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News: Work & welfare
Spin, privatisation & dogged reality04 October 2002
Paul Krugman unpicks the spin on privatising US social security, while John Quiggin reckons reality is sinking in.
The Bully's PulpitBy Paul KrugmanWar is peace. Freedom is slavery. Ignorance is strength. Colin Powell and Dick Cheney are in perfect agreement. And the Bush administration won't privatise Social Security. Ari Fleischer's insistence that Mr Powell and Mr Cheney have no differences over Iraq seems to have pushed some journalists into facing up, at least briefly, to the obvious. ABC's weblog The Note described it as a "chocolate-is-vanilla" claim, admitting that "The Bush team has always had a credibility problem with some reporters because of their insistence on saying 'up is down' and 'black is white.'" But the administration needn't worry; if history is any guide, many reporters will soon return to their usual cringe. The next time the administration insists that chocolate is vanilla, much of the media - fearing accusations of liberal bias, trying to create the appearance of "balance" - won't report that the stuff is actually brown; at best they'll report that some Democrats claim that it's brown. The Bush team's Orwellian propensities have long been apparent to anyone following its pronouncements on economics. Even during campaign 2000 these pronouncements relied on doublethink, the ability to believe two contradictory things at the same time. For example, George W. Bush's plan to partially privatise Social Security always depended on the assertion that 2-1=4 - that we can divert payroll taxes into high-yielding personal accounts, yet still use the same money to pay benefits to retirees. The Orwellian tactics don't stop with doublethink; they also include newspeak, the redefinition of words to rule out disloyal thoughts. Again, Social Security is a perfect example. Republican political consultants have found that in an era of plunging stocks and corporate scandal the word "privatisation" has taken on negative connotations. The answer? Deny that personal accounts constitute privatisation, and bully the press into going along. A Republican National Campaign Committee memo lays out the new strategy: "It is very important that we not allow reporters to shill for Democrat demagoguery by inaccurately characterizing 'personal accounts' and 'privatisation' as one and the same." Is it inaccurate to say that personal accounts equal privatisation? We could argue on the merits. Under the Bush plan, a worker's personal account reflects any gains or losses on the stocks it represents. When risks and rewards accrue entirely to the individual, isn't that privatisation? But wait, we can do better. The push to convert Social Security into a system of personal accounts has been led by the Cato Institute. The Bush plan emerged directly from Cato's project on the subject, several members of Mr. Bush's commission on Social Security reform had close Cato ties, and much of the commission's staff came straight from Cato. You can read all about Cato's role on the special Web site the institute set up, socialsecurity.org. And what's the name of the Cato project to promote personal accounts? Why, the Project on Social Security Privatisation, of course. Which brings us back to the issue of intimidation. The RNCC doesn't really think it can convince people that privatisation isn't privatisation. But that's not the goal. The memo doesn't talk about how to communicate with the public; it's a list of demands to place on journalists. As Joshua Marshall put it at talkingpointsmemo.com, the goal is to "mau-mau reporters out of using the word 'privatisation' in this context." And the intimidation will probably succeed. Indeed, it's already working. As Mr Marshall notes, in a recent interview of the House minority leader, Richard Gephardt, Judy Woodruff of CNN duly echoed the RNCC's memo. Unfortunately, this isn't just a question of Social Security policy. Once an administration believes that it can get away with insisting that black is white and up is down - and everything in this administration's history suggests that it believes just that - it's hard to see where the process stops. A habit of ignoring inconvenient reality, and presuming that the docile media will go along, soon infects all aspects of policy. And yes, that includes matters of war and peace. The trouble is that eventually reality has a way of asserting itself. And in case you are wondering, ignorance isn't strength.
Sums starting to dig inBy John QuigginOne of the marvellous things about economics is that, in a lot of cases, important questions can be answered simply by adding things up. For example, simple arithmetic shows that the current account deficit must be exactly equal to the difference between national investment and national saving. The arithmetic of privatisation is almost as simple, and yields some surprising answers. As an example, I first examined the proposed sale of airports in 1994. I concluded that, if the government was to receive a price sufficient to offset the loss of income from the Federal Airports Corporation, airport charges would have to rise. That analysis was spectacularly vindicated a couple of weeks ago, with the announcement of rises across the board, ranging as high as 100 per cent, and the prospect of more to come. These increases come on top of higher parking charges, taxi rank fees and a slew of other imposts on the travelling public. How could I make predictions with such confidence nearly a decade in advance? A simple matter of arithmetic. Private investors in infrastructure assets expect real returns of about 8 per cent. The same investors are prepared to buy government bonds with a real return of 4 per cent or less, reflecting the government's superior ability to spread risk through the tax system. Hence, the government can break even on an asset sale only if the private buyer can make twice the profits that were realised under public ownership. In some cases, greater profits can be realised through superior efficiency, but the FAC was already close to world's best practice. The only other way of increasing profits is to raise prices or reduce service quality. The first round of airport sales revealed another possibility, which I had neglected. If private buyers overestimate potential profits, they may pay more for an asset than its true value on the private market. After the first round of airport sales, it appeared this had happened. Buyers anticipated substantial monopoly profits, and paid accordingly, but then found themselves under the scrutiny of Allan Fels and the ACCC. For once, it seemed, the public, considered as taxpayers, had received a reasonably good price, while considered as consumers, we had not been too badly hit by privatised monopolies. But the biggest prize, Sydney Airport, had not been sold at the same time as the others. Potential buyers, having seen the losses incurred elsewhere in Australia, were unwilling to pay a substantial price for an asset with tightly regulated returns. The sensible option of keeping Sydney in public ownership was never considered. Next best, as far as the interests of the public were concerned, would have been to deregulate charges at Sydney alone, but this would have raised all sorts of political difficulties. So the government bailed out all the private buyers at the expense of the travelling public. The basic arithmetic of privatisation is inescapable. Whenever an efficient public enterprise is privatised, either taxpayers get an inadequate return on their asset, consumers pay more, or the buyers pay more than the true private market value. In every major Australian privatisation, one or more of these outcomes has occurred. Since private buyers have usually done well, consumers and taxpayers have been net losers. There are many areas in which government business enterprises invariably perform poorly, so that privatisation is beneficial. Our history is littered with such enterprises, from government farms to state-owned butcher shops. But Australian governments got out of most of these businesses decades ago. The privatisation wave of the past two decades was based on the claim that the private sector could do a better job of providing basic infrastructure than could government. This claim was always based on faith rather than empirical evidence and, since the Enron, WorldCom and Railtrack scandals, it looks positively absurd. These facts are starting to sink in. It is not that long since Richard Alston taunted opponents of privatisation with the claim that the policy was being adopted everywhere but in North Korea. Today, however, the tide has turned. As The Economist has noted, privatisation has ground to a halt in Europe, and in much of South America. Renationalisation is now on the agenda. Following Railtrack in the UK, accident compensation in New Zealand and airport security in the US, France Télécom is the latest candidate, as the conservative French Government tries to fix up the mess created by entrepreneurial managers under partial privatisation. Paul Krugman is Professor of Economics and International Affairs at Princeton University and a columnist for the New York Times, where this article first appeared on 6 September 2002. John Quiggin is an Australian Research Council Senior Fellow based at the Australian National University and Queensland University of Technology and a columnist for the Australian Financial Review, where this article first appeared on 1 August 2002. The pieces are reproduced with the kind permission of their authors. Image courtesy of Princeton. Also on the Evatt Site:
Aso on the Evatt site by Paul Krugman:Also on the Evatt site by John Quiggin:
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