Today's NYT has a story on New Jersey governor Jon Corzine's idea to lease the NJ Turnpike and the Garden State Parkway to private companies. In return for paying the state for the right to run the roads, the companies collect the tolls. Corzine is not the first governor to go this route.
There are any number of reasons why this is a bad idea. Tolls will almost certainly rise sharply. Future improvements will likely be more difficult and expensive. The requirement that the companies plow and otherwise maintain the roads will inevitably require that a new bureaucracy be created to monitor the companies. Even if that bureaucracy doesn't become completely corrupted by becoming part of yet another revolving door, it will be at best wasteful and unresponsive to the citizenry.
The worst thing about this, something that the NYT story doesn't touch upon, is that privatization of things at this scale frequently leads to higher costs and worse service. As examples, I offer Enron's control of the electrical grid in California a few years back, the billions that have passed through the hands of Halliburton in Iraq, and the fact that the Internet infrastructure in the U.S. increasingly lags behind the quality and capacity available in other nations.
The NYT is right to call attention to this as being seen as a cowardly move by Corzine. It's a way to raise revenue without having to raise tolls or taxes. In effect, it buys a little short-term breathing room at the expense of larger long-term problems. It shields the governor from having to be realistic with his constituency, and it puts yet another charge on the credit cards of the next generation.
The worst part about this idea is that it is yet another case of the government giving a sweet deal to the already rich and powerful. This isn't capitalism, despite how it will doubtless be pitched. Once a lease deal for a roadway is struck, there is no way for anyone to compete. It won't be a cost savings for society as a whole, either, and forget about any claims of increased efficiency. Monopolies are never cheap, agile, or responsive. Think about your cable bill, the price for the latest version of Windows, and the odd borrowed trillion.
Control over infrastructure that we all depend upon is not something that should be handed off to a small group. If something needs fixing and it's going to cost money, then politicians should not shirk their responsibilities. Raise the tolls yourself, Gov. Corzine, or add another nickel to the tax on a gallon of gas. We all use the roads, we should all pay for them, and you should have the courage to make that case.
Update
2007-01-28 09:35 EST
Edward Ugel has an interesting op-ed piece in today's (Sunday's) NYT, on another bad privatization idea under consideration. He also presents an additional argument that I hadn't thought of, but which I certainly second.
4 comments:
The economic models that show improvements in efficiency from privatization are based on an assumption of perfect competition, or essentially enough competitors in the market place such that no supplier has any market power. The models don't hold up under monopoly or oligopoly conditions: optimal efficiency is not achieved and there is a "deadweight loss". And if the service or good provided is something where there is not much substitution available then regulation is a requirement to achieve high efficiency. A lot of right wingers pushing for privatization either don't understand or are willfully denying this condition. Just a little side ammunition next time someone starts advocating the privatization of a public sector service that will not face heavy competition.
Thanks, Aidan. I need all of the ammunition I can get on this one.
For those who weren't around this afternoon (the population of the planet minus five people) to witness a debate on an different matter, Aidan managed to completely devastate my arguments against Wal-Mart. I remain convinced that they are an evil entity (which he didn't dispute) but I was unable to come up with anything coherent to combat his analysis of the entire situation.
In retrospect, I can say two things.
First, I wish I had my Secret NSA recorder ring going during our debate.
Second, I'm glad he agrees with me about the highway thing.
No, wait. Three things.
The third: why is your Blogger profile private, Aidan? You never told me you had a blog! Please share.
Because I just thought of a point I forgot to make about why Wal-Mart is bad in a purely economic sense, and that point can be summed up in a word that I learned last year and have been unable to flaunt since: monopsony.
You may have killed me on my lack of hard data about the jobs issue, and you may be mostly right about the idea that cheap goods imply a better-off condition for those who have no choice but to work at jobs like Wal-Mart, but I say again to you: monopsony.
The idea that a single buyer in one sphere can be optimal, or good for society overall, is as unlikely as the idea that a single buyer can be optimal in another. Whether or not Wal-Mart can be shown to be immediately bad (I couldn't today, though I bet other people could), I am convinced that the prospect of a single retail outlet for all manufactured goods of a certain price stratum is ultimately only going to benefit a very few people.
ho~~~!, busting out with the economic jargon! Yeah, just like you say, economic theory predicts that monopsonists will produce a deadweight loss and put the squeeze on consumers. Very good point.
Thing is, Walmart hasn't done it so far. They've passed along the efficiency that they've squeezed out of their source producers and employees thru low prices passed along to poor consumers. After they consolidate their market position then they might stop passing along the savings. It's a real risk.
Thing is, should society or the public sector impose restrictions on them now, before they've put the squeeze on? That seems like it could be more risky, or a slippery slope. What happens if other firms seem Walmart get slammed before they've actually started to put the squeeze on consumers? Will that encourage firms to charge poor people more for their products than they can? The problems arising from monopsony, generally speaking, don't involve low wages paid to employees (Walmart's issue) but the pressure that they put on their suppliers. In fact, a monopsonist should lose incentive to squeeze wages for their own employees as they consolidate their market power because they have little competition and pressure to lower wages and control costs. So monopsony should screw suppliers, not the monopsonist's employees.
Another thing to consider is that I can't offhand think about any long lasting monosonists, domestic or abroad (except the federal government?). Coke and Pepsi jump out, but most of the others have a degree of public sector support (ex. retail in India, I think). Once a monopsonist puts the squeeze on and raises prices for consumers, both consumers and suppliers have an incentive to shop at a competitor. Unless the monopsonist can put in a "barrier to entry" for competitors (thru great marketing, or gov intervention, for example), a lot of people will gladly move to a competitor once the monopsonist starts putting the squeeze on. GM and Ford put the squeeze on their suppliers, but Japanese cars were able to compete effectively and break the US lock on the US car market.
Jumping back to Walmart, analogously, should someone get thrown in jail because they have a profile with a high probability of committing murder, even if they haven't committed murder yet? OK, not a perfect analogy, but something to think about.
Don't get me wrong, I think Walmart sucks. I wouldn't want to work there and their buildings are ugly. They also kill culture in many towns, a definite downside. Still, I don't like sharks but they do play an important role in the ocean ecology. I think the better solution is to make greater investments in education for US kids (better education leads to better jobs) and to unionize service sector workers. Obviously not easy solutions, but better in the long run than arbitrarily shutting down a business because they (ruthlessly) squeezed out savings for poor people.
Hmmm, didn't even know that I had a blogging profile. Gotta get that worked out. Don't have a blog. Given how >50% of my friends consider me a blowhard as it is, maybe a blog isn't so needed ;-)
btw, Big Kahuna burger is definitely on the list for week after next!
I disagree that Wal-Mart is not yet a monopsony. I have heard or read of plenty of smaller suppliers being shut out of selling to Wal-Mart altogether, or being told that they'd need to shift their manufacturing base to China if they hoped to compete in the long run. In fact, it was in reading these stories that I first learned the term "monopsony."
It's hard to say whether this is already also hurting the consumers. It is my impression, though, that much of what Wal-Mart sells is shoddy merchandise. There's an example of this potential problem in news that I read yesterday -- Wal-Mart has been accused of mislabeling food products as organic, when they're not.
Another disagreement: It seems to me that a monopsony enjoys the same leverage over its employees as a monopoly does. Practically speaking, they amount to the same thing from the point of view of their workers. If there is no competition, the workers have less of an opportunity to seek work elsewhere, just as the suppliers have no other retail chains to sell to, and the consumers have no alternate stores in which to shop.
I also disagree that monopsonies are short-lived. You've given yourself a bit of an out by admitting the possibility of "barriers to entry," but you imply that this is the exception. I argue that it's the rule. In the case of soft drinks, look at the cooler in any convenience store or the soft drinks aisle at any grocery store -- fifty different products, half from Coke, half from Pepsi. I'm convinced that the sole reason that Diet Vanilla Coke (Decaf) is on shelves is to command the space. It has been well-documented that if you don't sell all varieties, your little store will have trouble getting the main ones that you do want from the wholesalers.
I agree with you about the dubiousness of the idea of direct government restrictions on Wal-Mart. I don't have a magic bullet answer. Until I come up with one, it seems that existing laws about unfair trade practices could be better enforced, and a more strenous and consistent effort could be maintained with respect to Wal-Mart's union-busting and other discriminatory labor practices.
I look forward to continuing this debate, especially at Big Kahuna.
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