Thursday, 30 April 2009

Why the Alliance Party is irrelevant

This Alliance Party media release comes via from Scoop.
The Alliance Party says the Government should take ownership of the Lane Walker Rudkin (LWR) Factory in Christchurch to prevent a disastrous loss of hundreds of jobs.
Despite everything we know about the relative performance of state v's privately owned companies they still want the government to "own the means of production." There is a world for that .... stupid.

The evidence on the effects of privatisation seem relevant here. The following comes from the summary of chapter 4, 'Empirical Evidence on Privatization's Effectiveness in Nontransition Economies', from William L. Megginson's book, The Financial Economics of Privatization, New York: Oxford University Press, 2005,
The 87 studies from nontransition economies discussed in this chapter offer at least limited support for the proposition that privatization is associated with improvements in the operating and financial performance of divested firms. Most of these studies offer strong support for this proposition, and only a handful document outright performance declines after privatization. Almost all studies that examine post-privatization changes in output, efficiency, profitability, capital investment spending, and leverage document significant increases in the first four measures and significant declines in leverage.
Sunita Kikeri and John Nellis write in their article, An Assessment of Privatization, "The World Bank Research Observer", vol. 19, no. 1 (Spring 2004)
This article takes stock of the empirical evidence and shows that in competitive sectors privatization has been a resounding success in improving firm performance. In infrastructure sectors, privatization improves welfare, a broader and crucial objective, when it is accompanied by proper policy and regulatory frameworks.
In other words privatisation improves performance, meaning that privately owned firms out perform state-owned firms.

The Alliance Party media release continues,
Alliance Economic Development Spokesperson Quentin Findlay says it is vital that jobs and incomes are preserved to prevent mass unemployment in New Zealand.
How does taking ownership of one firm prevent mass unemployment? And if you take a look at the unemployment figures we are along way from "mass unemployment".
He says the Government should take control of failing enterprises and investigate options such as public ownership, employee shareholdings and worker ownership.
When we look at the relative performance of different types of ownership what do we find? Mary M. Shirley and Patrick Walsh write in Public versus Private Ownership: The Current State of the Debate, Working Paper, The World Bank,
Our review found greater ambiguity about ownership in theory than in the empirical literature. In the debate over the effects of competition, theory suggests that ownership may matter and if so, that private firms will outperform SOEs. The empirical studies squarely favor private ownership in competitive markets. Theory’s ambiguity about ownership in monopoly markets seems better justified, since the empirical literature is also less conclusive about the effects of ownership in such markets. Theories that assume a welfare maximizing government suggest that SOEs can correct market failures. In contrast, public choice theories are skeptical of the benevolent government model. Corporate governance theories suggest that even well intentioned governments may not be able to assure that SOE managers do their bidding. The empirical literature favors those skeptical of SOEs as a tool to address market failures. In studies of industrialized countries, where we might expect more developed political markets to motivate greater government concern with welfare maximization or better information and incentives to overcome corporate governance problems, private firms still have an advantage. The private advantage is more pronounced in developing countries, where market failures are more likely.
The kinds of problems that mixed forms of ownership can bring can been seen from the New Zealand experience with the SOEs. While many are not in actual mixed ownership, the pressures that such ownership can bring about can, nevertheless, be seen in our recent history with the SOEs.

The SOE Act states that SOEs, basically, have to be run like normal non-government owned firms. In effect this requirement is the same as you could get if private owners have a stake in a firm. The private owners would, we assume, wish to maximise profits, but the government may not. And you see this with SOEs. The government often wishes to intervene in the running of SOEs to get them to carry out non-profit maximising activities, just as it would if it had a partial stake in a mixed ownership firm.

This problem of having SOEs (or mixed ownership firms) trying to serve two masters was noted more than 10 years ago by Spicer, Emanuel and Powell in their book "Transforming Government Enterprises: Managing Radical Organisational Change in Deregulated Environments" (The Centre for Independent Studies, 1996). They warned that there are two pressures on SOE's: the first being towards privatisation since the productivity and efficiency gains achieved by SOE are in danger of being eroded over time. Privatisation is a way of both cementing in the commercial orientation of enterprises and wringing out further gains resulting from the high powered incentive and control mechanisms which can be bought to bear in privately owned and publicly traded companies. The second pressure on SOEs is towards being pulled back into the public sector where social and political objectives can be more readily be meet. Most interventions seem to be more politically motivated.

These pressures would also be there for a mixed ownership firms and help explain why they don't do as well as fully privately owned firms. For example, Aidan Vinning and Anthony Boardman in "Ownership and Performance in Competitive Environments: A Comparison of the Performance of Private, Mixed, and State-Owned Enterprises", Journal of Law and Economics, vol. XXXII (April 1989) conclude
'The results provide evidence that after controlling for a wide variety of factors, large industrial MEs [mixed enterprises] and SOEs perform substantially worse than similar PCs [private corporations].
The basic problem is that partial government ownership politicises the firm.

What of labour-owned firms? The shortcomings of such organisations are all too obvious: lack of access to capital, inadequate risk pooling, investment problems − older workers want a shorter pay-back period than younger workers, are membership rights tradable and if so under what conditions, new members would have to purchase ‘equity’ in the business from retiring ones, borrowing to cover such a purchase could be a problem for younger would-be members etc. One should also note that we don't see many labour-owned firms - outside partnerships and the like - in reality and this should tell us something.

The Alliance Party media release goes on
Mr Findlay says the cause of the LWR factory’s closure was both National and Labour led Governments supporting free trade deals and free market policies.
How often must this point be made? Free trade does very little to the total number of jobs in the economy. What it does is move jobs around, away from areas in which we don't have a comparative advantage into areas where we do. As Paul Krugman, yes that Paul Krugman, has said
It should be possible to emphasize to students that the level of employment is a macroeconomic issue, depending in the short run on aggregate demand and depending in the long run on the natural rate of unemployment, with microeconomic policies like tariffs having little net effect. Trade policy should be debated in terms of its impact on efficiency, not in terms of phony numbers about jobs created or lost.
and as trade economist Douglas Irwin has put it,
The claim that trade should be limited because imports destroy jobs has been around at least since the sixteenth century. And imports do indeed destroy jobs in certain industries: [...]

But just because imports destroy some jobs does not mean that trade reduces overall employment or harms the economy. [...]

Since trade both creates and destroys jobs, a frequently asked question is whether trade has any effect on overall employment. Unfortunately, attempts to quantify the overall employment effect of trade are I exercises in futility. This is because the impact of trade on the total number of jobs in an economy is best approximated as zero.
But perhaps Laura LaHaye puts it best
Of the false tenants of mercantilism that remain today, the most pernicious is the idea that imports reduce domestic employment. This argument is most often made by American automobile manufacturers in their claim for protection against Japanese imports. But the revenue that the exporter receives must be ultimately spent on American exports, either immediately or subsequently when American investments are liquidated.
Alliance Party media release says more,
Mr Findlay says the use of tariffs, a regulated economy and an expansionary monetary policy could have saved this factory and 470 jobs.
So saving 470 jobs prevents "mass unemployment"? But as has been pointed out above tariffs will not save a single job. It will save a particular job, but only at the cost of a job somewhere else in the economy. Net effect zero.

Every economy is regulated. The question is, By what? The government or the market? Market regulation via competition is by far the most effective regulator of firm behaviour. Take as an example government regulation of the economy via antitrust (or competition) policy. As far as empirical evidence goes it tends to suggest that competition policy does not improve consumer welfare by much. Robert W. Crandall and Clifford Winston look at the effects of antitrust enforcement in the US and ask Does Antitrust Policy Improve Consumer Welfare? And the short answer is, not much. Crandall and Winston write,
In this paper, we argue that the current empirical record of antitrust enforcement is weak.
and add
We then synthesize the available research regarding the economic effects of three major areas of antitrust policy and enforcement: changing the structure or behavior of monopolies; prosecuting firms that engage in anticompetitive practices, namely, price fixing and other forms of collusion; and reviewing proposed mergers. We find little empirical evidence that past interventions have provided much direct benefit to consumers or significantly deterred anticompetitive behavior.
The media release says latter,
The Government has no real strategy to prevent job losses and business failures aside from listening to the failed mantras of so called 'market' and business leaders, he says.

“The fact is that this ‘advice’ has led to domestic factory failures and layoffs. The Clothing industry, in particular has been put to the sword by the free market and in return New Zealand is flooded with clothing made by virtual ‘slave’ labour from overseas.”
What "slave" labour?

But the main group who benefit from these imports are the poor. The very people I assume the Alliance Party wishes to help. The low cost of these imported cloths means that the poor have received an increase in their standard of living. Take the following example to do with Wal-Mart in the US.

Christian Broda writes at on China and Wal-Mart: Champions of equality. He opens his article by noting that the public debate, especially in the USA, and as can be seen in New Zealand, has taken for granted that inequality has risen as a result of globalisation. And then asks, "But has it really?" He argues that in fact it hasn't.

Broda points out that,
How rich you are depends on two things: how much money you have and how much the goods you buy cost. If your income doubles but the prices of the goods you consume also double, then you are no better off. Unfortunately, the conventional wisdom on US inequality is based on official measures that only look at the first half, the income differential. National statistics ignore the fact that inflation affects people in different income groups unevenly because the rich and poor consume different baskets of goods.
Inflation affects the rich and poor to different degrees, and these inflation differentials change our view of the evolution of inequality in the US. Broda writes
Inflation of the richest 10 percent of American households has been 6 percentage points higher than that of the poorest 10 percent over the period 1994 – 2005. This means that real inequality in America, if you measure it correctly, has been roughly unchanged. And the reason is just as dramatic as the result. Why has inflation for the poor been lower than that for the rich? In large part it is because of China and Wal-Mart!
The important point here is that relative to wealthier families, the poorer families in the USA, and most other countries, spend a larger share of their income on goods whose prices are directly affected by trade – obvious examples being clothing and food. What we see is that the wealthier you are the more you spend on services. Such services are less subject to competition from abroad. From the data we see that since 1994 the price of goods in the US has risen much less than the price of services. Broda writes,
This trend can partly be explained by China. In U.S. stores, prices of consumer goods have fallen the most in sectors where Chinese presence has increased the most. Take canned seafood or cotton shirts, for instance. Exports of China to the rest of the world in these categories have increased dramatically over this decade. Inflation in these sectors has been negative over the last decade, while in other sectors with no Chinese presence inflation has been over 20 percent. Moreover, as China produces goods of relatively low quality, sectors with strong Chinese presence are disproportionately consumed by the poor.
Broda goes on to note that the effects of the expansion of superstores like Wal-Mart has been good for the poor. He explains,
The expansion of superstores – like Wal-Mart and Target – has also played an important role in accounting for the inflation differentials between rich and poor. Superstores sell the same products as traditional shops at much lower prices. Today the poor do roughly twice as much of their buying of non-durable goods in these stores than the rich. So poor consumers have been the biggest beneficiaries of Wal-Mart coming to town.
Broda ends his column by making the important point that,
We need to remind politicians and the public that the gains from trade are broadly shared. Every time the discussion over trade is diverted towards the problems facing specific producers, be they farmers in France or textile workers in the U.S., we miss the central point. Trading allows everyone, and especially the poor, to buy things that they could not otherwise afford. Without better public understanding of these facts, governments will not only keep supporting policies aimed against China and Wal-Mart but may receive the uninformed support of many consumers who are benefitting from trade. (Emphasis added)
The same basic story plays out here in New Zealand. Cheaper imports help the poor.

The Alliance Party media release ends by saying,
"It's about time that the Government started to see economic sense in the face of the global recession and pressed the eject button on the failed policies of extreme capitalism."
Extreme capitalism?! In New Zealand?!

The general point that comes from all of this is that the government picking which firms to protect and which not to protect will result in a miss-allocation of resources which will ultimately decrease the welfare of New Zealanders. The government can not know which areas of the economy will grow in the future and therefore provide employment. A policy of intervention will be counterproductive in the medium to long term. It is unsustainable since it is not consistent with the preferences of consumers-savers-investors. Government bureaucrats carrying out the such a policy, have no way of knowing what the efficient, productive investments are likely to be, they are not entrepreneurs, they are not trying to determine the efficient and sustainable direction of resources. It is the market that can, over time, work this out, via the interactions of countless investors, consumers and producers. The public choice part of me would ask if the bureaucrats would really care what the investments they make are, which firms survive and which don't, as long as short-term employment is increased. And this seems to be the Alliance Party's only concern.

(HT: Brad Taylor)


homepaddock said...

The link the Alliance sees between the government making our clothes and economic salvation eludes me.

Paul Walker said...

Homepaddock: Not just you.

Victor Billot said...

Well, we can't be that irrelevant if you feel the need to spend hours trying to prove us wrong.


Paul Walker said...

Victor: Nice try! But it was only a few minutes as most of the material came from stuff I already had for other reasons.

Anonymous said...

It all proves that privatation doesnt work.

The government needs to find a way to secure people's job and if government ownership of companies is the way to do it then I support that.

Too many private companies put profits ahead of workers rights.

Anonymous said...

Wow - you wrote 2,600 words "in a few minutes"? Even with cut & paste, that's impressive.

Or maybe the given value of "a few minutes" is as contrived as the given relative performance levels of state vs private sector ownership, particularly in the light of the last few years.