Tuesday, 16 June 2009

Economic impact of the super city

BK Drinkwater has commented on the report "Economic Impact of Super City Amalgamation on Peripheral Councils (Manukau, Waitakere, Rodney, North Shore, and Franklin)" by Rhema Vaithianathan. I think he is right with regard to his generalised concerns about multiplier effects. Multiplier type argument always seem strange to me. Eric Crampton says about the same report,
Rheema Vaithianathan, Auckland University economist, worries that the Auckland supercity will lead to job losses and in particular will hurt the suburbs.

I'm worried that the opposite will happen.
And there are good reasons for his concern.

When I gave the report a very quick look, one thing I noticed was the following comment,
The analysis above has assumed no change in rates. However, the extent to which efficiency savings flow into reduced rates is uncertain. There is considerable evidence that following privatisation, efficiency savings did not in fact flow through to the customers as reduced prices but to executives as increased compensation8. For example following privatization in the UK Electricity Industry, top executive salaries increased three-fold.
The 8 above refers to a footnote which reads,
“Increases in Executive Pay Following Privatization”, Catherine D. Wolfram (2004) Journal of Economics, Management and Strategy Pages 327 - 361
This looks at bit odd to me since I don't see the relationship between privatising the UK electricity industry and the rates in an Auckland Supercity. Second, from the quick look at the paper mentioned in footnote 8, it appears that salary increases were due to rent extraction by executives of the privatised companies based on the way the industry was being regulated. Again I'm not sure what UK electricity regulation has to do with the Auckland Supercity.

Also there is a comment in the Wolfram paper,
On the one hand, the small data set limits both the power of some of my statistical tests and the generality of my results.
So the Wolfram results don't generalise and thus are they in any way relevant to the Auckland Supercity?

I'm guessing Vaithianathan is right that there will be no change in rates, but I'm sure the above argument makes this case. In fact as Eric argues rates could go up as expenditures increase, not decrease.

1 comment:

djp said...

Yes there seems to be confusion all around.. National supporters seem to be super sure of huge savings from economies of scale (forgetting the possibility of more insulated layers of out of touch management) whilst Labour supporters seem to think the whole of Auckland will be so efficient we will all be out of a job :(