THE TRUTH ABOUT PRIVATISATION: BLOG # 3

Last Sunday’s Sunday Star-Times editorialised against the government’s privatisation plans (‘Asset sales road littered with disasters and fiascos,’ 30 January).

Among other things, it said that government-owned companies “can be efficient as well as profitable. Kiwibank has been a brilliant success …”

The first part of this statement is certainly correct. Not all SOEs are poor performers and not all privately owned businesses perform well. But the unequivocal findings of economic research are that on average and over time, privately owned businesses outperform publicly owned ones (see here for relevant references). What matters for policy is this general result. Government should not bet against the odds with taxpayers’ money.

What about the claim that Kiwibank has been a “brilliant” financial success. I have never seen evidence to support this claim. Two points are relevant:

As I understand it, the original Cameron Partners advice to the government was that Kiwibank would ultimately earn profits but that these would not be sufficient on an NPV basis to warrant the investment, and

Many argue that Kiwibank has been cross-subsidised by the postal business of New Zealand Post.

Does the Sunday Star-Times have evidence on these points to justify the “brilliant success” claim?  I think we ought to be told.

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The Spirit Level 2

The Sunday-Star Times and journalist Anthony Hubbard in particular appear to have embarked on a crusade against inequality in New Zealand, motivated by the 2009 book The Spirit Level by British academics Richard Wilkinson and Kate Pickett (neither of whom are statisticians or economists).

To read the Sunday Star-Times you would never know that the book has been subject to devastating criticisms.

I had a lengthy blog on the book on 22 December, citing several references.

I also wrote this article which appeared in the Sunday Star-Times of 30 January.

For a biting short summary of some of the criticisms, see this article titled ‘If you want something trashy to read on the beach, I’ve got a recommendation’ by Toby Young in The Spectator of 14 August 2010.

Young refers to a paper by Peter Saunders published by the London think tank Policy Exchange which can be found here.

Saunders writes that the message of The Spirit Level, that redistribution is the cure of most social ills:

… has received an enthusiastic reception from politicians and pundits on the left who believe The Spirit Level offers a rational, evidence-based justification for the radical egalitarianism to which they have long been emotionally committed. However, careful evaluation and analysis shows that very little of Wilkinson and Pickett’s statistical evidence actually stands up, and their causal argument is full of holes.

He goes on to say:

In this report, Wilkinson and Pickett’s empirical claims are critically re-examined using (a) their own data on 23 countries, (b) more up-to-date statistics on a larger sample of 44 countries, and (c) data on the US states. Very few of their empirical claims survive intact.

And Saunders sums up:

This report shows that The Spirit Level has little claim to validity. Its evidence is weak, the analysis is superficial and the theory is unsupported. The book’s growing influence threatens to contaminate an important area of political debate with wonky statistics and spurious correlations. The case for radical income redistribution is no more compelling now than it was before this book was published.

According to a chart in the Sunday Star-Times, Australia comes just under New Zealand on the measure of inequality used.  There seems to be little political support in that country for the kind of redistributive measures advocated by Wilkinson and Pickett: the emphasis is, correctly in my view, on economic reform to lift all incomes.

I agree with Toby Young that the book “belongs in the trash pile”. Others are free to disagree, but if they do it is dishonest not to acknowledge the criticisms and engage with them.