Privatisation in New Zealand ... or rather the lack of it (updated)

In an article first published in the New Zealand Herald on 8 May 2008 Roger Kerr makes an obvious, but important, point with regard to privatisation in New Zealand, we are swimming against the tide. His article is Privatisation: New Zealand Swimming Against the Tide (pdf).

Kerr opens the article by noting

A few years ago the World Bank observed that “Privatisation is now so widespread that it is hard to find countries not using the approach: North Korea, Cuba and perhaps Myanmar make up the shrunken universe of the resistant.”

Clearly the World Bank had not noticed New Zealand on the map.

In fact New Zealand has gone in the opposite direction with the unfortunate buy-back of Air New Zealand and the railways and ferries, the setting up of a bank, Kiwibank, and the renationalisation of ACC, for example. To reinforce just how different we are, a friend sent me figures on the number of SOE's in Vietnam:

• 1989: 12,300
• 2001: 5,600
• 2005: 3,000
• 2007: 2,100, 1,500 of which are to be privatised in the next few years

Kerr goes on to note

Some people associate privatisation with right-wing politics because it was first initiated on a large scale by Margaret Thatcher’s government in Britain.

Actually the first large scale privatisation programme was started in 1974 in Chile, a few years before the Thatcher programme started in the UK. But the Chilean case would still, I'm sure, lead many to see privatisation in terms of "right-wing politics".

Kerr goes on to make the point that

The worldwide moves over the past 25 years to move state enterprises into the private sector have been driven by the evidence of major economic gains in the form of improved efficiency and profitability, lower prices and better services, and more investment and output.

This does not mean that all private businesses are success stories and all SOEs underperform. Rather, the point is that, on average and over time, the private sector is better than politicians at running commercial businesses, and governments should not bet against the odds with taxpayers’ money.

It is noted that

The picture in New Zealand is similar. Corporatisation and privatisation contributed to the surge in productivity growth in the 1990s. Productivity growth has slumped since 2000.

Corporatisation looks, on the surface, like an attractive option. We get the advantages of privatisation but with continued government ownership. But the problem with it was noted more than 10 years ago by Spicer, Emanuel and Powell in their book "Transforming Government Enterprises: Managing Radical Organisational Change in Deregulated Environments" (The Centre for Independent Studies, 1996). They warned that there are two pressures on SOE's: the first being towards privatisation since the productivity and efficiency gains achieved by SOE are in danger of being eroded over time. Privatisation is a way of both cementing in the commercial orientation of enterprises and wringing out further gains resulting from the high powered incentive and control mechanisms which can be bought to bear in privately owned and publicly traded companies. The second pressure on SOEs is towards being pulled back into the public sector where social and political objectives can be more readily be meet. What we have seen under the Clark government is the second of these pressures being very strong. But not for socially useful reasons. Most interventions seem to be more politically motivated.

All of this does raise the issue of when should the government own a firm? When is it economically desirable to have government control and production?

As a general guide, Hart, Shleifer and Vishny ("The Proper Scope of Government: Theory and an Application to Prisons", Quarterly Journal of Economics, 112(4): 1127-61, November 1997) argue that the case for government provision of goods or services is generally stronger when non-contractible cost reductions have large deleterious effects on quality, when quality innovations are unimportant and when corruption in government procurement is a severe problem. It has been argued that the case for government production is strong in such services as the conduct of foreign policy, police and armed forces. The case can also be made reasonably persuasively for the case of prisons. The case for private sector provision is stronger when quality reducing cost reduction can be controlled through contract or competition, when quality innovations are important and when patronage and powerful unions are a severe problem inside the government.

Its not clear that the government's interventions have been in areas where the Hart, Shleifer and Vishny arguments would suggest the government should be involved. Banking, for example, is not a area where cost reduction come at the expense of quality, where innovation is unimportant or where there are any problem with government procurement. So why have the government owning Kiwibank? Also government involvement in Air New Zealand is hard to justify on these grounds. As noted above, the case for private sector provision is stronger when quality reducing cost reduction can be controlled through competition, and the airline industry is very competitive, when quality innovations are important, and we want a high quality and innovative airline industry, and when patronage and powerful unions are a severe problem inside the government, which are things we wish to avoid with an airline. Here private provision makes sense.

Kerr concludes his article by saying

The political aversion to privatisation is costing New Zealand potential gains in living standards. A Business Roundtable study (www.nzbr.org.nz) estimated that New Zealand could gain around 1% of GDP a year by privatising SOEs (leaving aside local government-owned businesses).

Unless wages and other incomes in New Zealand are to drift further behind those of Australia and other countries, this is an economic reform that will have to come back on the political agenda sooner or later.

We can only hope its sooner.

Update: Kiwiblog comments on the Kerr article here.

The promise of prediction markets

There is an article in latest Science journal on The Promise of Prediction Markets (pdf) (it has 22 authors and is only two papers long!) The key point of the piece is the problems caused by regulation for the development of these markets:

Unfortunately, however, current federal and state laws limiting gambling create significant barriers to the establishment of vibrant, liquid prediction markets in the United States. We believe that regulators should lower these barriers by creating a legal safe harbor for specified types of small stakes markets, stimulating innovation in both their design and their use.

I wonder what the situation is in New Zealand?

There is a website on which you can find regular updates on what's happening in prediction markets. The site covers ongoing research that provides guidelines, prescriptions, rules, conditions, action statements, or advice about what to do in given situations.

(HT: Freakonomics)

Caplan on Fox (updated)

Bryan Caplan on Fox talking about the gas tax holiday idea put forward by Hillary Clinton and John McCain.

Caplan's New York Times article on this issue is The 18-Cent Solution. Caplan points out why most economist are opposed to the Clinton-McCain plan

Why are economists so opposed? In the short run, the supply of gasoline is basically fixed; it takes a while to build a new refinery. The demand for gasoline, in contrast, is more responsive to price; we’re already seeing greater use of public transportation and brisk sales of fuel-efficient cars. When you combine fixed supply with flexible demand, it’s suppliers, not demanders, who pocket the tax cut. That’s Econ 101.

Caplan goes on to present two arguments in favour of the plan

The first is that the tax holiday is a relatively cheap symbolic gesture that makes truly bad policies less likely. The main causes of high gas prices are probably factors beyond our control, like rapid growth in China and India and low real interest rates. But voters don’t want to hear this; they want politicians to “do something!”

and

Second, even a “giveaway” to the oil industry [i.e. oil companies pocket most of the tax cut] sets a positive course for the future. During the last crisis, the industry was a scapegoat for scarcity. Politicians scrambled to stop oil companies from profiting from the crisis, even though temporarily high profits end shortages by giving businesses an incentive to figure out how to increase output.

(HT: Bayesian Heresy and Greg Mankiw)

Update: Bryan Caplan talks with Bloomberg's Tom Keene about the proposals by Clinton and McCain to suspend the federal tax on gasoline, the outlook for the presidential election and impact of the dollar's decline on oil prices.

Norberg on Klein

From the Cato Institute Briefing Paper series we get an paper on Naomi Klein's book "The Shock Doctine". The paper is The Klein Doctrine: The Rise of Disaster Polemics (pdf) by Johan Norberg. The executive summary reads,

Naomi Klein's The Shock Doctrine purports to be an exposé of the ruthless nature of free-market capitalism and its chief recent exponent, Milton Friedman. Klein argues that capitalism goes hand in hand with dictatorship and brutality and that dictators and other unscrupulous political figures take advantage of "shocks"—catastrophes real or manufactured—to consolidate their power and implement unpopular market reforms. Klein cites Chile under General Augusto Pinochet, Britain under Margaret Thatcher, China during the Tiananmen Square crisis, and the ongoing war in Iraq as examples of this process.

Klein's analysis is hopelessly flawed at virtually every level. Friedman's own words reveal him to be an advocate of peace, democracy, and individual rights. He argued that gradual economic reforms were often preferable to swift ones and that the public should be fully informed about them, the better to prepare themselves in advance. Further, Friedman condemned the Pinochet regime and opposed the war in Iraq.

Klein's historical examples also fall apart under scrutiny. For example, Klein alleges that the Tiananmen Square crackdown was intended to crush opposition to pro-market reforms, when in fact it caused liberalization to stall for years. She also argues that Thatcher used the Falklands War as cover for her unpopular economic policies, when actually those economic policies and their results enjoyed strong public support.

Klein's broader empirical claims fare no better. Surveys of political and economic freedom reveal that the less politically free regimes tend to resist market liberalization, while those states with greater political freedom tend to pursue economic freedom as well.

Answers too complex?

Why are petrol prices high? Are the reasons so terribly complex that most voters can not understand them? Given much of the coverage in the media you would tend to think so. But Thomas Sowell thinks otherwise. For him the problem isn't that the explanation is complex rather that it isn't emotionally satisfying. Petrol prices are high because demand is high. As Sowell asks

Is there anything complex about the fact that with two countries-- India and China-- having rapid economic growth, and with combined populations 8 times that of the United States, they are creating an increased demand for the world's oil supply?

He goes on to point out that

The problem is not that supply and demand is such a complex explanation. The problem is that supply and demand is not an emotionally satisfying explanation. For that, you need melodrama, heroes and villains.

What villains? Well oil companies are a good place to start. Just think about all those "obscene profits" they are making.

What about those "obscene" oil company profits we hear so much about?

An economist might ask, "Obscene compared to what?" Compared to the investments made? Compared to the new investments required to find, extract and process additional oil supplies?

But as Sowell notes

Asking questions like these are among the many reasons why economists have never been very popular. They frustrate people's desires for emotionally satisfying explanations.

Economists are not popular but politicians have to be.

A politician's problem is how to get more votes-- and one of the most effective ways of doing that is to be a hero who will save us from the villains.

Of course they may have to invent the villains, but that's no problem. If fact it can be useful. Its easier to save people from villains you created in the first place.

More on the sale of Panmure House

Previously I had written on the sale of Adam Smith's house, see Support an Academic Future for Adam Smith's House. The decision of the City of Edinburgh Council (May 13, 2008) on the sale is available here. The Council agreed to the sale of Panmure House to the Edinburgh Business School (the Graduate School of Business at Heriot-Watt University), subject to the agreement of the Scottish Ministers to the sale being less at less than market value. For more on the sale see these postings, here and here, at Adam Smiths Lost Legacy blog.

Phillips Curve: read the paper now get the T-shirt,

From those at the LSE student union, the Phillips curve 50th anniversary T-shirt.

Chinese trade and pollution

It has been noted by many commentators that Chinese trade and pollution have exploded over the last decade. Some have looked at the correlation and determined causation, namely that the trade is causing the pollution. But new evidence shows that trade isn’t to blame for the pollution. In fact, Chinese imports and exports are becoming cleaner over time. Judith M. Dean and Mary E. Lovely make this point in a recent article, Trade growth, global production, and environmental degradation, at VoxEU.org. Dean and Lovely explain

In a recent working paper, “Trade Growth, Production Fragmentation and China’s Environment,” we calculate and track the pollution content of China’s export and import bundles from 1995 to 2005. Our calculations rely on official Chinese measurements of direct emissions of four pollutants for about 30 Chinese industries. We find that as China’s trade has grown, the pollution intensity of almost all sectors has fallen in terms of water pollution (measured by chemical oxygen demand (COD)) and air pollution (measured by SO2, smoke or dust) in 2004. This finding suggests that China has benefited from a positive “technique effect,” as emissions per real yuan of output have fallen across a wide range of industries.

Our study also reveals that China’s major exporting industries are not highly polluting, and that the export bundle is shifting toward relatively cleaner sectors over time. In 1995, textiles and apparel accounted for the largest shares of Chinese exports to the world, but these shares fell by about a third over the following decade. Office and computing machinery and communications equipment, in contrast, were the fastest growing exports and accounted for the largest export share in 2005. What is striking is that these growing sectors are cleaner than textiles and apparel; indeed, they are among the cleanest manufacturing sectors by the available measures of air and water pollution. The most polluting sectors, such as paper and non-metallic minerals, have in fact very low and declining shares in China’s manufacturing exports.

Linking industrial pollution intensities to detailed trade statistics from China Customs, we find that, contrary to popular expectations, China’s exports are less water pollution intensive and generally less air pollution intensive than Chinese import-competing industries. Moreover, both Chinese exports and imports are becoming cleaner over time. Part of this trend reflects changes in the composition of the trade bundle, as noted above. However, our evidence suggests that most of the fall in the pollution content of China’s trade is due to changes in industrial pollution intensities (how China produces), rather than in trade patterns (what China exports and imports). This latter finding has important implications as it suggests that the downward trend is not dependent on relationships with particular trade partners.

They goes on to also note that

Finally, we find some evidence that international production fragmentation, the breaking of production into distinct processes, may have played a role in reducing the pollution content of Chinese trade. “Processing trade” alone accounts for about 56% of the growth in China’s exports and 41% of the growth in China’s imports between 1995 and 2005. If investment in processing activities expands the range of the production process performed in China, this investment will tend to make China’s production and trade cleaner. Additionally, if the foreign-invested enterprises responsible for most of this trade bring greener technologies than those used by domestic producers, this will tend to make trade even cleaner. We find strong evidence that Chinese processing exports are cleaner than Chinese ordinary exports. Statistical testing suggests that processing trade has played a key role in explaining the drop in the pollution intensity of Chinese exports over time and that FDI inflows have contributed significantly to this decline, even controlling for the processing trade share.

So maybe trade growth isn't as harmful to the environment as some would have us believe.

Dani Rodriks on food prices

Even Dani Rodrik makes sense once in awhile,

I must say that I do not quite understand the argument of those who criticize the earlier liberalization. It seems to me odd to fault the World Bank for advice some 15 years ago to eliminate import protection--so that domestic prices could come down at the time--while at the same time complaining about high prices now, even with the benefit of hindsight. If developing countries had all kept their import protection, the global supply of food would have been lower today, not higher. (That is because import protection would have led global production to be reallocated from efficient exporters to inefficient importers.) If you are for self-sufficiency, you must be willing to live with high prices.

This comes from a blog posting under the title Does the food price crisis enhance the case for self-sufficiency? Rodrik's answer: No.

Organ donors (updated)

Back on May 1st an effort to increase organ donors was launched. According to this news article

Organ donation campaigner Andy Tookey has launched a private donor register with the aim of giving participants prioritised access to other participants' organs.

The aim of the "Lifesharers" register is to give people an incentive to offer their organs for donation, hopefully boosting New Zealand's poor organ donor rate.

It is later noted that

Under the scheme, which was first started about four years ago in the United States, registered members' organs are offered to other registered members who need them.

If there is no match then they go to the next person on the organ waiting list.

Such a scheme gives an extra incentive that could help boost the donation rates, thereby saving more lives.

Update: The LifeSharers website is at LifeSharers

Nye on Wine, War and Trade

On EconTalk there is an interview with John Nye of George Mason University. Nye talks with Russ Roberts about the history of Britain and France's trade policy, why the British drink beer and why Ricardo's example of Britain trading wool for Portuguese wine is bizarre. Nye turns the traditional story on its head--he argues that France was more of a free trader than Britain and that the repeal of the Corn Laws was not the dividing line between Britain's protectionist past and free trade future. At the end of the discussion, Nye emphasizes the importance of domestic free trade for economic growth.

Productivity and wages in NZ and Australia

Back when Paul Krugman was still an economist he wrote

Economic history offers no example of a country that experienced long-term productivity growth without a roughly equal rise in real wages. In the 1950s, when European productivity was typically less than half of U.S. productivity, so were European wages; today average compensation measured in dollars is about the same. As Japan climbed the productivity ladder over the past 30 years, its wages also rose, from 10% to 110% of the U.S. level. South Korea's wages have also risen dramatically over time. ("Does Third World growth hurt First World Prosperity?" Harvard Business Review 72 n4, July-August 1994: 113-21.)

In other words productivity increases drive wage increases. Productivity is a measure of how efficiently inputs such as capital and labour are used within the economy to produce outputs of goods and services. The more output we get from a given amount of inputs the more productive we are. Labour productivity reflects improvements in how much output each worker can produce while multifactor productivity reflects increases in output due to improvements in knowledge, technology and innovation. So if New Zealand's government wants to close the gap between wages in New Zealand and wages in Australia, increases in productivity in New Zealand would have to be higher than those in Australia.

In a recent piece published in the Otago Daily Times and, in a slightly different form, in the New Zealand Herald, Roger Kerr notes that

In Australia wages are already some 30 percent higher than in New Zealand, and a comparison of productivity growth trends in the two countries suggests that the gap between the two will widen even further under present policies.

Consider the two graphs, from Kerr's article, below




The publication by Statistics New Zealand of productivity data for the ‘former measured sector’ (which covers most of the business sector and around 63 percent of the economy) allows comparisons with Australia to be made on a like-for-like basis. As the charts above show, for the period 1992-2000 the average annual rates of growth of both labour productivity and multifactor productivity in New Zealand on a point-to-point basis outstripped the comparable growth rates in Australia. This performance by New Zealand was based on the reforms of the post-84 period. But also consider the data for the 2000-7 period. Here the situation is reversed. As Kerr points out, we see

... Australia doing better than New Zealand, even though Australia’s average productivity growth rates have also declined relative to the 1990s. New Zealand’s average labour productivity growth rate has fallen to 1.2%, well below the 3% rate achieved in the earlier period.

Another factor affecting wages is hours worked. Here Kerr notes that

... recent data indicate that full-time employees in Australia work slightly longer average weekly hours than full-time employees in New Zealand.

Thus to catch up with Australia we must work harder and smarter. Kerr closes his article by explaining that

Recent IMF research has concluded that Australia’s superior productivity performance is largely explained by its economic reforms, particularly in the labour and product market areas.

And goes on to say that it is therefore

... mystifying that recent productivity research by the New Zealand Treasury does not focus on the impact of New Zealand’s economic reforms on the productivity improvements of the 1990s, and the impact of policy reversals and increased government spending, taxation and regulation on the much lower productivity growth rates in the current decade.

The issues Kerr raises here are those which the New Zealand government must address if it truly wishes to close the gap between us and Australia.

Free trade with China: flag file

This report tells us that

Police in southern China have discovered a factory manufacturing Free Tibet flags, media reports say. The factory in Guangdong had been completing overseas orders for the flag of the Tibetan government-in-exile.

Even John Minto would have to see the irony in this trade deal!

(HT: Marginal Revolution)

Tax freedom day for New Zealand (updated)

I notice from this New Zealand Business Roundtable press release that tax freedom day (pdf) for this year is today April 29. This is at least as far as the tax burden imposed by central government is concerned. The press release notes

... 29 April is a red letter day because it represents the day in the year when the average New Zealander stops working for the government and starts working for themselves.

“In other words it means that since the beginning of January the average New Zealander has nationally spent one third of the year working for central government.”

Note that the

... calculation of 29 April was based on central government core expenditure, which amounts to 32.4 percent of gross domestic product (GDP) according to the 2008 Budget Policy Statement.

But don't get too happy since

... the core central government spending measure understates the true tax burden because it leaves out or underestimates elements of government spending such as local government outlays. If these are included, total government spending in New Zealand, as measured by the OECD, is projected to be 42.4 percent of GDP in 2008.

On this basis, Tax Freedom Day would fall on 4 June.

But it gets worse since

[t]his broader measure highlights the extent to which New Zealand is a relatively high-taxed country. Compared with New Zealand, Tax Freedom Day on this measure comes a month earlier in Australia and Switzerland (4 May), about three 2 weeks earlier in Ireland (10 May) and Japan (14 May), and more than two weeks earlier in the United States (18 May).

So back to work, the government wants more income from you!

Update: Not PC is Still waiting for Tax Freedom Day.

Economic research to save the world

• Jeffrey S. DeSimone, “Fraternity Membership and Drinking Behavior,” NBER Working Paper No. W13262, July 2007.
• Jay Pil Choi, “Up or Down? A Male Economist’s Manifesto on Toilet Seat Etiquette.” Working Paper, Department of Economics, Michigan State University, 2002.
• Robert Oxoby, “On the Efficiency of AC/DC: Bon Scott versus Brian Johnson,” Economic Inquiry, forthcoming. The abstract reads:

  We use tools from experimental economics to address the age-old debate regarding who was a better singer in the band AC/DC. Our results suggest that (using wealth maximization as a measure of “better”) listening to Brian Johnson (relative to listening to Bon Scott) resulted in “better” outcomes in an ultimatum game. These results may have important implications for settling drunken music debates and environmental design issues in organizations.

(HT: Organizations and Markets)

William Bernstein on EconTalk

The history of trade is the topic of discussion between Russ Roberts and William Bernstein on EconTalk this week. Drawing on the insights from his recent book, A Splendid Exchange: How Trade Shaped the World, Bernstein talks about the magic of spices, how trade in sugar explain why Jews ended up in Manhattan, the real political economy of the Boston Tea Party and the demise of the Corn Laws in England. The discussion closes with the political economy of trade today and the interaction between trade and income inequality.

Incentives matter: anti-Aids file

A report from FT.com tells us that the World Bank backs anti-Aids experiment. The article says

Thousands of people in Africa will be paid to avoid unsafe sex, under a groundbreaking World Bank-backed experiment aimed at halting the spread of Aids.

The $1.8m trial – to be launched this year – will counsel 3,000 men and women aged 15-30 in southern rural Tanzania over three years, paying them on condition that periodic laboratory test results prove they have not contracted sexually transmitted infections.

Its one way to try and get incentives working for you rather than against you.

Freer Trade Could Fill the World's Rice Bowl (updated)

The title of Tyler Cowen's latest piece in New York Times speaks volumes, Freer Trade Could Fill the World's Rice Bowl. Cowen points out that there are a number of reasons for rising food prices but he asks the question, Why adjustment to these prices hasn't been easier. A big problem, he says, is that the world doesn't have enough trade in foodstuffs.

As an example he looks at rice. He writes

Although rice is the major foodstuff for about half of the world, it is highly protected and regulated. Only about 5 to 7 percent of the world’s rice production is traded across borders; that’s unusually low for an agricultural commodity.

So when the price goes up — indeed, many varieties of rice have roughly doubled in price since 2007 — this highly segmented market means that the trade in rice doesn’t flow to the places of highest demand.

Cowen goes on to say

The more telling figure is that over the next year, international trade in rice is expected to decline more than 3 percent, when it should be expanding. The decline is attributable mainly to recent restrictions on rice exports in rice-producing countries like India, Indonesia, Vietnam, China, Cambodia and Egypt.

The problem here is, of course, the incentives export restrictions give. When export restrictions are placed on any good it sends a message to producers of that good that their output is least profitable precisely when it is needed most. Restricted exports increases the local supply which reduces the local price, which reduces the return for local producers. In the case of rice this means that there is little incentive to plant, harvest or store rice. High prices should give producers the incentive to expand production, which is just what is needed for rice. But if producers can not access those high prices on the world market because of export restrictions, then they don't have the incentive needed. Cowen notes

Restrictions on the rice trade run the risk of making shortages and high prices permanent. Export restrictions treat rice trade and production as a zero- or negative-sum game where one country’s gain comes at the expense of another.

There are few areas in which free trade could do more good, than in the production of food.

Update: Not PC makes the point that When producing becomes illegal, prices go through the roof.

Trade with China and the poor

Awhile back John Minto had a rant in the Christchurch Press on the China free trade deal. My comments on the piece are here. At one point Minto wrote

... it [trade with China] will not improve the standard of living of New Zealanders. In fact, for the many of the most vulnerable it will be disastrous.

Now I learn from Marginal Revolution about a new paper that looks at Inequality and Prices: Does China Benefit the Poor in America? (pdf). The paper argues

Over the past three decades there has been a spectacular rise in income inequality as measured by official statistics. In this paper we revisit the distributional consequences of increased imports from China by looking at the compositional differences in the basket of goods consumed by the poor and the rich in America. Using household data on non-durable consumption between 1994 and 2005 we document that much of the rise of income inequality has been offset by a relative decline in the price index of the poor. By relaxing the standard assumptions underlying the representative agent framework we find that inflation for households in the lowest tenth percentile of income has been 6 percentage points smaller than inflation for the upper tenth percentile over this period. The lower inflation at low income levels can be explained by three factors: 1) The poor consume a higher share of non-durable goods —whose prices have fallen relative to services over this period; 2) the prices of the set of non-durable goods consumed by the poor has fallen relative to that of the rich; and 3) a higher proportion of the new goods are purchased by the poor. We examine the role played by Chinese exports in explaining the lower inflation of the poor. Since Chinese exports are concentrated in low-quality non-durable products that are heavily purchased by poorer Americans, we find that about one third of the relative price drops faced by the poor are associated with rising Chinese imports.

The emphasis at the end is mine. So the poor in the US do benefit from trade with China, the cost of living of the poor is being held down by trade with China. What we see is that inflation rates for the richest ten percent outpaced inflation rates for the poorest by about 6 percent. This wipes out two thirds of the rise in inequality during these years, and China is responsible for half of that reduction. Inequality is rising because of an education slowdown, see here, but trade helps to keep it lower. So the protectionists would not just make America poorer but also more unequal. Why should it be any different here? But I'm sure John Minto will tell us that it is different here.

Tyler Cowen adds an interesting aside.

Broda and Romalis also find that the poor are more likely than the rich to buy newer goods. Because of the lag in how quickly the CPI tracks new products, the researchers argue that once this "new goods bias" which serves to keep official inflation rates higher than they actually are since newer goods are typically cheaper, is factored out, inequality between the rich and the poor between 1994 and 2005 may not have changed at all.

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.