A reply to Hogan and Crampton (updated)

In response to my previous posting, Should Meridian be privatised?, Seamus Hogan said

But what do Hart, Schleifer and Vishny say about industries where political pressure is more likely to lead to stupid regulation if profits are privately earned?

and Eric Crampton said

Seamus is right that the IO argument misses the point he was making; you're right that there are political pressures on SOEs as well. I'd expect Seamus to reply, though, that we've observed little expropriation of Meridian's profits through regulatory activity under the current system: the devil we know isn't that bad and we don't know what insanity voters would demand under a private system if a private power company were profiteering.

I worry that the argument could be used to justify any inefficient status quo if the "stupid voter" threat is big enough.

I'm not going to argue that they are wrong, in fact I will argue that they are right, but too right for their own good. In a sense their argument is too good. By picking just the right manner of "voter stupidity" they can get any result they want. They can explain everything, and thus nothing. They have in effect 'done a BERL'. By assuming the right amount of irrationality, of voters not drinkers, they manage to assume their result.

To be fully convincing their theory needs to endogenously determine the form of voter stupidity. Why is it that voters care about the profits of private power companies but not public companies? Why it is that voters care about the profits of private power companies and not private corner dairies? Or private supermarkets? Or private petrol companies? Hogan and Crampton appear to be assuming just the right manner of stupidity amount voters without showing why they are "stupid" in this particular way.

The issue of why voters would care more amount "private profits" than "public profits" seems important given that the government can directly affect the operations of an SOE. Not only can it regulate, it also have the power of ownership, which I would argue means that voters have more reason to apply pressure to the government under state ownership since that pressure has more chance of effecting the outcome.

Crampton is right to

[...] worry that the argument could be used to justify any inefficient status quo if the "stupid voter" threat is big enough

because his own argument, with just the right amount of voter stupidity, seems to lead to state ownership of everything. Crampton the Marxist!!!

As to the problem of,

a private power company [...] profiteering

First, What is profiteering? And second, Why not take an approach similar to that used in Germany where consumer cooperatives have vertical integrated backwards to control distribution and production? It's not clear why such a cooperative would have a incentive for "profiteering". Are consumers likely to rip themselves off? You end up with depoliticisation of the industry and less concern over profits.

Updated: Eric Crampton ponders Voter preferences and electricity generation.