Incentives matter: smoking ban file

From the New Zealand Herald:

A squeeze on cigarettes is already causing fights in prison, says an ex-inmate just released from Waikato's Rangipo Prison.

and

Overseas, smoking bans in prisons have produced a few riots, black market smuggling, and some bizarre alternatives to tobacco by addicted inmates.

In Quebec, up to 70 inmates rioted and lit fires two days after a smoking ban came into force at the Orsainville detention centre near Quebec City in 2008. A total ban was rescinded the next day to allow smoking outside.

In Vermont, a thriving black market and prisoners smoking powdered juice led to an easing of its bans in 1992 to allow smoking outdoors.

The Edmonton Sun, meanwhile, reported that grass, leaves, tree bark, toast crumbs, pepper and nicotine patches had been smoked at a local prison, rolled in pages from the Bible and lit by sticking staples into electrical outlets.

Does this behaviour come as a surprise to anyone? Ban something and you give people the incentive to form black markets and to look for substitutes. And to use violence to obtain and control whatever supply there is available.

Titles I just like ........

At AidWatch they note that Celebrities urge G8 to make new unkept promises to keep previous unkept promises.

EconTalk this week

Bryan Caplan of George Mason University and blogger at EconLog talks to EconTalk host Russ Roberts about two books: Eugene Richter's Pictures of the Socialistic Future and F. A. Hayek's The Road to Serfdom. Both books warn against the dangers of socialism. Pictures of a Socialistic Future, published in 1891 is a dystopian novel imagining what life would be like after a socialist revolution. The Road to Serfdom, published in 1944, explores the links between economic freedom and political freedom and the inherent similarities between communism and fascism. Both books look at the German roots of centralized planning and the nature of the people who rise to power when the State is powerful. The conversation includes discussion of the these topics as well as the rule of law and the amount of state control of the economy in Nazi Germany.

The Standard is right

No seriously!

Read Eddie's post on Why you don’t give the State too much power. Its about the police abusing their powers to take DNA samples. Eddie ends by saying

The Police should never have been given the power to take DNA off people at such a low threshold. It should be handled by an independent group and only on conviction. Letting the Police take DNA off anyone they arrest gives them too much incentive to bend the rules, and that seems to be happening.

Yes incentives matter, even for the police. We need greater controls on on when and why the police can take DNA samples.

Also you do have to ask why only the Greens and Maori opposed the law change that gave the police these powers. Civil liberties don't appear to have many supporters in Parliament these days.

No Right Turn also notes that the police have gone Fishing for DNA. Every so often even the left are right.

How regulation doesn't work in practice

From the New York Times,

An examination by The New York Times highlights the chasm between the oil industry’s assertions about the reliability of its blowout preventers and a more complex reality. It reveals that the federal agency charged with regulating offshore drilling, the Minerals Management Service, repeatedly declined to act on advice from its own experts on how it could minimize the risk of a blind shear ram failure.

It also shows that the Obama administration failed to grapple with either the well-known weaknesses of blowout preventers or the sufficiency of the nation’s drilling regulations even as it made plans this spring to expand offshore oil exploration.

and

Even in one significant instance where the Minerals Management Service did act, it appears to have neglected to enforce a rule that required oil companies to submit proof that their blind shear rams would in fact work.

While government regulation may be wonderful in theory, it's not so good in practice.

EconTalk this week

Scott Sumner of Bentley University and the blog, The Money Illusion, talks with EconTalk host Russ Roberts about the last 30 years of economic policy and macroeconomic success and failure. Sumner argues that there was a neoliberalism revolution beginning in the 1980s around the world, an era of deregulation, privatization and falling marginal tax rates. Sumner argues that the states that liberalized the most had the most successful economic results. Roberts argues that it is difficult to assess the independent effect of various policy changes and points to many areas--in the United States at least--where government involvement increased in important parts of the economy, and Sumner responds. Sumner also talks about the importance of culture in economic performance.

Jeffrey Miron interview

On C-Span Jeffrey Miron talks about his book, Libertarianism, from A to Z and he responds to telephone calls and electronic communications. The book is about Libertarian principles and what Libertarians think about current issues.

Everyone hates privatization, but why?

A new paper by Irina Denisova, Markus Eller, Timothy Frye, and Ekaterina Zhuravskaya on Everyone Hates Privatization, but Why? Survey Evidence from 28 Post-Communist Countries. This paper is to be presented at 14th Annual Conference of The International Society for New Institutional Economics at the University of Stirling, Scotland, UK, June 17 – 19, 2010. The abstract reads:

A 2006 survey of 28,000 individuals in 28 post-communist countries reveals overwhelming support for revising privatization, but also that most respondents prefer to leave firms in private hands. We test whether individuals support revising privatization primarily due to a preference for state property or due to concerns about the legitimacy of privatization. We find that a lack of human capital and privately owned assets affects the support for revising privatization primarily via a preference for state property over private property; whereas transition-related hardships influence support for revising privatization via both a preference for state property and concerns about the illegitimacy of privatization. These results suggest the value of analyses that not only link respondent traits with support for policy, but that also probe the motivations that underpin this support.

Denisova, Eller, Frye, and Zhuravskaya suggest several broad conclusions follow from their analysis. First, dissatisfaction with privatisation should not be equated with a preference for state property. Support among the general public for revising privatisation in postcommunist countries is broad and deep. More than 50 percent of the population in each of the 28 countries and over 80 percent of all respondents support some form of revision of privatisation from levying additional taxes on current owners of privatized assets to the full expropriation and re-nationalization of assets. However Denisova, Eller, Frye, and Zhuravskaya report that only 36 percent out of those 80 who support revision of privatization - ie 29 percent of all respondents - hold these views because of their preference for state ownership. The remaining 64 percent of supporters of privatisation revision - roughly a half of all respondents - prefer private property despite their support for privatisation revision. Such views are due to a massive discontent with the process and outcome of privatisation in transition countries. One wonders how much of the anti-privatisation feeling in New Zealand, and other western countries, is due to this factor.

While it is important to identify factors that influence peoples' preferences over revising privatisation, it is also important to explore their underlying motives for holding their views.

Discriminating between these motivations is important as they suggest very different policies to increase the legitimacy of privatization. Some oppose privatization because they prefer state ownership, which in turn could be rooted in ideology or personal interest. Others favor private property in principle, but oppose privatization because it resulted in an illegitimate distribution of wealth. When public support for the revision of privatization is rooted in relative losses from declining returns to human capital (as is the case for less skilled and long-time state sector workers), then retraining programs designed to match skills with demand from the new market sectors may prove to be an effective tool. In contrast, when public support for the revision of privatization is driven by concerns of legitimacy, and this is the case for the majority of population of transition countries, governments may have to revise privatization results through policies ranging from redistributive taxation to expropriation of current owners of privatized assets which necessarily generate distortions in the investment decisions of current owners.

When people's human capital is poorly suited for a market focussed organisation then the economic hardships suffered by these people, because of privatisation and exposure to work outside of the state sector, could
significantly increase support for opposing privatisation in the first place and for revising privatisation should it happen. Human capital changes only slowly and policy changes such as privatisation can make specific human capital largely obsolete over night. It is not hard to believe that people caught up in such changes would oppose privatisation, at least in the short term. This could be one factor in the opposition to privatisation in New Zealand.

Denisova, Eller, Frye, and Zhuravskaya close their paper by noting

Two optimistic lessons emerge from our analysis for those who are concerned about the consequences of revising privatization. First, while support for revising privatization in the region is very high, about 70 percent of respondents ultimately support private property. Second, most of the support for the revision of privatization due to illegitimacy comes from negative personal experiences during the transition, and these transition experiences are likely to play a smaller role in shaping attitudes over time.

Expectations and the employment effect of minimum wages

From the Economic Logic blog comes this comment on Expectations and the employment effect of minimum wages. In many markets it is known that anticipated changes in policy can have different effects to unanticipated changes in policy.

Sara Polini applies this idea to labor markets and specifically to the anticipation of movements in the minimum wage. She builds a search and matching model and applies it to Spain where minimum wage changes are usually anticipated, but occasionally not, like after the 2004 terrorist attack that lead to a surprise Socialist government. Anticipated changes lead to a reduction in employment, while unanticipated ones do not. This reconciles the ambiguous and inconclusive results in the literature, which ignored whether changes were anticipated or not.

But what happens over time, presumably unanticipated changes will have to be adjusted for at some point in the future.

Jeffrey Miron on the death penalty

He writes,

Death penalty supporters rely on three arguments. First, that the possibility of capital punishment deters crime by increasing the expected punishment that confronts rational, forward-looking murderers. Second, that executing criminals convicted of the most serious crimes is cheaper than incarcerating them for life. Third, that murderers deserve to die.

None of these arguments is persuasive. Decades of social science research finds little evidence that the death penalty deters murder. Some murderers are not forward looking (e.g., perpetrators of crimes of passion), and forward-looking murderers correctly believe their chances of being executed, even if arrested and convicted, are low and will only occur years or decades after conviction. The monetary savings from use of the death penalty are overstated, since fighting appeals from death row prisoners is costly. Moral considerations do not resolve the issue because many people believe it is wrong for the state to take a life, no matter how heinous the crime.

The death penalty, moreover, has unintended consequences. Capital punishment eliminates the possibility of correcting mistakes. This is not an enormous effect if most convicted murderers are guilty, but everyone benefits from correcting the mistakes that do occur. As with gun control, the death penalty is a distraction. Society wastes substantial energy arguing about the death penalty rather than focusing on policies that would actually reduce crime, such as ending drug prohibition, legalizing prostitution, and improving educational outcomes.

The effects of the death penalty is one of the most controversial issues in law and economics. At Freakonomics Justin Wolfers blogs on How the Supreme Court Misread My Research: Empirics and the Death Penalty. Wolfers writes

Cass Sunstein and I have an Op-Ed in today’s Washington Post, discussing the mis-reading of available empirical evidence in recent death penalty jurisprudence. Some background: A recent Supreme Court ruling (Baze v. Rees) reaffirmed the constitutionality of the death penalty, and along the way, the justices revisited the empirical literature on whether the death penalty has been shown to be an effective deterrent. Justice Stevens cited research by John Donohue and myself in concluding that “there remains no reliable statistical evidence that capital punishment in fact deters potential offenders.” Countering this, Justice Scalia cited a paper by Cass Sunstein and Adrian Vermeule, in arguing that the data do in fact point to deterrence. As two of the supposed flag bearers for the competing views cited by the court, Sunstein and I thought it worth poring over the data to see what we agree on. It turns out there’s a lot of agreement between us: “In short, the best reading of the accumulated data is that they do not establish a deterrent effect of the death penalty.”

Ronald Bailey at Reason magazine asks Does It Really Matter If The Death Penalty Deters Murderers? In the article Bailey argues

The reason to retain the death penalty is vengeance, or as more polite people put it, retribution.

But notes at the end of the article

... in the era of post-conviction exoneration through DNA testing, I have become much more uncomfortable about the possibility that an innocent person might be executed.

This I think is the biggest problem with the death penalty, if you get it wrong there is nothing you can do about it ex post.

An economic forecast I'm almost certain will come true ...........

(HT: Aid Watch)

The rise and fall of central banking

In this audio from VoxEU.org Howard Davies, director of the London School of Economics, talks to Romesh Vaitilingam about his new book, co-authored with David Green, ‘Banking on the Future: The Fall and Rise of Central Banking’. Among other things, they discuss the cost-effectiveness of central banks, the characteristics of an ideal central bank governor, and potential reform of the voting structure at the European Central Bank.

Paul Samuelson misread Hayek (updated)

Hands up who is surprised to hear that!

Donald J. Boudreaux writes to the Wall Street Journal

Justin Lahart accurately reports that, as recently as last year, the late Paul Samuelson dismissed F.A. Hayek’s book The Road to Serfdom as alarmist and wrong: “Sweden and its Scandinavian neighbors are among the most socialistic countries in the world, as Mr. Hayek defined them, Mr. Samuelson pointed out. ‘Where are their horror camps?’ he [Samuelson] wrote” (“The Glenn Beck Effect: Hayek Has a Hit,” June 17).

But Mr. Samuelson profoundly misread Hayek’s book. Hayek said that “the planning against which all our criticism is directed is solely the planning against competition – the planning which is to be substituted for competition.” So because Scandinavian countries emphatically do not plan in this way, Samuelson was mistaken to say that their socialism is of the sort that Hayek believed paved the road to serfdom. Those countries have reasonably free trade, only light regulation of capital markets and business, and strong private property rights. In short, all Scandinavia retains what for Hayek was the most significant protection against serfdom: competitive economies.

And while Hayek would disapprove of the size of Scandinavian welfare states, he stated explicitly that “Nor is the preservation of competition incompatible with an extensive system of social services.”

Paul Samuelson’s long history of misrepresenting Hayek’s arguments has done a great disservice not only to one of the 20th century’s wisest minds but also – and more importantly – to the countless people who would have read Hayek but for Mr. Samuelson’s mischaracterization of The Road to Serfdom.

While I'm not surprised to read that Samuelson misrepresented Hayek's work I do sometimes wonder why people focus so much on The Road to Serfdom when talking about Hayek's work. It isn't his best stuff. To me his papers like "Economics and Knowledge", "The Use of Knowledge in Society" and "Competition as a Discovery Procedure" are much more interesting and important.

Update: In the comments Eric Frampton points us to this interesting looking paper on the Hayek-Samuelson debate: Hayek, Samuelson, and the logic of the mixed economy? by Andrew Farranta and Edward McPhail.

A legacy of the holocaust in Russia

A new paper by Daron Acemoglu, Tarek A. Hassan and James A. Robinson looks at Social Structure and Development: A Legacy of the Holocaust in Russia. The abstract reads:

We document a statistical association between the severity of the persecution and mass murder of Jews (the Holocaust) by the Nazis during World War II and long-run economic and political outcomes within Russia. Cities that experienced the Holocaust most intensely have grown less, and both cities and administrative districts (oblasts) where the Holocaust had the largest impact have worse economic and political outcomes since the collapse of the Soviet Union. Although we cannot rule out the possibility that these statistical relationships are caused by other factors, the overall patterns appear generally robust. We provide evidence on one possible mechanism that we hypothesize may link the Holocaust to the present the change it induced in the social structure, in particular the size of the middle class, across different regions of Russia. Before World War II, Russian Jews were predominantly in white collar (middle class) occupations and the Holocaust appears to have had a large negative effect on the size of the middle class after the war.

Sometimes history matters in very bad ways.

Has Frampton met Crampton?

The Press tells us that, with regard to the Christchurch mayoralty race,

Canterbury University senior economics lecturer Eric Frampton, who sits on the iPredict advisory board, said the Christchurch mayoralty contest had attracted plenty of trading.

and

"Parker started to drop after Anderton confirmed he was running and he fell further after this week's poll came out," Frampton said.

Perhaps Eric Frampton should meet his colleague Eric Crampton, of Offsetting Behaviour fame, they seem to have much in common.

Well done The Press!! Not.

How to fight the war on drugs

I have just come across a 2004 NBER working paper on "The Economic Theory of Illegal Goods: the Case of Drugs" by Gary S. Becker, Kevin M. Murphy, and Michael Grossman. The abstract reads:

This paper concentrates on both the positive and normative effects of punishments that enforce laws to make production and consumption of particular goods illegal, with illegal drugs as the main example. Optimal public expenditures on apprehension and conviction of illegal suppliers obviously depend on the extent of the difference between the social and private value of consumption of illegal goods, but they also depend crucially on the elasticity of demand for these goods. In particular, when demand is inelastic, it does not pay to enforce any prohibition unless the social value is negative and not merely less than the private value. We also compare outputs and prices when a good is legal and taxed with outputs and prices when the good is illegal. We show that a monetary tax on a legal good could cause a greater reduction in output and increase in price than would optimal enforcement, even recognizing that producers may want to go underground to try to avoid a monetary tax. This means that fighting a war on drugs by legalizing drug use and taxing consumption may be more effective than continuing to prohibit the legal use of drugs. (emphasis added)

What this means is that legalisation of drugs is the best anti-drugs policy.

Ed Glaeser has this to say on the Libertarian view of the drug war in his review of Jeff Miron's book "Libertarianism, from A to Z",

In some cases, like drug legalization, his views are clever if not nuanced -– “the right policy toward drugs is legalization.” Professor Miron’s writing on drugs is interesting not because his overall view is a surprise, but because he has spent decades marshaling arguments and facts in favor of drug legalization. Drug prohibition, he asserts, “harms the public purse,” because of both the cost of enforcement and the lost tax revenues; breeds “disrespect for the law”; “enriches drug traffickers”; leads drug dealers to resort to violence and causes some “thrift-minder users” to use more dangerous drugs that have “the biggest bang-for-the-buck.” He also asserts that some people would benefit by using drugs and that the risk of imprisonment and higher prices that drug laws bring do excessive damage to drug users. Professor Miron’s warning that drug prohibition erodes civil liberties concerns anyone who worries about the millions of Americans who have become part of the prison system because of our drug laws.

In other words the war on drugs comes with seriously big costs.

Johan Norberg on the financial crisis

Johan Norberg on the financial crisis. He is discussing how bailouts, stimulus packages and zero interest rates create new bubbles, especially in emerging markets.

EconTalk this week

Johanna Blakely of the University of Southern California talks with EconTalk host Russ Roberts about the fashion industry and the role of intellectual property. In the fashion industry there is limited protection for innovative designs and as a result, copying is rampant. Despite the ease of copying, innovation is quite strong in the industry and there is a great deal of competition. Topics discussed include the role of the street in generating new designs, the role of fashion in our lives, and whether the host of EconTalk has any hope of being fashionable. The conversation concludes with a discussion of the Grand Intervention, an urban park design competition, and the potential of Second Life for studying social trends.

The rational optimist: how prosperity evolves (updated)

Matt Ridley, bestselling author of The Red Queen, Nature via Nurture, and other books, tells the story of human cultural and economic evolution in his latest work, The Rational Optimist: How Prosperity Evolves. Combining the best of economics and biology, he explains both the "how" and "why" of the amazing (and recent) explosion in worldwide human well-being. Against the pessimism of many of today's intellectuals and commentators, Ridley presents a compelling case for why progress will continue, but only if cultural evolution is allowed to develop in the direction of more contact, trade, and openness between people.

Update: Matt Ridley, the Rational Optimist, Answers Your Questions over at the Freakonomics blog.

I'm in the wrong business

Not PC has recently put up his Blog Stats for May. Seeing these I took a look at some of my own stats. And yes nobody reads Anti-dismal. Ok the Standard thinks six people do, but that seems an over estimate. This didn't come as much of a surprise given that a couple of weeks ago another economist spent part of a Friday night complaining to me how boring and pointless the blog is. And this was after I bought him a beer!! But today I took at look at the draft programme for the upcoming New Zealand Association of Economists conference and there was nothing there that would make me spend even other peoples money to go and see.

I take from all of this that what interests me doesn't interest anyone else, be they economist or non-economist. May be I am in the wrong business.

Klein on people's political views and their understanding of economics

Here's a short audio of Dan Klein being interviewed about his recent Wall Street Journal article on the relationship between people's political views and their understanding of economics.

I discussed the article more fully here.

Quote of the day

John Goodman writes,

In general, a bureaucratic system is one in which normal market forces have been systematically suppressed. In such an environment, there tends to be a sea of (relative) mediocrity, sometimes punctuated by little islands of excellence. Further, the islands of excellence tend to be randomly distributed. They do not correlate with much of anything.

In other words without market forces you can not weed out under performance or reward those who preform well. Excellence therefore trends to be random.

Math in econ

At his blog Economics One John Taylor writes, with respect to the use of maths in economics,

People are always surprised by the amount of math used in teaching economics in graduate school, and some think it is used too much. In an interview with Milton Friedman I published several years ago, he said “I go back to what Alfred Marshall said about economics: Translate your results into English and then burn the mathematics. I think there’s too much emphasis on mathematics as such and not on mathematics as a tool in understanding economic relationships.” While I agree about the need to explain the mathematical results in simple terms, I do not agree about burning the math once translated. Mathematical methods are now used in practice in economics and finance in both the public and private sector, from auctioning the spectrum to matching medical students and residence programs. People need to have an intuitive understanding of the methods, but you also need the math (and the computer programs) to make them work.

I would say that Marshall, who was trained as a mathematician, is basically right about the maths, you should burn it in as many cases as you can. However there are some situations where you can't and thus you have to live with it. I would also say that Friedman is right when he says "I think there’s too much emphasis on mathematics as such and not on mathematics as a tool in understanding economic relationships." Maths should be the handmaiden to the economics and not the other way round.

Does professor quality matter?

The question is asked by Scott E. Carrell and James E. West in a paper in the Journal of Political Economy. The answer?

In primary and secondary education, measures of teacher quality are often based on contemporaneous student performance on standardized achievement tests. In the postsecondary environment, scores on student evaluations of professors are typically used to measure teaching quality. We possess unique data that allow us to measure relative student performance in mandatory follow-on classes. We compare metrics that capture these three different notions of instructional quality and present evidence that professors who excel at promoting contemporaneous student achievement teach in ways that improve their student evaluations but harm the follow-on achievement of their students in more advanced classes.

But what incentives do the profs have? Basically to get their evaluations up, to hell with what happens after.

The answer to low savings rates ..............

more gay couples. At least this is the answer from Tim Harford. He writes

IZA DP No. 4961

Brighita Negrusa, Sonia Oreffice:

Sexual Orientation and Household Savings: Do Homosexual Couples Save More?

Abstract:
We analyze how sexual orientation is related to household savings using 2000 US Census data, and find that gay and lesbian couples own significantly more retirement income than heterosexuals, while cohabiting heterosexuals save more than their married counterparts. In a household savings model, we interpret this homosexual-specific differential as due to the extremely low fertility of same-sex couples, in addition to the precautionary motives driving cohabiting households to save more than married ones. Evidence from homeowners’ ratio of mortgage payments to house value exhibits the same pattern of savings differentials by sexual orientation and cohabiting status.

I would list a number of caveats at this point but who cares? Thoughtful people will know exactly what they are and trolls will do what trolls do.

Not an answer I had seen before ... or even thought of.

Self-identified liberals and Democrats do badly on questions of basic economics (Updated)

This is the conclusion of a study by Daniel B. Klein and Zeljka Buturovic published in the May issue of Econ Journal Watch. In a recent piece in the Wall Street Journal Klein writes,

Who is better informed about the policy choices facing the country—liberals, conservatives or libertarians? According to a Zogby International survey that I write about in the May issue of Econ Journal Watch, the answer is unequivocal: The left flunks Econ 101.

Respondents were asked about their political leanings: progressive/very liberal; liberal; moderate; conservative; very conservative; and libertarian and were asked eight economics based questions. Klein goes on to explain how Buturovic and himself conducted their study,

Rather than focusing on whether respondents answered a question correctly, we instead looked at whether they answered incorrectly. A response was counted as incorrect only if it was flatly unenlightened.

Consider one of the economic propositions in the December 2008 poll: "Restrictions on housing development make housing less affordable." People were asked if they: 1) strongly agree; 2) somewhat agree; 3) somewhat disagree; 4) strongly disagree; 5) are not sure.

Basic economics acknowledges that whatever redeeming features a restriction may have, it increases the cost of production and exchange, making goods and services less affordable. There may be exceptions to the general case, but they would be atypical.

Therefore, we counted as incorrect responses of "somewhat disagree" and "strongly disagree." This treatment gives leeway for those who think the question is ambiguous or half right and half wrong. They would likely answer "not sure," which we do not count as incorrect.

In this case, percentage of conservatives answering incorrectly was 22.3%, very conservatives 17.6% and libertarians 15.7%. But the percentage of progressive/very liberals answering incorrectly was 67.6% and liberals 60.1%. The pattern was not an anomaly.

The other questions that respondents were asked, along with the unenlightened answers,were:
1) Mandatory licensing of professional services increases the prices of those services (unenlightened answer: disagree).
2) Overall, the standard of living is higher today than it was 30 years ago (unenlightened answer: disagree).
3) Rent control leads to housing shortages (unenlightened answer: disagree).
4) A company with the largest market share is a monopoly (unenlightened answer: agree).
5) Third World workers working for American companies overseas are being exploited (unenlightened answer: agree).
6) Free trade leads to unemployment (unenlightened answer: agree).
7) Minimum wage laws raise unemployment (unenlightened answer: disagree).

As to the results, Klein writes,

How did the six ideological groups do overall? Here they are, best to worst, with an average number of incorrect responses from 0 to 8: Very conservative, 1.30; Libertarian, 1.38; Conservative, 1.67; Moderate, 3.67; Liberal, 4.69; Progressive/very liberal, 5.26.

I wonder how different the results of such a survey would be in New Zealand. I would guess there would be little difference.

Update: In the comments Eric points out that he has answered my question about New Zealand here.

Long story short: left wing ideology correlates with a reduction in economic thinking (0.2 sd) but also with a reduction in political ignorance (0.3 sd). Political ignorance correlates with reduced economic thinking (0.23 sd), so the absolute effect of left wing ideology on economic thinking is a bit smaller than the partial effect. But there's still an overall negative effect.

The impact of annual report language on firms: yes there is one

You may think that the language a firm's annual report is issued in would not matter. If you do it looks like you could be wrong.

This comes from the Economic Logic blog:

Thomas Jeanjean, Hervé Stolowy and Michael Erkens show that publishing an annual report in English, in addition to the local language, increases the pool of potential investors and thus reduces information asymmetry. They are careful to address the endogeneity issue here, of course, as a firm may issue an English report because the investor base has broadened. This language effect is similar to the adoption of particular accounting standards, as this allows investors to better understand the firm. Empirically, this improved information translates into lower bid-ask spreads on the stock market, larger following by analysts, and a larger share of foreign ownership. Whether this impacts also firm value is not addressed, though.

Do we need a central bank?

This is the question asked by Andre Johnston Phijuntjitr over at the IEA blog. He writes,

I will use the Federal Reserve as a case in point as it is a relatively new institution. Interestingly, the US survived until 1913 without a central bank and enjoyed robust growth. Since then the Fed has essentially failed in its objectives of ensuring monetary and financial stability. Interest rates have fluctuated between zero and 21 per cent, prices have continued to rise, and financial crises have been frequent.

Vigorous booms in the US are generally characterised by an artificial expansion of credit followed by a proportionately vigorous bust (the more unremarkable recessions of yesteryear, although more frequent, tended to be shallower). Recessions or depressions that have corresponded to central bank manipulations have produced substantial shifts in the economic sub-structure - we have seen multiple sectors of the economy suffer in the current crisis. In the past, business cycles were just that. Their cyclical configuration led to redundant institutions being liquidated and growth continuing again. Since the Great Depression, however, this kind of cycle has in effect been prohibited though big government and big bank initiatives. But when a boom and bust has happened, it has had much deeper effects on the whole economy.

As the Federal Reserve has tried to prevent recessions, economic growth on average has slowed. While there may be many reasons for this, the assumption that central banks bring both stability and growth is questionable. Indeed, it could be argued that the attempted suppression of the business cycle has been a source of weakness to the US economy.

The recent crisis and the response to it only highlights the shortcomings of the current banking system based around a central bank. If we want innovation and growth in the economy we do not want the impetus of artificial credit. Saving and production, not debt and consumption, are the drivers of economic growth. Robert Higgs at The Beacon looks at the actions of the Fed in the recent crisis. He writes,

Everybody now understands that economic central planning is doomed to fail; the problems of cost calculation and producer incentives intrinsic to such planning are common fodder even for economists in upscale institutions. Yet, somehow, these same economists seem incapable of understanding that the Fed, which is a central planning body working at the very heart of the economy—its monetary order—cannot produce money and set interest rates better than free-market institutions can do so. It is high time that they extended their education to understand that central planning does not work—indeed, cannot work—any better in the monetary order than it works in the economy as a whole.

If markets work for other commodities, why not money?

EconTalk this week

Daniel Okent, author of Last Call: The Rise and Fall of Prohibition, talks about the book with EconTalk host Russ Roberts. They discuss how the 18th Amendment banning the manufacture, sale, and transport of intoxicating beverages came to pass in 1920, what life was like while it was in force, and how the Amendment came to be repealed in 1934. Okrent discusses how Prohibition became entangled with the suffrage movement, the establishment of the income tax, and anti-immigration sentiment. They also discuss the political economy of prohibition, enforcement, and repeal--the quintessential example of bootleggers and baptists.

May be one for Geoff Palmer.

Incentives matter: safe cars file

Tim Harford wants more dangerous cars:

The trouble with cars these days is that they’re too safe. Of course, I don’t write as a driver; I write as a cyclist. Drivers quite reasonably feel that they’re so well protected by their seatbelts, bull-bars, airbags, ejector seats and the rest that they can afford to take risks. Cyclists and pedestrians are the ones on the receiving end.

We need more dangerous cars. A spear mounted on the steering wheel, pointing at the driver’s heart, would do nicely. Cheese wire instead of seat belts would work too. Of course, these innovations would skewer and slice the typical crash-test dummy, but drivers aren’t crash-test dummies. Give them the right incentive and they will drive more carefully, to the benefit of the cyclists and pedestrians.

This, of course, is just the Peltzman effect.

Trade and firms

In a footnote in some of my current work on the theory of the firm I write,

The first existence of a firm becomes even more problematic if we consider a farm as a firm. Farming is an ancient human activity. At what historical point did the farm first become a firm? Ofek (2001: chapter 13) argues that agriculture developed with a symbiotic relationship to exchange/trade and thus farms can seen (at least partially) as firms from a very early stage.

I have now come across an article in the Wall Street Journal by Matt Ridley in which he says,

Agriculture was invented where people were already living in dense trading societies. The oldest farming settlements of all in what is now Syria and Jordan are situated at oases where trade routes crossed, as proved by finds of obsidian (volcanic glass) tools from Cappadocia. When farmers first colonized Greek islands 9,000 years ago they relied on imported tools and exported produce from the very start. Trade came before—and stimulated—farming.

So again we see the argument that trade and farming (and thus firms) are closely related. The question is why? One possibility follows from the fact that we specialise in production but diversify in consumption. Thus if we set up a farm and start producing, say, meat but want to also consume, say, grains in some form, we need to obtain those grains. How? We swap meat for grain, in other words we trade. It is arguable that one necessary factor is making sure that farming survived was the ability to trade, in that trade meant we were able to specialise in production but were also still able to diversify our consumption.

Ridley also notes,

Once human beings started swapping things and thoughts, they stumbled upon divisions of labor, in which specialization led to mutually beneficial collective knowledge. Specialization is the means by which exchange encourages innovation: In getting better at making your product or delivering your service, you come up with new tools. The story of the human race has been a gradual spread of specialization and exchange ever since: Prosperity consists of getting more and more narrow in what you make and more and more diverse in what you buy. Self-sufficiency—subsistence—is poverty.

A specialised, trading unit of production, like a farm, is basically a firm. Thus firms are a very old human institution. Just not as old as trade.

• Ofek, Haim (2001). Second Nature: Economic Origins of Human Evolution, Cambridge: Cambridge University Press.

An interesting turn of events

In 1992 Professor John Carroll co-edited a book "Shutdown: The Failure of Economic Rationalism and How to Rescue Australia". As Roger Kerr notes,

In it Carroll blasted the Hawke-Keating government’s economic reform programme that began in 1983. In essence that Labor government abandoned Fortress Australia policies, liberalised imports, floated the dollar, deregulated industries, corporatised and then privatised government businesses, and adopted more disciplined fiscal and monetary policies.

Recently in the The Australian newspaper Carroll wrote,

MICHAEL Stutchbury refers disparagingly to a book, Shutdown, that I co-edited with Robert Manne in 1992 ("Goodbye to the notion neo-liberalism caused the global financial crisis," 17/4). My view today, with the benefit of hindsight, is that Shutdown was basically wrong. I was principally troubled in 1992 with Australia's escalating international debt, and the consequent foolishness of running down local manufacturing (which would also aggravate the already high unemployment rate). My prediction was that an economic crisis loomed.

The reality turned out to be just the opposite: nigh on two decades of unprecedented economic growth. Moreover, industry policy in 1992 to encourage local manufacturing would have been almost entirely doomed once Chinese export production got into full gear -- something that could not have been foreseen then.

To me now, the past two decades support the maxim: if in doubt, trust the free market.

This brings to mind the famous quote by John Maynard Keynes,

When the facts change, I change my mind. What do you do, sir?

As Roger Kerr also notes

John Carroll was widely congratulated in Australia for admitting his earlier folly.

Will any of the anti-reformers in New Zealand, the likes of Brian Easton, Tim Hazledine, Paul Dalziel, Bryan Gould, Hunter Wade, Keith Rankin or Jane Kelsey, look at the facts and change their minds?

Rothbard on the size of firms

I have been rereading Murray N. Rothbard's essay "Ludwig von Mises and Economic Calculation Under Socialism". In this Rothbard argues that Mises's argument about the impossibility of socialism can be applied to the problem of the size of firms. Rothbard argues that

There is one vital but neglected area where the Mises analysis of economic calculation needs to be expanded. For in a profound sense, the theory is not about socialism at all! Instead, it applies to any situation where one group has acquired control of the means of production over a large area - or, in a strict sense, throughout the world. On this particular aspect of socialism, it doesn't matter whether this unitary control has come about through the coercive expropriation brought about by socialism or by voluntary processes on the free market.

In other words it can apply to a firm.

Rothbard continues

[ ... ] Mises analysis also supplies us the answer to the age-old criticism leveled at the unhampered, unregulated free-market economy: what if all firms banded together into one big firm that would exercise a monopoly over the economy equivalent to socialism? The answer would be that such a firm could not calculate because of the absence of a market, and therefore that it would suffer grave losses and dislocations. Hence, while a Socialist Planning Board need not worry about losses that would be made up by the taxpayer, One Big Firm would soon find itself suffering severe losses and would therefore disintegrate under this pressure. We might extend this analysis even further. For it seems to follow that, as we approach One Big Firm on the market, as mergers begin to eliminate capital goods markets in industry after industry, these calculation problems will begin to appear, albeit not as catastrophically as under full monopoly. In the same way the Soviet Union suffers calculation problems, albeit not so severe as would be the case were the entire world to be absorbed into the Soviet Union with the disappearance of the world market. If, then, calculation problems begin to arise as markets disappear, this places a free-market limit, not simply on One Big Firm, but even on partial monopolies that eradicate markets. Hence, the free market contains within itself a built-in mechanism limiting the relative size of firms in order to preserve markets throughout the economy.

Rothbard then notes that this argument is related to Coase's argument about the size of firms.

This point also serves to extend the notable analysis of Professor Coase on the market determinants of the size of the firm, or of the relative extent of corporate planning within the firm as against the use of exchange and the price mechanism. Coase pointed out that there are diminishing benefits and increasing costs to each of these two alternatives, resulting, as he put it, in ah " 'optimum' amount of planning" in the free market system. Our thesis adds that the costs of internal corporate planning become prohibitive as soon as markets for capital goods begin to disappear, so that the free market optimum will always stop well short not only of One Big Firm throughout the world market but also of any disappearance of specific markets and hence of economic calculation in that product or resource. Coase stated that the important difference between planning under socialism and within business firms on the free market is that the former "is imposed on industry while firms arise voluntarily because they represent a more efficient method of organizing production." if our view is correct, then, this optimal free-market degree of planning also contains within itself a built-in safeguard against eliminating markets, which are so vital to economic calculation

While Rothbard makes a telling point about the limits of monopoly in free markets, the issue of the size of the firm that Coase was interested in, I would argue, was what determined the size of the firm well before the firm gets to the point where it takes over entire input markets. There must be other factors limiting the size of the firm that become relevant before it gets to the point of controlling its input markets.

Quote of the day

From Coordination Problem

During his talk Eric quoted Henry Ford: "If I'd asked people what they wanted, they would have asked for faster horses."

Part of being an entrepreneur is seeing answers others don't.

A reality check on the Gulf spill (updated)

Jeffrey Miron at Forbes.com makes four important points about the ongoing debate about the oil spill in the Gulf. Miron writes

1. Drilling produces benefits, not just costs. As pictures of the spill appear nightly on television screens, it is easy to forget that oil has value.

2. Incidents like the Gulf spill, or the Exxon Valdez disaster in Prince William Sound, Alaska, are horrific but rare. Drilling has occurred for decades in locations around the world, with only a few incidents even approaching the harm of the current situation. This incident may show that deep-water drilling is too risky, but it might instead be just a perfect storm of ineffective regulation, poor decision-making, and bad luck, with minimal chance of recurrence.

3. The environmental damage caused by the spill, and the lost income from fishing, tourism, and so on, are enormous but finite. Eco-systems (such as Prince William Sound) recover from oil spills to a substantial degree, and within decades, not centuries. We should not understate the damages, but we should not overstate them either.

4. Even if the costs from drilling are much greater than was recognized pre-spill, that does not make Cap-and-Trade a good policy. The risks from drilling mean the social costs exceed the private costs, so policy should raise the private costs. One approach is less drilling, or more regulation, or increased liability for drillers; this discourages drilling relative to other sources of energy. A second approach is higher carbon taxes, which push markets to substitute away from oil.

These points have been largely overlooked in much of the (over)reaction to the spill. Good analysis of the situation should take them into action.

Update: Bryce Edwards suggests this article: Let’s put the Gulf-spill crisis into perspective

Airlines and returns to scale

Over at his blog John Macilree notes that the Top 10 airlines almost all have relatively small home markets. Could this simply reflect the fact that airlines have increasing returns to scale which require a large market to exhaust and thus airlines in small countries have an incentive to enter the international market, which is more competitive than the local markets, and quality improvements are driven by the increased competition.

Privatisation and Greek debt problems

Economist Alan Meltzer puts privatisation forwrd as a partial solution to Greek debt problems: He writes

Much of Greece’s industry and commerce, including much of the tourist industry, is owned by the state. It should be sold with the proceeds used to reduce public debt. That would make the remainder of the debt more sustainable and transfer workers to the private sector where competitive pressures for lower wages and increased productivity would more closely align employment costs and reality. If the socialist government returned more of the economy to the private sector, Greece would have a better chance of economic recovery.

I'm not so sure about this. While there is no doubt privatisation would help the Greek economy, doing privatisation properly takes time and Greece needs money now. A rush for revenue could result in a privatisation programme that does more harm than good. As I have noted before, just trying to maximise revenue from privatisation programmes isn't always a good idea, you should maximise revenue subject other constants such as getting the market structure right, increasing competition, putting good regulation in place etc. Theses thing will help the economy but also lower the price an SOE can be sold for. The most obvious example of this is that monpolies sell for more than competitive firms but competitive markets are better than monopoly markets.

Treasury Secretary pays tribute to former Secretary Bernie Galvin

But I think he was also the guy that gave us Think Big. Not his best idea.

Via Scoop:

Treasury Secretary John Whitehead today paid tribute to former Secretary Bernie Galvin, who passed away yesterday.

Mr Galvin headed the organisation from 1980-1986, a time of volatility that featured the repercussions of the second oil shock, the devaluation of the dollar in 1984, the end of the Muldoon era, and the economic reforms of the 1980s.

An able economist, he joined the Treasury in 1955 under then Secretary Henry Lang as one of his first recruits, and was highly regarded by the revolutionary Lang. “Bernie proved exceptional from the beginning,” Mr Whitehead said. “He joined the Treasury at a time when very few graduates were recruited into the organisation, yet he was hand-picked by Henry.” The pair went on to develop a deep and mutual respect.

Mr Galvin, who came from a staunch Irish Catholic background, had a strong sense of social justice and was highly intelligent, Mr Whitehead said.

“He did try very hard to encourage economic debate within the organisation, and much of the work that informed the 1984 Budget was done under his watch, and with his active leadership.

“His time in what became the Department of the Prime Minister and Cabinet was really groundbreaking,” Mr Whitehead said. “He and Robert Muldoon invented it, and he staffed it with the best people he could find. The agency did make a material difference in ensuring that the public sector worked more closely together.

“He will be remembered with great admiration and much affection.”

EconTalk this week

Louis Menand of Harvard University talks with EconTalk host Russ Roberts about the state of psychiatry. Drawing on a recent article of his in the New Yorker, Menand talks about the state of knowledge in psychiatry and the scientific basis for making conclusions about mental illness and various therapies. Menand argues that the research record shows little difference between the effectiveness of psychopharmacology and talk therapies of various kinds in fighting depression. Neither is particularly successful in any one case. Other topics that are discussed include the parallels between economics and psychiatry in assessing causation, the diminished role of Freudianism in modern psychiatry, and the range of issues involved in using medication to avoid pain and hardship.

Lies, damn lies and Marty G

Over at the (ever lower) Standard Marty G has gone into comedy mode and has written The weak neolib defence of asset sales as a counter to my previous posting Privatisation: the "facts". Read Marty's piece, but please don't laugh too loudly as you may disturb others.

For a start I didn't offer a "defence of National’s privatisation agenda" since from what I have heard of it there are a number of things I would say are wrong with it, partial sales for example. And what exactly is "neo-liberalism"? Is this just Marty's name for good economics?

I said

Actually no we don’t [own the SOEs]. The government does. The government has the residual control rights over these assets and thus they own them.

Marty said

In the neoliberal mind, the government isn’t an expression of society’s collective will and cooperation, it’s a business. You and I know that what the government owns it owns on our behalf. The privatisers see a business to be asset-stripped.

Well the "government isn’t an expression of society’s collective will and cooperation" so he right about that, but it also isn't a "business". Even the left-wingers like Paul Krugman has worked this out. See his article, A Country Is Not a Company, in which he asks: Should politicians turn to business leaders for advice in formulating economic policy? And he answers no as countries are not companies.

Anyway, none of this has anything to do with my point, which is very simple: we the people do not have residual control rights over state assets, the government does, and thus the government, and not we the people, is the owner of those assets. The question is about who has the rights of control over SOEs in all situations not contracted for, and the answer is the government and thus they are the owners. Marty does not address this basic point at all. As Oliver Wendell Holmes Jr. put it,

But what are the rights of ownership? They are substantially the same as those incident to possession. Within the limits prescribed by policy, the owner is allowed to exercise his natural powers over the subject-matter uninterfered with, and is more or less protected in excluding other people from such interference. The owner is allowed to exclude all, and is accountable to no one. (The Common Law, p193, (1963 edn.))

That is, the owner has residual control rights. For SOEs this owner is the government.

I said

They may not [end up owning privatised assets] but why should we worry? The idea of the sale of any asset is to get it in the hand of whoever values the asset most highly. That may or may not be “Mum and Dads”.

Marty said

Out comes the truth. The assets go to the people with money. Look closely: “whoever values the asset most highly”. Neoliberals equate value with money. Who values a loaf of bread more? A starving man with no money or a rich man who wants to sop up his soup? According the neoliberals, the one who will pay the most money. They don’t understand that an asset will be bought by the people with the most money even though others may value the asset more highly.

The point I was making is simply that if you want the owner of an asset to have the best incentives to use that asset efficiently then you want that asset in the hands of whoever values that asset most highly. Social welfare is maximised when we use our resources efficiently and thus we want assets allocated to those who will use them efficiently. This may be Mums and Dads, in which case they can buy and hold on to shares in a firm. If they choose to sell them to someone else, then it must be that the new owner values those shares more highly than the Mums and Dads and is thus willing to pay the Mums and Dads more than the Mums and Dads value those shares. Because, in short, trade is voluntary.

I said

“Privatisation harms markets”. I’m not sure that even make sense. I’m not sure how getting more firms into a market can “harm the market” – whatever that means. The evidence tells us that privatisation increases competition in markets and I can’t see how that “harms the market”.

Marty said

Oh dear. Who hear thinks the electricity market is working better now than it was when it was before the Bradford reforms that partially privatised it? The introduction of privatisation to natural monopolies has historically lead to under-investment and competition based on advertising, not quality and price.

Well actually the electricity market is doing better thanks to the Bradford reforms so Marty is wrong here. Also the electricity reforms had little to do with privatisation, so I don't get Marty's point. (For discussions of New Zealand's electricity markets see the postings by Seamus Hogan, who knows lots more about this than most people, on the topic over at Offsetting Behaviour.)

I would like to see Marty's evidence for this assertion: "The introduction of privatisation to natural monopolies has historically lead to under-investment and competition based on advertising, not quality and price." The general point about privatisation in (near) monopoly markets is that the outcome is more dependent on the design and regulation of the market than on privatisation as such. The need to introduce competition and an effective regulatory regime emerges as key issue for markets such as these. (see William L. Megginson's book "The Financial Economics of Privatization", New York: Oxford University Press, 2005 for discussion.)

I said

"Privatisation leads to asset-stripping". It may or may not. In some cases that is exactly what should happen. In a number of cases, eg NZ Rail, the business as sold wasn’t viable and thus needed reorganisation. Privatisation is a good way of doing this.

Marty, for some reason, said

You read it here first (unless you’re one of the 6 people who read Anti-dismal): the Right supports asset-stripping. I love that they picked rail as an example of asset-stripping working. The fact is we got to the edge of losing a vital piece of national infrastructure which private owners had extracted huge profits from and then dumped back into the government’s hands, knowing it couldn’t let it collapse.

Now who exactly is "the right"?

The point about NZ Rail was that a lot of it was simply not economical viable, and as Kiwirail still isn't. In the July 2009 issue of Competition and Regulation Times put out by the New Zealand Institute for the Study of Competition and Regulation (ISCR) the question is asked, Kiwirail: strategic asset or strategic blunder? The article summaries an ISCR research paper "The history and future of rail in New Zealand" by Dave Heatley.

My view has, for awhile, been nearer the blunder end of the scale than the asset end. The Times article and the research paper argue along similar lines. Heatley opens his Times article by noting that back in 1999 one of the first projects undertaken by the ISCR was a study of the long-term economic performance of New Zealand railways.

Public rail ownership was characterised by declining performance, beginning in the 1920s and culminating in a very poor prognosis in the 1990s. There were signs that since 1993, privatisation had led to improved productivity and profitability; however, the business was still far from achieving financial sustainability. The ISCR report predicted that private-sector ownership would result in better incentives for productivity-enhancing decision making, but in the long run it was unlikely that in its current form the business would be able to generate returns sufficient to cover the costs of the very large sums of capital employed. Given these facts, a rational private owner would likely rationalise services and reduce the scale of the network to the point where it constituted a sustainable long-run business. Revenues freed up from repeated cycles of historic government-funded capital injections and operating subsidies could then be applied to more productive uses, to the wider benefit of the New Zealand economy.

Given that rail is again in the hands of the government it is timely to re-examine the assumption that government ownership will result in superior long-term outcomes for the long suffering taxpayer owners. Heatley writes,

The 2009 analysis reveals little evidence to suggest that overall the economic outlook for rail has improved since 1999. Despite gains in operational productivity, rail's share of the land freight task has declined over the period examined. Profitability has remained poor, suggesting an ongoing lack of competitiveness vis-a-vis other freight modes.

and continues

Rail networks offer benefits from economies of density (increasing use of existing tracks), but not necessarily from economies of size (increasing size of the network).' In a rail network with uneven patterns of use, such as New Zealand's, the economics of density means that the closure of lightly used lines will, in general, improve the overall economic performance of the network.

Importantly Heatley notes that

It proved difficult for private owners to rationalise the size of the network efficiently, due to poorly aligned incentives and political intervention in operational decisions such as exiting from the provision of certain long-distance passenger services.

The retention of land ownership by the Crown at the time of privatisation muted private incentives to rationalise the network as the private operator was unable to access the potential land-sale benefits from closing unprofitable lines. Private-sector owners have been incentivised to persevere with a strategy (originating under public ownership) of retaining otherwise uneconomic lines for their current income-generating potential, but refraining from investing in replacement infrastructure such as sleepers, tracks and bridges.

A return to integrated land, infrastructure and operational ownership resolves the incentive misalignment, enabling its new owners to rationalise network infrastructure efficiently. Yet perversely, extensive recapitalisation has followed re-nationalisation. The government has invested $2.9 billion in rail since 2002, and has committed a further $0.9 billion through to 2013. It is unlikely that the government will earn a reasonable financial return on this investment, as the strong incentives of private owners for ongoing productivity improvements will likely be muted under government ownership, and the scope for political intervention in strategic and operational activities has increased.

The consequences of political intervention are evidenced in the targets set for a modal shift from road to rail freight in the New Zealand Transport Strategy. Any increases in rail freight's share must ultimately come from substitution at the margins away from competing transport modes. Extensive competition from both road and sea freight restrains the ability of rail to set prices. Rail exhibits few apparent cost advantages, even with subsidies from the written-off opportunity cost of capital. So modal shift can only be driven by increasing the level of subsidies in order to lower prices artificially and therefore induce movement of marginal freight away from more efficient road and sea freight. Such shifts will be to the detriment of the overall economic performance of the transport sector and the wider New Zealand economy.

There is little evidence that the real costs of the current government ownership and investment strategy have been adequately assessed in terms of foregone benefits in other taxpayer-funded areas, such as health and education.

After this, an obvious question to ask is, Is there light at the end of the tunnel? Heatley comments,

The 2009 analysis confirms that the issues identified in 1999 still remain, and are unlikely to be addressed by recent changes in governance, ownership and policy direction. Yet rail still remains a viable transport medium for those segments to which it is intrinsically well-suited - long-haul carriage of heavy, bulky freight (coal, logs, manufactured goods, etc.) and high volume urban commuter services. The challenge for rail's new owners is to find a viable subset of the current rail network. Given current and projected freight and passenger types and volumes, it appears a viable subset exists at around 1500-2000 kilometres in length - less than half the present size. Line closures and land sales could fund upgrading of the core network to 21st-century standards.

So, rail makes sense for a small portion of the current network. However I can't see the changes in government policy and public perceptions need for rationalisation of the network coming to pass any time soon. So the taxpayer gets stuck with yet another white elephant.

I said

We also get a bad deal on SOE sales.” How can we tell? If this means we don’t get the highest price possible for an asset then why worry? The idea idea for asset sales isn’t to sell at the highest price, if it was then the government should make all SOE’s into monopolises before selling them as monopolises command a higher price than competitive firms. Even Marty G should be able to see the problem with that!!!!

Marty went on to say

OK. That’s a bit of a mad rant. Selling assets at a low price is a good thing? For whom? Oh, yeah, the rich buyers, like Fay and Richwhite who made half a billion dollars by buying government assets for fire-sale prices and hocking them off quick for more.

Selling assets at a low price is good? Yes it can be. If fact selling at a (almost) zero price can be a good thing! For example, Anbarci and Karaaslan put forward An Efficient Privatization Mechanism:

In this paper, we consider the privatization of State-Owned Enterprises (SOEs) that are legal monopolies but not natural monopolies; their markets can be opened to competition once privatization takes place and other competitors can emerge and compete successfully against them in a few years. But until that happens, these privatized SOEs can have a significant level of market power. The currently used “Revenue Maximization (RM)” privatization scheme maximizes the government revenue from privatization but does not provide sufficient incentives for the privatized SOE eiher to charge a price lower than the monopoly price or to improve production efficiency until competition arises. We propose a new scheme to privatize such SOEs. We term this new scheme the “Welfare Maximization (WM)” scheme. The WM scheme practically yields no revenue to the government from the privatization of any such SOE; however, it induces the privatized SOE to charge a competitive price in the absence of any regulation. It also turns out that the WM scheme provides greater incentives for post-privatization process invention (i.e., for post-privatization cost reduction) than RM scheme. (emphasis added)

The point is that just trying to maximise the price received for an asset is not necessarily a good idea. In the above example welfare is maximised while revenue is basically zero. If revenue was the only concern, as it seems to be for Marty, then selling monopolies would be a good idea, as I pointed out before.

I said

Kiwibank doesn’t need to be partially sold to get money for expansion. The cheapest source of capital is the government” If this is true for Kiwibank then it is also true for all other firms and thus the government should supply the capital for all firms. To get capital allocated rationally you need the price of capital to be the market price so that it reflects the true opportunity cost of that capital.

Marty madly said

Anyone who thinks that capitalism succeeds in rationally allocating capital needs their head read. We’ve just gone through the largest recession in generations because of mis-allocation of capital. We’re on the brink of environmental collapse because we’re expending our capital on building SUVs rather than creating clean energy. The neolibs can’t actually counter my point – if Kiwibank needs more capital, the government is the best value supplier.

All of which has nothing to do with my point: If it is true that the government is the cheapest source of capital for Kiwibank then it is also true for all other firms and thus the government should supply the capital for all firms. What is so special about Kiwibank? Why does this business get cheap finance when others do not? Like I said, to get capital allocated rationally you need the price of capital to be the market price so that it reflects the true opportunity cost of that capital.

Marty has to explicitly explain why Kiwibank is different from all other businesses in New Zealand and thus needs government funds while all other businesses do not. Why is it that the opportunity cost of capital for Kiwibank is a lower government rate whereas the cost for all other business is a higher market rate?

And the government's record on allocating capital is far from good, remember Think Big? For the government to supply capital at a lower rate to Kiwibank gives that bank an advantage over other banks who must go to the capital markets for their funds. What would the Commerce Commission say about this?

Also, as an aside, the much of the mis-allocation of capital in the recent financial crisis was due to government actions, mainly in the US: keeping interest rate too low for too long, trying to push too many people into housing, altering the incentives that banks face for lending etc. Also it not clear that Marty's examples of mis-allocation are actually mis-allocations. If consumers like SUVs its not a mis-allocation of resources for producers to make them.