jamesz

Air NZ gentry reject free markets

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Suppose that a class-based system of privileges existed, in which you achieved high status through long participation in the rituals of the society. Those in the upper classes receive access to luxury goods not available to those of low status. Now suppose that the governing body of our society decided that luxury goods should really be available to everyone with the means to pay for them, rather than just the high status individuals. In fact, the luxury goods will now be sold to the highest bidder, who has the greatest desire for them (and means to pay). Well, that would seem pretty reasonable to most people, given that’s how most markets for goods work. We might worry about inequity because of ability to pay, but nobody would doubt that the luxuries will now go to people who really care about them. Economists would crow about the increase in efficiency in the system and the removal of deadweight losses.

Obviously, the people you’d expect to object would be those of high status, who’ve suddenly had their special privileges, that they’ve toiled to achieve, removed from them. The governors understand that they’d object so a scheme is devised by which people can get discounts on their luxury goods if they buy a lot of them, much as you’d get from many customer rewards programs where you can save up reward points and then spend them on goods from the store. The governors hope that grandfathering in the upper classes so that they have greater means than commoners will placate them. Unfortunately, they’re wrong: nobody likes getting their trinkets of status stripped from them.

Air New Zealand is being accused of driving away its most loyal customers with a recent overhaul of its Airpoints rewards system. …frequent flyers using their Airpoints to book flights on the national carrier will have to bid against each other to get seat upgrades. …The changes have sparked outrage among frequent flyers, with many threatening to shift their support to rival

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Will Taylor

Ban transfer fees in professional soccer (football)?

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A very interesting piece in the telegraph today where Rory Smith argues that it is time to abolish the transfer fee. This passage of the article had particular resonance, mainly because it smelled like there was some economics present:

In what other sphere do companies have to pay other companies to recruit their staff?

There would be some logic to it if it was a figure reflective of the time left on a player’s contract, the wages they were due to earn, the potential loss to the club, that sort of thing. But an arbitrary sum plucked from an oligarch’s imagination? An amount a local baker decides he desires for a teenager with a season’s mediocrity under his belt? Nonsense. Victorian nonsense. It’s people trafficking in Baby Bentleys. It’s a Roman slave market.

He seems to be saying that transfer fees represent some form of barrier to switching. While transfer fees are higher for better players, and lower when contracts have less time to run (i.e. Liverpool paying  more for Stuart Downing then Manchester United paid for Ashley Young, primarily because Ashley Young only had a year remaining on his contract), I can see some logic to what Rory is getting at. If we abolished transfer fees, then players would presumably still move to where they are most valued by virtue of the wages they would be offered?

What are your thoughts…are transfer fees a historical relic or is there an efficiency justification hiding in there somewhere?

Matt Nolan

The day where Panadol was needed

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I realise that oft times my writing style, and the writing on this blog is very “faux academic”.  That suits my purposes as I like having the fully described arguments that come from this sort of writing – however, it can also be boring.

In order to help related economic ideas to the common man, I’ve decided to start up a Friday post – a day in the life of an economist.  In these posts I will go through everyday things, and discuss how economic ideas can crop up while we are living our daily lives.

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Matt Nolan

Question on the power price spikes

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So some businesses are complaining that the spot price of electricity occasionally spikes when there is a shortage (and that these spikes are inconsistent).  They want government intervention.

My question is, if these spikes are such a concern – why don’t the businesses set up fixed price contracts with electricity retailers in the same way household do.  Also, the retailers are complaining about the wholesale price spike – but couldn’t they also set up contracts on a fixed rate?  Ultimately, knowing that the price can spike heavily in the face of a shortage of power, these businesses are CHOOSING to buy at the spot price (I guess it must be cheaper) – if that is what they choose to do then they should really face the risk of it.

Now if there was something anti-competitive about the setting of wholesale energy prices sure, go ahead and complain.  But if they spike because there is a significant shortage – and this price is just representing the underlying opportunity cost associated with providing that power – then having the spike occur is a GOOD thing.

This is because the price is saying “hey, at the current time there is a severe shortage of power, and unless you can create oodles of value from it you should think about stopping power usage for a short period of time”.  When it is placed in that context the spike seems reasonable, and all the complaining about it seems weird – so what is going on?

FYI:  Good comments from Rauparaha.

Matt Nolan

Thoughts on milk

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There is talk about the Commerce Commission investigating milk prices in New Zealand.

An interesting passage from this piece states:

At the moment, we basically have a monopoly supplier of milk and two supermarkets selling it,” she said. “I think an inquiry could be a really good thing for consumers.

I think this is a bit over the top, and plays on how poorly the idea of a monopoly is understood in general parlance.  There is a general impression that the existence of a “monopoly” along some attribute indicates that we need government intervention – when the case is actually a lot more complicated then that. We need to ask why the market has a monopoly, what the characteristics of the market mean, and whether there a policies that can then genuinely improve outcomes – in many cases there are not.

Now note that I don’t necessarily disagree there might be issues – but we can’t just scream monopoly to ask for intervention.  So lets do a primary run down ourselves shall we 😉

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Matt Nolan

Asset sales

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There has been a lot of commentary on asset sales around the place, so much so that I didn’t feel like I need to write anything.

Dim Post mentioned a lot of the people against asset sales and also Geoff Simmons recently wrote against them.  Furthermore, both Anti-Dismal (*, *, *, *, *) and Roger Kerr (*, *, *) wrote a series of insightful posts regarding the issue.

On the left there seems to be an inherent bias against any selling at all – selling is bad.  On the right there is an inherent bias against government ownership – government ownership is bad.

So, where do I fall on the issue?  I have to admit that I am relatively in the middle – I see it as a case by case issue.  There is nothing inherently wrong with privatisation, at all.  Furthermore, I agree that generally privately run firms will “meet the market” more efficiently – implying that they either/both provide the same outputs more cheaply, provide more outputs for the same cost, and/or provide higher value outputs.

At the same time there is no doubt that some assets have social values/external benefits that are not captured by private agents.  If the cost of indirect regulation (taxes and competition policy) is too high, it may be preferable for the government to run said agencies directly – I view it as direct regulation.

In New Zealand at the moment there is definite scope for opening up SOE’s to private sector investment – that is where we are sitting now.  However, even given this I cannot go as far as Roger Douglas and say that the price does not matter – in fact, price is THE issue that the government should use when deciding whether to sell assets.

Why do I say this?  I have already said that I believe that, in the absence of external benefits, the private sector is more than likely to run the organisation more efficiently.  However, just because the evidence says this happens on average, and just because I have a value judgment that individuals are more responsive to incentives than government, isn’t sufficient to justify policy when we have prices available!

Effectively, a private purchaser will be willing to pay up to their reservation price for an asset.  This reservation price will be based on the dividend yield they expect to get from the asset, and the relevant opportunity cost of investment.

At the same time the government know that, if it keeps hold of the asset, it expects to make some dividend yield from said asset through time.  As a result, the government can price the asset – they can say they would not accept a bid below the discounted expected return from holding the asset.

If the government sticks to its guns, and a private sector agent is willing to pay MORE than this then we know that – ex ante – the private agent will be able to run the business more efficiently/add more value.  This implies that the government SHOULD NOT sell for less than their discounted expected return (not the should, so I’m being all prescriptive 😉 ).

In essence, pricing the assets (including relevant external benefits) and then seeing what price people are willing to pay gives us information regarding what can be run more efficiently in house – and more efficiently in the private sector.

Looking backwards and saying “this business is paying dividends overseas, wahhh” or “this business ended up making more than what we sold it for, wahhh” is a rubbish argument against privatisation  – but so is saying “the private sector is better, so give it the assets for free, wahh” is a poor way of justifying privatisation.

At the moment, the type of debate we are hearing in public sounds like the above quotes – and as a result the two sides appear to be talking past each other, making the debate feel more like ideology than reasoned analysis.

If we sat down and just explained the dividend example to people in society, I do not think they would be averse to a government stock take.  The tough questions will then be “how do we value external benefits” and “what is the expected dividend yield” rather than is selling blanket good or bad.

Update:  Anti-Dismal points out that there are other factors that need to be taken into consideration beyond the starting point of comparing dividend streams – that is why this is very much a case-by-case issue.

Update 2:  I somehow missed this piece by Eric Crampton (even though I did check the site while writing the post).