Clash of the codes

It was only a matter of time before the mounting losses atthe Accident Compensation Corporation lead to ideologically-charged plans foropening up the work account to competition.  

Opposition parties equate competition with privatisation, orthe equally dirty "P" word, profits.   Private insurance companies will be,heaven forbid, making money out of providing insurance.  

Never mind that this implies some logical contortionist actwhere private profits are worse than public losses.   Never mind that it doesn’tmake sense to believe that private insurers will be able to win lots ofbusiness off ACC despite supposedly charging more (as their "profit motive"dictates).    

It is helpful to separate the imaginary risk from privatecompetition from the real one.   It is an illusion that we’re better off whenthe government provides a public good for "free" rather than when a marketprovider offers it for profit.

The true cost to society is still always the opportunitycost of resources being employed to provide the good.   The people and capitalinvolved with ACC could be put to use in alternative profit-making industries.  Or to put it another way, ACC is already equivalent to a profit-making insurerthat pays out all its dividends to its owners (the taxpayer) in terms ofproduct rather than money.   This wouldn’t be an attractive notion forshareholders in, say, McDonald’s.  

There is an added inefficiency in the above process.   Theprice the end users see for the service is lower than the true cost of theservice (which included earning normal rent on the assets employed).   We canexpect, therefore, that we get more of this service than we would in a freemarket.   In this case, ironically, we are making accidents cheaper than they"should" be, and consequently encouraging more of them through less individualresponsibility.   For this reason alone, it would be preferable if ACC was runas a for-profit institution.

But there is a genuine problem to allowing privatecompetition for ACC, arising from the unfairly tilted playing field for thestate provider.   ACC effectively operates with a dual mandate of an insurancescheme and a welfare scheme, with a lot of cross-subsidisation between theprofitable areas and the money-losing ones.  

In these circumstances, if the competition is allowed tocharge actuarially fair prices to ACC’s profitable customers, they can easilyundercut ACC.   This kind of cherry-picking would make ACC’s model unsustainablewithout massive price hikes or direct subsidies from general taxation.    

That outcome is not necessarily a tragedy.   A good economicrule of thumb is that people are normally made better off by giving them cashand letting them face true market prices, rather than simply giving themsubsidised goods.   And making the welfare component of ACC more explicit andtransparent would make it easier for us to weight the value versus other socialinterventions.  

After all, we want there to be clear signals that certainactivities and jobs carry (expensive) risks, in order to discourage people frompursuing them, without making reasonable attempts to reduce the associatedrisks.

Realistically, though, it is more likely that the governmentwill instead opt for some way of levelling the playing field.   There are twoobvious ways: either demand that private insurers cover a similar cross-sectionof employer types as ACC, or demand that private insurers reimburse ACC for thewelfare component of the levies that would have been paid to ACC by theirformer customers.

If private providers are still keen to play on those terms,we can be more confident that there are needless inefficiencies that can bewrung from the ACC structure, or benefits from employers having more choice asto their level of cover.   Neither of these things are bad, even if they doresult in profits for the insurance industry.  

But competition can go both ways.   There is something quiteappealing about the government and the private sector going head-to-head inwhat we might term the "KiwiBank" model, where the government directly competeswith the private sector in an attempt to limit pricing power.   It is one thingto make the easy claim that government institutions are inefficient dinosaurs,or that private companies are rapacious profiteers.   It is another to test thismodel by allowing competition between the two as a relatively low-costsolution.

This style of government intervention is not pure economics(normally interventions require evidence of market failure), and it is easy tosee government franchises extending into all areas of the economy based onoptimistic empire building.   At the same time, it is silly to deny SOEs theopportunity to expand where there is a business model that compliments its coreoperations (as banking did for NZ Post).

We shouldn’t be afraid of competition in economic strategiesbeing fought out in the marketplace.   The success and failures will be valuablefor future policy decisions, provided we take on board one ruthless lesson fromfree markets – when ventures fail, you have to be prepared to cut your losses.

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