Saturday, 1 October 2011

Bad reasons for asset sales

Over at Offsetting Behaviour Seamus Hogan notes that next Tuesday he will be speaking at a forum run by U of C Political Science students to inform students for the upcoming general election. He says he lay out some principles that he thinks all economists should agree on (and that more than 90% would agree on), independent of their underlying values. He will present four general principles that would be relevant to pretty much any election campaign and two others specific to the issues of this year’s election. One of these principles is
CGT versus Asset Sales: As best I can tell, the parties are not promising radically different paths for the deficit. We therefore need two separate debates: one concerning whether our fiscal position would be better addressed by selling equity rather than debt, and one concerning the mix of taxes. The issues regarding both are technical and complicated; confusing the two does not promote informed debate.
The point I want  to make here is that the idea that asset sales should be used to pay-off debt is wrong-headed. Having a debate about whether to use asset sales to pay for the deficit is the wrong debate to be having about asset sales. The reasons for privatisation have nothing to do with dealing with the deficit, the reasons for asset sales should hold even if you get nothing from the privatisation programme. Talking about maximising the return from asset sales to cover the deficit misses the whole point of privatisation. Asset sales are about improving the efficient and productivity of the economy. If we just worry about how much we will get for the sale of assets then we should sell all of the state assets with the firms being monopolists. But that's unlikely to do much for welfare but would cover a lot of the deficit.

The point to note is that the advantage of privatisation is that it will depoliticise the firm. The aim is to have the greatest possible "distance" between the government and the firm. Government interference in the running of a firm is impossible to eliminate completely but a good privatisation plan will result in a situation where any government interference is as obvious and politically costly as possible.

For successful privatisation it is more important to get the regulatory environment right so that competition can breakout in the industry than it is to maximise the price for which the asset is sold. Basically I'm arguing we should have lexicographic preferences, with price low on the list. Worrying about whether or not the ‘family silver’ was sold too cheaply misses the point, the price received can only be see as too high or low relative to the market structure the firm finds itself it. Just arguing that a higher price could be obtained with a different market structure is only useful if the new market structure improves welfare.

In short, having to cover a deficit is nether a necessary not sufficient reason for the sale of state assets.

1 comment:

Seamus Hogan said...


You are right that price is not the main issue in whether assets should be sold, but that was not my point. Yes, the main issue is where the asset would be most productively owned from the point of view of overall social welfare, and that is the debate that we should have, separate from the issue of the appropriate level of total government net worth. A secondary issue, that is potentially important is the appropriate allocation between debt and equity in the governments net asset position. At the margin, this could, in principle, determine, whether marginal assets should be privatised or remain in public ownership. None of this changes the fact that "CGT versus Asset sales" is not an issue at all.