The current controversy over payment of dividends by Housing New Zealand is misplaced because of the subtle connections between payment of dividends and greater value for money.
By paying dividends, the investment priorities of Housing New Zealand are subject to additional ministerial scrutiny. Its capital program is scrutinised in greater detail by the Cabinet because ministers must fund it against competing bids across the entire budget and parliamentary scrutiny process.
Each budget bid is championed by a minister, each of whom must make their case every year against all-comers. This annual competition for a central pool of capital filters out lower value investment bids.
If dividends were not paid but were instead retained as free cash flows in the agency, there would be less ministerial scrutiny of Housing New Zealand because it would have a smaller role in annual budget rounds. Ministers and the Parliament sit up and pay attention when money is to be spent, as they should, and the larger is the sum in the budget, the more attention is paid to value for the money sought. Funding projects with retained dividends may reduce ministerial and parliamentary scrutiny.
Payment of dividends does not reduce the ability of Housing New Zealand to engage in new capital spending. If the dividends were not paid, the amount of new capital spending from budget appropriations would be reduced dollar for dollar.
The 40 PAKnSAVE supermarkets on the North Island charge for plastic bags which you pack for yourself. The 100 New World supermarkets owned by Foodstuffs on the North Island do not charge for plastic bags and the bags are packed for you. The reason is supply and demand that takes account of the full price of groceries including the time cost of shopping and the incomes of their respective customers.
My New World supermarket is just down the road for me – I can see it from my window as I type. The nearest PAKnSAVE is a short drive to a slightly rougher part of town. The PAKnSAVE supermarkets are warehouse style supermarkets rather than a shopping experience made as pleasant as possible and convenient to where you live. PAKnSAVE supermarkets are much larger supermarkets required to be a hub for a number of suburbs rather than one or two.
The type of people who shop at PAKnSAVE are people that the New Zealand Greens pretend to be concerned about. PAKnSAVE customers are lower income people sensitive to prices, willing to go to the trouble of recycling bags.
As you expect under capitalism and freedom, a supermarket chain emerged through market competition to service that more price sensitive niche. The New World supermarket caters more for people in a hurry rather than people on a budget. People on a budget go to PAKnSAVE.
The customers of New World supermarkets are nice members of the middle class who are much more likely to vote Green. They are busy people who do not have the time to keep their bags for next time, much less pack them for themselves. That is before we discuss how unhygienic the recycling of plastic bags is.
Typical of your middle-class Green disposed voter, they are cheapies in a small way as well. When my local supermarket started charging for plastic bags, they quickly dropped the idea because of hostile customer reactions.
The charges are nominal but the people on budgets particularly low income people struggling to with the budget, every cent counts. Naturally the New Zealand Greens are quite dismissive of the cost to shoppers of paying for bags because hardly any of their voters are on a budget.
Typical of the nanny state attitude of the New Zealand Greens, they are happy to compel people to pay for plastic bags and not compensate them for the loss even when they are on low incomes. Do the New Zealand Greens believe plastic bags should be free for low income families?
Let the market sorted it out. There are already supermarkets are charge for plastic bags. Most do not because their customer is uninterested in wasting time paying or bringing their own bags.
I well remember wanting to get time back on my deathbed as we waited behind some arrogant young Green who was packing his own bag after paying for his goods so he kept us waiting for a minute or two.
That is another reason why middle-class supermarkets pack your bags for you. They get you out of the supermarket and away from the lines at the checkouts faster if they pack the bags for you rather than let you do it in a more leisurely pace or perhaps after you have paid.
Again, this is a case about entrepreneurial alertness in the organisation of supermarkets. When your customers are time sensitive, the supermarket does things for them because the supermarket staff can do it faster than they do as they chat to each other and deal with their children.
Two of my brothers studied economics in the early 1970s and then went on to different paths in law and computing respectively. If Greg Mankiw is right, my two older brothers could happily conduct a conversation with a modern central banker. Their 1970s macroeconomics, albeit batting for memory, would be enough for them to hold their own.
I would spend my time arguing with a central banker that Milton Friedman may be right and central banks should be replaced with a computer. The success of inflation targeting is forcing me to think more deeply about that position. In particular the rise of pension fund socialism means that most voters are very adverse to inflation because of their retirement savings and that is before you consider housing costs are much largest proportions of household budgets these days.
Here's when Labour knew how to appeal to the white collar vote. 1945 poster. Managerial socialism. http://t.co/Yq1jSxUqvl— paulkirby (@paul1kirby) September 13, 2015
One of the first things I noticed when feuding on Twitter with Green MPs was how polite they were. Twitter is not normally known for that characteristic and that is before considering the limitations of 144 characters. People who are good friends and work together will go to war over email without any space limitations for the making an email polite and friendly. Imagine how easy it is to misconstrue the meaning and motivations of tweets that can only be 144 characters.
The New Zealand Green MPs in their replies on Twitter make good points and ask penetrating questions that explain their position well and makes you think more deeply about your own. Knowledge grows through critical discussion, not by consensus and agreement.
Cass Sunstein made some astute observations in Republic.com 2.0 about how the blogosphere forms into information cocoons and echo chambers. People can avoid the news and opinions they don’t want to hear.
Sunstein has argued that there are limitless news and information options and, more significantly, there are limitless options for avoiding what you do not want to hear:
Those in search of affirmation will find it in abundance on the Internet in those newspapers, blogs, podcasts and other media that reinforce their views.
People can filter out opposing or alternative viewpoints to create a “Daily Me.”
The sense of personal empowerment that consumers gain from filtering out news to create their Daily Me creates an echo chamber effect and accelerates political polarisation.
A common risk of debate is group polarisation. Members of the deliberating group move toward a more extreme position relative to their initial tendencies! How many blogs are populated by those that denounce those who disagree? This is the role of the mind guard in group-think.
Sunstein in Infotopia wrote about how people use the Internet to spend too much time talking to those that agree with them and not enough time looking to be challenged:
In an age of information overload, it is easy to fall back on our own prejudices and insulate ourselves with comforting opinions that reaffirm our core beliefs. Crowds quickly become mobs.
The justification for the Iraq war, the collapse of Enron, the explosion of the space shuttle Columbia–all of these resulted from decisions made by leaders and groups trapped in “information cocoons,” shielded from information at odds with their preconceptions. How can leaders and ordinary people challenge insular decision making and gain access to the sum of human knowledge?
Conspiracy theories had enough momentum of their own before the information cocoons and echo chambers of the blogosphere gained ground.
J.S. Mill pointed out that critics who are totally wrong still add value because they keep you on your toes and sharpened both your argument and the communication of your message. If the righteous majority silences or ignores its opponents, it will never have to defend its belief and over time will forget the arguments for it.
As well as losing its grasp of the arguments for its belief, J.S. Mill adds that the majority will in due course even lose a sense of the real meaning and substance of its belief. What earlier may have been a vital belief will be reduced in time to a series of phrases retained by rote. The belief will be held as a dead dogma rather than as a living truth.
Beliefs held like this are extremely vulnerable to serious opposition when it is eventually encountered. They are more likely to collapse because their supporters do not know how to defend them or even what they really mean.
J.S. Mill’s scenarios involves both parties of opinion, majority and minority, having a portion of the truth but not the whole of it. He regards this as the most common of the three scenarios, and his argument here is very simple. To enlarge its grasp of the truth, the majority must encourage the minority to express its partially truthful view. Three scenarios – the majority is wrong, partly wrong, or totally right – exhaust for Mill the possible permutations on the distribution of truth, and he holds that in each case the search for truth is best served by allowing free discussion.
Mill thinks history repeatedly demonstrates this process at work and offered Christianity as an illustrative example. By suppressing opposition to it over the centuries Christians ironically weakened rather than strengthened Christian belief. Mill thinks this explains the decline of Christianity in the modern world. They forgot why they were Christians.
The New Zealand Labour Party would make a lot more progress in its opposition to private prisons if it would drop its ideologically blinkered opposition to privatisation. If it was to do that, it would have a much stronger case against private prisons.
That case would be based on the modern economics of industrial organisation and state and private ownership. In particular, the make or buy decision that any organisation, be they public or private must face when deciding whether to make a particular production input in-house or source it externally.
Labour’s current case against private prisons is a bunch of ideological clichés as it illustrated today in a post on Facebook by Jacinda Ardern. Her post was based on her speech in the House of Representatives:
Yes, part of that opposition is my view that no one should make a profit from incarceration, but it’s also about the complete fallacy that somehow a company like SERCO will do the job better.
The notion that no one should make a profit from incarceration is farcical. There are a whole range of private profit making suppliers of goods and services to prisons and prison officers draw a wage.
The case was state ownership, as well stated by Andrei Shleifer is no different than any other ownership decision taken by an organisation facing the inability to contract fully over hard to measure quality issues with the goods or services supplied to it.
Shleifer in “State versus Private Ownership” argues that you make in-house rather than buy in the market under the following conditions:
opportunities for cost reductions that lead to non-contractible deterioration of quality are significant;
innovation is relatively unimportant;
competition is weak and consumer choice is ineffective; and,
When should a government provide a service in-house, and when should it contract out provision? We develop a model in which the provider can invest in improving the quality of service or reducing cost.
If contracts are incomplete, the private provider has a stronger incentive to engage in both quality improvement and cost reduction than a government employee has. However, the private contractor’s incentive to engage in cost reduction is typically too strong because he ignores the adverse effect on non-contractible quality. The model is applied to understanding the costs and benefits of prison privatization.
The privatisation of prisons is at the margin of the case was state versus private provision of a good or service.
Labour forecloses this entire literature to itself and bases its arguments on ideology. Any other argument Labour makes are just talking points to a fixed ideological position.There is no give-and-take. When one argument is knocked down, Labour just looks for other arguments to defend the same fixed position.
The reason Labour forecloses this large economic literature on state versus private ownership and its application to private versus public prisons is embracing that literature would mean admitting that same literature makes a strong case for the privatisation of a number of other government services and state-owned enterprises. As Shleifer says in State versus Private Ownership:
Private ownership should generally be preferred to public ownership when the incentives to innovate and to contain costs must be strong.
The main argument, the best argument, against the privatisation of publicly provided services and state-owned enterprises is the dilution of quality once it is supplied privately. This risk of compromises and quality to enhance profits is higher when the privatisation is contracting back to government. Detailed contracts must be written to assure quality. As Hart, Shleifer and Vishny say:
Critics of private schools fear that such schools, even if paid for by the government (e.g., through vouchers), would find ways to reject expensive-to-educate children, who have learning or behavioural problems, without violating the letter of their contracts. Critics also worry that private schools would replace expensive teachers with cheaper teachers’ aides, thereby jeopardizing the quality of education.
In the discussion of public versus private health care, the pervasive concern is that private hospitals would find ways to save money by shirking on the quality of care or rejecting the extremely sick and expensive-to-treat patients. In the case of prisons, concern that private providers hire unqualified guards to save costs, thereby undermining safety and security of prisoners, is a key objection to privatization.
Our model tries to explain both why private contracting is generally cheaper, and why in some cases it may deliver a higher, while in others a lower, quality level than in-house provision by the government.
By basing the argument on the strengths and weaknesses of contracting over quality for specific services, Labour would have to drop its straight ideological opposition to privatisation and run on a case-by-case basis over the ability to successfully contract to assure quality.
That sounds far too much like becoming a Blairite – the horror, the horror if you are a Labour Party member in the 21st century concerned more about ideological purity than winning office and improving the lot of the people claim to you represent.
If it were to embrace the modern economics of state versus private ownership, Labour would have to agree with Hart, Shleifer and Vishny when they say:
the case for privatization is stronger when quality reducing cost reductions can be controlled through contract or competition, when quality innovations are important, and when patronage and powerful unions are a severe problem inside the government.
When the government cannot fully anticipate, describe, stipulate, regulate and enforce exactly what it wants and prisons are a good case this and has difficulty enforce in any contract with regard to quality assurance, it’s better to make it in-house as Hart, Shleifer and Vishny show.
A call to the barricades is not be very uplifting if based on incomplete contracting over service quality rather than the evils of capitalist profit. It is unfortunate that the Labour Party sacrifice the interests of those incarcerated in the prison system to its unwillingness to be denounced as a Blairite.
The case for private prisons is based on public prisons may have fewer incentives to keep costs down, including keeping costs down by skimming on quality to increase profits as Andre Shleifer explains:
Ironically, the government sometimes becomes the efficient producer precisely because its employees are not motivated to find ways of holding costs down.
The modern case for government ownership can often be seen from precisely this perspective. Advocates of such ownership want to have state prisons so as to avoid untrained low-wage guards, state water utilities to force investment in purification, and state car makers to make them invest in environmentally friendly products.
As it turns out, however, this case for state ownership must be made carefully, and even in most of the situations where cost reduction has adverse consequences for non-contractible quality, private ownership is still superior.
That is the twist in the tale for Labour. The case against privatisation is merely a balancing act requiring detailed scrutiny of the potential to successfully enforce contracts with private providers over quality assurance.
The case against prison privatisation is simply for the public sector as fewer incentives to weaken quality because this increases the bottom line of the contractor or salaries of management. It’s a trade-off between cost control and quality dilution. Publicly run prisons have fewer incentives to control costs, but they also have fewer incentives to deliberately cut corners on quality to increase dividends or managerial salaries .
There’s nothing new about the non-profit provision of goods and services in the marketplace. A whole range of non-profit firms emerged through market competition in situations where contracting over quality or trust was costly.
Most life insurance companies were initially mutually owned by customers. Because they were a non-profit firm, there were fewer avenues to run off with the premiums through excessive dividends.
Many private universities and private schools are run by charitable trusts as a way of quality assurance. Another way of quality assurance is heavy involvement of alumni through giving and sports to police the reputation of the university or school they once attended or want their children to attend.
An arguable case can be made against prison privatisation, based on sound economic principles as long as you’re willing to admit that in many cases privatisation is a good idea based on the same economic principles. That’s a bridge too far from the Labour Party in New Zealand.
Maybe the reason is Labour knows that although they may be able to make an arguable case against prisons privatisation, they may still lose to better arguments and, in particular, successful experiments in prison privatisation at home and abroad. Better to keep the debate away from evidence-based policy. This awkwardness in seeking out the best argument is due to the proclivity of Labour in opposition to repudiate the successes of its last time in office and look for reasons to make themselves even less electable by going left rather than going back into the centre.
Why Evolution is True is a blog written by Jerry Coyne, centered on evolution and biology but also dealing with diverse topics like politics, culture, and cats.
“We do not believe any group of men adequate enough or wise enough to operate without scrutiny or without criticism. We know that the only way to avoid error is to detect it, that the only way to detect it is to be free to inquire. We know that in secrecy error undetected will flourish and subvert”. - J Robert Oppenheimer.
Utopia, you are standing in it! 
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