For the want of a nail…

by George Hatjoullis

For the want of a nail…

…the Kingdom was lost

My son informed me that the reintroduction of wolves to Yellowstone National Park had restored the ecosystem. The wolves checked the populations of Moose and Elk and allowed trees to regrow which attracted Beaver, which dammed and stabilised the water course, and so on. It illustrates the interconnectedness of all things organic and how small perturbations can have far-reaching and quite unexpected consequences. In mathematics it is studied as Chaos Theory and in Economics as general equilibrium analysis.

The purpose of econometric models is not to predict the future but to understand the present system. It is an attempt to trace feedback loops and see the consequences of some proposed interventions. Any one that has tried to build such models understands how difficult it is and anyone that has used such models will know how unstable they can be. They are only as good as the specification, data, and estimation technology. They are not very good.

Economics has moved on to incorporate more psychology into analysis, and not before its time. The manner of intervention is now more closely regarded. A simple example is the opt-in/opt-out option. If I want someone to do something I make it automatic with the option to choose not to do so by opting out. Inertia does the rest. Take a look at workplace pensions and union contributions to political parties for examples. Of course, this does not say anything about the general equilibrium consequences of these nuanced interventions. It is customary not to trace too many feedback loops and to assume our interventions are a good thing.

The election has produced a few election pledges from all parties. These are designed to have good soundbite qualities and attract votes. But good soundbites often make poor policy. I am not Political Party animal (or the other kind really). I re-enlisted with the Liberal Democrats solely on the issue of the EU. I am broadly in line with their position on foreign policy and share their stated commitment to civil liberty. Their economic and social policy often makes me shudder. Let us consider this hypothecated 1p income tax to increase funding to the NHS. It is good politics because a survey revealed people would be happy to pay more if they knew for certain it would go towards NHS funding. But let us follow the logic a little further.

The purpose of funding public services through general taxation is to allow the government of the day to set priorities in line with the ideology that it has presented at elections. The Liberal Democrats could simply state that they will prioritize the NHS, aim for a particular public deficit, and set taxation accordingly, perhaps in addition demonizing high earners as the Labour party appears to be doing. Does not sound as appealing as ‘1p dedicated to the NHS’ does it? Does it matter? Let us explore hypothecation.

Let us take this hypothecation further and introduce full hypothecation for all NHS expenditure at a flat rate. What we now have is a state-run health system funded by a health insurance premium irrespective of income or previous conditions. We could introduce some kind of means testing to make the funding less regressive but there is still a health insurance premium to be paid. We have changed the narrative from free at point of use to insurance premium funded.

The introduction of the health insurance premium is a qualitative change that could have far-reaching consequences. At the moment access to the NHS is based on need and payment does not enter the issue. There is no direct connection between taxes and our use of NHS facilities. Once we hypothecate there is a direct connection and it becomes like National Insurance in relation to welfare payments and pensions. Your rights are based on contributions with welfare and pensions. How long before the same situation arises vis-a-vis the NHS? The premium/services framework lends itself much more to a privatisation narrative than the existing NHS free at point of use narrative. Think carefully before you go wolf hunting.