succumbed to a global pandemic.
Lytton Advisory has been extremely fortunate to work with a committed group of clients and be well supported by a talented array of professionals. Thank you to one and all.
With blessings and best wishes to you and yours at Christmas and for the coming year.
Craig
Economic analysis starts from an assumption that people act in a rational way. Over the past few years economists have been exploring why people seemingly break this assumption on a regular basis. Understanding how people react to information, incentives and the way in which choices are presented is becoming increasingly key to developing effective approaches to designing and delivering public policy. It was one of the reasons I recently completed a short course on behavioural economics.
Coronavirus is forcing utilities to rapidly reappraise their pricing, to assist communities. I have been looking how to stress test utilities in response to Coronavirus. This follows observing the deferral of a recent regulatory pricing review and extension of the regulatory pricing period by a year for a water utility here in Australia. That action in and of itself will not address the impacts of Coronavirus.
I had some thoughts about a possible review approach. Specifically:
i) the financial capacity of the water and waste units to respond to requests by the governments to support their communities; and
ii) the ability of water and waste activities to defer some capital expenditures beyond the governments’ current budget horizons.
My initial thoughts are that this might be in the form of a series of financial stress tests that consider:
i) the implications of extending the current path for rates based on governments’ current asset management approaches;
ii) reducing charges by dropping any surplus generated to assist households over a period nominated by governments;
iii) deeper reductions in charges based on deferring capital and operating expenditures through the current period of budgets and perhaps beyond;
iv) implications for the path for charges beyond the current budget outlook, including taking into account the impact of deferring of capital expenditures designed to drive greater efficiency of service delivery; and
v) commercial implications of significantly lower volumes of services to businesses on utilities’ operations and margins, which might be significant in terms of trade waste issues.
A high-level review of engineering costs, capex and opex, could feed this financial analysis based on available information. Although not a full cost pricing determination, the review would help a government and utility business managers quickly figure out what level of relief can be given by the water and waste activities to households and businesses while minimising future rises in charges.
From an economic perspective, it may be simpler for governments to subsidise water and waste activities through temporary community service obligations (CSOs) directly. If that were a viable policy option, this could be a key piece of analysis to help set the level of the CSO, lay out KPIs for that CSO and establish the criteria for unwinding the CSO when measurable impacts from Coronavirus have passed.
Lytton Advisory