Comments on: Internal liquidation

By: Prometheus 6

Prometheus 6 — Tue, 26 Aug 2003 16:11:43 +0000

I’m going to assume for a moment that history has shown that regulators will set inefficient prices because o political pressures. I am also going to assume that history has shown that the market will be manipulated if it is manipulatable. Will our deregulation proponents so stipulate? Since we’ve all expressed concern about the market being well served I’d like to know: 1-what does it mean to serve the energy market well? 2-what is necessary to insure the more rapacious among us cannot game the market to the disadvantage of consumers?

By: Ken

Ken — Tue, 26 Aug 2003 15:42:39 +0000

“Power generation is easy to deregulate and gain the advantages of competition and innovation, but power transmission is another matter since it makes no sense to have multiple, competing transmission infrastructures. ” It makes just as much sense as having multiple competing power plants. Or multiple competing automobile factories. “Back40 can you imagine a circumstance under which there would be no regulation in the power industry? Indeed can you name a market which works and isn’t regulated?” Sure. The computer hardware market. Rapid consistent improvements in quality and price year after year after year. With no significant regulation outside the FCC’s radio interference requirements. The computer hardware industry blows everything else out of the water in terms of improving quality and price over time. Also, airline deregulation had a positive effect on ticket prices. Ridership increased so much (thanks to the vast increase in the number of people that could afford tickets) that, up until 9/11, the government owned and regulated airports couldn’t keep up with demand, and couldn’t move all the planes full of passengers fast enough.

By: back40

back40 — Tue, 26 Aug 2003 06:30:37 +0000

Henry, electricity generation and transmission is highly diverse. The utility that you have an account with is a reseller of purchased power generated by others and transmitted by others. This is true even for utilities that also generate and transmit power, it’s the nature of the business. Excesses are sold into the grid and peak needs are bought from the grid. This is more sensible than maintaining sufficient capacity to satisfy peak needs and being idle much of the time when needs are low. This is how the recent outage could have such a wide effect. All of those states and Canada are linked in a codependent network that is owned by a diversity of entities. It’s true that state regulations largely determine prices to consumers, that’s part of the reason that there are power outages. Regulators set prices based on political pressures rather than true costs, change regulations without considering network effects, and generally create an atmosphere of unreason which makes it impossible for providers to plan.

By: Prometheus 6

Prometheus 6 — Tue, 26 Aug 2003 06:00:18 +0000

back40: It’s been a bit hectic today, and I’m not trying to be obstinant. But I can’t see any value added to that graph on page 13 (the concepts represented by it by, actually) by adding the population of each nation. I’m not sure someone else’s comments are an appropriate place to go into why. At any rate, regardless of the intellectual underpinnings of the movement, I still observe that on the ground deregulation has made way for what looks supiciously like profiteering. It’s the economic equivalent of neocons winning elections with centrist rhetoric.

By: Henry

Henry — Tue, 26 Aug 2003 05:42:46 +0000

The gas and electric utilities were deregulated several years ago in my neck of the woods. I currently have exactly one choice of utility for each, which makes both of them unregulated monopolies. The only thing holding my rates down is state law limiting increases for existing customers. If I had changed to the one eletricity competitor a few years back, I would now be paying about 20% more, as they ceased doing business and I would have had to return to my previous electric company without the rate limitation (as I would no longer have been an existing customer.)

By: back40

back40 — Mon, 25 Aug 2003 17:16:42 +0000

Jack: “can you imagine a circumstance under which there would be no regulation in the power industry?” All industries, all human behaviors, everywhere and everywhen are regulated. The only issue is the quality of the regulation, whether it helps people live well together or hinders them. Prometheus 6: “…this long-term rise in inequality among national average incomes seems to have slowed during the past 20 years.” This was the focus of the Economist article. It highlighted Fischer’s two charts, Growth in GDP per head” and Growth in GDP per head, proportional to population. When people, rather than nations, are graphed the large populations of China, India and a few other populous nations that have had strong growth since liberalizing and globalizing change the picture completely. When every nation counts as one point on the chart it appears that inequality is rising, perhaps more slowly than before but still rising. But this is misleading since one small African nation with a comparatively tiny population has the same graph weight as China. When the graph points are weighted by population it becomes apparent that poor people are getting richer faster than the rich even if poor nations, each counted at the same weight, are still losing ground. The balance of the Economist article explores the reasons that some nations grew slowly or lost ground and what they and EU/US can do to help. They refer to Fischer’s call for more aid and mention trade restrictions that harm poor nations.

By: Prometheus 6

Prometheus 6 — Mon, 25 Aug 2003 13:48:42 +0000

Thanks for the link to the original speech transcript. I really prefer source material and I’m still reading—globalization is a topic I need to get more current on. About the Economist article that was based on this speech, did they note the opening statement in the review of poverty data? For some time it was accepted that the proportion of people living in poverty in the world has been declining, but their absolute number has been increasing. This refers to the World Bank’s measure of absolute poverty, defined as living on a real income of less than one dollar a day. There is no consistent fully reliable set of data reflecting longer-term developments in poverty. That statement would explain why I’d never seen anyone claim the gap between haves and have-nots is shrinking. And Mr. Fischer correctly emphasizes that he’s working with “only estimates”… did the Economist make that point as strongly? The best support for the statement I find so far is: Inequality among national average incomes appears to have been increasing for at least 400 years, since before the rapid increases in economic integration that took place in the nineteenth century. However, this long-term rise in inequality among national average incomes seems to have slowed during the past 20 years. I guess it’s good that the gap is widening slower than it has, but that hardly supports a claim that it’s being reduced. Again, though, an interesting read.

By: Jack

Jack — Mon, 25 Aug 2003 13:38:31 +0000

Back40 can you imagine a circumstance under which there would be no regulation in the power industry? Indeed can you name a market which works and isn’t regulated? Markets can provide feedback, accountability and flexibility but they do not have a monopoly on these things. Singapore is highly planned as are most corporations. Furthermore the Russian example shows that the necessary changes are not necessarily what you think they are and the cell phone example shows that the benefits are not immediate Slovenia is richer than the poorest EU countries already for example. As for the mobile phone argument, there may be jam tomorrow but on the other hand US mobile phone companies might end up like Japanese PC makers or Banyan and Novell. Your outcome is plausible but believing that it is inevitable is theology not science.

By: back40

back40 — Sun, 24 Aug 2003 20:53:39 +0000

Here’s the paper.

By: back40

back40 — Sun, 24 Aug 2003 20:41:09 +0000

“Globalisation and Its Challenges”. By Stanley Fischer. AEA Papers and Proceedings. American Economic Review, volume 93, number 2, May 2003.

By: Prometheus 6

Prometheus 6 — Sun, 24 Aug 2003 19:12:58 +0000

I suppose I’ll have to grab a copy of The Economist unless you can tell me the paper they are discussing. I’d rather read the original anyway since the only spin I trust is my own. “Local telephone charges have increased 17 percent since the Telecommunications Act became law” This is because they had been subsidized, not because costs have increased. I certainly agree the cost of providing the service hasn’t increased to that degree. What I don’t agree on is the idea that the telcos made insufficient profit. If the idea behind the rate increase was to match the rates to the true costs, then business rates should have fallen while consumer rates increased. Both have increased. No concept of “enough.” This is not a problem limited to corporations, but it is the problem.

By: back40

back40 — Sun, 24 Aug 2003 18:23:16 +0000

I’ll try again, I seem to have omitted a close quote on the URL. The gap is reported to be decreasing world wide. It’s an Economist article, subscription required, about an essay by Stanley Fischer about how the poorest people in the world are getting richer faster than the rich, and that those that liberalize the most benefit the most, just as theories predict. Jack: The part of the power system that failed, transmission, has not been deregulated the way power generation has been deregulated. It is still highly regulated by a confusing and contradictory set of rules that vary by region and are gamed by politicians. Industry analysts had warned of this for a long time, it was expected, but the politicians didn’t have the courage to act. Developing workable policies is really complicated due to the confusion of initial conditions. In the coming weeks we’ll see a number of proposals by some really smart people. I’m not one of them but I’ll report their ideas if the opportunity arises. “…would any saving, especially after considering the costs of duplicated biling systems, diseconomies of lack of scale, etc. be worth the cost of this kind of disruption?” No, disruptions are too expensive and damage the social fabric as well, but the outage wasn’t caused by deregulation, it was caused by bad regulation. It’s hard to develop good regulations due to political pressures. Economies of scale are a wash when all of the players are big enough to realize them. Getting big beyond big doesn’t yield greater economies and can even go the other way. Centralization is more expensive than distributed control in a large number of situations so long as a minimum size is achieved that makes effective use of assets employed. Jack: “In any case there is no contradiction between Prof Kay’s claims and the claims you make in your first post.” Yes there is. Kay says: “Determining the right balance between supply security and costs will always be a matter of expert regulatory judgment and political negotiation.” I say that expert regulatory judgement and political negotiation caused the problem. I have less faith in experts and no faith in politicians since they have done so poorly at so many things for so long in so many places. The more powerful and centralized they are the more harm they cause. I go further and bring up the ethical aspects. Systems controlled by regulatory/political methods are wasteful and expensive, an impoverishment of the population served, but it is also an ethical failure in that scarce resources available in insufficient amounts are squandered. Looking forward to world development which is in progress it seems that we should be good world citizens and not waste resources. By using bad technique we are wasteful and set a bad example, in effect export bad techniques to vulnerable new societies, another sort of ethical failure. Jack: “how come it hasn’t worked out for the Russians or US cellphone customers yet?” Russia has a lot of damage to repair. It won’t happen soon. US cell phone systems are an interesting subject. There is great turmoil as technological innovation occurs. It’s early days where multiple competing methods and providers are proving themselves. Some use one technique and some another. Both the players and the game are evolving. Some insight can be gained by comparing this situation to previous situations such as switched circuit/packet, PCs, automobiles, trains etc. CDMA/TDMA are just the tip of what will be a robust competition between techniques, many of which are still in development. In time, if this situation follows the usual script, clearly superior techniques will emerge, be recognized and claim the majority of implementations in a mature industry. Competing standards as well as competing companies create confusion in the early days of an industry but the temptation to interfere should be resisted since experts, politicians and regulators often pick the wrong standard and harm societies. Regulatory interference often results in large investment in technologies that are obsolete before the ink dries on the regulations. This saddles societies with large debts for inferior systems. It is only after industries have matured that good regulation can help clarify details of standards. ——— “Local telephone charges have increased 17 percent since the Telecommunications Act became law” This is because they had been subsidized, not because costs have increased. There is still subsidy for residential use in that the amount charged to businesses for equivalent capability is higher. The cost to society as a whole, the relevant measure, has declined while services have blossomed in capability and variety. This is the classic example of political manipulation to conceal subsidy. We need to help those who can’t afford essential services, but we should do this explicitly with well targetd aid rather than subsidy which enriches those who don’t need help and deforms the industry. We have to look at whole systems and longer time frames to make useful analyses. When the price of a service reflects its true cost then people can make better decsions about consumption. This rewards capable providers and conserves resources.

By: Prometheus 6

Prometheus 6 — Sun, 24 Aug 2003 14:52:42 +0000

back40, the anchor in the second paragraph is mere formatting – the tag has no address. I was hoping the statement in it was documented by something on the other side of the link because it;s the first time I’ve seen that claim made. At any rate, we’re disagreeing on fundamental principles, you and I. Or maybe fundamental perceptions. I counter your claim: Since break up of the Bell system more people can afford more service, and do more things with the service. with a 2002 report by the Consumers Union that I posted in another thread here. Local telephone charges have increased 17 percent since the Telecommunications Act became law.(3) Local phone bills are expected to go up another 5 percent in July 2002 as the result of ongoing deregulatory policies at the Federal Communications Commission (FCC) to raise subscriber line charges.(4)

In 1996 there were eight major companies providing local phone service, each to a different area of the country. Today those eight companies have shrunk to four as a result of massive consolidation. The two biggest companies, Verizon and SBC, each control 30 to 40 percent of the nation’s local phone business. Local phone monopolies have skillfully used their size and influence to avoid opening their markets to competitors as the Telecommunications Act intended.

Meanwhile, the nation’s largest long-distance providers – AT&T, MCI Worldcom, and Sprint – have either raised or are planning to raise their basic long-distance rates in coming weeks to as much as 35 cents a minute during the day from about 26 cents a minute in 2000. They are also raising evening rates from about 16 cents a minute to as much as 30 cents, and weekend rates are rising from about 12 cents to as much as 19 cents.(5) These price hikes come at the same time that long distance companies are saving $3 billion a year for the cost of connecting calls to their customers. Long-distance companies have largely failed to expand their business into local phone markets, except in New York where regulators have intervened to promote competition and reasonable prices.

Technically, in the six years since the Telecommunications Act became law, long-distance rates have dropped 14 percent.(6) However, that figure hides the inequitable distribution of costs and benefits to consumers. When long distance companies lowered their per-minute rates, they increased their monthly fees. Some of the most popular calling plans charge a few pennies for each minute of long distance calling. But the plans also charge a tall stack of fees, including monthly service charges, universal service fees, and in-state service fees for people in certain states. At least one company has even started charging a fee for its property tax.

The increase in fees has left many consumers paying more, not less, for long distance THIS is the result of deregulation, my friend.

By: Jack

Jack — Sun, 24 Aug 2003 11:48:21 +0000

back40: But how do you regulate it in a way that doesn’t cause the small problem of power blackouts for 50 million of the richest people on earth? It is just possible that a competitive industry might deliver cheaper power to those who need it but would any saving, especially after considering the costs of duplicated biling systems, diseconomies of lack of scale, etc. be worth the cost of this kind of disruption? Also, even by your analysis the crisis is the result of the latest changes in regulation. I submit that A)these changes were a significant deregulation in the sense that you seem to be in favour of B)noone seriously thinks that immediate total deregulation is either realistic, desirable or achievable. Given that what are your practical suggestions? In any case there is no contradiction between Prof Kay’s claims and the claims you make in your first post. You say that people try to make the most money and somehow that will all come right in the end because every one else makes mistakes (unlike the market in 1999 eh?). John Kay says that accounting is imprecise or ignores some things but that peoples bahaviour about it is not. Both can be true. I think you just don’t like where you think he might be headed. Also how come it hasn’t worked out for the Russians or US cellphone customers yet?

By: back40

back40 — Sun, 24 Aug 2003 06:16:35 +0000

Monopolies have no competitors, but they do not serve the whole population and do not serve them well. Telcos are a good example of this. Since break up of the Bell system more people can afford more service, and do more things with the service. The gap is reported to be decreasing world wide, but not evenly due to local variations. There is every reason to believe that laggards could do better. But, a more meaningful measure is of improvement in real terms, what is sometimes called capability analysis, and that is rising except in areas (such as Africa) that have special circumstances or that have had political/social/economic collapse due to failed ideologies. That gap is closing because the poorest are getting richer faster than the rich. It’s uneven at every level. Some states are doing better than others, some regions within each state are doing better, and some people within each region are doing better. When you look at the whole picture things are looking up, but you can always find a bounded sample that tells a different story. China and India, where vast numbers of people live, are doing much better, but other states are less successful. The system as a whole is positive sum but there are still losers. Too many. There always will be some, but the key is to reduce the period of suffering after loss, to get people back up quickly. It’s heartbreaking that everyone can’t have everything all the time, not yet, but the world as a whole is improving and the methods for continuing and accelerating the process, the methods of the past 20 years, are working. It takes time, usually more time than best case estimates, in part because some people are grumpy and uncooperative about change or are wedded to belief systems that hamper them. All this improvement needs to be efficient. Power, water and every other service consumes resources to give benefits. Efficiency means fewer resources are consumed. Increased productivity is another way to measure efficiency. Among the best ways to gain efficiency, improve productivity, are to allow choice among providers with prices reflective of true costs – not skewed by inappropriate regulation, political interference, subsidy or other transfers that conceal costs – so that people can make sensible decisions about consumption. Under these conditions providers work diligently to improve themselves and consumers conserve. This matters at each social level, from communities to nations to the world as a whole. It isn’t inappropriate to think in global terms. Resource consumption, and waste generation, really are global issues. There is a multiplier effect too in which techniques spread, people learn from one another. But, they can learn bad techniques as well as good. A significant amount of the world’s current poverty is a result of the wave of bad techniques that were adopted in previous decades by some states. One of the most valuable resources, one which is often wasted, is the human mind. Unemployment is pure waste, all consumption and no production, but it’s the waste of those minds more than hands and backs that is tragic and expensive. Every aspect of society is diminished when a large percentage of the population is not engaged with the affairs of society. Systems that engage and employ larger percentages of their populations are more productive, more efficient, and altogether smarter. Universal suffrage means more than having a vote, it means having useful work, a voice, and a piece of the action. Engaged, employed, smart societies with open and transparent systems consume fewer resources but get greater benefits. When Power, water, fuel, food, communication, education, transportation and health care are provided by those smart people to each other at prices that reflect true costs then those services will be efficient and will continuously improve.——Both monopolies and regulated industries are inefficient and both could be regulated at any level of return, but in practice the monopoly is a safer investment since when it fails, everything fails and the regulators and politicians can’t so easily evade responsibility for that failure. When responsibility is not clear, when no one is accountable, when responsibility and control are divided, then systems are more risky. Regulated industries are more risky for investors yet don’t have returns appropriate to their risks. They have all the problems of regulated monopolies but not the benefits. Politicians can game them for political benefit and hope to evade blame when they fail. Regulated monopolies are less risky for investors. Both are bad for consumers and society as a whole.——Lucent should be judged on its performance since that’s what’s of interest to society. They have to do good work and give good value. There are many, many companies that seemed wonderful at one time… until they met better companies. Sometimes competition comes from start ups (IBM/Wintel), sometimes from a foreign land (Ford/Toyota) and sometimes it comes from exposing a protected monopoly to real world conditions. That’s why we expose them. It’s like making that 30 year old child get off the couch and get a job. All parties are improved.