Blue Planet Notes

Saturday, July 2, 2011

Why Your Stitches Cost $1,500 - Part Two

Wednesday, June 29, 2011

Friday, June 24, 2011

Welfare Impact of the British Privatizations 1979-1997

Review of The Great Divestiture. Evaluating the Welfare Impact of the British Privatizations 1979-1997 by Massimo Florio. MIT Press 2004, $39

Professor Florio appears to have proven that Thatcherism, or at least that aspect of Thatcherism covered in his book, namely the privatisation of state-owned firms, signally failed to increase productivity, which was its main battle-cry. Its principal effect was to divert a stream of income from the poorest 20% to the richest 10% of the British population. This occurred in three ways: firstly by selling off the gasworks, coal mines, water systems, etc. at very low prices to investors, many of whom were rich; secondly by freeing these firms from the politically imposed constraint of subsidized rates for pensioners, the unemployed, etc. On the contrary, the new owners sometimes imposed regressive rates, so that the poor paid more per unit than the rich! Thirdly, privatisation allowed top management to raise its own salaries.

One of the calamities brought about by Thatcher’s privatisation was a dramatic rise in the rates of the water utilities. However Professor Florio does not condemn this phenomenon out of hand, as a consequence of mere greed. Rather he points out that most of these rate increases were the consequence of investments either long-overdue or that had become necessary to bring Britain up to the new EU standards.

One of his conclusions is that private ownership of large utilities offers no advantages over public ownership, since in Britain the government officials who ran the companies were competent and devoted and their successors, while competent, were grasping and self-centred (often they were the same people, who remained at their posts but altered their behaviour!). Furthermore the companies remained subject to government regulation, since they were mostly monopolies, and ownership was dispersed among many small stockholders, so that the latter were unable to impose their interests, leaving effective power with the managers.

This conclusion appears to contradict studies that indicate that public utilities are generally less efficient that private ones (except for power companies)[*]. Nonetheless these studies are mostly of small local utilities, where private ownership really means effective control by the capitalist, thus assuring the benefits that private ownership theoretically confers. We must conclude, especially in view of the desirability of a progressive rate structure, that large utilities are best left in state hands, with the proviso that the bureaucracy be neither incompetent nor venal. Unfortunately this condition is not fulfilled in much of the underdeveloped and “transitional” worlds. On the other hand the corruption of public officials there is often matched by the corruption of capitalists, as seen in the expropriation of small shareholders by large ones in many Russian firms.

The notable and sustained improvement in the efficiency of Canadian National railways likewise seems to indicate that inefficiency of large state firms is a curable disease, given the political will to reform.

The cited efficiency studies appear, however, to suffer from a notable defect: they disregard the welfare losses attendant upon privatisation, the greatest of which is that labour tends to become degraded and precarious under the untrammelled tutelage of the profit motive. Barbara Ehrenreich worked incognito in various jobs while gathering material for her revealing book on blue-collar work conditions Nickel and Dimed -- On (Not) Getting by in America. Her experiences included a stint as a sales clerk at Wal-Mart. She discloses that that great paragon of American free enterprise prohibits its employees from conversing on the job! When a large military hospital in Washington, DC privatised its cafeteria operation a few years ago, the scullery crew, consisting of mentally handicapped people, was summarily dismissed.

Is this the kind of efficiency we want?

October 2005

[*] See Charles Wolf, Jr.: Markets or Governments. Choosing between Imperfect Alternatives, MIT Press 1988, pp. 202-210.

Thursday, June 16, 2011

BIG-GOVERNMENT MAN

Big-Government Man

by Tequila Kid

I'm a big-government man. Not that I want to maximize the size of government come hell or high water, but I do believe that the size of government should never be allowed to sink beneath a certain proportion of the economy -- say 30 or 40 per cent. Furthermore I think large utilities like big power companies, ports, railroads, airports, electrical grids, highways and schools, post office. etc. should be state-owned.

Furthermore I believe that there are sound reasons of economic efficiency to support a hefty government sector of the economy. This is a well-established thesis that the right has done its utmost to efface, but in vain, alas! Every economist knows that in an economic slump, private businesses reduce expenses and the state’s expenses grow because it must now pay unemployment compensation, etc. Thus the government willy nilly has to increased its own demand in response to a fall in demand by the private sector.

So that a considerable government role in the economy is desirable from the get-go, for reasons of macroeconomic stability. In order for these so called automatic stabilizers to be effective in making up for lack of private investment, the government has to be fairly chunky.

I think that utilities should be nationalized and run by the state. Mexico is an inspiring example of how the life of the very poorest can be greatly improved by electrical power (1). The Mexican state-owned electrical power monopoly CFE plans investment in new power lines according to demographic forecasts, not according to income projections.

You may object that then many lines will serve people that lack the money to pay!

And I reply that’s the beauty of it, the CFE charges the poor only 3% of what they charge the rich. CFE makes a profit anyway. So in Mexico everybody has electricity, even very poor people. Compare that with South Africa, where private utilities have ceased serving certain neighborhoods because of no payments. South African poor have suffered greatly for years because they were unable to pay their bills to the privately owned utilities.

That’s why I think utilities should be government-owned. That way the rich pay a higher price than the poor. For example in Britain, when the electrical power companies were privatized in the 1980s, the private companies altered the fee scales and did away with rebates for pensioners and other low-income people. So that Margaret Thatcher’s privatization made the rich richer and the poor poorer. This is a recurring pattern.

Furthermore in the case of very large enterprises like CFE, government ownership is not a factor that reduces efficiency very much, as opposed to small businesses. After the Brtitish privatization, no increase was registered in the newly private companies’ efficiency. This naturally reflects the high standards of British civil servants, who of course received none of the profits.

An additional reason I love big government is that government is capable of compensating for and counteracting market failures.

This is a bit of a sore point. Libertarians denounce market failure theory because existence and admission of market failures don't fit their plans for society. They must keep alive the illusion that an individual decision maker is at work. But contrary to popular belief, existence of market failure does not automatically imply government intervention. Various sorts of government measures can be considered, but the option of the government doing nothing at all should always remain available. Then there is the option of public non-government entities conducting economic policy instead of government. I haven’t looked into this issue at all, so I'll just keep quiet about it.

I don't know to what extent there are non-governmental solutions to certain sorts of market failure.

Also, to a great extent, Government has the power to structure the business environment so that people behave ethically. Who put ingredient labels on grocery cans? Was it the private sector or the public sector?

Since private returns from investment in human capital formation are low, people don't like to spend money on education. However the social returns are much higher. So there are excellent reasons for government to make up for the private citizen’s stinginess when it comes to education.

(1) My description of Mexico reflects the 1980s. I cannot vouch for the current situation.