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06/20/2006

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Arun Khanna

Indiana toll road project is a good step for a different reason than the ones discussed above. Indiana has a balanced budget law so its ability to manage its finances and budget is curtailed. Under existing economic conditions in Indiana, by signing a long-term lease with a private firm, Governor Mitch Daniels has sidestepped the limitation to help Indiana. Indiana is best off moving towards a balanced budget with additional financing according to the business cycle. So, if the state economy is in a downturn, Indiana could spend say 4% over its budget. If the state economy is in a boom, Indiana could spend 4% less than its budget.

Isocrates

I agree that privatization of many public services would benefit the economy. State-run companies stifle innovation and competition. But this raises the question: why is there so little momentum behind privatizing the Post Office? My own dealings with UPS and FedEx persuade me that private companies could do a better job, but no politician is talking about it, as far as I know.

GRG

I am a business idiot, and will admit that up front. What scares the bejesus out of me, with privatization, is my experience with private monopolies.

Take last night I wasted 3 hours of my life trying to activate Microsoft Windows XP. It seems to me Windows has a monopoly on desktop OSs. I have to use it. That meant giving a 50 digit number to a computer over the phone. Receiving a 48 digit number back. Having to deal with customer support in India when that number did not work. Then having the line go dead without any success. What do I do now? I cannot go to a competitor; I don't believe there are any. I have to deal with this very frustrating situation because there is no alternative.

I work in a 'Govt Sponsored' profession. Although we are not as efficient as 'private practice', we are more thorough for each patient; we listen better, and the 'expert referral source' when all else fails.

Dealing with Govt is frustrating. However dealing with private monopolies is also very frustrating. There has to be some hybrid where responsibility, efficiency, professionalism, and friendliness coexist.

MJG

GRG, I think Becker addresses your issue by implying that private monopolies are often more conducive to competition than government monopolies. This seems to hold true in your situation as well, since you could be using a Mac OS or even Linux.

GRG

Yes that issue was addressed. However, for practical purposes, a private monopoly, like Microsoft enjoys with the Windows OS, doesn't seem to promote competetion in reality. I could use Macs (I have 2) or Linux. However, every network, every computer at work, every professional program runs on MS's OS. MS now is totally user unfriendly. Dealing with this private monopoly is every bit as frustrating as dealing with Govt bureaucracy!

Haris

I agree a private monopoly is much more conducive to competition, but isn't it also true that some private monopolies are much more conducive to competition than others? I don't think a trans-Indiana toll road will invite much competition: the capital outlay for a competing road or railroad would be so large that I doubt that the projected returns could justify such an investment up front. [Additionally, building a competing road where there is one already is inefficient, since it would be cheaper to simply expand the existing road.] Competition for private roads might be possible in big cities, where well-maintained private toll roads can compete with less well-maintained public roads, public transportation, biking, and walking. The Indiana road, on the other hand, just doesn't seem to provide such alternatives or to make any of them viable.

N.E.Hatfield

Harris, There is a competing road with the Ind. Toll Road. It's called Old U.S. Route 20 and doesn't cost a dime. The only difference is you can get across Northern In. in about 3 to 4 hrs. whereas, on U.S. 20 it's going to take at least 8 to 10 hrs. That's why I-80/90 was built in the first place. Not too mention the rapid transport of military manpower and supplies. That's the original reason for the building of the Interstate system. Private use was and still is a secondary concern.

GRG

Are 'state run' services that bad? Take the USPO. I actually think they do a pretty good job now. The rates are good, and the delivery is pretty good. If you send a package to a foreign address, the USPO is the best route. Fedex and UPS rates are often much higher. Thus, the USPO (at least here) gives good service.

I work at a university medical school/hospital. We are 'state run'. I believe (and public opinion concurs) that our services are cutting edge, good value, and expert in nature. (believe me we have our problems too). However, in most university hospitals there is motivation to offer good service. In this case I believe our service is better than the private sector.

Thus, not all public or state run 'enterprises' are slow, ineffective, and braindead. :-)

Haris

NE: I realize there's plenty of "alternatives" to a toll road. Local roads, longer routes on interstates in other states, etc. My basic point was that meaningful competition is much more likely on shorter routes in city than in the situation in Indiana.

GRG: Short answer: Yes, state-run services ARE that bad. I have written a thesis on privatization, and the numbers on labor and capital productivity are pretty clear: all things being equal, private entities run their business more efficiently. Obviously, that answer is simplistic, since many factors figure into whether a good or service should be privately or publicly funded. But to use your example of the USPO, I usually spend a good 30-45 minutes at the local post office, and I imagine the situation is similar in most medium-and-up cities. UPS and FedEx, on the other hand, have lines of one or two people at most. Also, I think the USPO is partially subsidized, which explains their low prices.

In fact, the USPO is a good analogy for this situation. Neither the USPO nor roads are technically public goods, in the economic sense of the term (goods that are non-rivalrous and non-exclusionary), but they are de-facto public goods. Losing the USPO would raise the cost of mailing to remote places, and losing public highways would raise the cost of traveling. This country has already implicitly decided that it is in the national interest to enable low-cost communication and travel to even the more remote (and thus higher-cost) areas. Presumably there are network externalities at work here, but it is possible that these externalities are no longer applicable and that we no longer benefit from cheap mailing to northwestern Montana or from publicly funding travel across Indiana. It's just easier to stop doing so when legitimate alternatives are present.

ben

GRG, the OS market is a good example of the dynamic competition Becker speaks of. The market is served by a near monopolist, but under dynamic competition, market share is weakly related to competition. There are strong network effects in the OS market, and the market is 'tipping', meaning it is served by a single provider. The competition, in this case, is between firms to be the annointed monopoly provider.

There are something like 30 OS providers out there, 27 of which you and I have probably never heard of, and most lose money. They are there, however, because the rewards to tipping the market away from Microsoft are very large. Overall, the market makes normal returns (i.e. Microsoft's supernormal profits are offset by losses elsewhere), which is exactly what you'd expect in any competitive market, dynamic or static, with free entry. (I don't have a journal reference handy - can provide one if you like)

The point here is dynamic competition doesn't look like textbook static competition, in that a monopoly does not imply a lack of competition. Microsoft is probably competing harder than you think.

GRG

There have to be other factors at work than just private v. public. Has someone studied this.

For example in health care, the best hospitals are often 'public'. If I had a serious medical condition in SE Michigan I would go to the Univ of Mich Hospital rather than a private hospital. Around the country many public hospitals are more advanced and more efficient than private hospitals.

One can also point to the educational system at the college level. Again, many many state universities offer outstanding educations.

Yet, we have all had experiences with courthouses/Govt offices in big cities where everyone seems to move about the rate of molasses.

Is there an analysis of the data looking at multiple factors?

Is the variable professionalism? Education of employees?

N.E.Hatfield

Harris, the USPO is not a good analogy. In fact it was set up do to the failures of a privatized mail service. At least now I can send a post to Nowhere Idaho or any other obscure place in N.America. Would I be able to do the same if FEDEX or UPS was in charge? I doubt it, the service would probably be dropped because it isn't cost effective. Once again, are we not one Nation.

Patrick R. Sullivan

'the USPO is not a good analogy.'

No kidding. It is against the law to compete with the USPS, which rather telling about their performance.

At any rate, guess what's happening outside the U.S.? Privatized mail services. Even Her Majesty's Royal Mail.

N.E.Hatfield

Pat, Yeh, we know all about the Brit method of operations, it cost them N. America and later others. ;) As for the Law, there is something to be said about publically regulated monopolies. Need I cite the current problems of the Telecommunication Industry. Deregulation? It was supposed to save me money. Then why is my phone bill 3 times what it used to be? Not too mention, poor connections and dropped service.

Ozawa Kenji

Can anyone understand Becker's support of privatization in this case? His points seem to be:

--This privatization is good b/c private monopolies are more competitive than govt. monopolies.

--Then he realizes that probably this deal won't induce any new competition. (no shit sherlock...)

--Nevertheless he supports it b/c govt can impose restrictions on the monopoly.

So, government can't impose restrictions on government monopolies? That makes no sense whatsoever.

Basically, it boils down to this: Becker supports privatization in this case b/c he believes privatization is always good no matter what. Then he applies this logic equally to drastically different industries -- the cookie cutter, textbook IMF approach to economics. One model fits all, even if its basic assumptions don't apply.

I'm not saying privatization in this case is bad or good, only that Becker's arguments fall far, far short of coherence. Can anyone salvage Becker's position? I must be missing something.

Haris

N.E., you actually confirmed my point. You can send mail cheaply to Nowhere, Idaho because of the Postal Service, just like to you can drive to Nowhere, Idaho because of public roads. If these services were privatizes, the cost to do so would be very high, if the service were provided at all. The reason we provide these services publicly is because we think the benefits of a unified nation outweigh the cost in higher taxes. The analogy is, as the Simpsons would say, apt. Apt!

DanV

What we seem to be missing here is a good definition of the "prime directive". Efficient transportation systems are the underpinning of our entire economy. All private citizens, and all business entities, need a robust and efficient transportation system to enable their lifestyles and business objectives to be accomplished.

Allowing one link in a transportation system to be sold to a private entity may very well create a more efficient or more profitable link, but there is no guarantee that this will lead to an efficient or robust SYSTEM. Governments are the only entities that can manage the transportation system as a whole -- THIS is their prime directive, not the creation of "windfall" income.

The transporation system in this country is already on its knees, and the mix of private and public entities is one of the problems. We are not going to be able to work our way out of our current troubles by creating even more permutations of private vs. public facilities.

Government needs to get down to the real task of guiding the overall transportation system toward more efficiency and flexibility. If they can only find the political will to get on with the task, their powers of taxation, regulation, and capital investment can be used to create a transportation SYSTEM that actually works.

Patrick R. Sullivan

As Schumpeter aptly put it, the only way for a private monopoly to remain a monopoly is to not act like a monopoly.

In this case Cintra-Macquarie can't force anyone to use their highway. They've got to make it value for the money to entice the marginal user. Especially since they clearly seem to have overpaid for the rights.

Toll Road News says two other bidders valued it at between $2.2 -2.5 billion. Similarly, they seem to have overpaid Chicago by about 40% for the Skyway 99 year lease.

As I detailed on the other thread,I make their cash flow to be negative $1.3 billion in the first five years. They'll be lucky to survive.

ben

GRG, public healthcare is little short of a disaster outside the US. Here in New Zealand, a leftist government has sharply increased public funding of health in the last six years from around 7% of GDP to 10%. But the problem of zero price remains: queues. In spite of the massive funding increase, queues are now so long that people have, quite extraordinarily, started being dumped off them. This is a direct consequence of public funding. The zero price model for healthcare simply doesn't work. It is private care, and non-zero prices, where quality and quantity of healthcare is much higher. I don't accept your claims about quality of public provision.

The Constructivist

Why don't we go for all-out privatization of all government functions? Neal Stephenson's Snow Crash (a novel law and economics folks may enjoy) presents a nice parody of a future where comparative advantage has run amok (I mention it b/c of his portrayal of rival roads companies). By contrast, Kim Stanley Robinson's Mars trilogy tracks the formation of a world government (on Mars). Why blog on boring reality when SF lays out scenarios much more conducive to clarifying principles?

DanV

What we seem to be missing here is a good definition of the "prime directive". Efficient transportation systems are the underpinning of our entire economy. All private citizens, and all business entities, need a robust and efficient transportation system to enable their lifestyles and business objectives to be accomplished.
Allowing one link in a transportation system to be sold to a private entity may very well create a more efficient or more profitable link, but there is no guarantee that this will lead to an efficient or robust SYSTEM. Governments are the only entities that can oversee the transportation system as a whole -- THIS is their prime directive, not the creation of "windfall" income.
The transporation system in this country is already on its knees, and the mix of private and public entities is one of the problems. We are not going to be able to work our way out of our current troubles by creating even more permutations of private vs. public facilities.
Government needs to get down to the real task of guiding the overall transportation system toward more efficiency and flexibility. If they can only find the political will to get on with the task, their powers of taxation, regulation, and public capital investment can be used to create a transportation SYSTEM that actually works.By definition, sale/lease of a public asset creates at least two drains on the public value: the fees/commissions paid to brokers and consultants, and the profit component to be earned by the private purchaser. And what do we gain as a society by these sales/leases? Easy money for the politicians that have trapped themselves in the "less government is always good" philosophy. Quite a bargain?

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