Pragmatic analysis says maybe we should privatise more government businesses, but we should also consider nationalisation. We should certainly consider better regulation, Brian Easton says

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

An earlier column argued that we should make the government’s net worth – the value of its assets less its liabilities – more prominent in fiscal policy. Net worth is also fundamental when we are discussing whether an asset should be privatised or nationalised.

The privatisation boom began with Rogernomics, but as Roger Douglas later confessed, ‘I am not sure we were right to use the argument that we should privatise to quit debt. We knew it was a poor argument but we probably felt it was the easiest to use politically.’ Then we had no measure of net worth for the government accounts so it was difficult to explain that while privatisation would reduce public debt, it made no difference to net worth. (There was a similar difficulty explaining corporatisation, which involved the government reshuffling its balance sheet; this is all a long time ago, it but left a scar on those whose task it was to explain to the public what was happening.)

Douglas’s real argument was that private businesses would perform better in private hands. Actually, there is not a lot of evidence for his better-efficiency proposition if one compares the privatised companies with when they were publicly owned corporations. There is more evidence of gains when comparing the public corporations with the ramshackle public management of the Muldoon era.

Here is how I got to the pragmatic position on which the following analysis is based. In adolescence I believed the fashionable, but ideological, position that there should be more nationalisations. This was challenged by Arnold Nordmeyer, then leader of the Labour Party, who once asked a meeting of students whether they should nationalise everything including grocery stores (which had yet to be replaced with supermarkets). I concluded there was a line to be drawn where on one side the economic activity should be left to the private sector and on the other it was better left to the public sector. I have spent the following sixty years thinking about that line. While there are some clear examples for either side, there is much fuzziness about the exact line. People of goodwill can disagree, even using the same evidence.

At that time there was a debate over ‘Clause Four’ in the constitution of the British Labour Party which stated the party’s aim was of ‘the social ownership of the means of production, distribution, and exchange’. I was persuaded that the clause should be replaced by ‘the social control of the means of production, distribution, and exchange’.

Social ownership is a means of social control but it is not the only means and not necessarily the most effective one. Often that could be achieved by ‘workable competition’, where the state sets up a framework which results in the industry meeting the social goals in the market. The ownership of a store in a competitive market does not give the owner a lot of significant social control. That should be generally true for ownership in a properly regulated market. So there is no need to nationalise grocery stores.

Economists have a more rigorous notion of ‘competition’ than popular sentiment, which is happy to adopt the economists’ conclusions derived from competition theory even when they do not apply. A monopolist will say they are ‘competitive’, but that is not what an economist means.

To simplify, economists refer to pure competition when there are numerous firms in the market, that it is easy for them to leave and new ones to join and where customers are reasonably informed. The economist’s conclusion is that this result in maximum efficiency – use of resources to attain a given output – and, under certain assumptions (which are not always applicable) a high rate of innovation. There are downsides. For instance, the economic outcome may not be equitable. Some economists recommend addressing fairness with other policies; others just ignore it. (I leave you to work out their politics.)

Practically, many markets are not ‘competitive’ in this economic sense. This is particularly true in a small economy like New Zealand; we cannot adopt the conclusions from larger economies without considerable adaption. Instead, we look for ‘workable competition’, for market structures which are near enough to be fully competitive to reap similar benefits. Typically, that involves at least five firms (more if they have very different production technologies). With fewer than five, each firm can game one another at the expense of the public. So as numbers of actors in a market get smaller, the case for intervention gets greater. One form of intervention may be public ownership.

The stupidity of ignoring these regulation issues is illustrated by the privatisation of Telecom in 1989, when government did not even have a paper which addressed them. When, following the restructuring of the Post Office, telecommunications had been split out into Telecom, a publicly owned corporation, the government had directed the business to operate in ways which reduced the monopoly’s ability to exploit its market dominance. It had a natural monopoly of the lines connecting telephones which it could use to control service provision and exploit its customers. Sold off into the private sector, Telecom promptly abandoned those directions.

Some will tell you that Telecom was very successful, citing its profitability, but that may mean it was exploiting its monopoly and overcharging. There are three major indicators this was the underlying situation. First, business customers and consumers grumbled about Telecom’s services. Second, it manifestly failed to get the broadband rollout under way. Third, in order to achieve the rollout, the government separated the line part of the company (now Chorus) from the service part of the company (now Spark). The share price promptly crashed because shareholders knew that Telecom could no longer exploit its monopoly power. Today, Spark is a very ordinary company.

This example illustrates the difficulties of market design. Typically, the businesses which the Treasury Investment Statement says are being reviewed for privatisation are in complicated market structures. The pragmatic decision is complicated.

How the Treasury will work through the list is not known. First, it should sideline those agencies which primarily have social objectives which the market does not capture well, despite the government having put them into a corporate ‘for-profit’ form. They include HealthNZ and RNZ. Considering social objectives in other businesses is important too. I was not initially a fan for Kiwibank but I was persuaded by the failure of the commercial banking system to provide for the needs of modest income households.

Second, there should be far more attention to the regulatory framework than was given at the time the Rogernomics privatisation. (We especially need to move away from the nonsense that adding one more to a handful of competitors is a full solution to a lack of competitiveness.)

Third, a non-ideological review will also look at the possibility of nationalising (or re-nationalising). There is a case, for instance, for there being a single electricity business like Electricorp, rather than a handful of businesses gaming one another in the short term when the industry needs a long-term strategy.

Fourth, we should accept that the line between what should be in the public domain and what in the private domain is fuzzy and will be resolved in part ideologically (a.k.a. who you vote for). One consequence is that any analysis should not rest only with the Treasury, as it would if the only concern was the government’s debt position, but requires the involvement of other agencies including the Ministry of Business, Innovation and Employment and the Ministry of Regulation.

Apologies if this column’s conclusions do not align with your ideology. It should inform it.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.