Disillusioned commentary on Australian financial sector, politics, business, media... with attention occasionally distracted to the world outside... and intermittent reminder that rage is a more life-conserving irrationality than despair.

Saturday, February 05, 2005

The market economy in all its glory

A strong body of opinion, especially in the United States, believes that the fundamental problem with society is government.

If government stopped doing most of the things it does, tax rates could be dramatically reduced, everyone would have much more incentive to work harder and private enterprise would step into the gap. Firms would provide the services that government now does, but they would do it efficiently because they are propelled by the profit motive, instead of inefficiently and wastefully, as government currently does.

Leading proponent of this thesis, Grover Norquist, is interviewed here on National Public Radio:

LIASSON: And Norquist is very clear about what's at stake in the tax cut debate.

Mr. NORQUIST: The central question in American politics is the size of government, is it gonna get bigger or smaller? Of the resources that you and your family put together, more of it go to the state or more of it stay with you?

LIASSON: When the tax cut is enacted, Grover Norquist says, there will be much less money available to the government, fewer resources that the state can use to bother the members of what Norquist calls the 'leave us alone' coalition. Grover Norquist's long-term goal is simple and very radical. He wants to cut the size of government in half over the next 25 years. That's a serious and reasonable goal, he says, and one he's willing to advance with as blunt a metaphor as possible.

Mr. NORQUIST: I don't want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub.

In many countries, supply of gas and electricity has either been responsibility of government, or has been heavily regulated by government. So let's see what happens when government gets out of the way, and lets private enterprise do what it does best.

From The New York Times:

February 4, 2005
Tapes Show Enron Arranged Plant Shutdown

EVERETT, Wash., Feb. 3 - In the midst of the California energy troubles in early 2001, when power plants were under a federal order to deliver a full output of electricity, the Enron Corporation arranged to take a plant off-line on the same day that California was hit by rolling blackouts, according to audiotapes of company traders released here on Thursday.
The tapes and memorandums were made public by a small public utility north of Seattle that is fighting Enron over a power contract. They also showed that Enron, as early as 1998, was creating artificial energy shortages and running up prices in Canada in advance of California's larger experiment with deregulation.

The tapes provide new details of market manipulation during the California energy crisis that produced blackouts and billions of dollars of surcharges to homes and businesses on the West Coast in 2000 and 2001.

In one January 2001 telephone tape of an Enron trader the public utility identified as Bill Williams and a Las Vegas energy official identified only as Rich, an agreement was made to shut down a power plant providing energy to California. The shutdown was set for an afternoon of peak energy demand.

"This is going to be a word-of-mouth kind of thing," Mr. Williams says on the tape. "We want you guys to get a little creative and come up with a reason to go down." After agreeing to take the plant down, the Nevada official questioned the reason. "O.K., so we're just coming down for some maintenance, like a forced outage type of thing?" Rich asks. "And that's cool?"
"Hopefully," Mr. Williams says, before both men laugh.

The next day, Jan. 17, 2001, as the plant was taken out of service, the State of California called a power emergency, and rolling blackouts hit up to a half-million consumers, according to daily logs of the western power grid.

Officials with the Snohomish County Public Utility District in Washington State, which released the tapes, said they believed Enron officials had taken similar measures with other power plants. This tape, they said, was proof of what was going on.

At the time, power plants in the greater West Coast grid were under a federal emergency order to keep their plants running...

Economist Paul Krugman explains that, the way the California energy market was structured, this was almost inevitable:

The really striking thing, of course, is that there is excess capacity in the system - yet the price goes sky-high. And with a little realistic friction added, you could easily imagine blackouts and brownouts as part of the picture. Let me also stress that this is a non-cooperative equilibrium - it doesn't involve collusion, let alone conspiracy, among the generators. You don't have to imagine Ken Lay and Dick Cheney sitting in a room, trading sneers, and chortling over the havoc they are wreaking (which isn't to say that this might not have happened!). All it takes is individual firms, acting in their individual self-interest.

Of course this doesn't prove that private enterprise cannot satisfactorily provide services that governments otherwise provide. The California energy market today is a case in point.

On the other hand, if private enterprise is to be kept in line, it may require energetic defenders of the public interest such as New York Attorney General Eliot Spitzer, who, having done Wall Street and the insurance industry like a dinner, has now turned his attention to shopping mall rorts.


Blogger Frederick J. Helfrich said...

While there are some valid situtations in which the government of the USA should be active (safety regulation, national defense, regulating financial markets, for example) there are a host of activities in which the government interferes for one reason and one reason only.

It is the self-important motivation behind members of government in all countries with which I am familiar (and I could assume Australia would follow the pattern, as well). All members of government seek to preserve their position. The way they do that is by granting favors and arranging beneficial situations for their patrons. Sometimes, this is opposing another government (as France did against the USA in Iraq, in order to protect her pre-existing and possibly illegal oil dealings) or enacting legislation protecting the patrons interests (Bush's steel tariff fiasco). In fulfilling self-importance, politicians almost invariably increase the size and scope of government, thus increasing their own clout, and making it easier for them to retain power.

February 23, 2005 at 11:18 PM


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