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Stutchbury replies

October 20th, 2010

Michael Stutchbury has offered a rejoinder to my post responding to his article in the Australia. I’ve put it up as a guest post. I remind commenters to stick closely to the comments policy, and avoid any kind of personal attack. Feel free, however, to agree or disagree with the substance of the post. – JQ

Michael Stutchbury writes

Let’s remember one thing. The 20-plus economists who signed John Quiggin’s statement do not all oppose the Queensland Rail privatisation.

They may have a gripe with the Bligh Government’s stated reasons for the privatisation, to make room on the public balance sheet. Some think the freight business is being sold off too cheaply and will be a net cost to the budget. Others think Labor is artificially propping up the sale by crystalling future monopoly rents. Quiggin appears to back both positions.

The first of the economists I rang on this admitted he had not been sure what he had signed. The second strongly disagreed with the Quiggin position. The third readily agreed it was a mistake to have signed the statement because of the way it was used.

But gathering together a bunch of eminent economists behind a position that inevitably would be seen as being against the sale is a clever way to fan the opposition, stretching as it does from the opportunistic stance of the LNP, to the rail unions’ desire to maintain public ownership featherbedding, to the Queensland traditions of rural socialism practised on both the right and the left. Talk about spin!

Let’s say QR has been run less than efficiently – does anyone seriously doubt this? And let’s suppose that a private operator would clean out some of the inbred inefficiencies (as implicit in Quiggin’s suggestion that the AWU has sold the other unions down the river)? If so, then the asset will be worth more in private hands. That’s just another way of saying that governments have enough to do without operating coal freight.

Some might still be able to suggest that the state budget would suffer if the public ownership has been acting like a monopolist, for instance tolerating union featherbedding and by reducing capacity in a way that caused the first China boom bottlenecks. And it might be possible to argue that privatisation may simply transfer the monopoly rents to the private owner, which might also be able extract some of the monopoly cream now taken by labour.

But of course the budget also is affected by the taxable income of the taxpaying entities in its jurisdiction. It doesn’t help the budget bottom line for the government to be running a rail freight monopoly that crimps its biggest industry by restricting the ability of coal companies facing a world price to get their coal to their customers.

It’s true that regulating for competition in a quasi-natural monopoly such as the rail network is tricky. It might have been better to allow the coal companies to buy a structurally separated network because they would have a stronger incentive to clean out the inefficiencies. No doubt the competition economists will argue about that.

But the regulatory regime to cover QRN is still likely to promote more competition than the former public monopoly model. The latest positions of both the main above-rail competitor and the coal company customers support this.

It may be technically true that the interest savings from being downgraded from a AAA credit rating to AA+ are not large. But the issue is bigger than this simplified comparison at the top of the commodity price cycle.

Australia is a capital-importing economy trying to run a high growth and high risk development path based on Chinese demand for our natural resources. Government can help minimise the risk by maintaining fiscal discipline and maintaining a strong credit rating – as evidenced in the global financial crisis.

Quiggin’s exercise reinforces Ken Henry’s complaint that by, arguing over the details, economists too often frustrate the political capacity to deliver better policy. Quiggin appears to understand this all too well.

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  1. Andrew c
    October 20th, 2010 at 17:17 | #1

    John – is it indeed true that a number of signatories to the petition disagree with it? Am I correct in reading that as a claim you misrepresented them?

  2. October 20th, 2010 at 18:09 | #2

    Leaving aside all other objections to privatisation in general, the idea of privatising a largely coal carrying railway at precisely the time when we are going to need to begin reducing and then phasing out coal use is simply insane. A privatised company is going to not only demand to keep the coal carrying business it has but to aim to increase it. And who is going to say them nay now?

  3. October 20th, 2010 at 18:10 | #3

    Oh and John you might want to italicise the first para, or put the rest in quotes. It wasn’t clear until I was someway in that it had switched from your voice to Mike’s.

  4. Alice
    October 20th, 2010 at 18:37 | #4

    Is Mr Stucthbury implying that the signatories were not intelligenmt enough to know what they were signing?? “The first of the economists I rang on this admitted he had not been sure what he had signed.”

    What evidence do we have – did Mr stutchbury tape the call or is it his word alone? (heresay)

    The second strongly disagreed with the Quiggin position (heresay again).

    The third readily agreed it was a mistake to have signed the statement because of the way it was used (heresay again).

    I didnt know Mr Stutchbury thought his heresay evidence would trump a signed letter of intelligent academics but anything is possible these days, and the minority often thinks it can trump a greater number of signatories by lying.

    I dont believe a word Mr Stutchbury says. Tell him to get his opinions about other people’s motivations in writing and signed on paper (and their elucidations of their reasons for signing Professor Quiggins letter)…preferably by the person concerned, and not Mr Stutchbury.

    The so called people Mr Stutchbury phoned, could for all we know, be sitting at home cursing him for misrepresenting them as we speak.

  5. Sam
    October 20th, 2010 at 18:48 | #5

    Let’s say QR has been run less than efficiently – does anyone seriously doubt this?
    Yes they do, this is John Quiggin’s blog, not “The Australian.” It is possible that that QR has been run inefficiently, but here you have to actually make the case that this is so. You can’t simply rely on our pro-privatisation prejudice to assume it.
    And let’s suppose that a private operator would clean out some of the inbred inefficiencies (as implicit in Quiggin’s suggestion that the AWU has sold the other unions down the river)?

    Actually this is not implicit in his suggestion. A company being able to extract greater concessions from it’s workforce is certainly transferring wealth from Labour to Capital, but from a system wide perspective, this not the same as being efficient. Of course, certain kinds of union practices are genuinely productivity destroying, and should be confronted, but simply reducing workers to penury is not by itself a social achievement.

  6. Alice
    October 20th, 2010 at 19:00 | #6

    @Sam
    I rather hope and wish and pray that sometimes our unions could once again garnish the sort of support that French unions are enjoying Sam. They are holding the country and Sarkovsky to account because he wants to increase the pension age by two measly years.

    We just let our governments get clean away with hiking the electricity price in NSW beyond the ridiculous and beyond what businesses and average families can afford, and we watched governmentys extend our working lives before we can get the pension a lot more than 2 years and a lot afte 62.

    We also let government childcare be overtaken by Eddy Groves, the education budget be snatched by wealthy private schools, the tertiary budget by foreign export dollars, the soldiers left to fight for another 10 years in Afghanistan, corupt political dealing after corrupt politica public dealings exposed but excused and excused again. We have permitted increasing tolls on roads and fares on public transport, privatisation after privatisation, bought shares in things we were supposed to own, watched executives pay themselves extraordinary amounts and watched our own kids get treated like poo by workplace laws that dont even protect basic rights.

    We are a bunch of sheep and the more economists that sign letters the better.

  7. SamB
    October 20th, 2010 at 19:17 | #7

    Just out of curiosity, when did it become an article of faith that (from a public perspective) an efficient monopoly is superior to an inefficient one?

    After all, one man’s “inefficiency” is another man’s “income” (or discount) … and to the extent that the benefits of the monopolist’s inefficiency are shared by the monopolist’s suppliers and customers (aka “the general public”), it is arguably a better outcome than an efficient private monopolist being able to capture the maximum possible quantum of economic rents.

  8. Ryan
    October 20th, 2010 at 20:48 | #8

    Hi John, just came across your blog today and thank you. The few posts I have read have been a wonderful and an enjoyable read.

    A few points in this last paragraph in this clearly unbiased article really jumped out and bit me:

    “Australia is a capital-importing economy trying to run a high growth and high risk development path based on Chinese demand for our natural resources. Government can help minimise the risk by maintaining fiscal discipline and maintaining a strong credit rating – as evidenced in the global financial crisis.”

    Firstly, I find it a bit silly and counter-intuitive that the article associates reducing the risk associated with resource-led growth (implied volatility) with fiscal discipline (implied austerity), citing the financial crisis during which we pursued very aggressive counter-cyclical fiscal policy to effectively try to minimize cyclical volatility.

    Secondly, what just plain annoys me is the assumption everywhere that following a growth path dictated by foreign demand for our resources exports is the best trajectory for Australia anyway. Is there empirical evidence to back this popular assumption? There is certainly plenty of evidence out there about the (social and economic) problems associated with resource dependency.

  9. Andrew c
    October 20th, 2010 at 23:14 | #9

    Ryan

    That paragraph was written by Michael Stutchbury, a writer at The Australian, not by John.

    Apart from that, I agree with your points.

  10. jquiggin
    October 21st, 2010 at 06:04 | #10

    A few responses from me

    Let’s remember one thing. The 20-plus economists who signed John Quiggin’s statement do not all oppose the Queensland Rail privatisation … Talk about spin

    It was made very clear at the time the economists’ statement was issued that the object was to criticise the government’s misleading and spurious case for privatisation and not to take a position for or against the asset sales. In fact, I myself supported one of the asset sales (forestry) and was undecided regarding QR until the actual proposal, with all of the faults noted by Stutchbury, was announced.

    And let’s suppose that a private operator would clean out some of the inbred inefficiencies (as implicit in Quiggin’s suggestion that the AWU has sold the other unions down the river)

    This is very revealing regarding Stutchbury’s thinking. If an employer (even one who is the sole operator in an industry) can beat down wages and conditions by union-busting that proves (in Stutchbury’s view) that the pre-existing situation was inefficient and wasteful. My general observation would be that over the past 30 years or so, growing waste, overpayment and ineffiency among top managers has pretty much offset any efficiency gains from the elimination of “restrictive work practices”

    Government can help minimise the risk by maintaining fiscal discipline and maintaining a strong credit rating

    In what sense does selling assets constitute fiscal discipline, particularly if, as seems likely much of the proceeds are dissipated in electoral bribes.

    Final observation: Stutchbury appears to interpret Ken Henry as saying that if governments are lying but the policy they support is a good one, economists should line up behind the government and not mention the lies. I don’t think this is what Henry meant.

  11. BilB
    October 21st, 2010 at 11:08 | #11

    If the objective of the sale was to improve rail performance then is a ham fisted method of achieving this. Rail are roads jast as highways are roads, only narrower and less extensive. A far better method to improve rail throughput would be to allow private operators to invest in rolling stock and engines, and utilise the same rail beds. This way if private industry can improve efficiency they would have the method to prove this. In the so doing overall performance would improve as competition led the way to best efficiency, or not. How ever an outright sale leaves open the path to the other kind of private enterprise, asset stripping, as occured in New Zealand.

  12. trout
    October 21st, 2010 at 12:32 | #12

    “Let’s say QR has been run less than efficiently – does anyone seriously doubt this? And let’s suppose that a private operator would clean out some of the inbred inefficiencies.”

    I’ve always found this kind of argument to be quite strange. That is, those who have a leaning towards free markets using the following train of thought.

    1.) The public provision of a good or service is inefficient for reason x
    2.) A private operator would correct inefficiency x
    3.) Hence, privatisation is desirable in this industry

    In a lot of cases, these people are correct in step 1 and 2. But what they fail to see is that leaving it to the market creates a completely new set of problems. So, it’s not enough to say that the private operator would fix the inefficiency associated with public provision. What needs to be shown is that the problems associated with private provision are more desirable then those associated with the public sector.

    Of course, the argument works the other way around as well.

  13. Ikonoclast
    October 21st, 2010 at 12:56 | #13

    The real goal of ideological privatisation proponents has been, is and always will be the transfer of wealth. Their protestations about efficiency are just obfuscation.

    Those who make case by case arguments for certain privatisations may have different motivations. But where the blanket argument is used, the reasons are the self-interest of the monied class.

  14. October 21st, 2010 at 12:57 | #14

    Let the Fisking begin.

    Stuchbury begins by playing the man, not the ball, by attacking the credibility of the “eminent economists” who oppose the QR sale, who are somehow tarnished by association with various guilty parties:

    But gathering together a bunch of eminent economists behind a position that inevitably would be seen as being against the sale is a clever way to fan the opposition, stretching as it does from the opportunistic stance of the LNP, to the rail unions’ desire to maintain public ownership featherbedding, to the Queensland traditions of rural socialism practised on both the right and the left. Talk about spin!

    So political opponents of the QR sale are guilty of…political spin! Plato, call your office, it appears that humans are venal creatures after all.

    But even this criticism does not hold any weight, because there is a world of difference between the measured opinion of disinterested economic experts and the rag-tag bunch of interested parties that Stuchbury reels off (“opportunistic L/NP…featherbedding rail unions,,,Queensland rural socialism”). Stuchbury offers no reason why economists suddenly decided to throw in their lot with this allegedly disreputable bunch.

    And its not as if the political proponents of the QR sale are completely without sin, er I mean spin. The usual suspects of privatisers include a spend-thrift government trying to plug a hole in mismanaged finances, various financial bottom-feeders trying to get rich quick by snapping up distressed sale of the family silver and the Murdoch press which never saw a union it didn’t want to bust.

    Its not as if the record of privatisers over the past generation has been squeaky clean. Did someone mention Russia and Andrei Shleiffer?

    Let’s say QR has been run less than efficiently – does anyone seriously doubt this? And let’s suppose that a private operator would clean out some of the inbred inefficiencies (as implicit in Quiggin’s suggestion that the AWU has sold the other unions down the river)? If so, then the asset will be worth more in private hands. That’s just another way of saying that governments have enough to do without operating coal freight.

  15. October 21st, 2010 at 13:12 | #15

    Let the Fisking continue…

    Michael Stuchbury said:

    Let’s say QR has been run less than efficiently – does anyone seriously doubt this? And let’s suppose that a private operator would clean out some of the inbred inefficiencies (as implicit in Quiggin’s suggestion that the AWU has sold the other unions down the river)? If so, then the asset will be worth more in private hands. That’s just another way of saying that governments have enough to do without operating coal freight.

    For arguments sake, lets agree with Stuchbury’s premise, that the private sector can run QR more efficiently than any conceivable public sector agency. That is, for a given stock of capital, a capitalist QR can produce the same revenue for less cost or it can increase revenue at the same cost. Either way, implying a better Return on Investment (ROI) under private capitalist hands.

    That would be good news for the new QR shareholders. But it does not necessarily benefit the Queensland voters. The improved return would be almost totally captured by the new shareholders, it would not necessarily flow through to Queensland voters in the form of a higher share price.

    In any case, revenue income is most likely fairly inelastic to shareholder proprietorship. The main financial difference would in cost savings, with lots of deadwood being pruned. The substantial cost savings would flow into the pockets of share-holders rather than railway workers, who would be thrown onto the scrap heap.

    Of course this is hypothetical. We havent seen much in the way of figures showing that QR is substantially over-manned compared to similar railway agencies. In fact Stuchbury’s response is remarkably statistical fact-free which is a worry in an economist.

    But even if QR was over-manned this provides no ironclad justification for privatisation. The asset can just be corporatised or simply go through a shake-up at the hands of the infinite number of management consultants at the disposal of the QLD government. I’m sure they could reccommend staff cuts which any capable public sector manager on bonuses could implement standing on his head.

    Why go through all the expensive bother of flogging off the asset to business, unless business wanted to profit from these staff cuts? But in that case, welfare economic theory implies that the public sector should shed the staff and reap the cost-savings, passed onto the public in the form of either lower charges or increased operating surplus.

  16. Ryan
    October 21st, 2010 at 13:15 | #16

    @Andrew c

    Hi Andrew, that was pretty clear. Thanks anyway :)

  17. Alphonse
    October 21st, 2010 at 13:21 | #17

    Stutchbury:

    Government can help minimise the risk by maintaining fiscal discipline and maintaining a strong credit rating – as evidenced in the global financial crisis.

    Did not the GFC evidence the fact that strong credit ratings are what non-government players give to instruments of financial destruction while they downgrade government ratings for purely ideological reasons? (I don’t dispute that they may have done this efficiently)

    As for privatisation in general, did not the Telstra debacle tell us that it is a bad idea to privatise vertically integrated agencies instead of splitting them up?

  18. October 21st, 2010 at 13:31 | #18

    More Fisking…

    Michael Stuchbury said:

    Some might still be able to suggest that the state budget would suffer if the public ownership has been acting like a monopolist, for instance tolerating union featherbedding and by reducing capacity in a way that caused the first China boom bottlenecks…But of course the budget also is affected by the taxable income of the taxpaying entities in its jurisdiction. It doesn’t help the budget bottom line for the government to be running a rail freight monopoly that crimps its biggest industry.

    “Some might say” this or that, why the need to coyly invoke these anonymous sources to prop up ones arguments. Journalists cite live verifiable sources, they are not supposed to base their stories on channeling unnamed third parties.

    Infrastructure bottlenecks certainly crimped NSW coal exports. But these bottlenecks are mainly at the port railhead. They are not deficiencies in rolling stock or railtrack. There is certainly a case for increasing the size of Queensland’s port terminals. The one at Dalrymple Bay is clearly over-whelmed.

    But again, these facilities in the past can and have been managed adequately by the public sector. Its only since the unprecedented PRC boom has escalated that the call has come for privatisation.

    This is simply a bunch of capitalists muscling in on the governments lucrative business. Picking the eyes out of the business now that it is taking off. Just as capitalists have done in the past to other lucrative monopoly utilities – the phone companies, gas and electricity companies etc.

    Liberal journalists bang on about the bracing effect of free enterprise competition. But when it gets down to brass tacks they always seem to want business to take over a government monopoly, licence to print money. Talk a good game but dont really play it.

  19. October 21st, 2010 at 15:16 | #19

    There is a very good reason why I, and increasing numbers of Australians, choose to deliberately avoid all Murdoch press and TV.

    We choose not to be exposed to its discredited, self-confessed bias and frequently dishonest output.

    I am certain that I am not the only one who therefore gets annoyed at the degree of time and space they continually get given on places like the ABC.

    You have your own massive media conglomerate with a functional monopoly on my state’s press and control not only 70% of Australia’s press but seem to have an informal arrangement with ABC radio whereby they read your papers in the place of doing their own journalism.

    I don’t come here to read Murdoch’s output.

    Sorry , but I wish you’d leave them out of this place, where they are allowed to pervade any discussion they try to control the debate and set the agenda.

    “Some” would prefer them to stay in their own place so they can be assiduously avoided.

  20. Ryan
    October 21st, 2010 at 15:36 | #20

    We still have Dateline once a week Megan

  21. stockingrate
    October 21st, 2010 at 22:00 | #21

    “Australia is a capital-importing economy.”This is rotund jargon in search of an outlet and could be restated thus: Australia is a country choosing to sell off equity and mortgage its future even though export prices are very high. If we hit limits in borrowing then we need not tighten our belts – just sell a bit more of the farm to keep the consumption binge going.

    “Government can help minimise the risk by maintaining fiscal discipline and maintaining a strong credit rating – as evidenced in the global financial crisis.” More rotund jargon strung into an article.
    Firstly the QLD government has not had fiscal discipline as evidenced by the massive growth in state debt ($65Bn now?) during a period of high export prices and high tax take from what may well be a real estate bubble. Secondly selling down income-producing assets to fund, in-part, current expenditures and non-income “infrastructure investments” such as the Commonwealth Games (circus for the voters and indirect handouts to building unions workers and managers and real estate developers) cannot sensibly be associated with the term.

  22. October 22nd, 2010 at 08:36 | #22

    stockingrate @ #21 said:

    Firstly the QLD government has not had fiscal discipline as evidenced by the massive growth in state debt ($65Bn now?) during a period of high export prices and high tax take from what may well be a real estate bubble. Secondly selling down income-producing assets to fund, in-part, current expenditures and non-income “infrastructure investments” such as the Commonwealth Games (circus for the voters and indirect handouts to building unions workers and managers and real estate developers) cannot sensibly be associated with the term.

    Good point. QLD is in the only state in a real hole after the GFC, because QLD is always in a hole after a property collapse.

    Quelle surprise.

    Ever since the year dot the QLD economy has moved in fits and starts in response to real estate bubbles. The QLD government finances were temporarily buoyed by stamp duty revenue and the like so it busted up big and now finds itself maxed out on the state credit card.

    So like any improvident spender it starts to sell assets in order to finance current expenditure. Instead of selling off the family silver the QLD government should put its own fiscal house in order. It needs a good dose of austerity economics, or better still, put a stop to pointless grandstanding with its major projects and other sundry forms of state boosterism.

    QLD citizens should not pay for the greed of its financiers and the ineptitude of its fiscal managers. Joh Bjelke-Petereson, for all his faults, would never have countenanced this outrage.

    Joh for Premier.

  23. john
    October 22nd, 2010 at 09:23 | #23

    What, minor faults like collaborating with police to run brothels and drugs, and malapportioning electorates so he one with 30% at highest? Faults like that? Faults like letting the police beat people to death, and enacting segregation laws on Aborigines. Nah, don’t worry about Bje;ke-Petersen being the most corrupt and evil politician Australia has seen, he not as bad as Anna Bligh, right?

  24. James Haughton
    October 22nd, 2010 at 11:05 | #24

    I suspect that a privatised QR will be the same as a privatised British Rail, a privatised Telecom and every other privatised infrastructure monopoly out there.

    The new private owners will appoint managers who produce “massive savings” by sacking half or more of the engineers and maintenance staff and stripping out R&D, long-term planning, high-quality materials and workmanship, etc. They will report a record dividend to shareholders and double all managerial salaries to reward themselves for their hard work increasing the unemployment queue. In five to ten years time when the under-maintenanced and aging trains start going off the rails and killing people, all the managers who made these decisions will already have taken golden handshakes and moved on to the next plunder, rape and pillage target.

    At least when the Vandals, Mongols, Huns etc were invading we shared a clear understanding of the enemy and their policies.

  25. Sam
    October 22nd, 2010 at 11:24 | #25

    @James Haughton
    Hear hear! I’ll just repeat what I’ve said in previous posts though. This is one industry that I actually want to do badly, because of coal’s enormous role in climate change.

  26. Monkey’s Uncle
    October 22nd, 2010 at 15:31 | #26

    John, I guess Jack’s attitude is ‘Joh may be an SOB. But he is our SOB’. It seems that for some of the ‘free markets are evil’ brigade any crook is preferable.

    Or is it a case of ‘no enemies on the corporatist, protectionist right’?

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