John Quiggin

Commentary on Australian & world politics from John Quiggin
  My Website with lots of newspaper and journal articles

Oz Blogs
Thursday, July 18, 2002


Ken Davidson is spot-on regarding Telstra. Bob McMullan makes some interesting points, but fails to recognise that the era of competition in telecommunications is basically over. Any sensible policy must take account of the natural monopoly characteristics of the industry. Meanwhile, the Oz continues mindless cheerleading for privatisation.

Take a look at the not-so-super power of America

This piece from the Guardian beat me to the punch. The idea that America is "the worlds only economic and military superpower", and can therefore do what it likes, belongs with the rest of the rhetoric of the bubble era. Like all societies, the US has finite resources.

Wednesday, July 17, 2002

Kevin Phillips ('of 'Emerging Republican Majority' fame) has an interesting piece onThe Cycles of Financial Scandal

Buddy can you spare a dime

A long thread in f**kedcompany deals with the Resurgence of begging in the US. As usual with this site, you have to wade through a lot of foulmouthed drivel, but most posters agree that beggars have returned to US streets in large numbers. In a country with no real welfare system, this is a sensitive economic indicator. When I lived in the US, during the 1990 recession, there were beggars almost on every corner in DC, but on subsequent visits, the numbers declined steadily, and by the late 90s, only a few, clearly mentally ill, remained.


The notion of a ‘mandate’ has played an important role in recent debates about the role of the Senate in Australia. However, the discussion of this topic has been, to put it mildly, confused. One important source of difficulty arises from the fact that the term ‘mandate’ can be derived from two, very different, sources.
The first, deriving from English debates about the role of the House of Lords, arises when a popularly elected government faces resistance from an unelected, or unrepresentative, Upper House. In the English constitutional arrangements of the 19th century, there was no way of resolving such a deadlock. Even if the Parliament was dissolved, and the government re-elected with a clear majority of the votes, the House of Lords retained its veto power, and used it to defeat bills for Irish Home rule and social-democratic reforms.
The only solution was the use of the Royal Power to create large numbers of new lords who would pass the necessary legislation. This solution was justified by the notion of the ‘mandate’, that is, the idea that the House of Lords was acting in defiance of the clearly expressed will of the people.
The second notion of mandate arose in a very different context, that of Imperial China. As in other autocracies, Chinese political theorists faced a conflict between a theoretical structure that demanded absolute obedience to the Emperor and the empirical fact that emperors were regularly overthrown. The solution was found in the notion of the ‘Mandate of Heaven’. The idea was that the requirement of obedience was conditional on the Emperor's possession of the mandate of heaven. Once this was lost, rebellion was justified.
In practice, the success or failure of rebellions determined whether the mandate of heaven had or had not been lost. The same reasoning is reflected in the English aphorism ‘Treason never prospers: whats the reason. If it prosper, none dare call it treason’.
In most recent Australian debates, it is the Chinese version of mandate theory that has been at issue. No government in the last two decades has received a majority of the popular vote, rendering the popular mandate theory moot at best. In many cases, such as the proposed privatisation of Telstra, parties opposed to the policy have received a majority of votes, so that popular mandate theory justifies Senate resistance.
The basic claim of Chinese-Australian mandate theory is that, having secured executive power in the form of a majority in the House of Representatives, a government is entitled to unconditional obedience from the Parliament and the courts. This theory has been advanced with equal assurance whether or not the government in question received a majority of the ‘two-party preferred vote’, further emphasising the irrelevance of popular mandate theories.
The obvious problem with Chinese mandate theory is that it has no answer to successful defiance. If some provincial warlord or democratic republic ignores the Emperor and repels his armies, the Mandate of Heaven ceases to apply. Similarly, if the Senate rejects government legislation year after year, and is re-elected in much the same form, what does it matter whether there is a mandate or not. Since the theory has no ethical foundations, it is little more than a decorative adornment. If the government fails to get its legislation passed, mandate theory is useful, and if the government succeeds, it is superflous.

Monday, July 15, 2002

The Hauser Report picks up Mickey Kaus on the same point as me, regarding his dodgy comparisons of US and German unemployment (the figures are distorted by the former East Germany), and adds some new ones.

Sgt Schulz at the helm has a nice piece on CEOs who claim ignorance of large-scale fraud being carried out under their noses. These guys are undermining 1990s-style turbocapitalism more effectively than any left-wing diatribe.

50 per cent increase in US business honesty

The number of major US corporations reporting their profits honestly has jumped from two to three with the news that Coke is to Report Stock Options as an Expense. The others, for those interested, are Boeing and Winn-Dixie.
Meanwhile, other US corporations are learning a lesson long familiar to Soviet planners. If you give people a strong enough incentive to meet a target, they'll move the target if they have to. One of many examples is the idea of Linking Executive Pay to Sales

Sunday, July 14, 2002

What I'm reading this week

Holiday brochures for Mission Beach, NQ. It's the time of year in Canberra when everyone who can, gets out, either North to the sun or up to the snow. I'm going to try and get a bit of both, if I can manage it.

Private, public or mixed

Henry Ergas has an interesting piece, defending privatisation in general, while criticising the sale of Sydney Airport. Henry nominates me as ‘the most perceptive critic of privatisation’, and I'll return the compliment by observing that Henry is the most persuasive advocate of the case for 'light-handed regulation' of privatised monopolies such as Telecom NZ and (assuming Howard gets his way) Telstra.
Henry's basic point about Sydney Airport is the same one that I've made. While the sale looks like a good deal for the public at first glance, the price was boosted by raising the monopoly prices the airport is allowed to charge, relaxing regulation and ruling out any competition from a second airport in the foreseeable future.
The more general point is that privatisation cannot be assessed simply by looking at the effect on the net worth of the public sector, that is, the difference between the sale price and the value of the earnings that would have been achieved under continued public ownership. If privatisation is accompanied by policy changes that make the market more or less competitive, or changes in working conditions, quality of service and so on, these effects must be taken into account in working out the total effect on the welfare of the community.
I've focused on the net worth test in assessing past privatisation because most advocates of privatisation have got it wrong - claiming that privatisation has been good for public finances when as Ergas notes ‘many past privatisations would have failed the net-worth test’. But the net worth test provides an evaluation of privatisation on an ‘other things equal’ basis (economists like the Latin version, ceteris paribus).
For a complete evaluation it's necessary to take account of regulatory changes and so on. In my assessments of privatisation, I've tried to do this. Nevertheless, the net worth test is still relevant.
In the Australian context, many of the changes that are commonly associated with privatisation have occurred separately, as a result of the corporatisation of government business enterprises and the introduction of regulatory systems designed to be ‘competitively neutral’ between public and private firms. Corporatised government business enterprises have employment conditions more similar to their private counterparts than to old-style government departments. In particular, they have shown themselves willing to undertake labour-shedding on a large scale. On the other hand, private enterprises that are subject to extensive regulation necessarily become responsive to political pressures rather than pure market forces.
As Ergas says, the differences that cannot be eliminated are those associated with ownership. He notes:
For example, before Telstra was partly privatised, each Australian citizen could be said to own a non-tradeable 'share' in Telstra.
Because shares are non-tradeable government business enterprises are not subject to the threat of takeover, and the associated capital market discipline. But estimates of the costs and benefits of takeovers vary widely. In the mid-1980s, a lot of Australian commentators were very enthusiastic about the market discipline imposed by raiders like Bond, Skase and Elliot. When their jerry-built empires collapsed, more realistic assessments suggested that, even where there were benefits, they had been greatly exaggerated. The recent scandals in the US, which have particularly affected ‘serial acquirers’ like Tyco and Worldcom, are leading to a similar reassessment there.
Moreover the costs and benefits are not all one way, as Ergas implies. Public ownership of Telstra is a form of social insurance - the risks associated with profits and losses are spread through the tax system.
Like other forms of social insurance, this is a ‘one size fits all’ solution. As Ergas notes, 'This means that people who wanted to take on the risk of owning more shares in return for greater reward could not do so'. The disadvantages of inflexibility must be balanced against the fact that compulsory risk-spreading through the tax system is much more cost-effective than market alternatives. The superiority of is reflected in the difference between real rate of return required for typical private investments (around 8 per cent, even in relatively stable areas like infrastructure) and the real rate of return on government bonds (generally less than 4 per cent).
Whenever costs and benefits of alternative approaches must be balanced, the optimal outcome is likely to be a mixture of the two. The mixed economy, in which some goods and services are produced by the private sector and others by the public sector has historically outperformed the alternative extremes of pure socialism and free-market capitalism. In recent years, some lessons have been relearned the hard way. The wave of privatisation in the infrastructure sector (telecommunications, electricity, roads etc) has been followed, in many cases, by a return to public ownership, as the defects of the privatisation model became apparent.

Thursday, July 11, 2002

Mickey Kaus continues the US vs Europe culture wars, relying on the tried-and-true argument of lower US unemployment. He writes
" German Chancellor Gerhard Schroeder is entitled to a bit of schadenfreude, but generalizing from the U.S. accounting scandals to the general inferiority of U.S.-style shareholder-oriented corporate governance seems a leap. ("Now it has been revealed that egotism practiced at the top under the catchphrase 'shareholder value' is worth less in macroeconomic terms, but also as far as the companies themselves are concerned ....") What's Germany's unemployment rate again? Oh, yes -- 9.5 percent. [Thanks to kf reader A.E.]"
Unfortunately, going to his source, The Nando Times, we find:
"Last month's increase was exclusively due to the former communist east Germany. Western Germany, which accounts for most of the nation's economic output, reported a 7.6 percent jobless rate for June, unchanged from May. "
The US (5.9 per cent) still looks to have an advantage, but add in 2 million mostly unemployable people locked away in prisons and jails, and the difference is pretty much zero. This was a great argument for the late 90s, when the US rate was 4 per cent and falling, but it's run out of legs today.

Unsafe at any IQ

Gareth Parker weighs in on the question of ads for fast cars, posing it as a question of personal responsibility.

"The problem is this. Every time someone else decides for us what is "safe", our personal responsibility is diminished. Every time someone else makes the decision, it becomes someone else's fault when something goes wrong.

I crashed my car. Car ads are to blame. Individuals are no longer culpable, and that is just wrong."

Gareth may not have noticed but, when motorists who think they are racecar drivers crash their cars, they usually crash them into somebody else.
If these cars were used only for motor racing, the ads for them would serve as fine candidates for the Darwin awards, helping to remove stupid genes from the pool. Unfortunately, they usually take others with them.

What if they threw a political party and nobody came?

A couple more pieces on the future of the ALP. Ken Davidson describes it as a "self-perpetuating" oligarchy, and attacks John Brumby for ignoring a party conference that criticised the government's approach to public-private partnerships (PPPs). I'll write more on this subject later. But Ken's point about the ALP is right. There's no point in reforming the structures of a party that no-one would want to join. ALP membership has collapsed in the past two decades. In part this reflects general social trends. But the big question is why anyone would want to spend evenings in drafty rooms discussing policy ideas when all the decisions are made by a closed circle of politicians and party leaders. The result is that, for the most part, the only people who join are those looking for a political career or the friends and relatives they've signed up to vote for them.

On the role of the unions, this piece points out that the big issue isn't whether the ALP wants ties to the unions, but whether unions should want to be tied to the ALP.

Standard and Poor's reject globalisation

As the NYT reports, the S.&P.; 500 has dropped all non-US companies. This is pretty much a vote of non-confidence in globalisation and, since 5 of the companies are Canadian, in NAFTA as well.

There's a nasty sting at the end of the article:

"One change that was not made by the index was to drop the 10 companies with tax headquarters outside the United States, like Tyco International, based in Bermuda, and Carnival, based in Panama. S.& P. said those companies maintained the United States as their operating headquarters and as the principal market for their stocks."

Wednesday, July 10, 2002

Are CADs Bad?

One of the striking ironies about microeconomic reform is that it was promoted as a way of reducing Australia's current account deficit, and therefore our net overseas debt. In the twenty years since, the CAD has remained at about 5 per cent of GDP, and net debt has grown gradually. The defenders of reform have taken two contradictory lines on this today. In The Australian, Michael Chaney makes the standard last-resort argument for failed policy - things would have been even worse otherwise. Meanwhile, as
Ross Gittins points out, more sophisticated supporters of reform have decided that the CAD is actually a good thing. As he says, "Well, if you say so."

Andrew Scott is spot-on in asserting that the last thing Labor needs is 'modernisation', at least as it is being defined in the current debate.

Tuesday, July 09, 2002

Fun, fun, fun 'til Nanny takes the billboards away

According to recent arrival James Morrow, fun has been banned in Australia. Not having noticed the nanny state at work in my daily life lately, I read on to discover that, for Morrow,"fun" consists of driving around looking at billboard ads for McDonalds and Marlboro, then settling down for an evening watching TV ads for fast cars. Well, James, I think we have to concede that, by that definition, Americans have more fun than anyone else.

Monday, July 08, 2002

What would Daffy Duck say?

This story from the New York Times describes the decline of the AOL Time Warner empire and presages its eventual fall (or at least breakup). Here's my take on the merger which took place just as the NASDAQ was approaching its peak.
(The Telstra-Ozemail merger I mention never happened - it was killed off by Allan Fels and Ozemail remained part of the Worldcom empire).

The carpetbaggers

Writing on why Why Labor has hit the rocks, John Button notes the takeover of the parliamentary party by political careerists and carpetbaggers.

"After Kim Beazley's vigorous campaign in the 1998 election, Labor returned to parliament with a party of 96 members of vastly changed occupational backgrounds. Although one medical practitioner, one public servant and one engineer remained, no farmers or tradesmen did. There were two academics, two teachers and nine lawyers, but the social complexion had changed.

What had replaced a broad spectrum of backgrounds was a new class of political operator who had been filtered through the net of ALP machine politics. Out of the 96 members, 53 came from jobs in party or union offices. These members described themselves variously as "administrators", "officials" and "electoral officers". There were also 10 former members of state parliaments and nine described as political consultants, advisers and lobbyists."

I suspect the situation is only marginal better in the Liberal Party. Worse still, for most of these careerists, public office is not the final object, but a stepping stone to bigger and more lucrative things. After 10 years or so in Parliament, it's time to cash in on the contacts, favors and obligations you've built up with a job in lobbying or a cushy board set. Recent examples include Wooldridge, Fahey and Reith.


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