Posted on 30-7-2002

Return Of The Prodigal Government
By Alan Marston

Biblical tales, like all mythology that lasts, personalise recurring themes
of human existence. The story of the return of the prodigal son
encapsulates the observation that people find subservience useful but in
the end value independence and integrity. I believe that this lesson can be
applied to government, and we are witness to this fact right now in the
so-called developed democracies.

Ever since the mid 1980s politicians operating in the democratic states
have been vying with each other in a race to the feet of the owners and
executives of the world's giant corporations. A few, very few, have headed
off into the political wilderness by maintaining a belief and advocacy of
the need for state regulation imposing limits on commerce. However, now
that global corp unlimited and the rest of the planet is reaping the
inevitable poisoned fruit of unbridled greed in the pursuit of monetary
gain, and commercial sickness has at last joined social, environmental and
personal sickness, the narrow beam of capitalist vision is darkened by
internal bleeding and the fathers of finance are forced to seek help from
the sons. And which son would that be? I submit it is the prodigal sons who
will be called upon and the politically correct who submitted to the
selfish dictates of the patriarchs, Bush, Blair, Howard, Clark will be
turned on, rejected in favour of yesteryear's outcasts. Specifically, the
promoters of market freedom, code for taking off limits to the dictates of
money, will be spurned and those who have held to the need for government
regulatory limits over politcal-economy will be welcomed back into the
houses of government. It goes without saying that a number of subservients
will turn overnight into regulators, such is the nature of that sub-species
of humanity that grasps for political power at all costs.

Examples of `the return' are already apparent in the USA, though New
Zealand will follow when, I predict, Helen 360 Clark will turn Green and
regulate and re-nationalise.

Regularisation USA

For the first time since the Carter administration began deregulating in
the late 1970's, the process has halted, and the winds are pushing in the
opposite direction. The House and the Senate approved last week the first
stab at renewed regulation — a bill that would punish chief executives with
jail for hoodwinking the public and would erect obstacles to future
hoodwinking, particularly by accountants. President Bush says he will sign
the bill quickly, so quickly infact, I suspect he will put his neck out as
he performs a sudden turn from the right.

Economists, with piles of papers with their names on them, find it more
difficult to change direction in the blink of an eye, even those who 25
years ago were leery of too much deregulation. Nonetheless the views of
economists can't be sniggered at. They are the people who still have the
cred who will provide the rationale and the cheerleading for a new era of
regulation, just as they have provided the reasoning and crucial support
for deregulation. For all the mayhem of recent weeks most mainstream
economists say they still hold to the theory that unfettered competition,
achieved through deregulation, tends to lower prices and promote efficiency
and innovation. The prodigals are there though, and they will find their
voice is now listened to. James K. Galbraith of the University of Texas at
Austin argues for balance between regulation and deregulation in an economy
that relies for prosperity as much on the public sector as the private
sector. And Robert Kuttner, co-editor of the American Prospect magazine,
contends that mainstream economists are caught in a bind. "You have a whole
generation of economists who have devoted their careers to supporting
deregulation," he said, "and now they are twisting themselves into
intellectual pretzels to deny that they are recanting on deregulation."
Instead of giving up on deregulation, many economists are proposing ways to
fix it; that is, they don't want to be sidelined.

Sidelined they will be, the experience of business-government cycles is,
like all good mythology, true. A few of the more obvious US business
examples is insightful.

Consider the airline industry. Deregulation started with the US airlines in
the Carter administration, which lifted federal restrictions on routes and
on fare changes. The goals were to lower fares through competition, and to
admit more new airlines to the industry. Fares did come down, although
often not by much, and certainly not for most business travel. As an
alternative to lower fares, airlines lured travelers with frequent-flier
miles. Some economists consider frequent-flier miles a deregulation flaw
and would fix it by getting rid of these lures. In New Zealand the sole
national carrier has been re-nationalised, and a move to sell bits of it
off again (to its competitors) will become politically impossible in the
near future.

Or consider telecommunications, which the US Congress deregulated in 1996.
Havoc followed. With the stock market bubble offering encouragement,
telecommunications companies overexpanded, built up huge debts and engaged
in ruinous price-cutting in a futile attempt to make use of idle networks.
As the shake-out proceeds through mergers and bankruptcy, the odds grow
that a few surviving companies will acquire enough pricing power to raise
rates for the telephone, Internet and television cable services that so
many people now feel they must have. That would give the survivors the sort
of monopoly power that AT&T enjoyed until the courts broke up the company
in the early 1980's. In the absence of competition, government had set
rates and operating standards, a regulatory practice that many economists
said stifled entrepreneurship and innovation. But now that the
telecommunications industry is shrinking to fewer companies, the new danger
is too much pricing power. As a result, price regulations still in effect
for local service may have to remain, said Eli M. Noam, a Columbia
University economics professor. "There was the expectation," he said, "that
these tariffs would phase out through competition, but now that no
competition is expected, the regulated rates are not likely to go away."
The experience in New Zealand mirrors the above, there were many telcos,
now there are two - who will already be negotiating an informal oligopoly
which the NZ Government will have to pass regulations to break, as soon as
2003 I predict.

Or consider electricity. Deregulation got into a lot of trouble in
California in the summer of 2000. The electric utilities had sold off
generators and power stations and were buying electricity for customers on
the open market, presumably at competitive prices. But in 2000 the
suppliers spiked prices, partly because of power shortages but also through
manipulation. That led to some fixes even before corporate scandals and
plunging stock prices awakened much broader public interest in repairing
deregulation. California began to buy electricity under long-term,
fixed-price contracts on behalf of the utilities, thus averting price
spikes. And the federal government imposed price caps. In New Zealand the
privatisation of the generators seprately from the line companies
separately from the retailers has been an unmitigated disaster for everyone
except the owners of the generation companies - one of whom is the NZ
Government.

I predict NZ Rail mark II will be born 2003. Limits are back, they might
even last a generation.