Update 12/12: This was initially posted here and emailed to QIC on the morning of 10 November. As yet, no response. And, apart from a snark by Andrew Fraser, no public response to my piece in last week’s Fin pointing out that the government’s case for privatisation was entirely spurious
Dear Doug,
As you may be aware, I have been very critical of the “Myths vs Facts” booklet which is, as far as I know, the only document released by the Queensland government to present its case for sales of public assets. In today’s ABC News, you are quoted as supporting the sales and saying
It can curtail its spending on its infrastructure program and let service quality deteriorate, it can raise taxes to pay for the interest bill that’s building up, or it can rearrange its balance sheet – sell those assets which don’t have a particular need to be in Government hands and own assets that should be,
This statement appears to endorse the government’s claims that investment in non-income generating assets can be financed by the sale of income-generating assets, with no need for additional revenue to service the associated debt. In my view, these claims are obviously fallacious, and I would appreciate clarification on a number of questions. I think these questions admit an unequivocal “Yes” or “No” answer, with supporting argument if desired.
1. Do you believe that the “Facts and Myths” booklet presents a fair statement of the arguments for and against privatisation, offering Queenslanders sufficient information on which to make an informed judgement?
2. Do you endorse the statement 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.?
3. Do you regard the statement that “The total return from all five businesses in 2008-09 was approximately $320 million … When the sale process is completed, it is anticipated the Government will save $1.8 billion every year in interest payments” as providing a fair basis for assessing the fiscal costs and benefits of privatisation?
With my regards,
John Quiggin
Note: A previous version was addressed to Bernie Fraser, but Doug McTaggart’s comments appear more directly relevant.
John Quiggin 
I am unable to help with tracking Bernie Fraser down although I do see him on the TV occasionally spruiking financial products.
I haven’t read the booklet on privatisation either but I doubt that it mentions the ever rising prices at far greater than inflation rates, the lack of investment in infrastructure and new technologies, the profits repatriated overseas, the illusory savings, the Australian workforce reduction, no investment in training future workers and the overall reduction of services which all seem to be part of the privatisation deal.
Why is it that despite the GFC that the State governments are so wedded to the outdated financial products and devices that are encapsulated in privatisations and Private/Public Partnerships?The sleight of hand accountancy which became the norm in the noughties is alive and kicking boosted by the love of government for only telling the positives about any plan that they make. The spin makes people wild, but they expect no more from any opposition (with good reason) and meantime those friends who are making a bucket load of cash spread it around to help those who helped them.
PrQ,
Perhaps a counter question or two may be in order.
1. Given your near-constant (and at many times justified) criticism of many governments’ inability to understand the basics of economics, accounting and at times the law, why do you persist in believing that governments are the appropriate group to be running businesses?
2. Do you believe that there is a government out there that could, given the limitations and stresses inherent in any democratic system, manage businesses and the economy in such a way as to comply fully (or even fairly closely) with any economic theory?
@Andrew Reynolds
Better the devil you know than the banks you dont Andy.
@Andrew Reynolds
If inabiliity to understand the basics of economics were a disqualification for economic activity, we would all starve.
o spell it out, we have a choice between having the investment and pricing policies of large enterprises determined by governments or by financial markets. Neither is likely to do an ideal job. Which will do better, or less badly, is a matter to be determined on a case-by-case basis.
(actually, I see Alice has made the same point more succinctly).
I surely look forward to the reply.
PrQ,
I would agree that if a failure to understand were a disqualification then we would all starve – but that is not the question here. In the case of a government they have the ability to mandate the economic activity to be followed. No one else has that ability – not even a bank, Alice. Governments can force us to pay for their mistakes. Again, given their (aparent) inability to understand the impacts of their decisions, why do you believe them the appropriate persons to run businesses?
@Ernestine Gross
Me too… but my guess is ..the reply will go into the same black hole as the sale proceeds..never to be seen again.
Andy. I already answered that one (succintly too!). You dont need to repeat the question.
one of my two fingers slipped up again! Thats ..succinctly.
This bulldust about “the only way we can get the future income we need is to sell our income-generating assets” really does get me. I wouldn’t get so annoyed if I thought it was pure cynicism on governments’ part (dressing up the books for an election by moving stuff off-budget basically). But the Blighs of this world really do seem to believe they are genuinely fixing a budget problem.
There really are only two good reasons for privatisation:
(1) you think its a task the private sector can do just as well using fewer real resources than government; that is, you’re creating competition or doing something else that makes a real efficiency (sorry Jill, but “enabling workforce reduction” for the same output is a Good Thing – it’s how living standards rise).
(2) you reckon foreign investors are vastly overrating the income these assets can generate(ie there’s a bubble like the 1990s tech bubble) and you want to relieve the suckers of their money while you can (you can always buy it back cheaply later). So much for the Efficient Market Hypothesis.
None of these proposed privatisations have either of these motives.
@derrida derider
The sale by the Victorian Government of its electricity assets in the mid 1990s was an example of (2). It was highway robbery. I don’t think it’s a refutation of the EMH if buyers pay too much on a one-off sale.
@derrida derider
There is a third reason – corruption and too close relationships between governments and bigwigs. Yet the privatisation rampage just runs merrily along. In the end they will have nothing to sell. No income generating assets. The infrastructure will be in shambles and the resulting deficits will expose all the incomptent governments past and present. Then we get what we have been voting for. The market rhetoric and the unholy mess than goes with it and some disgusting little corporate dictators.
I am still very interested in a reply to the open letter.
@Alice
But given that the time horizon of governments is the next election, the unholy mess is beyond imagining for the stunted intellects of both the politicians and the corporate dictators. The extraordinary conflict of interest exhibited by McTaggart is worthy of some note, however. He’s (I think) the highest paid public sector executive in Queensland, presiding over a vast pool of taxpayers’ and public sector employees’ savings, on a private sector remuneration package. No doubt he’ll end up making the investment decisions in these sales, and equally no doubt, his personal remuneration will reflect any additional profits he can squeeze out of them through slashing jobs, ahem, cost cutting. I doubt whether even Peter Costello would be so brazen in his new role with the Future Fund.
Alice, to be fair, DD said that there were two good reasons. There’s any number of bad reasons. 🙂
@SJ
LOL SJ – I wasnt being rational (again!)
@Hal9000
Yeah – well Im very disappointed in McTaggart. I used to think he had a half decent textbook (not outstanding mind you – but passable).
@Hal9000
But then again McTaggart wasnt ever in the same league as Waud, Hocking, Maxwell, Bonichi or even in the same leaugue as Dornbusch and Fisher.
@Hal9000
Or Jackson, O’Connell..Jackson, McIver and Bajada…
Maybe McTaggart just wrote an ordinary textbook.
DD Says:
Not necessarily. Because of measurement errors, it can look like output is the same, and that GDP is either unchanged or increased, and thus that TFP for the country has increased, and so average living standards have increased. But what’s really happened is that GDP decreased (more precisely, rate of GDP growth was reduced), and it doesn’t become apparent until years later.
@SJ
Exactly SJ – all those workforce reductions add to unemployment / unemployment which is a lagging indicator, subject to a multiplier effect and GDP falls. (Duh!). Short term gain, long term pain…
DD There is no doubt that workforce reductions in many cases of privatisation haven’t helped service levels, profits or the nation. One of the great services that government instrumentalities have is the ability to create a more skilled workforce. Private companies are not inclined to do this because it cuts into the bottom line. The privatised electricity market has reduced employment. However is has increased the number of hours without electricity especially at times of peak load such as when it is very hot. The price goes up whilst service goes down and skilled workers go on the scrap heap.
I think the question I asked under “Fixing Queensland’s Budget” was worthy of an answer but perhaps it was missed. I’ll repeat the point here.
I agree with John Quiggin that governments should not sell public assets for a price below what they are clearly worth. An examination of future cash flows coupled with reasonable conservative judgements is the correct way to determine these things or at least get within the ballpark of a correct decision.
My question for John Quiggin and his many enthusiastic followers is quite simple. Why do you seem to apply a different logic when it comes to buying or building public assets? For instance if the future cash flows associated with the proposed National Broadband Network don’t justify the capital cost then why swap public money (cash asset) for a more poorly performing physical asset?
I’m a free market advocate. I think cutting taxes and other trade barriers is vastly more important that getting the government out of running businesses. However I do support the latter. If the price that private interest in the market place are willing to pay for a government owned business is below the worth of the business then the correct political solution in my book is to either corporatise or mutualise the business and then transfer ownership as a gift to all citizens (resident citizens in the case of a state government) in equal portion. At the last election this was the position that the LDP took with regards to getting the ABC out of government hands. Selling the asset for less than it is worth is equivalent to making a gift to the top end of town. And the government already gives far too many gifts of that nature.
@TerjeP (say tay-a)
Two points:
1) “social dividends” not captured in future cash flows.
2) a judgment call that the beancounters’ analysis is wrong – something businesses do on a regular basis as well.
Robert – us free market advocates can also pull out “social dividends” arguments in favour of getting businesses out of government hands. Shall we do “social dividends” arguments at ten paces? More to the point shouldn’t we expect some quantification of social dividends arguments. In the case of the National Broadband Network I’ve yet to see them add up to a good case for building an asset at a price above it’s worth.
I’m on Terje’s side in his particular issue – “social dividends” are speculative and unmeasurable and are as likely to run in the privatiser’s direction as not. Like “culture” they’re often the resort of people who are unconscious Burkean conservatives, fearing change.
Alice @20 falls for the classic lump of labour fallacy (as well as misunderstanding what a Keynesian multiplier is). Alice, labour markets just don’t work like that. Overall Australia destroys about 2 million of its jobs a year, but unemployment is not continually rising by 2 million a year. Indeed it’s not continuously rising at all.
@derrida derider
Ever heard of uneremployment DD? That has been and is rising. You can take the unemployment measure on face value if you like but I will not. Its a crock. They have recently changed it so the entire generation leaving high school this year cant get unemployment benefits unless they are “learning” but hey presto – once they are deemed to be “learning” (learning ??? If the kid wants to work “learning” usually means some two bit private sector employment agents hastily shot together two bit dodgier course —- oh and for the which the provider gets a nice little government subsidy and the poor unemployed kid still has to pay for the dodgy two bit course – and it wont be enough to get a job).
But the icing on that little sham, as regards the unemployment figure is (drum roll….) if the kid is “learning” he isnt counted as unemployed.
Hey presto !! – a generation of school leavers is “vanished” from the unemployment measure.
There is a sucker born every minute DD but its not me.
I meant “ever heard of underemployment DD”???
TerjeP (say tay-a) :
My question for John Quiggin and his many enthusiastic followers is quite simple. Why do you seem to apply a different logic when it comes to buying or building public assets? For instance if the future cash flows associated with the proposed National Broadband Network don’t justify the capital cost then why swap public money (cash asset) for a more poorly performing physical asset?
I apply the same logic in all cases. Obviously, the NBN is a risky investment, but it is justified only if the expected future returns equal or exceed the capital costs.
There is a particular problem with rural services – it has been accepted that we have to subsidise these . But whether or not you agree with this subsidy is a separate issue – the subsidy will be paid through a CSO either to private or public telecoms, and this CSO should be counted in the returns to the NBN.
Terje: I actually happen to agree with you, to some extent, on the NBN.
Much as the Telstra tax gives me the screaming willies, I think the benefits of the NBN have been oversold considerably.
@Robert Merkel
So do I, but then, how do the benefits of the NBN compare with the benefits of 25-40 billion worth of submarines?
If the government must spend/guarantee 43 billion on something, an NBN is not the silliest, especially if the roll out were coordinated with undergrounding power, regrading roads, fixing/upgrading water infrastructure, redoing street lighting, adding to/upgrading public housing stock etc
I understand the 40 billion is the figure for a network that would entirely duplicate Telstra’s. That’s needed as a threat, but the sensible outcome, which I expect to be realised is that Telstra and the government will come to a commercial agreement in which the existing network becomes the basis of the NBN.
Let’s grab the Telstra (partial) privatisation. Upon privatisation to 49%, Telstra was the behemoth of Australian telecommunications. At this point, free market activity couldn’t easily dislodge the monster, or rise to compete with it – it is just too big and has the infrastructure to the home, for most Australians at least. The Telstra strategy has been to milk the teats off of the old infrastructure milch cow, and to keep very high prices on the digital/optical assets which kept broadband use and innovation to a very low growth curve. Meanwhile our overseas trading partners were moving ahead of us in rapid strides. Australia paid a hidden cost of loss of innovation opportunities for the simple reason that the broadband freeways had ridiculously high tolls along the way.
For Telstra this strategy made sense, as it could squeeze every last dollar out of its copper network, while getting premium prices for lowband on a potentially fast broadband infrastructure. They played this strategy well, but at cost to the Australian public in both a direct dollars spent (on communications services) and hidden costs of discouragement of innovation and application development (such as TeleMedicine where realtime high resolution video is required, and fast transfer of a patient’s scans, eg MRI, with secure encryption services), but these hidden costs are probably as good as impossible to estimate with much accuracy.
Perhaps the government privatisation process should have involved a split of Telstra into Retail services and into Network Infrastructure services, or something. Given that both governments have taken private sector advice on strategy regarding the whole privatisation, I think if any mistakes were made – which hindsight indicates may be so – the errors belong to not only government and some public servants, but also to various private enterprise consultants too.
If there had been no privatisation of Telstra at all, what possible scenarios might have played out? Let’s ignore the “inefficient public service, bloated bureaucracy” scenario, since it is fairly clearly that Telstra was an aggressive adopter of ITC and of continuous cost-cutting of labour, well before any privatisation actually happened. A different scenario, one that is quite plausible, is that Telstra research staff not only continued on inventing new technological improvements or services, but that they made the case for management to adopt a high-speed optical mode of operation, with the aim of providing multi-megabit/sec uplink and downlink speeds. Telstra, at the board level, could have shared their long term vision for Australian high-speed data and communication services, and encouraged the government of the day to do the same. Ultimately Australia may have had true competitive infrastructure, but more importantly, have a flourishing and innovative ITC sector which is willing and able to market its products and services internationally.
Then I woke up, complete with keyboard rash, and looked at the utopia that is the current free market.
Let’s ignore the “inefficient public service, bloated bureaucracy” scenario, since it is fairly clear that Telstra was an aggressive adopter of ITC and of continuous cost-cutting of labour, well before any privatisation actually happened.
Actually, let’s not ignore it, since it was in fact very close to the mark. The fact that Telstra started cutting staff before privatisation does not change this – a obese person who gives up one ice-cream in ten a day is still obese.
@Andrew Reynolds
Probably the best argument against privatisation is that the inefficient and unbusiness like government gets all the money which they then spend on pet projects.
Interesting talk on the ABC by american Jack Fletcher, he went to Canberra and was coolly met by Frank Crean who let it be known that the government was not interested in dealing with yanks.
I still haven’t picked up why government should be like a business
Nor me Nanks – when governments starting adopting that idea (that governments should be like a business) is precisely when they started falling apart. Once we let the profit motive in to once public services and set the profit motive to the default objective, as we have done in Australia, all notions of serving the public interest started to erode.
Not immediately of course, but the profit motive in the public services plays out in a dangerously insidious creeping escalation (and often corruptly in my opinion – you cannot permit the use of the profit motive and expect people not to try to reward themselves along the way).
Hence we get privatisations for illogical reasons, semi privatisations, the masquerading of public service on the surface with a managerial zeal for the collection of endless fees and charges (on top of our taxes).
This is only one tiny example (but they are everywhere now) – my partner had to get a certificate of registration for a W.A. car this week. They charged him $5. The WA authority posted the wrong information on the certificate saying that the vehicle was encumbered. It wasnt. He rang and asked for the correct information to be sent. “That will be another $5” they said. He said “but it was your mistake. Do you mean I have to pay again for you to correct your mistake?” They said, in short…”yes you do – we are sorry, we have to charge every time we send the paperwork.”
Thanks John. Obviously we are going to disagree on the detail but you have gone some way towards answering my question. You seem to be saying that the rhetoric of the Rudd government with regards to the NBN is tactical as they try and negotiate a deal with Telstra. I suspect the rhetoric of the Queensland government is also tactical except they are trying to negotiate the general public into a sympathetic pose. Both seem to me to represent considerable bad faith.
For what it is worth I think a Telstra split between retail and wholesale is a quite destructive process that will lead to buck passing and even worse customer service. Structural separation should have happened before Telstra was sold and it should have been by splitting Telstra geographically into two or more operators (with incumbant exchange infrastructure intermixed between the two in much the same layout as the black and white squares on a chess board). These separate entities should have remained vertically integrated. Of course this structural reform did not happen because the Howard government was less intrested in the “social dividend” that privatisation might deliver and more interested in maximising the sale price. No doubt to satisfy critics who knock privatisations on the basis of price obtained (JQ comes to mind).
What we need is more vertically integrated providers of telecommunications services not less. Unfortunately the regulators have created a set of incentives via various access regimes that encourage the opposite.
Pure retailers can only innovate in terms of marketing, billing and soothing words when things go wrong. These are necessary activities but not the space where innovation and investment is really needed. If the government wants to have a government owned NBN then they would destroy less value if they just nationalise Telstra.
@Alice
Please Alice, don’t try and pass off the inefficiency of the local government shopfront off as some failing of the free market. It was like the time Gerard tried to lecture me about the failure of the free market in healthcare by holding up the example of China’s state-run, heavily-regulated, for-profit hospitals (that’s possibly the worst combination possible).
You also seem to believe that all profit comes from exploitation of some description. The only thing that profit means is that the public has a high demand for something, and at present that same something is being undersupplied. In a free market, eventually new sellers will enter to increase supply and profits will disappear. Unless of course you’re the government, whereupon you can maintain your monopoly indefinitely. In this case, I would hardly call it the profit motive – in fact, I probably would agree, that it is exploitation, by our own government no less.
The reason government should be run like a business is so that every dollar they spend goes through some rigourous cost benefit analysis, instead of being thrown into some black hole (such as Medicare, the arts, or the humanities department at the local university).
Without this, I don’t know how government would determine which services were most demanded. Perhaps nobody told you, but this was one of the problems with the USSR, they operated without a profit motive and ended up producing a whole lot of junk that nobody wanted.
Sea-bass @38,
The story you are telling about profits is known as product cycle hypothesis. There is indeed some empirical evidence to support this hypothesis. However, the behaviour of profits on a product line is not the same thing as the behaviour of profits for corporations. Is your ivory tower or whatever blinker mechanism you seem to be constrained by so dense that you are not aware that corporations play merger and take-over games? The evidence on this behaviour is not at all consistent with your assertion that the decisions are the outcome of a “rigourous [sic] cost benefit analysis”, even in purely financial terms.
But more to the point, the idea that governments should be run like a business is an entirely empty proposition at best and outright silly at worst. This is not to say that government actions are not to be scrutinised and criticised. On the contrary, the topic of this thread is concerned with exactly this point.
If you have any influence among ‘mainstream economists’, would you like to encourage the addressee of the open letter, which is the subject of this thread, to respond? I am particularly interested in questions 2 and 3 because these are technical questions.
@Sea-bass
You say to me “You also seem to believe that all profit comes from exploitation of some description. ”
Where in anything I said did you possibly deduce this Sea Bass?? Please quote source. Monumental leap of your own imagination?
“The reason government should be run like a business is so that every dollar they spend goes through some rigourous cost benefit analysis”
ahhh the profit motive of the private sector…..
The reason government should be run as a public service is to save people money by providing a service which adjusts for, corrects and prevents market failure.
It should not involve a profit. It should be run on cost benefit analysis to BREAKEVEN after our taxes are deployed to the provision of the service, if at all, and……. not in every case Sea Bass (pure public goods). If the public service provided departmental provision of services or policing of the legislative responsibilities of the private sector, this then mitigates against the negative externalities of the unfettered free market, and we will save money regardless of whether the individual public sector cost unit makes an accounting loss.
You ascribe ideals of private sector profit maximisation to the public sector which do not, and should not, be thus ascribed. In fact you inflict double taxation on us all to pay for the service with our taxes and again with government profit oriented fees and charges.
In some ways Sea Bass, with such views, you are directly responsible for the expansion of government which you pitifully continue to wail against.
Amen to that.
Governments typically don’t profit from really low taxes. However higher taxes reduce private sector welfare (the welfare produced by the private sector). Governments most certainly should not be profit maximising. In laffer curve terms they should not operate at the peak of the curve (the revenue maximising point) but should operate at the point where total welfare (private sector welfare plus public sector welfare) is maximised. This will be well below the peak of the laffer curve.
Terje – dont you mean “laughter curves” as they have been laughed out of then profession?. Last time I heard Julie Bishop was virtually pronounced a badly “behind the times” airhead for bringing up the laffer curve.
By the media, Terje
Yes members of the media are renowned for their intellect. That’s why they get quoted in the media so often.
What exactly are you refuting anyway? Even JQ agrees that taxes are subject to diminishing returns at some point. Do you have a meaningful objection to what I said at #43?
Yes Terje – studies show the diminshing returns to higher taxation do not kick in until about 80% tax rate, which is considerably above what you are paying now…
So I would suggest to stop using the Laffer curve as a crow bar for more tax cuts. Reagan looked at this theory favourably coming out of a period in WW2 where he was paying 90% income tax – of course he would. But thats not what you pay.
People have had their “Laffer view” tax cuts Terje, since 1974, and all we got from it was rising inequality and underemployment, unemployment and not the promised growth. Its a case of not being too greedy and wanting yet more and more tax cuts. If I was you, Id know when to stop Terje and drop reliance on the Laffer curve (before income taxes get raised on you because the government budgets are out of control and in deficit – which will likely come anyway – its called the “weeper curve”).
Any benefits the Laffer curve argument ever had have been delivered in the form of tax cuts – in fact, over delivered – but what would you expect of governments Terje? They always go too far.
@TerjeP (say tay-a)
And at a certain point Terje, if you really believe in the benefits explained by the Laffer curve, you must also acknowledge that there could exist the inverse or negative version of a laffer curve, whereby diminishing returns to the budget will also occur through the lowering of income taxes beyond that optimal point.
Or does your Laffer curve only work in one direction Terje – ever downward with income taxes?
It is this assumption that is laughable.
Alice – my comment at #43 did not entail a call for tax cuts. It simply explained why I didn’t think governments should be run like a profit maximising business.
The peak of the Laffer curve indicates the point at which government can maximise public sector welfare (ie maximum government spending). However I care about total welfare (public sector and private sector). The Laffer curve does not indicated where total welfare is maximised. By it’s very nature the peak of the Laffer curve is at a tax rate above that tax rate where total welfare is maximised. This should be quite self evident if you contemplate the reason why the laffer curve reaches a platue (what every point this might be at).
Whilst all of this should be uncontroversial there is obviously a valid debate about the shape of the Laffer curve that corresponds with the real world. That’s where John Quiggin and I tend to part company. Personally I envisage the Laffer curve for the real world to look something like the postcard version of Uluru. It has steep edges and a long flat middle. The implication is that we should keep taxes rates quite low (to maximise total welfare rather than just public sector welfare which occurs at the peak of the curve) but an increase in tax rates above this point will indeed produce more revenue.
This is a prime example of why libertarians should be shunned. They reject the idea of an objective, empirically determinable reality.
Hey, let’s hold a competition. Whose imaginary Laffer curve looks the best? Mine looks like Mont Blanc viewed from La Visaille between noon and 3 pm on the vernal equinox.