A reply to Crampton

In a comment on Matt Burgess's posting on National's broadband plan, Crampton raises an interesting point:

I can imagine a second-best argument for a lot of public investment in fibre. Simply put, the government cannot credibly commit to refraining from expropriating the returns to private investment in this area, either via nationalization or regulation of access.

For another example of Crampton's non-credible commitment point consider the public ownership of waterworks in the US. Usually the reasons for public ownership are placed into one of three categories: market failure, regulation problems or transaction cost reasons. An interesting case study of waterworks is offered in the Troesken and Geddes paper "Municipalizing American Waterworks, 1897-1915". This paper provides support for a transaction cost interpretation of municipal acquisition of private waterworks. The incentives facing local government and the private companies are an important factor in the government take over.

The basic Troesken and Geddes story is that municipalities were unable to credibly precommit to not expropriating value from private water companies once (sunk) investments were made. This gave the private firms an incentive to reduce investment in water provision. This rational under investment was then used by local governments as a pretext for municipalising the private water companies.

Now if we accept Crampton's second-best argument that its right and proper (or at least, least bad) for governments to own broadband networks and waterworks, where does it end? The government cannot credibly commit to refraining from expropriating the returns to ANY private investment and following Crampton's (second-best) logic the government owns everything.

But maybe its even worse. What incentives does Crampton's argument give to governments? Consider the waterworks example. If the government wanted, for its own reasons, to take over the private works all it need do is to refuse to credibly precommit to not expropriating value from private water companies and use the resulting rational under investment by private firms as an excuse for municipalising the private companies.

Thus if we accept the Crampton argument, are we not giving the government the tools and incentives to nationalise everything! Would it not be better to try to find ways of giving governments a disincentive to nationalise rather than the incentive to do so? Crampton's whole argument underlines how important property rights are and why governments must forced to respect them.

In fact in the case of New Zealand, wasn't the reason for many of the changes made during the post-84 reforms about trying to restrain government. The Public Finance Act, the Reserve Bank Act, the State Owned Enterprises Act and, more recently, the Regulatory Responsibility Bill can be seen as attempts, all be they imperfect, to do this. As the former Secretary of the New Zealand Treasury Graham Scott has written recently

It is also important to continue the search for more stable and predictable policy frameworks where the role of the state is prescribed and procedures defined for the use of its powers of intervention. Examples are the fiscal responsibility provisions in the Public Finance Act, The Reserve Bank Act, the State Owned Enterprises Act and the Commerce Act. New rules to stabilize the share of the state in the economy and impose a national benefit test on regulatory powers in the manner of the Regulatory Responsibility Bill before the Parliament would also help to establish a sounder basis for economic policy than the haphazard intervention of ministers with short political fuses.

Tying the hands of government, as best we can, seems the best approach to the issue of protecting the returns to private investment. Having well defined and enforced rules as to when and how the state can use its powers of intervention and coercion are needed not just to ensure an efficient and growing economy, but perhaps even more importantly they are needed to protect our individual freedoms from abuse by the state. I fear Crampton's argument is a counsel of despair.