An Expected Unusual Day

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If you were working in a maternity ward on the 1st July, 2006, you could be forgiven for believing that you were living in the movie Groundhog Day. On that day, the baby bonus rose to $4,000; an increase of $834 (or 26%) from the day before. And what happened that day was the same sort of thing that had happened when the baby bonus was introduced two years earlier; a flood of babies compared to what would have been normal.

In Groundhog Day, Bill Murray is forced to repeat the same day over and over again, knowing what was coming next, until he learned how to deal with it. The Federal government is Bill Murray. They are living the 1st July, 2004, over again but, unlike Bill Murray, are not learning. Despite warnings, nothing was done to soften the incentive impact of the 2006 baby bonus increment. Indeed, the government ignored all of the warning signs and pleas from the medical community. And, surprise, surprise, they woke up to yet another unusual day.

Using newly released ABS data, Andrew Leigh and I have been able to look at what happened in 2006 using the same methodology we did in 2004. Here are the results. We estimate that about 687 births were moved from the last week of June to the first week of July. This is compared with 1167 moved back in 2004. The movement was expected but the magnitude has surprised me. That said, $834 tax free is no small change: a new pram, high chair and a cot (maybe a cheap Plasma TV) for a few days extra pregnancy.

You may recall that the 1st July, 2004, had the most number of births on any day in Australian history. That isn’t the case for the 1st July, 2006, which was a Saturday. But it was a very busy day indeed. It was Monday the 3rd that saw a big raw jump. We, of course, take into account the historic low birth rate on weekends to benchmark the impact of the increment to the baby bonus. But given that doctors don’t like to schedule deliveries on weekends, the jump is quite significant. My guess is that, given the usual strong doctor bargaining power (in a conflict they win three quarters of the time), the patient pressure in 2006 was at least as high as it was in 2004. Parents at least seem happy to delay for cash.

The big issue here is that this shouldn’t be happening. Whatever the benefits (if any) of a baby bonus is, like any economic policy, governments need to worry about implementation. People have choices and respond to incentives. What we don’t want is a normal, stable and predictable medical environment being disrupted by arbitrary incentives being handed down from above by governments. It is completely unwarranted. And to see it repeat itself again amounts to ‘nano-economic’ mismanagement of a high order.

In 2008, it is all happening again. According to a reader comment at news.com.au (see 15), doctors are even making parents aware of it!

The policy response is simple. For a few extra million in baby bonus payments, if you want to increase it, it can be increased in smaller increments (< $100). Indeed, when we do that, this doesn’t seem to tax the minds and bellies of parents. That payment is a drop in the ocean in the context of over an expected billion dollars given to new parents in 2007.

So will 1st July, 2008, be Groundhog Day, again? Or will the government of the day be born again and do what is right? The Federal government ignored the warnings last time and did nothing. I don’t expect them to react this time either. But what about the Labor Party? Will they really lose votes for some earlier, softer payouts?

Update: Andrew Leigh writes about the political reaction.

Some press:


$834: how baby bonus adds up to baby boom

Crikey, 9th November

Joshua Gans writes:

If you were working in a maternity ward on the 1st July, 2006, you could be forgiven for believing that you were living in the movie Groundhog Day. On that day, the baby bonus rose to $4,000; an increase of $834 (or 26%) from the day before. And what happened that day was the same sort of thing that had happened when the baby bonus was introduced two years earlier; a flood of babies compared to what would have been normal.

In Groundhog Day, Bill Murray is forced to repeat the same day over and over again, knowing what was coming next, until he learned how to deal with it. The Federal government is Bill Murray. They are living the 1st July, 2004, over again but, unlike Bill Murray, are not learning. Despite warnings, nothing was done to soften the incentive impact of the 2006 baby bonus increment. Indeed, the government ignored all of the warning signs and pleas from the medical community. And, surprise, surprise, they woke up to yet another unusual day.

Using newly released ABS data, Andrew Leigh and I have been able to look at what happened in 2006 using the same methodology we did in 2004. Here are the results. We estimate that about 687 births were moved from the last week of June to the first week of July. This is compared with 1167 moved back in 2004. The movement was expected but the magnitude has surprised me. That said, $834 tax free is no small change: a new pram, high chair and a cot (maybe a cheap Plasma TV) for a few days extra pregnancy.

You may recall that the 1st July, 2004, had the most number of births on any day in Australian history. That isn’t the case for the 1st July, 2006, which was a Saturday. But it was a very busy day indeed. It was Monday the 3rd that saw a big raw jump. We, of course, take into account the historic low birth rate on weekends to benchmark the impact of the increment to the baby bonus. But given that doctors don’t like to schedule deliveries on weekends, the jump is quite significant. My guess is that, given the usual strong doctor bargaining power (in a conflict they win three quarters of the time), the patient pressure in 2006 was at least as high as it was in 2004. Parents at least seem happy to delay for cash.

The big issue here is that this shouldn’t be happening. Whatever the benefits (if any) of a baby bonus is, like any economic policy, governments need to worry about implementation. People have choices and respond to incentives. What we don’t want is a normal, stable and predictable medical environment being disrupted by arbitrary incentives being handed down from above by governments. It is completely unwarranted. And to see it repeat itself again amounts to ‘nano-economic’ mismanagement of a high order.

In 2008, it is all happening again. According to a reader comment at news.com.au (see 15), doctors are even making parents aware of it!

The policy response is simple. For a few extra million in baby bonus payments, if you want to increase it, it can be increased in smaller increments (< $100). Indeed, when we do that, this doesn’t seem to tax the minds and bellies of parents. That payment is a drop in the ocean in the context of over an expected billion dollars given to new parents in 2007.

So will 1st July, 2008, be Groundhog Day, again? Or will the government of the day be born again and do what is right? The Federal government ignored the warnings last time and did nothing. I don’t expect them to react this time either. But what about the Labor Party? Will they really lose votes for some earlier, softer payouts?

For the original post, click here.

Joshua Gans is a professor of economics at Melbourne Business School, University of Melbourne and maintains a blog on these issues at economics.com.au.

7 Responses to "An Expected Unusual Day"
  1. Surely it can’t be that hard to ramp the bonus up gradually rather than a sudden increase. I’ll point this out to my MP after the election.

    Has there been any change in the number of abortions related to the baby bonus?

  2. Hi Joshua,

    Heard you on radio the other day and thought I should drop by your blog. I skimmed over your findings and just had a little thought.

    Aside from the obvious trend of shifting delivery dates, I’d be interested in what I’d imagine is the smaller subset of that group that significantly risked their health for that extra $834.

    Let me try the analogy of a balloon blowing exercise where the intent is to inflate an average sized balloon and deflate it after 4 minutes from the start – If three boys were blowing balloons and each started 1 minute after the other, then the one who started first has the highest chance of the ballooon popping before the 4 minutes are up whereas the one who started second may have had little or no risk of the balloon exploding anyway.

    If delivery has a window period, then the economic incentives are really ‘harmful’ only to the those who take significant health risks.

    Having said that, I completely agree that incentivizing a couple for which a child is a marginal decision is a disturbing concept.

    Cheers,

    Joseph

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