"When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals.
We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues"

( JM Keynes, "Economic Possibilities for our Granchildren" 1930 )

Thursday, April 12, 2012

Lethal Markets

From "The Economist"
JAMES CARVILLE, an advisor to Bill Clinton, famously once said he would like to be reincarnated as the bond market, because then "you can intimidate everybody". The European Union now has a huge rescue fund in place for member countries that come under attack from the bond vigilantes, and is working on plans to replace this with a permanent mechanism. Spain, a big, indebted euro member often thought of as a potential target for market vigilantism, is now straining to set its finances straight and avoid a roughing-up.”

In the Spanish case it seems that Mr. Carville´s description fell short of real life. The recent austerity plans put as a reaction to the markets´ demands are not only intimidating but could fall into the category of “Lethal”

First of all, lets see the relation between the intimidating monster and the policies policies. The evolution of the austerity policies adopted by Spain´s government can be followed through the evolution of the “Spread” ( i.e. the difference between the German and the Spanish Bond.

And in a more close perspective we can see that since the BCE ceased to buy Spanish paper the Spread went up

As expected Spain´s Government Pavlovian style reaction to the recent spike was immediate: The government unleashed an additional austerity cut of 10 billion € (approximately 1% out of GDP) announced last weekend. For those not familiar with Spain´s budget this is a COMPLEMENTARY measure beyond the cut pack included in the 2012 budget. The main victims of the actual measures are Health and Education budgets, which in relative terms sum up to app. 10% of their actual budget framework. I will deal in this blog only with the Health component, hoping that the cuts in Education effect did not yield , yet, the expected outcome of endless illiterates unable to read or understand this short note …. 

How the cut will be performed? The official version is that the cuts will be concentrated in rationalization measures (which by themselves, rationalization is always welcomed … ) but such rational raises two main questions

1. What is the margin of rationalization? To what extent the system is inefficient? ( I will remind my loyal readers the famous story told about the farmer that reduced his horse daily ration by half every day until the horse one day died of hunger …)?

2. If the cut is not only about rationalization but real cuts, what is the expected consequence in terms of human lives?

The first question can be answered by comparing the Health expenditures of different countries, in that case with countries with a similar level of income for the period 1960-2009 ( in real terms ) and contextualizing the figure with life expectancy at birth

(Source OECD Statistics “Health Expenditure and Financing” /capita, US$ at 2000 PPP rates, own elaboration of the data)

As can be seen from the above graph, Spain ( Red circles) Public Health System is able to generate one of the highest Life Expectancy rates among developed countries with fewer money than other countries (in 2009 at app.1600 USD/ Capita . In other words, it seems that the Spanish Health system is already rather lean so it would be more than probable that any cut in expenses is expected to hurt the flesh and bones, not the nonexistent of the system. Question 1answered.

So what could be the impact in human terms? In order to deal with this question I´ve run a simple linear regression between “Expenditures” and “Life expectancy” (50 observations between 1960 and 2009). The results indicate a high correlation between the magnitudes (above 90%) which means in practical terms that an increase/ reduction of 160 USD implies a lower Life Expectancy by ap. 7 months up to 1.3 year ( depending on the statistical tool used) , for the sake of the debate let´s take the one year figure as reference . Answer to question 2.

Final remark: We limited our analysis to Life Expectancy terms but bear in mind that Health is not just mere “quantity” but “quality” as well. Therefore a cut in Health Expenditures may affect not only the shortening of our lives but a poorer quality of service (for example, suffering for months from pains before having the opportunity to see a surgeon or a specialist … something becoming very common in Spain)

Conclusion : In comparison to the data presented above, Carville´s observation looks as a subtle understatement, when European countries like Spain are obliged to adopt policies literally lethal for their citizens. Therefore  the evaluation of the market "Diktats" exceeds the sphere of "Economics" and become  a matter to be handled in the arena of moral principles .

The question should be : Are we ready to live in a society that exchanges "financial stability" or "credibility" with its hardest coin,  the lives of its citizens??? I personally prefer longer lives even if that implies poorer banks or lower paychecks for top executives. How to do it? If the thug of the neighbourhood, the "market", speaks "Intimidationish", the citizenship should learn how to handle that Newspeak of determination and firmness . I can guarantee you that Mr. Carvell monster could become much less intimidating that it appears. It´s a matter of social choice.  

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