Home > Boneheaded stupidity, Economic policy > Asset sales, yet again

Asset sales, yet again

April 12th, 2014

Among the most unkillable of zombie ideas is the belief that governments can solve their fiscal problems by selling assets. What’s particularly surprising about this belief is that it is most strongly held by the kind of politician who likes to talk as if government and household budgets are exactly the same. But would anyone suggest to a household struggling to make ends meet that it would be a good idea to cash in the super, or sell the house and rent it back from the new owners, in order to pay off the credit card? The advice of course, would be to get your expenditure and income in line before addressing the debt problem.

I’ve written yet another paper making this point, which, along with my recent post on capital recycling, got a run from Paul Syvret in the Courier-Mail. Nothing new for those who’ve been paying attention, but, clearly, lots of people haven’t been.

  1. Ikonoclast
    April 12th, 2014 at 10:40 | #1

    The politcians don’t listen to the people in this matter. The majority of the public don’t want assets, especially public utility assets, sold. The politicians don’t listen to economists in this matter. I recall public letters against such asset sales, signed by prominent, well-credentialled academic economists.

    So it begs the question. Who are the politicians listening to and why? Ideas matter, so economists like Prof. J.Q. have to keep making the case against blanket asset sales. But something else is wrong too when the ideas of the majority in a democracy fail to be enacted. Something other than power of ideas and of demcoracy is at work here. No prizes for guessing it is the power of concentrated, privileged money. But how do we turn it around?

  2. bjb
    April 12th, 2014 at 12:50 | #2

    Thank you JQ for once again providing a rational analysis of the (usual) nonsense governments peddle in the case for selling public assets.

    A few months back when it was put to Treasurer Nicholls that there would be no need to sell any assets if the level of payroll tax (I think ?) was raised to be in line with NSW, Nicholls’ response was that he was categorically ruling out raising taxes. You’d think if someone was genuine about resolving some problem, they’d look at all possible solutions and not only one side of them.

  3. sunshine
    April 12th, 2014 at 13:24 | #3

    Its a pretty simple message for simple folk. They say govt is too big and intrusive. It needs to balance the budget so we dont crash like Greece and future generations wont have to pay back our debt. Said over and over .

    That message is cover for reducing governments role to simply ensuring property rights .

    Standing in the ‘designated protest area’ wont work. Do we have to wait for the day the real world butts in and spoils the party ?.

  4. iain
    April 12th, 2014 at 13:35 | #4

    Mostly sensible. However, I’d support electricity asset sales for the simple reason that the days of our inefficient transmission & distribution system are numbered.

    Impossible to logically promote solar / 100% renewable / local distributed electricity production etc – and not support the sale of some assets, here.

    Slight side note; with fracking now linked to earthquakes, and, by extension, geothermal now in similar difficulty – then both 100% renewable boosters in Australia (who rely on fantasy geothermal numbers) and unconventional fossil fuel boosters will now be pitted in the same corner — with hydrogen in the likely opposite corner.

  5. Gerard
    April 12th, 2014 at 15:05 | #5

    The problem iain is that they will sell the power assets and then use regulations to lock in future returns. This is what they are already doing. So selling the power network actully makes it less flexible and adaptable than government owning it.

  6. paul walter
    April 12th, 2014 at 18:18 | #6

    @Ikonoclast
    Good one Ikon.. that is how I would approach it, too. The way they do it obscures the actual value of the resource or process up for sale, as is intended.

  7. Megan
    April 12th, 2014 at 19:57 | #7

    @Ikonoclast

    Yes, we have a very big problem with our “democracy”. As you say:

    No prizes for guessing it is the power of concentrated, privileged money. But how do we turn it around?

    And Sunshine at #3 makes a similar point:

    Standing in the ‘designated protest area’ wont work. Do we have to wait for the day the real world butts in and spoils the party?

    “We” need to do a variety of things. Protesting is one such thing, but there are almost limitless other things that can be done.

    I am of the firm view that it is fatal/futile to leave it to our establishment politicians and their megaphone media corporations. They want you to believe 3 things:

    1. Resistance is pointless;
    2. If you have an issue you must vote for either of ALP/LNP but nobody else; and
    3. You should direct all concerns and correspondence through the establishment media (Fairfax, Murdoch, ABC, SBS), and nowhere else.

    But if any of that were true then, logically, they wouldn’t expend so much money, time and effort to convince us of that “reality”.

    Consider for example our friendly trolls. They aren’t here to have a discussion with you. They’re mainly here to disrupt civilised discourse and divert the lurkers from getting too interested.

    Just plucking a figure from out of the air, in the US the fossil fuel lobby spent $500million in 09/10 on climate denial propaganda. Worldwide, and on a much broader range of issues, the amount expended are huge.

    Why would they bother if they weren’t terrified of you?

    Think of yourself as a grain of sand in a sand-blaster. If you weren’t there – what difference would it make to stripping away the corrosion?

    But if there were no grains of sand…..

  8. April 12th, 2014 at 23:04 | #8

    We seem to be acting like a household with expenditure exceeding income, and we’ve decided that rather than earning a bit more money, we are going to sell the house. And to drag a dodgy analogy further, we are cutting our expenditure on food, while the wine budget remains untouched.

  9. yuri
    April 13th, 2014 at 00:51 | #9

    Sometimes the asset sales can be justified in part by one of the arguments for the kind of restructuring, including reduction in the number of entities, that took place in Victorian local government in the early 1990s.
    Against those who said the needed efficiencies and economies could be achieved by twigs it was argued that the 150 year old structures and the habits they had bred and harboured needed a festival of creative destruction.

    Another point about the apparent foolishness of selling an asset which returns to the state, perhaps because of uncompetitive pricing, more than the bond rate is that the capital raised may, at the same time as preserving the state’s AAA rating, provide a kind of equity investment in new infrastructure which allows the capex to be augmented by money borrowed at the lowest possible interest. Then there is the point that the government may do well out of taking certain elements of the risks involved in new infrastructure while financing them with AAA rated bonds and then selling them on to superannuation funds which are seeking established infrastructure investments.

  10. Ikonoclast
    April 13th, 2014 at 07:01 | #10

    @John Brookes

    Yes, I wonder what sort of parent I would be considered to be if I had 5 kids and split my support of them the way this country splits its wealth. Child 1 would get just over 60% of all my financial support, Child 2 would get just over 20%, Child 3 would get just over 10% Child 4 would get about 5% and Child 5 would get maybe 1%. So Child 1 would go to a private school, get a nice car in grade 12, have the latest laptop, mobile phone, clothes etc. Child 5 would walk barefoot, almost in rags, untreated eye, ear, nose and throat problems, untreated dental problems, without school books or lunch to the local primary school. At the same time, I would boast about this wonderful “future fund” I had set up and stuffed full of money for the kids’ futures.

  11. Historyintime
    April 13th, 2014 at 17:32 | #11

    You need a good chart or info graphic about the course of net debt.

  12. April 13th, 2014 at 18:00 | #12

    Many firms rent instead of buying. This is all part of the make-or-buy decision.

    There are even corporate spin-offs. There is also out-sourcing. Some of the largest companies around are spin-offs. Yum! Brands, Inc is a spin off from PepsiCo.

    there is a large literature on value creation by spin-offs. The share price effect is positive.

  13. Peter Chapman
    April 13th, 2014 at 20:32 | #13

    Perhaps the point is not to actually “balance the budget” but to remove certain activities from government ownership, regulation and control, making those assets available to others. Other questions then arise. If the activities are not profitable in government hands, then what right-thinking capitalist would want to invest in them, other than to get them at a fire-sale price? And if the assets are profitable and a fair market price is secured, does that not take private capital away from other potential investments? Seems to me we will simply end up with assets and services in private control, no real promise of any improvement or better (market-based) management of those assets and services, and no private capital flowing to new activity.

  14. SJ
    April 14th, 2014 at 00:00 | #14

    Peter Chapman pretty much has it. Add in some fairly major corruption in the politicians that are doing the selling, the bankers doing the advising, and buyers themselves, and here we find ourselves.

  15. yuri
    April 14th, 2014 at 00:50 | #15

    @Ikonoclast
    I am intrigued to know what you mean by “the way the country splits its wealth?” Are you referring to the decisions implicit in state and federal budgets? If so, I still can’t make it add up.

  16. Tim Macknay
    April 14th, 2014 at 12:25 | #16

    WA’s Economic Regulation Authority has reanimated this corpse as well, recommending the sale of revenue-earning, natural-monopoly assets amid some other, more sensible proposals.

  17. derrida derider
    April 14th, 2014 at 12:30 | #17

    It’s the usual thing with privatisation – there are often respectable in principle arguments with real theoretic economic benefits but the incentives for the sellers created by the process means those theoretic benefits are rarely realised in practice. In particular, the effect pointed to by Gerard@5 (locking in future inefficiency in order to maximise the sale price) is typically made far worse where governments are focused on some quick cash flow rather than on future efficiencies. From this viewpoint it would be much better to do any privatisation when the budget is looking really healthy rather than when it is sick.

  18. April 16th, 2014 at 12:06 | #18

    I see Barry O’Farrell has resigned over his “memory lapse” re: the $3000 bottle of Grange and his evidence to ICAC yesterday that he never received the bottle from AWH.

    He denied it to the hilt yesterday but today he was shown his handwritten note thanking the AWH executive for the wine. He still doesn’t remember anything but has resigned to show how honest he is.

    So asset sales/privatisation etc…. of all our public goods is such an excellent proposition for us, the citizens, that it can only happen through lies, bribes, and political corruption?

    Not the best argument in favour.

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