Home > Economic policy, Oz Politics > Quiggin and Catallaxy vs Newman and Bligh

Quiggin and Catallaxy vs Newman and Bligh

March 1st, 2014

I’ve had a few responses to my recent report on the history of electricity privatisation and market reform in Australia. There’s one here from Lynnette Molyneux, who’s with another research group in my own school, and one from the Electricity Supply Association (doesn’t seem to be online, I’ll post a link shortly). Most interestingly, one from Sinclair Davidson at Catallaxy[1] who starts with a couple of points of agreement.

A couple of thing where we agree:

Economists, at least when they were thinking clearly and speaking honestly, were as one in rejecting the most popular political reasons for privatisation: as source of cash for governments or a way of financing desired public investments without incurring public debt.

I made a similar argument recently in New Zealand.

Then he is critical of Public-Private Partnerships. I am too – albeit for different reasons. All too often, I suspect, they are financing mechanisms looking for infrastructure to finance, as opposed to being a positive NPV infrastructure project looking for financing.

before going on to quibbles and more substantive criticism.

I’ll try to present a proper rejoinder to the criticisms later, but for now I want to observe the striking fact that the point on which Davidson and I, and (AFAICT) all Australian economists, agree is also the focus of agreement between Campbell Newman and his predecessor, Anna Bligh, along with Peter Costello, Barry O’Farrell, and the great majority of Australian politicians[2]. The only problem is that the politicians agree on a view exactly opposite to that of the economists

Newman was on TV tonight, saying that unless we had asset sales, Queensland would need to raise taxes and charges, be unable to fund new investments in hospitals and so on. Five years ago, the Bligh government, pushing for the sale of Queensland Rail, port corporations and so on, issued a booklet called “http://www.brisbane.apana.org.au/~cpds/Documents/External/AssetSalesMythsFacts.pdf” which asserted, among other spurious claims that

‘Keeping these businesses would cost the Government $12 billion over the next five years. That’s $12 billion spent on new coal trains and new wharves that can«t be spent on roads, schools or hospitals.

Bligh’s argument was rejected by more than twenty of Australia’s leading economists in a statement I organized at the time.

The sales went ahead. But as the LNP was eager to point out at the time, the asset sales program was based on a lie. There was no net improvement in the government’s financial position, and no money for extra schools and hospitals. The electoral consequences were disastrous, and the LNP was elected with a thumping majority. But, as Labor had done in 2009, they immediately discovered a financial crisis and began a campaign for asset sales. (To be fair, Newman has kept his promised not to sell major assets before the next election, unlike the promises he made to public sector workers).

And, rather than offer a coherent argument to the effect that privatisation would produce greater efficiency and competition (it won’t for the assets being looked at, but at least it’s logically possible), Newman has fallen back on the same tired fallacy politicians have been pushing for 20 or 30 years, that privatisation is an easy alternative to the hard work of raising enough revenue to finance necessary public expenditure.

It really does seem like a cross between Whack-A-Mole and Groundhog Day. But, so far, almost every time this nonsense has popped up from its subterranean home, the voters have been happy to knock it on the head. The polls suggest they may do so again next year

fn1. As always, this post is not an invitation for attacks on, or discussion of, Sinclair Davidson or Catallaxy. Please respond only on the topic of the post, namely the bogus case for asset sales

fn2. The main exception being the remnants of Queensland Labor. At the launch of my report, Shadow Treasurer Curtis Pitt finally addressed what he called “the elephant in the room”, saying that privatisation was not merely bad politics (that’s obvious) but also bad policy.

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  1. March 1st, 2014 at 20:13 | #1

    Don’t asset sales deliver short term gains to government budgets? Or is not even that valid?

  2. John Thompson
    March 1st, 2014 at 20:32 | #2

    The fire in the coal mine at Morwell provides an interesting perspective on the privatisation of electricity assets. The mine is part of the assets sold off by the Kennett government and since that time we have seen electricity prices increase very substantially. As a significant part of the population of the town is now being advised to evacuate their homes for health reasons, it will be interesting to see (a) what liability is attached to the owners of the mine to meet the very significant costs of the local community, and who are drawing on the resources of the state government to try to extinguish the fire, and (b) what responsibilities were not met by the state government supervisory agencies that apparently did not check or enforce the safety measures the company was required to maintain.
    The fire is having a huge economic impact on the town while it is not extinguished. No doubt the Victorian taxpayer and the electricity consumer will have to pick up a very substantial tab that this major incident will incur.

  3. John Quiggin
    March 1st, 2014 at 20:37 | #3

    John Brookes :
    Don’t asset sales deliver short term gains to government budgets? Or is not even that valid?

    Not if the budgets are drawn up in the standard way with separate current and capital accounts. Assuming the assets are sold at their market value, and the proceeds used to repay debt, there is no immediate change in the government’s net worth. The long-run effects on the budget depends on whether the earnings of the asset exceed the interest savings from repaying debt.

  4. March 1st, 2014 at 20:46 | #4

    @John Quiggin

    So they do dodgy accounting?

  5. Megan
    March 1st, 2014 at 22:13 | #5

    I’m in the middle of re-reading Naomi Klein’s “The Shock Doctrine – The Rise of Disaster Capitalism”.

    This is text-book Chicago Boys stuff.

    And as an aside, looking for example at the ALP’s ‘we’d be tougher on removing your rights’ stance, I’m not so sure about this:

    the voters have been happy to knock it on the head. The polls suggest they may do so again next year

    The actual result will be an LNP reduced majority rather than ALP win (or possibly – if the voters are really angry – an LNP/Palmer/Katter/Other government).

    The ALP will remain in opposition in Qld for a very long time because they so comprehensively screwed anyone of a ‘left’ persuasion. Sadly, the Greens in Qld are rightly seen as ALP stooges.

  6. derrida derider
    March 1st, 2014 at 22:20 | #6

    @John Brookes
    Definitely. Booking an asset sale as income is something ASIC would be right on your hammer about if you were a private company.

  7. derrida derider
    March 1st, 2014 at 22:27 | #7

    @Megan

    This is text-book Chicago Boys stuff

    The whole point of the OP, Megan, is that Chicago Boys would never promote privatisation on these particular grounds (ie that it somehow creates government income from nothing). Because after all Chicago Boys want governments to divest assets because they want to make government smaller, not bigger.

  8. Megan
    March 1st, 2014 at 22:49 | #8

    @derrida derider

    I’m missing your point.

    The selling of public assets is core Chicago Boys stuff. So is the propaganda about debt emergencies or whatever. So politicians lie to ram through actions that might cause public unrest if they told the truth about their true motivation.

    The policies are pure neo-con, and the propaganda is stock standard in a country pretending to be a functioning democracy.

  9. Collin Street
    March 2nd, 2014 at 08:30 | #9

    > The long-run effects on the budget depends on whether the earnings of the asset exceed the interest savings from repaying debt.

    But at that price noone would buy, given that states pay less interest than private-equity operators.

    [I would have thought, "why does my counterparty think that doing the exact opposite of what I'm doing is a good idea?" was a pretty fundamental question when you're making investment decisions.]

  10. John Quiggin
    March 2nd, 2014 at 09:02 | #10

    @Collin Street

    Private buyers would be willing to pay a price higher than the value in continued public ownership if they thought they could increase profits sufficiently to offset their higher cost of capital. This might be because of greater efficiency or because of greater capacity to extract monopoly profits. Obviously the first case is the one where privatisation is beneficial.

  11. Ikonoclast
    March 2nd, 2014 at 09:49 | #11

    We need to ask ourselves about the big picture. Both major parties favour major public asset sales and sooner or later push them through while in government. The majority of the electorate has shown it does not want more major asset sales. This is after the public has been bitten and hurt by major asset sales in the 1990s. So, our two party quasi-dictatorship delivers outcomes the majority do not want. How does this happen? It’s simple. The two parties have been bought by corporate capital. They do the bidding of capital against the wishes of the people.

    The people apparently do not understand enough to know they should abandon those parties that are bought by corporate capital. Instead the public keeps flip-flopping thinking that the opposition will be different when they become the government.

    These events are consistent with the capture of parliamentary democracy by late stage capitalism. Until people realise that capitalism itself is the problem they will have no chance of changing this dynamic. Capitalism is inherently undemocratic. The wealthy few rule public policy (where it relates to money and ownership) rather than the majority of the people. The proof is in the pudding. The will of the majority is against the sale of major public assets, particularly public utilities and major infrasctructure. The will of the wealthy (corporates, oligarchs, plutocrats – call them what you want) is for the sale of these assets. Which will is prevailing? People, the evidence is plain and straight in front of you. The will of the wealthy is prevailing against the will of the people.

    Prof. J.Q. has done excellent work but being correct and empirically supported is not enough. The problem is entirely and inherently systemic. It is the system (capitalism) that needs to be changed. This is a political economy problem not an economics problem.

    Whilst I don’t expect J.Q. will agree with Marxist analysis, I would like to see it conceded that some sort of systemic problem and conflict exists with and between Australian parliamentary democracy and the separate system of capitalist ownership and the power that ownership confers. Why can’t the people elect a government which will enact the will of the majority? What are J.Q.’s views on this and on how could it be rectified? When a blog bills itself as commentary from a social-democratic persepective there ought to be some analysis offered of theory and praxis. What is the social-democratic solution to this since parliamentary democracy fails to deliver a solution?

  12. March 2nd, 2014 at 10:21 | #12

    John it’s a disagreement between evidence-based scholarship and John Howard’s common sense at the pub test. No contest.

  13. sunshine
    March 2nd, 2014 at 11:37 | #13

    Iko you say it good….

    So, our two party quasi-dictatorship delivers outcomes the majority do not want.

    But Im concerned just what the will of the people may be these days . Im not sure what the polling numbers are on asset sales . .Apparently 25% still want asylum seekers treated more harshly .Australias most influential media personallitys (Bolt -according to Crikey) TV show has gone to a 1 hour format now. On the positive side -Malcolm Turnbull gave Murdoch and the Australian a terrific spray at the launch of the hopefully successful Saturday paper.

    This is a political economy problem not an economics problem.

    This seems correct to me . I did an accounting degree a long time ago before I ‘ tuned in, turned on, and dropped out’ but Im just a semi informed observer as far as nuts and bolts macro economics goes . I think Abbott is planning to buy a couple of drones for $3 or $4 billion to further secure our borders, and a new round of kicking the unemployed (because we cant afford them) is starting. Its a question of priorities .

  14. J-D
    March 2nd, 2014 at 14:48 | #14

    An asset sale might be a good deal financially when the other party to the transaction can be played for a sucker, as famously in the case of Kerry Packer, Alan Bond, and the Nine Network. But as Packer equally famously pointed out in that case, big opportunities of that kind are once-in-a-lifetime-type deals. Also I somehow find it easier to imagine governments playing the role of Bond than the role of Packer in a story like that, although I admit I can offer no justification for this suspicion.

  15. Jim Rose
    March 2nd, 2014 at 15:26 | #15

    Good to see that everyone agrees that governments are terrible at owning businesses.

    Screws up and politicises the simplest task of ownership which is selling the business. Imagine what follies and rent-seeking occur further away from the public eye?

  16. March 2nd, 2014 at 15:29 | #16

    @J-D

    I don’t know. The sale of T2 was pretty good work by the government at the time.

  17. John Quiggin
    March 2nd, 2014 at 16:15 | #17

    @Jim Rose

    Jim, if you can’t offer more than snark, just don’t bother posting

    John Brookes :
    @J-D
    I don’t know. The sale of T2 was pretty good work by the government at the time.

    As I pointed out in 1999, the sensible thing to do was to sell off the inflated internet assets, and buy back the rest

    Fortunately, the ‘new economy’ bubble, while it lasts, provides a solution to this dilemma. Telstra’s local, long-distance and mobile assets currently account for around half its market value. The other half is the ‘new economy’, including pay-TV and Big Pond. The incoherence of Telstra’s recent management is due as much to the internal conflict associated with the combined roles of content carrier and content provider as it is to the mixture of public and private ownership.

    Splitting Telstra would not only make good commercial sense, but would provide a simple route to renationalisation. Private shareholders could be offered the choice of shares in the ‘new Telstra’ or repurchase at a price equal to the average received by the government in its two sell-offs. After disposing of any residual holding in ‘new Telstra’, full public ownership of the core telecommunications network could be restored without any net public outlay.

  18. geoff
    March 2nd, 2014 at 17:38 | #18

    Hi John

    You say “To be fair, Newman has kept his promised not to sell major assets before the next election, unlike the promises he made to public sector workers).”

    But hasn’t he been selling off CBD buildings, not to mention coastal properties in the form of redevelopments as at Kirra and at Cleveland?

  19. paul walter
    March 3rd, 2014 at 01:56 | #19

    Delicious!

    Reading it makes me think of the ALP trying to hold governemt in SA, the same streak of pig ignorant stubborness leading to the current predicament is manifest.

  20. rog
    March 3rd, 2014 at 09:27 | #20

    When is an asset sale not an asset sale? When it’s a lease

    In NSW BOF is caught between pushy Libs and adverse polls re asset sales. Using a lease provides capital without losing an asset and some of this capital is to be reinvested in a traditional ALP stronghold, Newcastle.

    Or so it would seem, one wonders at the income stream that the Port currently generates and if a lease would be more cost effective.

  21. rog
    March 3rd, 2014 at 09:35 | #21

    @John Brookes The benefits of the sale of Telstra are debatable, under various CEOs TLS moved from providing a service to providing a return to shareholders. The creation of the NBN was in part due to the frustration of dealing with TLS and the subsequent cost of the NBN should be offset against gains made in selling Telstra.

  22. derrida derider
    March 3rd, 2014 at 16:49 | #22

    The point here is NOT whether privatisation is in principle a good or a bad thing. As John points out if it in fact results in more competition it is usually a good thing. Even if it doesn’t if the government is sufficiently incompetent and the new monopolist sufficiently competent (both, pace Jim Rose, something that is far from a given) it might still be worthwhile.

    But even the Jim Roses of this world understand that an asset is not income – selling it doesn’t “free up” money for more government spending elsewhere. After all Jim wants LESS government spending, not more. It’s important, Megan, to understand where your opponents are coming from – those neoliberals certainly want governments to sell assets to their friends, but they don’t want governments to use it to permanently expand elsewhere on the temporary proceeds.

    But the pollies OTOH are just trying to sell it as a Magic Pudding, no doubt relying on peoples’ ignorance of elementary accounting.

  23. Paul Norton
    March 4th, 2014 at 07:00 | #23

    After this temporary outbreak of sanity, Catallaxy has swung back to type with a vengeance. The latest thread by Steve Kates – barking mad in its own right – on the Ukraine/Crimea crisis has generated a Godwin in the very first comment and a thread drift to the looniest extremes of the Israel-Palestine argument in the very next comment.

  24. sunshine
    March 4th, 2014 at 08:37 | #24

    Comparing public to the best examples of private ownership could be a losing game in the long run if maximum efficiency (measured primarily in terms of $) is the only acceptable standard of judgement .As long as we insist on maximum growth and keep pretending we are broke we may be painted into a corner on that.

    Neoliberals have a track record of making government bigger in several ways like policing ,military ,image management ,surveylance ,jails etc -anything to do with protecting the current power relations .

    Our democracy is broken.

  25. The Age
    March 5th, 2014 at 22:41 | #25

    Prof Quiggin, I thought the main reason a Government might want to privatise an asset was because a private company can get in a fight with unions and ‘default’ on public expectations in a way that a government can’t. This allows for profits that are irrecoverable to a government owner. Am I wrong? Where would this fit in your ‘greater efficiency or greater capacity to extract monopoly profits’ model?

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