Home > Economics - General > The secret case for privatisation

The secret case for privatisation

March 18th, 2008

Ross Gittins had a piece in the SMH yesterday offering an intriguing line of defence for the privatisation proposals of the Iemma government, in the face of attacks from me and Nicholas Gruen. As Gittins concedes Iemma’s arguments, based on the idea that the sale will protect the states AAA rating and allow for new investment in infrastructure, don’t stand up to scrutiny.

He starts off promisingly enough

You don’t have to be very bright to pick holes in the arguments Morris Iemma and Michael Costa have been using to sell their plan to privatise electricity.

But it seems you have to be wiser than some of our brightest economists to comprehend the deeper issues involved … Various economists, including Professor John Quiggin of Queensland University and Dr Nicholas Gruen of Lateral Economics, lost no time in blowing these arguments out of the water. But it doesn’t seem to have occurred to my learned friends that they’ve been busy demolishing a straw man. They may be economic geniuses, but they have more to learn about the politics of economics.

The line implied here and spelt out later on is that, while the ostensible case for privatisation is nonsense, there are deeper reasons which Iemma can’t acknowledge, but which provide a compelling case. It sounds promising. Unfortunately, Gittins makes rather a rhetorical mess of things.

First, the criticism that we responded to the actual version of an argument being presented, rather than every possible variant of that argument is silly in general – this is policy debate, not the Journal of Economic Literature – but it’s particularly silly in the context of a 700 word opinion piece. There is no room to do anything more than respond to the ostensible case put forward by the other side.

Second, Gittins spends most of the article responding to our critiques with marginally more sophisticated versions of the same arguments. These have duly been demolished in their turn by Nicholas, and by Joshua Gans. I don’t have anything much to add in substantive terms.

My objection, as I said, is to the structure of the argument. Gittins has already foreclosed the option of a direct reply by his rhetorical concession that Nicholas and I are “some of our brightest economists” and “economic geniuses”. In saying this, he’s implicitly conceding that we will have anticipated any technical response he’s likely to make, and to make an adequate counter, as we have done. If Gittins really thought he could knock down our arguments on debt levels and ratings agencies, he should have stuck to the high ground of a direct response, as we did when we responded to the shoddy case put forward by Iemma and Costa.

The real interest in Gittins’ piece doesn’t come until the final few paras when he says

But while I’m talking home truths, here’s the big one. No one wants to say it but the strongest reason for privatising electricity is so the electricity unions can’t use political pressure to get at their employers.”

Of course everyone knows this, but there are obvious reasons why no-one wants to be the first to say it. Privatisation is usually motivated, at least in part, by the hope of cutting pay and conditions for workers. Critics like me (and I expect Nicholas) don’t want to say this in response to privatisation undertaken by a Labor government because we will be drowned in indignant denials. Therefore, what we do is demolish the ostensible arguments and wait for someone on the other side to obligingly spill the beans as Ross has just done.

Second, the whole idea of an ostensible and a secret case for policy puts me in mind of the Straussian distinction between exoteric (or public) and esoteric (or secret) teaching. The obvious problem with this story is that of peeling an onion. Having been admitted to the esoteric secret teaching you realise that the story presented to the outer world (the “punters” in Gittins’ story) is a sham, designed to secure assent without understanding. But how do you know that the story you are now getting is the real secret and not another layer of deception? In my limited experience of these matters, the inner caucus that supposedly controls things is in fact controlled by a still smaller group and, while I’ve never got inside such a group, I imagine that the process only terminates with a minimal majority group of two in a controlling triumvirate.

In the present case, the esoteric story that has been sold to Ross is that, in their zeal to defend the public good, Iemma and his allies need to shake of the grip of the electricity unions by selling a bogus story to the innocent public. But, isn’t at least as possible that the financial sector players who stand to gain hundreds of millions (or more) from a privatisation have something to say about the matter, and that their representations have at least as much influence as the public good. Could it be that, in some inner circle from which not only Nicholas and I, but also Ross and other advocates of privatisation have been excluded, it’s been observed that privatisations tend to produce both lavish corporate donations and lucrative post-political careers for all those involved?

Unfortunately, there’s no easy way to test this kind of argument against reality. That’s why its better, at least in public forums like newspaper columns, to stick to open debate. If Iemma wants to put up anti-union arguments for privatisation, or, for that matter, to explain that we should support the deal because of the benefits that will flow to Labor mates, I’ll be happy to respond. Until then, let’s stick to the arguments that are actually only the table.

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  1. Hal9000
    March 20th, 2008 at 12:45 | #1

    “private rorts are held to account by the market”

    That’ll explain the low and falling rates of senior executive and board members’ remuneration across the private sector, then. Thanks, Joseph, I was confused about that until now.

  2. Socrates
    March 20th, 2008 at 13:18 | #2

    Joseph,

    Too many examples to fit into one lunchhour, but here is a good one from my field. Central Qld (coal) ports were privatised in the 90s. With the sher tonnage of coal exports from the Bowne basin, there is no economical alteranative to their use for mining companies. The new private owners systematically avoided building new capacity so that they could exploit their monopoly power and raised their loading prices. Now as demand goes up, by 2006/07 millions of tonnes of saleable coal exports sat on the stockpile sites because there was not capacity spare to load it onto ships. The private port operator increased their profit by tens of millions, but the Australian economy lost billions. The same was true of the failure to expand the (public) coal trains from mines to the ports. I don’t call that efficient on the public side or the private. I have plenty more such examples.

  3. Joseph Clark
    March 20th, 2008 at 13:40 | #3

    Socrates, I’m not too familiar with the industry but I remember there being an issue with capped return on investment after privatisation leading to underinvestment in capacity. Are we talking about the same thing?

  4. Socrates
    March 20th, 2008 at 14:57 | #4

    Joseph

    partly, but much more than that. Some of these cases are a straight exploitation of monopoly power. Whether returns are capped or not, the monopolist may be tempted to pick a supply position which maximises their profit, even if overall economic outcomes are very poor. This example (coal ports and coal trains to them) is such a case. I picked this example because “both sides” (private ports and public railways) are guilty, but the point is, that market failures can persist with both public and private supply. Hence I don’t think you can say the market always does it better than government, even when very large sums of money are invovled. It depends on the nature of the industry.

  5. Joseph Clark
    March 20th, 2008 at 15:15 | #5

    Socrates, Don’t get me wrong. I don’t think markets aren’t perfect or even necessarily always preferable. But you are giving an example of a monopoly that is provided and sustained by government. It seems that most examples of monopolies behaving badly are in this category.

  6. Socrates
    March 20th, 2008 at 15:22 | #6

    Joseph
    Not true at all. There is a huge amount of literature on this topic; read it. I just gave one example. The point is that some things by their nature tend to be natural monopolies. Ports are a good example, but far from alone. Consider things like the market for computer operating systems, most public utilities, and almost anything with a very large start up cost. I don’t claim to be pro-government, but I think the current trend towards the free-market solves all, is a fallacy.

  7. Joseph Clark
    March 20th, 2008 at 15:50 | #7

    There is no monopoly in computer operating systems and public utilities are public. I’m trying to think of an example of a monopoly that is not provided by government.

  8. Ernestine Gross
    March 20th, 2008 at 17:16 | #8

    #50: Joseph Clark says “The market is just people”.

    Substituting “just people” for ‘market’ in #55 gives:

    “Socrates,Don’t get me wrong. I don’t think just peoples aren’t perfect or even necessarily always preferable. But you are giving an example of a monopoly that is provided and sustained by government. It seems that most examples of monopolies behaving badly are in this category.”

    I wonder who Joseph Clark thinks he is.

    Assuming Joseph Clark is a real person rather than part of a hoax played on commentators of blogs in the form of an automated debating point program, then I’d say Joseph, breaucrats and politicians are also people and so are managers of corporations. However, the corporate form of enterprise relies on an artificial legal construct. Perhaps this is where your gripe lies.

  9. Joseph Clark
    March 20th, 2008 at 17:25 | #9

    Ernestine,
    You asked for the postal address of ‘the market’ so that you could inspect it. I just pointed out that the market is just a bunch of people and as such has no one fixed address. Sorry if I confused you.

  10. SJ
    March 20th, 2008 at 18:09 | #10

    But you are giving an example of a monopoly that is provided and sustained by government. It seems that most examples of monopolies behaving badly are in this category.

    This is probably true, but has very little explanatory value. The reason being that if private monopoly suddenly pops its head up, the government will in most cases intervene, by assuming ownership or regulating, or changing the industry structure. You’re trying to think of something that probably doesn’t exist.

    (And Ernestine, John has assured by email that Joseph is in fact a real person known to John.)

  11. Socrates
    March 20th, 2008 at 23:28 | #11

    Joseph

    When I said that C.Qld ports are monopolies, it is by virtue of geography, not acts of government. There is nothing stopping anyone building a rival, but there are only so many locations viable to build such deep water ports. Hence if you own the port it is a natural monopoly, not by virtue of government power.

  12. Joseph Clark
    March 20th, 2008 at 23:48 | #12

    If I tried to build a port I would require approval. Would I easily receive that approval?

  13. SJ
    March 20th, 2008 at 23:59 | #13

    Joseph, you’re still tied up with correlation issues. You need to sort out which is the cause and which is the effect.

  14. Socrates
    March 21st, 2008 at 00:16 | #14

    Joseph
    You are a sophist who really has a psychological difficulty in admitting you are wrong. Under the relevant planning legislation, which I presume you have never read, permission could only be refused for a defined ground. If someone applied for a facility that met all navigational and environmental rules, permission could not reasonably be refused. But if you own the port site with the only deep water natural harbour for a few hundred kilometres, building an alternative is prohibitivbely expensive. Such examples exist; this is the end of your free education.

  15. Joseph Clark
    March 21st, 2008 at 03:41 | #15

    Socrates, You seem overstimulated. Don’t try to turn everything into a race. I only asked a question.

    If it is easy to get approval then I don’t think there is a problem. If there are profits then there are profits to entry, regardless of the entry costs. There is always a bigger fish in the sea.

  16. Joseph Clark
    March 21st, 2008 at 03:51 | #16

    And if it is not profitable to enter then the price is low enough already and there is no problem. Of course, some people feel indignant when a company sells at the lowest price and still makes a profit. I can understand that.

  17. March 28th, 2008 at 15:34 | #17

    If Terje had intended to be objective about the threatened privatisation of NSW electricity, he would have also paid regard to the way workers employed by privatised companies such as, for example, Telstra are treated, as an example, by the privatised Telstra as shown on the 4 Corners documentary Tough Calls of 18 June 2007 when he gave his sensationalised account of working for NSW electricity.

    However, Terje has his extreme free market ideological barrow to push, so, of course, objectivity is not to be expected.

    Clearly the practises described by Terje back in 1993, if his descriptions are accurate and not embellished, are indefensible, but many workplaces have since become the extreme opposite of what Terje describes, where workers have no rights and are subject to the arbitrary whims of petty minded bosses.

    What is needed are workplaces in which the pace of work and hours are civilised and the remuneration can provide at least frugal comfort to all. This is not possible in a society where market forces rule unchallenged.

  18. March 28th, 2008 at 16:18 | #18

    If Terje had intended to be objective about the threatened privatisation of NSW electricity

    I wasn’t making an objective point. I was sharing a subjective anecdote about dodgy behaviour. I could also share some from when I worked at Optus in the mid 1990s if it helps.

    All workers have the right to quit and go elsewhere. However when it comes to public utilities consumers (and or taxpayers) don’t generally have this privaledge.

    I suspect that we don’t share the same view about what “rights” people are entitled to. I don’t generally accept positive rights as having any moral legitamacy. I’m more into negative rights.

  19. March 28th, 2008 at 16:22 | #19

    extreme free market ideological barrow to push

    The thing is I think freedom is a moderate ideal.

  20. SJ
    March 28th, 2008 at 20:21 | #20

    Terje Says:

    All workers have the right to quit and go elsewhere. However when it comes to public utilities consumers (and or taxpayers) don’t generally have this privaledge.

    Terje, as is not uncommon, you are making an argument from ignorance.

    The term “public utility” does not mean “government owned utility”. Electricity is a public utility whether or not it’s owned by government.

    Public utility is a US term meaning:

    any organization which provides services to the general public, although it may be privately owned. Public utilities include electric, gas, telephone, water, and television cable systems, as well as streetcar and bus lines. They are allowed certain monopoly rights due to the practical need to service entire geographic areas with one system, but they are regulated by state, county and/or city public utility commissions under state laws.

    You still won’t have much freedom to stop using the public utility after it’s privatised. And because it’s being proposed that the price controls will be abolished, it’s likely to cost even more than it currently does.

    You might feel some smug satisfaction that a bunch of fat lazy bastards you observed in a workshop 15 years ago have been replaced by a different bunch of fat lazy bastards in a boardroom getting paid a thousand times as much, but that smug satisfaction comes at a high personal cost to you. I wouldn’t care about that if you chose to pay the entire cost yourself. But because you’re also advocating that I should help pay as well, I feel entitled to tell you to sod off.

  21. March 29th, 2008 at 14:31 | #21

    Firstly to correct my error in which I repeated myself. My apologies:

    If Terje had intended to be objective about the threatened privatisation of NSW electricity, he would have also paid regard to the way workers employed by privatised companies such as, for example, Telstra are treated as shown on the 4 Corners documentary Tough Calls of 18 June 2007 when he gave his sensationalised account of working for NSW electricity.

    Terje wrote: “I wasn’t making an objective point. I was sharing a subjective anecdote about dodgy behaviour. …”

    But you were using this example as evidence in support of privatisation.

    Terje continued: “… I could also share some from when I worked at Optus in the mid 1990s if it helps.”

    Perhaps you should have. There is a capacity for featherbedding for workers at the expense of the public even in privatised monopolies or duopolies.

    If we are to discuss public ownership rationally, we need a complete picture of what the problems with both public and private ownership are and what are the possible solutions. The clear problem with privatised companies is that the likes of Trujillo and the big investors want to take everything possible from everyone else: wages jobs, employment opportunities, service quality, service reliability, and service affordability in order to line their own pockets.

    The problem you identified could have been solved in a win-win way with greater openness, public accountability and good will on the part of employees and management. Why couldn’t shorter working hours and guarantees of employment and training been offered in return for acceptable levels of productivity?

    But the vested interests whom Iemma and Costa serve were never interested in a fair win-win solution.

    Terje wrote: All workers have the right to quit and go elsewhere. …

    How original! I never heard that one before. Can you say when you thought up this argument? Just now? 2005? 1930? or 1830?

    (Thank you SJ for your response.)

  22. TerjeP (say tay-a)
    March 31st, 2008 at 05:58 | #22

    SJ – I’ll accept your terminology. I did indeed mean government owned utility. In terms of being free to choose I will note than in my business and my home I have successful divorced myself from Telstra. If you wish to return to the days when I didn’t have that freedom then you can sod off also. Otherwise have a nice day.

    Daggett – it is reasonable for you to infer that my anecdote was meant in support of privatisation because I am a frequent advocate of privatisation. However it was just an anecdote offered in response to an anecdote by somebody else. My personal experiences do suggest that the government owned sector is more prone to cultural deviance, waste and mismanagement, however whilst my personal experiences no doubt help to shape my opinions they don’t amount to an arguement and I didn’t mean to suggest that they do.

    If I was Iemma I’d privatise hospitals a long way before I’d privatise electricity. The electricity works reasonably well. However thats also just a point of view rather than an argument.

  23. SJ
    March 31st, 2008 at 18:28 | #23

    If you wish to return to the days when I didn’t have that freedom then you can sod off also.

    Ah, the non-sequitur. E.g: Terje, if what you’re really saying is that you want to wipe out all human life on earth, then I’d have to say you’re completely nuts.

    This sort of argument is easy to make, but is just a useless distraction. I haven’t proposed to do anything with Telstra, but if that’s the first thing that pops into your head when you try to think of a successful example of privatization and the introduction of competition, well, perhaps you haven’t thought this through very well.

    Have a day.

  24. wizofaus
    April 1st, 2008 at 08:08 | #24

    Worse, Terje is incorrect – it is still virtually impossible to divorce ourselves completely from Telstra. Were Telstra to switch off / decouple every bit of telecomms infrastructure it owns in the country, your ability to make any sensible use of the phone or internet would be about zero.

    I do agree with him however that there is a far better case for privatising hospitals than electricity. Canada’s health system, publicly-funded but privately-supplied, appears to work somewhat more efficiently than Australia’s, though neither are particularly bad when compared to say, the U.S. (where I just spent 4 weeks working: virtually every day most of lunch would be taken up with discussing somebody’s recent woes dealing with health insurance companies).

  25. April 9th, 2008 at 23:57 | #25

    I would not entirely rule out wizofaus’s point about the Canadian Health system, but we cannot allow this one purported success of privatisation allow us to be undemocratically stampeded into either the privatisation of NSW’s electricity power generation or of its health system as has happened all too often in the past.

    We need to establish firstly that the Canadian Health system is working well (and this is disputed by at least one Canadian) and, if so, we need to establish whether it is because of or in spite of it being privatised and also if costs haven’t been shifted onto for example the taxpayer or the workforce.

    Even then we woudl need to think carefully as to whether under Australian conditions privatisation would improve the situation or make the situation worse like it is with the privatised US health system

    I somehow suspect that if, this time, we followed democratic processes and the public were consulted and kept fully informed, we would not end up with a privatised system in Australia.

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