Wednesday, 29 August 2012

What is it about Labour and economics?

Another example of Labour getting basic economics wrong. Thanks to a message at the Homepaddock blog my attention to drawn to this comment on the upcoming partial sale of Mighty River Power:
Labour's state-owned assets spokesman, Clayton Cosgrove, seized on the result as evidence the company was in no fit state for sale.

"Mighty River's profits have almost halved. That will have a real impact on their share price if the Government rushes ahead with the sale. Listing a struggling company in a market like this is economics for dummies."
But the current level of profits of the company doesn't determine what people will pay for (part of) the company. The sale price will be determined by the expected future profits of the firm. Even if this years profits are down, what matters to investors are future profits. If investors think the future is likely to be good they will pay more for the firm no matter what the current level of profits are. Investors are forward looking, not backward looking as is the case with Clayton Cosgrove.

There are, I would argue, good reasons for not liking the partial sell-off of SOEs but Cosgrove's argument isn't among them.

1 comment:

Anonymous said...

Not to mention that falling profits are another reason for the company to be in private hands