Salon.com has a nice piece on CEOs who claim ignorance of large-scale fraud being carried out under their noses. These guys are undermining 1990s-style turbocapitalism more effectively than any left-wing diatribe.

The number of major US corporations reporting their profits honestly has jumped from two to three with the news that Coke is to Report Stock Options as an Expense. The others, for those interested, are Boeing and Winn-Dixie.
Meanwhile, other US corporations are learning a lesson long familiar to Soviet planners. If you give people a strong enough incentive to meet a target, they’ll move the target if they have to. One of many examples is the idea of Linking Executive Pay to Sales

Holiday brochures for Mission Beach, NQ. It’s the time of year in Canberra when everyone who can, gets out, either North to the sun or up to the snow. I’m going to try and get a bit of both, if I can manage it.

Henry Ergas has an interesting piece, defending privatisation in general, while criticising the sale of Sydney Airport. Henry nominates me as ‘the most perceptive critic of privatisation’, and I’ll return the compliment by observing that Henry is the most persuasive advocate of the case for ‘light-handed regulation’ of privatised monopolies such as Telecom NZ and (assuming Howard gets his way) Telstra.
Henry’s basic point about Sydney Airport is the same one that I’ve made. While the sale looks like a good deal for the public at first glance, the price was boosted by raising the monopoly prices the airport is allowed to charge, relaxing regulation and ruling out any competition from a second airport in the foreseeable future.
The more general point is that privatisation cannot be assessed simply by looking at the effect on the net worth of the public sector, that is, the difference between the sale price and the value of the earnings that would have been achieved under continued public ownership. If privatisation is accompanied by policy changes that make the market more or less competitive, or changes in working conditions, quality of service and so on, these effects must be taken into account in working out the total effect on the welfare of the community.
I’ve focused on the net worth test in assessing past privatisation because most advocates of privatisation have got it wrong – claiming that privatisation has been good for public finances when as Ergas notes ‘many past privatisations would have failed the net-worth test’. But the net worth test provides an evaluation of privatisation on an ‘other things equal’ basis (economists like the Latin version, ceteris paribus).
For a complete evaluation it’s necessary to take account of regulatory changes and so on. In my assessments of privatisation, I’ve tried to do this. Nevertheless, the net worth test is still relevant.
In the Australian context, many of the changes that are commonly associated with privatisation have occurred separately, as a result of the corporatisation of government business enterprises and the introduction of regulatory systems designed to be ‘competitively neutral’ between public and private firms. Corporatised government business enterprises have employment conditions more similar to their private counterparts than to old-style government departments. In particular, they have shown themselves willing to undertake labour-shedding on a large scale. On the other hand, private enterprises that are subject to extensive regulation necessarily become responsive to political pressures rather than pure market forces.
As Ergas says, the differences that cannot be eliminated are those associated with ownership. He notes:
For example, before Telstra was partly privatised, each Australian citizen could be said to own a non-tradeable ‘share’ in Telstra.
Because shares are non-tradeable government business enterprises are not subject to the threat of takeover, and the associated capital market discipline. But estimates of the costs and benefits of takeovers vary widely. In the mid-1980s, a lot of Australian commentators were very enthusiastic about the market discipline imposed by raiders like Bond, Skase and Elliot. When their jerry-built empires collapsed, more realistic assessments suggested that, even where there were benefits, they had been greatly exaggerated. The recent scandals in the US, which have particularly affected ‘serial acquirers’ like Tyco and Worldcom, are leading to a similar reassessment there.
Moreover the costs and benefits are not all one way, as Ergas implies. Public ownership of Telstra is a form of social insurance – the risks associated with profits and losses are spread through the tax system.
Like other forms of social insurance, this is a ‘one size fits all’ solution. As Ergas notes, ‘This means that people who wanted to take on the risk of owning more shares in return for greater reward could not do so’. The disadvantages of inflexibility must be balanced against the fact that compulsory risk-spreading through the tax system is much more cost-effective than market alternatives. The superiority of is reflected in the difference between real rate of return required for typical private investments (around 8 per cent, even in relatively stable areas like infrastructure) and the real rate of return on government bonds (generally less than 4 per cent).
Whenever costs and benefits of alternative approaches must be balanced, the optimal outcome is likely to be a mixture of the two. The mixed economy, in which some goods and services are produced by the private sector and others by the public sector has historically outperformed the alternative extremes of pure socialism and free-market capitalism. In recent years, some lessons have been relearned the hard way. The wave of privatisation in the infrastructure sector (telecommunications, electricity, roads etc) has been followed, in many cases, by a return to public ownership, as the defects of the privatisation model became apparent.

Mickey Kaus continues the US vs Europe culture wars, relying on the tried-and-true argument of lower US unemployment. He writes
” German Chancellor Gerhard Schroeder is entitled to a bit of schadenfreude, but generalizing from the U.S. accounting scandals to the general inferiority of U.S.-style shareholder-oriented corporate governance seems a leap. (“Now it has been revealed that egotism practiced at the top under the catchphrase ‘shareholder value’ is worth less in macroeconomic terms, but also as far as the companies themselves are concerned ….”) What’s Germany’s unemployment rate again? Oh, yes — 9.5 percent. [Thanks to kf reader A.E.]”
Unfortunately, going to his source, The Nando Times, we find:
“Last month’s increase was exclusively due to the former communist east Germany. Western Germany, which accounts for most of the nation’s economic output, reported a 7.6 percent jobless rate for June, unchanged from May. ”
The US (5.9 per cent) still looks to have an advantage, but add in 2 million mostly unemployable people locked away in prisons and jails, and the difference is pretty much zero. This was a great argument for the late 90s, when the US rate was 4 per cent and falling, but it’s run out of legs today.

Gareth Parker weighs in on the question of ads for fast cars, posing it as a question of personal responsibility.

“The problem is this. Every time someone else decides for us what is “safe”, our personal responsibility is diminished. Every time someone else makes the decision, it becomes someone else’s fault when something goes wrong.

I crashed my car. Car ads are to blame. Individuals are no longer culpable, and that is just wrong.”

Gareth may not have noticed but, when motorists who think they are racecar drivers crash their cars, they usually crash them into somebody else.
If these cars were used only for motor racing, the ads for them would serve as fine candidates for the Darwin awards, helping to remove stupid genes from the pool. Unfortunately, they usually take others with them.

A couple more pieces on the future of the ALP. Ken Davidson describes it as a “self-perpetuating” oligarchy, and attacks John Brumby for ignoring a party conference that criticised the government’s approach to public-private partnerships (PPPs). I’ll write more on this subject later. But Ken’s point about the ALP is right. There’s no point in reforming the structures of a party that no-one would want to join. ALP membership has collapsed in the past two decades. In part this reflects general social trends. But the big question is why anyone would want to spend evenings in drafty rooms discussing policy ideas when all the decisions are made by a closed circle of politicians and party leaders. The result is that, for the most part, the only people who join are those looking for a political career or the friends and relatives they’ve signed up to vote for them.

On the role of the unions, this piece points out that the big issue isn’t whether the ALP wants ties to the unions, but whether unions should want to be tied to the ALP.

As the NYT reports, the S.&P. 500 has dropped all non-US companies. This is pretty much a vote of non-confidence in globalisation and, since 5 of the companies are Canadian, in NAFTA as well.

There’s a nasty sting at the end of the article:

“One change that was not made by the index was to drop the 10 companies with tax headquarters outside the United States, like Tyco International, based in Bermuda, and Carnival, based in Panama. S.& P. said those companies maintained the United States as their operating headquarters and as the principal market for their stocks.”

One of the striking ironies about microeconomic reform is that it was promoted as a way of reducing Australia’s current account deficit, and therefore our net overseas debt. In the twenty years since, the CAD has remained at about 5 per cent of GDP, and net debt has grown gradually. The defenders of reform have taken two contradictory lines on this today. In The Australian, Michael Chaney makes the standard last-resort argument for failed policy – things would have been even worse otherwise. Meanwhile, as
Ross Gittins points out, more sophisticated supporters of reform have decided that the CAD is actually a good thing. As he says, “Well, if you say so.”

Andrew Scott is spot-on in asserting that the last thing Labor needs is ‘modernisation’, at least as it is being defined in the current debate.